Budgeting for a smart state


M Ziauddin

CONSIDERING the current socio-economic and security challenges that confront Pakistan and also the challenges thrown up by the below par performance of the economy during the current fiscal year so far one is extremely concerned about what is being contemplated by our official economic policy makers for the next budget which is only three months away. Most likely, the proposed balance sheet for the next fiscal year would be a repeat of what Pakistani governments — no matter what kind — have been presenting year after year all these years. The overwhelming emphasis would once again be on macroeconomic stability with a lot of rhetoric about egalitarianism studded with a few cosmetic measures aimed at introducing a facade of equity.
The widening inequity is likely to continue widening further, along with inequity in access to affordable two square meals a day, affordable education, affordable heath cover, affordable transport and affordable housing. Once again, the mantra of macroeconomic stability taking care of equity would be repeated justifying proposals for the rich to become even richer. Stagnating allocation for social sectors would be attributed to the chronic resource shortage for which the haves would be squarely blamed for not contributing their due to the national treasury but making no efforts to bind them to pay their taxes strictly in accordance with the law of the land.
In this context it would be instructive to go through a pertinent part of Thomas Piketty’s research (Capital in the Twenty-First Century — Pp 491): When the four rich countries of the world (Sweden, France, Britain and the US) collected less than 10 per cent from the national income by way of taxes they could afford to fulfil only their central ‘regalian’ functions (police, courts, army, foreign affairs, general administration, etc.) but not much more. This was the situation in these four countries during the 19th century up to the First World War. However, between 1920 and 1980, the share of national income that the wealthy countries chose to devote to social spending increased considerably as in just half a century, the share of taxes in national income increased by a factor of at least three to four and in Nordic countries by more than five.
The growing tax collection enabled the governments of these rich countries to take on ever broader social functions which now consume between a quarter and a third of national income of which one half goes to health and education, the other to replacement incomes and transfer payments. All told, the total social spending, broadly speaking, amounts to 25-35 per cent of national income. “In other words, the growth of the fiscal state over the last century basically reflects the constitution of a social state.” Our experience of the past three decades shows that unfettered markets do not offer any solutions to economic and social challenges, but have become part of the problem. An alternate economic model, the ‘Economy of Tomorrow’ (EoT) considered to be a gateway to what is called the Good Society rejects such blind faith in ‘the magic of the market’.
In order to walk the path to Good Society the state needs to restructure the economy to ensure inclusive distribution and stable investment allocation. The choice is no longer between a ‘big’ or ‘small’ state, but how to build a ‘smart state’ capable of preventing risk, correcting distortions and giving policy guidance. In the neoliberal model, economic dynamism grows out of the incentives set by inequality and competition (‘Greed is good’). In contrast, dynamic growth in the EoT model is driven by inclusiveness. By providing full capabilities for all, a society unleashes the full potential of all its citizens. The social market economy refrains from attempts to plan and guide production, the workforce, or sales, but it does support planned efforts to influence the economy through the organic means of a comprehensive economic policy coupled with flexible adaptation to the market and in the process creating an economy that serves the welfare and the needs of the entire population. A government has no business doing business. Sounds logical. But a government devoid of the necessary instincts of a sharp businessman would find it almost impossible to frame socio-economic policies that ensured progress with equity. Such governments either end up widening the gap between the rich and the poor, or failing them both miserably.
The problem is that not everything that is profitable is of social value and not everything of social value is profitable. Few would argue that the Army, Police, fire department, libraries, parks and public schools are of no social value, and yet, they could not exist if they were required to be financially profitable. Take for instance, the Steel Mill. No matter how you run it, at the production capacity of 1.1 million metric tonnes, it can never be financially profitable even if you cut its fat to bare bones. Its social value is too dubious to merit any consideration. So sell it today even if it brings in only one dollar (the land in its possession should, however, be sold at market rates). However, this will never be true for PIA, Pakistan Railways, power generation and distribution entities, Oil and Gas Development Company Limited, Pakistan State Oil, Utility stores, National Bank of Pakistan, Civil Aviation Authority, Pakistan National Shipping Corporation, Karachi Port Trust and Port Qasim, etc. These entities have as much social value as the armed forces, security agencies, libraries, parks, public schools and public health institutions.
A big chunk of unnecessary financial losses that these public sector entities of social value are incurring currently can be eliminated by cutting down on waste and replacing inefficient managements with efficient ones. Meanwhile, Pakistan should also be prepared to shape its economic policies to fit into the new international economic order that seems to be emerging defined by geo-economics rather than geopolitics. Geo-economics has been defined by its proponents in two different ways: as the relationship between economic policy and changes in national power and geopolitics; or as the economic consequences of trends in geopolitics and national power. The notion that ‘trade follows the flag’ as also ‘the flag follows trade’ crisply explains the concept of geo-economics.
— The writer is veteran journalist and a former editor based in Islamabad.