M Ziauddin
One common feature of the eight governments we saw since 1977 plus the one in power currently has been the IMF dictated economic model they all worked. This model is based on the Washington Consensus and draws its inspiration from Milton Friedman’s philosophy of ‘greed is good’. But the upshot has been, every successive government since the first of Benazir Bhutto had inherited a bankrupt government. In the case of Benazir’s first, the situation was so bad that the incoming PM had to sign on the dotted lines of an IMF agreement finalised by the outgoing government of president Ghulam Ishaq Khan which had come into being the day the military ruler, General Zia-ul-Haq, died in an air crash.
The succeeding first Nawaz government passed on to the second Benazir government a country even more destitute which then bequeathed a country even more broke to the in-coming second Nawaz government. The military government of General Musharraf which inherited a country in the red from the second Nawaz government passed on to the government of President Zardari a Pakistan in economic ICU. And Zardari’s government, in turn, passed on to the succeeding third Nawaz government an insolvent country which then went to the first government of Imran Khan with the economy in a direr state.
Dole-driven poor countries, like Pakistan, have consistently failed to improve their lot because very early in the day, they had conceded the commanding heights of their economies to the private sector and followed the Milton Friedman’s free-for-all economic model.
What, however, they really needed was business-savvy governments with the public sector controlling the commanding heights of their economies. Governments if not well versed in what is happening in international business and trade, would end up returning almost the entire dole back to the donor countries in import bills. Also, it is only a business-minded government, which can make a distinction between an enterprise that yields profits of immense social value and those that yield purely financial profits.
The problem to understand in short is that not everything that is financially profitable is of social value and not everything of social value is profitable. Reality TV, fashion and gambling casinos are all of the questionable social value, but each is quite profitable and exists in the private sector. On the other hand, few would argue that the armed forces, coast guards, police, fire department, libraries, parks, public schools, public transport and government hospitals are of no social value yet couldn’t exist if they were required to be financially profitable.
A government has no business doing business. Sounds logical. But a government devoid of the necessary instincts of a businessman would find it almost impossible to frame socio-economic policies ensuring progress with equity. Such governments either end up widening the gap between the rich and poor or failing them both miserably.
Pakistan’s basic problem has been the economic model that the country has employed throughout the last several years. Free market economy – riding on the shoulders of deregulation, divestment and denial of safety nests, along with all eggs in the basket of the private sector has only caused more poverty, more illiteracy and greater health hazards.
In order for such countries to make the most of the limited indigenous energy, capital resources and poor access to technology, they need to adopt an economic model that is based on principles of mixed economy with the commanding heights of the economy in the hands of the state and the private sector working under a strictly-regulated regime with even their profit margins fixed by the state along with a greater emphasis on human resource development.
The crisis of free-market economy is being increasingly linked to the recent figures showing that the wealthiest eight billionaires in the world have as much wealth as the bottom half of the global population or some 3.5 billion people. The equivalent figure was the 62 wealthiest billionaires in 2016. Back in 2010, it was more than 300. This is how rapidly wealth is being sucked up to the top – this may be termed the vacuum-up effect as opposed to the myth of trickle-down economics. The reality of deregulated free markets, most evidently in financial services, has been a monopoly, cartels, collusion and rigging.
Pakistan’s economy needs to grow at an annual average rate of at least 10 per cent of the GDP over the next 10 to 15 years to be able to lift the teeming millions from below the poverty line and generate enough jobs to absorb its ever-expanding youth bulge in gainful employment, provide to the majority of its population affordable educational facilities, health cover, public transport, communication facilities and housing. But in order to grow at this rate, the economy would need investment to the tune of at least 35-40 per cent of the GDP at an annual average for the next 10 to 15 years.
However, our current rate of savings has been stagnating at around 12-14 per cent of the GDP for the last several years. The gap of almost about 25-30 per cent between the required rate of investment and the existing rate of saving could be filled with borrowed resources and foreign direct investment (FDI). Borrowing is not bad as long as the borrowed resources are invested in economically and socially-profitable avenues.
Most of the revenues collected domestically are through indirect taxes which are regressive in practice and a big chunk of direct taxation is collected through what is known as withholding taxes which again amounts to no more than a minuscule residual of huge settlements made through black cash in most of the major transactions.
The biggest source of black economy which has reached almost the size of the white economy is the exemption allowed to incomes from agriculture. Today, most big businesses own huge land-holdings in barren regions. On books, they show the profits earned from their other businesses as income from agriculture and declare losses from the former. Most of the professionals like doctors, engineers, lawyers, high-end educational institutions, hospitals, etc. share their taxes in three ways keeping a large part of the amount in their own private lockers, distributing the remaining balance between the tax collector (bribe) and the treasury (under-declaration).
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— The writer is a veteran journalist and a former editor based in Islamabad.
