Daily Times

Countries lacking in energy, technology and capital—the three essential ingredients needed to achieve a modicum of economic sovereignty and establish a social welfare state—like Pakistan does have either continued to suffer like we do from chronic under-development or have adopted innovative paths to break out of their respective economic stagnations.

The East Asian countrieshad readily and without question offered to become sweat shops for the US and European manufacturers. Using imported capital and technology from the US and Europe and putting to work locally generated subsidized power and cheap labour these poor East Asian countries became the Asian Tigers by the end of 1970s as they emerged into global export power houses.

India followed a highly restrictive import regime along with adhering to very high savings rates for almost 45 years while its economy expanded haltingly at a snail’s pace producing for a market of a billion plus on the back of ever widening budgetary deficits in states. India, in fact had tried rather successfully to spend its way out of stagnation and at the same time because of its focused attention to the education sector, especially to education in physical sciences the country became one of world’s top software exporters. Over the last ten years or so, its economy has been growing at an annual average of over 7%.

China on the other hand had remained confined within its bamboo curtain for more than 40 years following a rigid policy of looking after its people from cradle to grave providing them with only the barest minimum essentials by way of food, shelter and clothing while at same time it was manually creating a gigantic production power house generating assets worth trillions and savings worth billions.

One only hopes that Pakistan does not find itself going back to the IMF in the next six months or so, as is being predicted by independent economists. Instead, the country needs to prepare a policy blueprint to make the most of indigenous comparative advantages for enabling the national economy to come out of its dependence, while at the same time developing into an essential clog of the interdependent world

None of these three regions had reached where they are today with the help of the institutions that created the so called Washington Consensus. The concept and name of the Washington Consensus summarizes commonly shared themes among policy advice by Washington-based institutions, such as the International Monetary Fund, World Bank, and U.S. Treasury Department, which were believed to be necessary for the recovery of countries in Latin America from the economic and financial crises of the 1980s.

The Washington consensus included ten broad sets of relatively specific policy recommendations: 1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP; 2. Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment; 3. Tax reform, broadening the tax base and adopting moderate marginal tax rates; 4.Interest rates that are market determined and positive (but moderate) in real terms; 5.Competitive exchange rates; 6.Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; 7. Liberalization of inward foreign direct investment; 8.Privatization of state enterprises; 9.Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions; 10. Legal security for property rights.

Macroeconomic stability is a highly desirable goal but by the time a country succeeds in achieving this goal, it invariably ends up with resource constraints becoming even more chronic, the unemployment rate shooting through the ceiling and inflation spiralling out of control.

In fact like Pakistan most of the countries that have used the 10-point magic formula once have only gone back for more of the same sinking further down the ladder in the process.

One only hopes that Pakistan dos not find itself going back to the IMF in the next six months or so as is being predicted by independent economists and instead prepares an economic policy blueprint to make the most of indigenous comparative advantages for enabling the national economy to come out of its dependence on dole while at the same time developing into an essential clog of the interdependent world.

According to Thomas Piketty (Capital in the Twenty-First Century – Pp. 491), the development of a fiscal and social state is intimately related to the process of state-building as such, “…the history of economic development is also a matter of political and cultural development, and each country must find its distinctive path and cope with its own internal divisions.”

So, it is imperative that Pakistan should try to find its own distinctive path to progress. But no matter how distinctive the path is, unless both the national incomes and tax collections rise to a reasonable level, the economy of developing countries like Pakistan would either continue to remain dole-dependent or trapped into a stagnant mode going south.

Piketty’s research states that 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 fulfill only their central ‘reglian’ 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.

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.” And that perhaps is the way for developing countries like Pakistan as well to reach the goal of managing affordable education, affordable health cover, affordable transport, affordable housing and affordable security.

The writer is a senior journalist based in Islamabad. He served as the Executive Editor of Express Tribune until 2014