People have short memories. It is often said that things are bad, but the country will muddle along as always. A few decades ago, more than half the population already fought to separate. Millions of people go abroad to make a living, bearing harsh and humiliating conditions there rather than suffer here, and tens of millions more would emigrate at the first chance they get. It is widespread among, at least urban, reasonably well-off families that the children or grandchildren have already settled abroad. It would be prudent for those in power to make far-reaching transformations, quickly. Doing the usual, a little more competently, will not do.
Whether capitalism or Marxism, they are both Western constructs. We must follow a path according to our people’s core values and principles. While everyone should have the opportunity to reach their potential, the outcomes may not be equal, but according to merit and effort. And citizens place responsibility on the State to ensure equal opportunity for all to reach their potential - by providing education/training, healthcare, social security and support in economic endeavours, to all. All citizens are seen as potential assets for the country, regardless of gender or faith etc., and are supported to become assets for the nation and live fulfilling lives.
To quote from my article in Dawn, in its early years Pakistan was deeply influenced by the then-prevailing Western economic approach for developing countries, which was based on the assumption that the rich would save more and then invest, making the economy grow, and, eventually, benefits would also reach the rest of the population. This was embraced in the Planning Commission’s Third Five-Year-Plan 1965-70: “It is clear that the distribution of national production should be such as to favour the savings sectors.” Here, ‘savings sectors’ include large-scale industry, capital markets and investors in agriculture.
The country’s pre-eminent economic thinker of the time, Dr Mahbubul Haq (chief economist of the Planning Commission from 1957-1970, and later finance minister) wrote in his book, The Strategy of Economic Planning: “There exists, therefore, a functional justification for inequality of income if this raises production for all and not consumption for a few. The road to eventual equalities may inevitably lie through initial inequities.”
However, the high savings assumption did not materialise and the policy of concentrating national income in the hands of the upper-income groups did not result in transformative economic expansion nor the passing on of substantial ‘trickle-down’ benefits to the rest of the population.
Due to this economic approach, interpersonal and inter-regional inequalities rose dramatically. “In the pursuit of securing its power base, the government, by means of subsidies, manipulation of tariffs and the exchange rate mechanism, transferred rents to the industrial elite,” Dr Akmal Hussain wrote in 2004. Here, ‘rents’ refers to unearned income, such as through restrictions on competition and reliance upon government subsidies. “In the decade and a half ending in 1967, real wages in the industry declined by 25% […] [and among the poorest 60%] per capita consumption of food grain declined […] This set the ‘mould’ for Pakistan’s narrow export base […] and the debt problem,” Dr Hussain said.
According to an exhaustive analysis based on 2017-18 data and which was published in the 2020 National Human Development Report (NHDR), Rs2,660,000,000,000 (Rs2.6 trillion) are spent each year on the privileges and benefits enjoyed by powerful interest groups in Pakistan (the number must be far higher by now). That is close to 7% of the GDP. Compare that to expenditures on debt servicing, which account for 5.4% of GDP; on security, 4.1%; and social services (education, healthcare, water and sanitation, etc), at just 3.5%. The government’s total tax collection is only around 11% of GDP.
“[This] involves special and favoured treatment of the privileged in laws, rules, and regulations, along with preferential treatment by public institutions”. It means that favoured people and sectors are protected against open competition, given undue preference by public institutions and granted concessions and subsidies. This may be done through an unfair taxation system, providing them with cheaper inputs, facilitating higher output prices for their products, and giving them preferential access to land, capital, infrastructure and services. The NHDR calculations found that the greatest beneficiaries of these annual privileges were, in order of magnitude, the corporate sector, including both the industry and the banking sector; the feudal class; high-net-worth individuals; large traders; state-owned enterprises; the military establishment (only partial information available); and exporters. The corporate sector’s powerful associations and well-connected Chambers of Commerce lobby for and protect them. Less than 0.7% of Pakistan’s population are owners or shareholders in these companies.
Undeniably, economic policies have been made for the benefit of only certain segments of the population, not in the interest of national development. Pakistan is a democracy and the well-being of all citizens should be paramount; the rights and interests of all segments of the population must be ensured, including the majority segment — ie, the lower and middle-income citizens.
For context, here is a quick recap of some pertinent economic particulars of the country:
- Imports are double of Exports (bought and sold in international currency);
- All the foreign assistance received each year by Pakistan (excluding CPEC) is equal to only about 1-2% of its annual economic production – but, crucially, foreign assistance is in international currency;
- Tax collection is merely around 10-11% of all the economic production in the country, mainly through Indirect taxation which puts a disproportionate burden on the poor;
- Agricultural revenue has dropped to around 20% of the total annual domestic production – the largest segment of the population is related to agricultural income and the country’s meagre exports are primarily agriculture-based.
Pakistan’s economy may be looked at as three +1 sectors:
A little over 50% of nominal GDP (of approximately $350bn) is categorised within the service sector (wholesale and retail trade, transport, storage, hospitality sector, banking/insurance, IT etc). In Pakistan, a large part of it consists of storage, transport and distribution; it is mainly for domestic purposes. Insurance and most banking facilities reach only a segment of the population. The majority of hospitality services are below the ranking category. Pakistan’s annual service exports are around $ 7bn FY22. Such Services are necessary but not sufficient for national development. They facilitate, but do not produce themselves, and are not attracting foreign inflows. Currently, the lack of international currency is the bane of Pakistan’s economy. It would be misreading it to surmise that Pakistan is now essentially a services sector economy and can be steered by tinkering with rates and percentages.
The industrial/ manufacturing sector is nearly 20% of GDP. But limited goods are made that can compete in the international market - despite regulations and subsidies favouring big businesses and exporters – a system drowning in cronyism, instead of merit. Big business, in general, neither shows innovation, nor cost efficiency nor technological advances. Reforming it will take time. This is a basic weakness in Pakistan’s economy. What is euphemistically called manufacturing is most often just the assembly of imported parts – thus further raising imports and worsening the balance of payments problem.
At this stage of national development, just literacy or education mainly in the ‘humanities’ is not sufficient for the country's purposes. To get ahead, the country needs a large percentage of people well-educated in STEM (science, technology, engineering, mathematics) and high-quality vocational skills training. At present, some institutions of higher education have many times more students enrolled in Urdu, Pakistan Studies, Islamiat and other humanities subjects than in STEM subjects. When properly informed about work opportunities, after completing basic education, a majority of students can be expected to opt for high-quality, market-driven vocational skills training.
The majority of the population is directly or indirectly related to agricultural income, while agriculture accounts for half of the employed labour force. Some of the country’s main industries are based on agriculture, for example, textile, fertiliser, tractors and agricultural machinery, and sugar and flour mills are linked with agriculture. Exports are still primarily agriculture-based, cotton goods, leather and rice still make up 70% of exports. But agriculture suffers from inefficiency – livestock milk production is a quarter of its potential; sometimes crop spoilage is up to a third of output; in some instances, fruit/horticulture export prices received were far lower than that received by market leader countries.
In its early years, Pakistan was deeply influenced by the then-prevailing Western approach for developing countries, based on the assumption that the rich would save more and then invest, making the economy grow
At present, international currency remittances from overseas workers are nearly equal to the combined exports of agriculture, services and industry. This is so even while a substantial percentage of remittances are received in rupees through informal channels instead of international currency through formal channels – this is a huge loss to the country. While all kinds of special facilities and concessions are given to exporters, these workers are left to their own devices. And while abroad, facing all kinds of inhumane treatment, the State does not assist or protect them. Because these workers are generally unskilled or have marginal informally learned skills, they are easily replaceable by people from other poor countries. Pakistan must recognise the vital part they are playing and fully support them. Everything required must be done to upgrade their skills and support them when abroad. That way they will earn more, will not be easily replaced, and will command more respect. When millions of our workers are disrespected abroad, the entire country is disrespected.
Using FY22 figures, there was an indefensible gap of $48bn between higher imports and lower exports; (reduced to $27.5bn in FY23, by cutting imports). Remittances from overseas workers ($31bn, FY22) were almost equal to the exports and filled a large part of the trade gap. Net annual foreign (multilateral and bilateral) inflows were only about $5bn. For decades Pakistan has been tight-rope-walking over such a trade gap, resorting to borrowing from the IMF and friendly countries. Many commodity exports are contingent upon receiving ‘favoured’ status from importer countries; while Pakistan’s overseas workers are mainly less skilled, and relatively replaceable. It is an unequal/supplicant relationship with foreign buyers and foreign employers.
In the next 3-5 years, the highest priority ought to be to bring agriculture and livestock productivity and quality to par with international standards and by improving water utilisation efficiency. Second, overseas workers ought to be treated as the fourth pillar of the economy and comprehensively supported. These sectors can give results in the time frame considered here.
So what do the imposed financial/economic managers (usually bankers, accountants or former IMF/WB staffers) do? For immediate relief, financial manipulations are usually used: the gap between imports and exports may be partly addressed by requesting friendly countries to defer payment for imports. The lack of Reserves was addressed by beseeching friendly countries to temporarily deposit a few billion at our State Bank. The low tax collection is handled by reduced services (healthcare, government schools), imposing more indirect taxes, entreating rollover of payment for past loans, taking new loans, and offering amnesty on disclosure of unexplained wealth. Whereas to raise exports, the value of the rupee may be lowered, rates tweaked and further subsidies conceded to exporters - but there are limited competitive goods to sell, and exports remain meagre. But these short-term financial manipulations have been repeated over and over again for decades, to no avail!
While short-term financial measures may be necessary to address emergencies, the ‘real’ economy must be focused to take the country out of continuing economic disarray and towards prosperity. For instance: Agricultural output can be raised many times over by reducing inefficiencies – with the same land and with less water – but properly applying well-known improved methods. Nearly 50% of the agricultural water is lost in conveyance. In some cases, there is 30-40% crop output spoilage, while livestock milk production is a quarter of potential output. To produce more varied export goods, excellent engineering skills are needed to reverse-engineer products, together with a capacity for applied research to improve products and a skilled middle tier through quality vocational training. A level playing field must be provided for entrepreneurs who can compete on merit in the international market without depending upon cronyism. Thus, the path ahead is to focus on the ‘real’ economy.
'Incremental' budgeting is generally practised by the government. That means that the Ministry/Department of Finance’s recurrent budgets are not based on costing latest development plans but, in effect, previous budgets are slightly raised or decreased depending upon available funds, with exceptions such as a new government’s few pet initiatives. That is the wrong side up – the right way is that plans should drive budgeting - the budget ought essentially to cost the plans. The result is that the Ministry/Department of Finance largely determines development policy, for which it is entirely unfit. Other ministries/departments lose much of their intended role.
In total, the net of all multilateral and bilateral funds received in July-March of FY22 was only about $5bn. For a country with an ‘official’ GDP of around $350bn, these amounts seem tiny. It would seem quite a mystery as to why its successive governments have remained so deferential to rich countries. The reason is that on the one hand, the country’s expenditures (and imports) far exceed its revenues (and exports). On the other hand, there is the fear of sanctions. The country’s (1) exports, (2) overseas workers, (3) acquisition of defence equipment and (4) foreign loans are all highly vulnerable to sanctions.
Pakistan’s major export destinations (FY23) are 19% to the US, 8% to China, 7% to the UK, 5.6% each to the Netherlands and Germany and so on. It relies on being granted a ‘favoured’ status by Western countries to export there. A displeased West can get such imports from elsewhere and also neglect munificence to eager officials harbouring many expectations. In the past, there have been instances where delivery of military equipment for which payment had already been made was delayed over a perceived slight.
Pakistan wants to import much, but has limited competitive goods to sell in return — so it takes from international lenders to plug the gap. Multilateral institutions, such as the IMF, are highly influenced by the interests of powerful countries. The IMF’s decisions are not made under a one-country-one-vote system, but with votes that are distributed in proportion to a country’s funding contribution to the agency. Therefore, while Pakistan has 0.4 per cent votes, the US has 16.5% votes, and its close allies Japan, Germany, the UK and France have 6%, 5%, and 4%, respectively. China has a 6% voting share. The West controls decision-making at the agency.
Interestingly, in fiscal year 2021, Pakistan paid back $600 million more to the IMF than it received from it, while in FY20 Pakistan received a net $2.1 billion.
On the face of it, IMF conditions essentially require a country to spend within its means. The recipient country can decide itself where to make spending cuts: for instance, whether to cut services for the poor or whether to rein in the rich and powerful. The lender's priority is to recover its loans — it does not take responsibility for any adverse impact on the country’s citizens.
A look at the kind of issues that need to be considered in national development policy can indicate the qualities policymakers ought to have to address them, issues such as:
- Price controls for all essential food items or direct subsidy for the deserving?
- If/when state subsidy to corporate-private businesses is deemed justified, for instance, to promote exports, should the State/citizens then also get a share of the resulting business/profits?
- Regulations and subsidies favour big business, anticipating trickle-down, or a level playing field for all?
- Indirect taxation (putting the burden on the poor) or direct taxation and face the wrath of the powerful?
- Agricultural water distribution by customary method, with only 50% application, or by efficient design by technical experts but which will likely antagonise influential land owners?
- Well-rounded education (literature, poetry) or focus on STEM and vocational skills?
- Is social protection for the poor, the unemployed, the old and so on, an extravagance that a poor country cannot afford, or is nurturing the citizens a necessary investment for the country’s future?
While no-doubt valuable in their fields and roles, training and experience as a career financier or as an accountant/auditor have little relevance to policy issues such as above. Further, with a few worthy exceptions who have a much broader perspective and experience, former staffers of multilaterals are understandably oriented to follow their given institutional policies and procedures.
Such technocrats imposed in key positions in finance and economics lack legitimacy as well as competence. They neither intend to nor can, build a narrative to galvanise citizens' support for policy reforms that would adversely affect special interest groups to withstand special interest’s furious backlash to protect their unjustified advantages. These are the wrong people for the job. Those helicoptered in cannot relate to ordinary citizens. Some technocrats have a clear conflict of interest, as they are closely associated with businesses in the field where they make policy. In the past, such wrongly selected technocrats focused only on short-term financial manipulations. The real economy of overseas workers, agriculture, industry and exports is not focussed.
Elected representatives ought to set clear national development policy objectives and guidelines. Technocrats should work under and within the given policy parameters to help develop plans and activities. Elected representatives need to then build a public narrative to explain and convince citizens of what needs to be done. And then citizens are more likely to stand by the government when it does away with the unjust gains of special interest groups.
Conclusions
Pakistan is a democracy and the well-being of all citizens must be paramount; the rights and interests of all segments of the population must be ensured, including the majority segment — ie, the lower and middle-income citizens.
Remove unjustified subsidies and concessions to the corporate sector/banks, large landholders, high-net-worth individuals and all others.
The most urgent problem for the country’s economy has been and still is a shortage of international currency for imports or to repay foreign loans. When our exports are just half our imports, it is simply not feasible to import with international currency. In the medium term, the viable solution is to carry out international trade by direct mutual exchange of goods with other countries or else in national currencies – till the time that a new better alternative mechanism is available. Make an all-out effort to import only from those who will in exchange buy from us or accept our currency; this will also force the country to produce goods for export. And no non-productive, unnecessary imports until there is a surplus of international currency for it.
Focus on the real economy: on agriculture, industry, and services as well as on overseas workers. Playing just with financial levers cannot work!
In the next 3-5 years, the highest priority ought to be to (a) bring agriculture and livestock productivity and quality at par with international standards and by improving water utilisation efficiency; (b) upgrade the skill levels of overseas workers and comprehensively support them as a pillar of the economy; (c) Give compelling incentives to overseas workers to send back international currency through formal channels instead of rupees through informal channels.
Industry must shift from just the assembly of imported parts to actual manufacturing and exports. In fact, industry will dramatically develop only if policy and decisions are made on merit, not on cronyism which is the norm. And the services sector must now focus on exports.
Pakistan needs to make itself resilient to external pressure. Firstly, the more informed and skilled our overseas workers are, the higher paid and less easily replaced they will be. Second, export destinations and export goods must be diversified. Especially reaching out to less developed countries. Exports should be won in open competition, not by ‘crony industrialists/agriculturalists’ relying on receiving favoured nation status. Thirdly, self-reliance in producing defence equipment, and its large-scale exports, ought to be a goal. This will only be possible with a defence strategy designed as is appropriate for a poor country. Instead of following the ways of great powers, defense strategies and administrative expenditures ought to be for the realities of a country where most people cannot afford nutritious and adequate food.
SOEs' continuing losses will have to be overcome by privatisation, except where it is the State's responsibility to provide services to the citizens (eg, education, healthcare, basic utilities like water), or where there are strategic reasons to retain state control. Privatisation must be kept in check by very effective regulatory bodies, which have no conflict of interest.
At this stage of national development, education ought to focus on STEM and vocational skills training. In fact, after a basic level of schooling, the majority of continuing students ought to be encouraged to opt for vocational skills training (and high-quality training ensured).