The removal of respected Princeton economist Dr Atif Mian from the Prime Minister’s (PM) Economic Advisory Council (EAC) was an unfortunate and sad reminder that the reasons of Pakistan’s existential crises are political and rooted in the xenophobic ideology that the state ideologues have imposed upon it through decades of brainwashing via text books and the state dominated media.
Amidst all the controversy about Dr Mian’s religious belief — which are a personal matter to begin with — scant attention was paid to what he wrote about fixing the financial woes of Pakistan. In an opinion piece he wrote in August, Dr Mian highlighted three elements that should be part of the government’s strategy to fix Pakistan’s financial woes: i) strengthen Pakistan’s financial and regulatory authorities, ii) shift Pakistan’s growth policy from the failed import-led strategies towards policies that focus squarely on raising domestic productivity growth and exports, and iii) modernise the financial system in order to reduce the incidence of tax evasion and money laundering.
I don’t disagree with the opinion that these three elements should be part of the government’s strategy. However, as I wrote recently in the Financial Times, the biggest and most critical challenge for Pakistan’s economy is reform of political economy built on patronage, rent-seeking and foreign bailouts under the protection of its military and civil bureaucracy. Many economists do not mention rent seeking, but it is one of the root causes of Pakistan’s economic malaise as was the “license raj” for India during 1947-1991 when the world mocked her for its “Hindu” growth rate of three percent.
What is rent seeking and why is it crucial to address this issue? Joseph Stiglitz, a nobel laureate and former chief economist of the world bank, disputes the view that economic growth would bring increasing wealth and higher living standards to all sections of society. He says, “standard economics is wrong as inequality and unearned Income kills the economy.”
95 percent of this country’s water is used for agriculture, but at least 40 percent of water losses are due to poor maintenance and the dilapidated condition of the irrigation system in Punjab
Rent-seeking means getting an income, not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway. Indeed, rent-seekers typically destroy wealth.
Rent-seeking is rampant in Pakistan. From non-collection of income tax from large land owners, tariff protection to auto industry to generous tax exemptions (Rs541 billion in lost revenues in 2017-18 alone) to affluent big businesses. We can have great people running the banks, but resources can’t be mobilised for development unless rent seeking is eliminated. Similarly, technology alone can’t fix the tax evasion issue when the real issue is the concentration of power in the hands of those who have rigged the system.
Pakistan’s biggest challenge is human development and the ticking population bomb. 45 percent of its workforce is employed in the agricultural sector. China’s transformation began with deregulation of agriculture in 1970s. Productivity jumped by 25 percent from 1975 to 1985. Any reform must give high priority to agriculture. Nearly 40 percent of the country’s arable land is not cultivated. Almost two-thirds of this land is held by large landowners, who own 25 or more acres of land. In contrast, small farms cultivate over 90 percent of arable land, deriving maximum benefit per acre of land.
Yes, the financial sector should be modernised, but I would respectfully remind Dr Mian that China, India and Taiwan made great progress since the 1990s despite the fact the banking sector remained largely in the public sector. Pakistan started the privatisation of banks in the 1990s but that did not help her much in catching up with rest of Asia. Why? The main reason is the policy distortions caused by a rent-seeking tax regime and culture that has prevented broader industrialisation because, for example, buying plots of land or investing in sugar mills is more attractive.
Land is an extremely scarce resource and its plunder by the state and its agencies through discretionary land allotment at throwaway prices deprives the government of billions in revenues which otherwise could be obtained through auctions.
No discussion about reform is complete with energy and water. 95 percent of this country’s water is used for agriculture, but at least 40 percent of water losses are due to poor maintenance and the dilapidated condition of the irrigation system in Punjab. Pakistan’s energy policy is a disaster, a backward-looking policy that encourages rent seeking at abnormal profits to Independent Power Producers. Energy generation and prices must be market driven as they mostly are in India, whose state policy is to support renewables but not thermal power. In India, no license is needed to set up a thermal power plant.
In conclusion, the crux of Pakistan’s chronic economic issues is not that the ruling elites do not know about the problems or how to fix them, but that few want to reform a system that has worked well for the powerful vested interests who dominate it.
The writer is a former head of Citigroup’s global emerging markets investments and author of ‘The Gathering Storm: Political Economy of a Security State
Published in Daily Times, September 17th 2018.