Daily Times

While there has been some progress now and then in terms of service delivery and social policies are clearly improving, most observers of Pakistan’s economy agree that more direct interventions are needed to deal with the persistent poverty.

Economic reforms typically fall into two categories: macroeconomic reforms are often pursued under IMF tutelage; structural reforms are designed to improve resource allocation and improve efficiency. Although the maintenance of macroeconomic stability remains the cornerstone of effective economic development, there has been a shift of emphasis in recent years towards structural reforms since these are key to achieving pro-poor growth.

Understanding the impact of structural or price reforms on poverty is key in several areas. For example, the imposition or removal of a tariff on indispensible food can have a major impact upon the incomes of the poor. The same is true of a reduction in the transaction costs faced by the poor in reaching markets, through for example, investments in rural feeder roads, policies to enhance competition in the transportation sector, or marketing reforms. Similarly, utility reform and privatization often have a dramatic impact upon the prices for such services and for poverty if the purchase of such services is important for the poor. The same is true of changes in a wide variety of taxes and subsidies. The defining characteristic of these reforms is that they are designed to change prices and thereby influence resource allocation to different activities. Therefore, for the purpose of understanding the impact of structural reforms upon the poor, it is essential to have a good methodology for linking price changes to changes in poverty.

Peter Temin, the MIT economist, argues that “Escaping poverty requires almost 20 years with nearly nothing going wrong” and “the factors that put someone in an impoverished situation keep them in that impoverished situation”. Escaping the poverty trap requires more than a cash lump sum. While regular benefits reduce poverty, improve living conditions and can help families make a head start, for many this is not enough to escape the poverty trap. Instead, a large cash amount or provision of assets – such as oxen for farmers or sewing machines for tailors – can support the start-up of a business to provide a regular future flow of income. However, the key difference between the low-income group and the high-income group is education. People in the high-income group bring skills to the table that businesses are willing to pay well for, and the only way to get those skills is through education. Structural reforms in education sector are of prime importance for long run economic development.

Economic reforms typically fall into two categories: macroeconomic reforms are often pursued under IMF tutelage; structural reforms are designed to improve resource allocation and improve efficiency. Although the maintenance of macroeconomic stability remains the cornerstone of effective economic development, there has been a shift of emphasis in recent years towards structural reforms since these are key to achieving pro-poor growth

Seeking financial help from friendly countries and running after the IMF to escape the poverty trap is itself a trap. There is a lesson in the Chinese miracle for other countries that wish to surge from deep poverty to advanced development in a matter of decades. In China, the authorities first allowed markets to emerge even though they were hampered by corruption, weak property rights and under-regulation. Market activity then generated problems that required officials to build stronger institutions. This in turn fostered the further development of markets. This process could unfold only because local officials were incentivized to innovate constantly, no matter the risk. – a process often labeled as “franchised decentralization’. China’s transformation in recent decades cannot be attributed to a single cause; rather, it arose from a contingent, interactive process – often labeled as “directed improvisation”.

Conventional measures of poverty, including measures of chronic and transitory poverty that are derived from transition matrices, do not allow a direct count or identification of dynamically poor households. Asset-based approaches which try to identify potential poverty traps offer better identification of dynamic poverty and its causes. If the macroeconomic and microeconomic data required for such an approach are available and reasonably accurate, the Computable General Equilibrium (CGE) models (See Fig.) can provide useful ex-ante predictions of the impact of price shocks upon different types of households and thereby upon poverty.

CGE models have been used to examine the impact of a variety of price reforms including trade, marketing and shifts in agricultural technology. To reduce the data and resource requirements, many analysts have used simpler partial equilibrium techniques which can be implemented more quickly on readily available data.

Such analysis has typically involved detailed micro-econometric work on household survey datasets. Unfortunately policymakers in developing countries like Pakistan often do not have the data and resources needed to undertake the most sophisticated approaches to such analysis. CGE models can be used to examine the impact of changes in government policies or other environmental factors on the global economy.

For example: the impact of regional free trade agreements; trade facilitation efforts designed to reduce delays in the movement of goods across borders; disruptions in trade and supply chains due to natural disasters; changes in domestic tax policy on fuel or other government initiatives; expansion of migrant flows; implementation of carbon emissions schemes; and others. In the short run, households cannot change their activities in response to a change in prices. In the long run, households may well change their activities as a result of the price change – indeed this may be the intention of the reforms. In many circumstances, households earn an important share of their income from the labour market and exogenous price shocks resulting from reforms may give rise to changes in employment levels in different sectors rather than only changes in wages. So, the structural reforms must be designed keeping in mind the impact of reforms on households. The CGE model has helped low-income countries such as Bangladesh, Rwanda and Haiti which aim to give people a big and sustainable push out of poverty.

Pakistan has to rethink structural reforms in line with CGE Model analysis to examine the impact of changes in government policies on the economy. The IMF and the World Bank publish their own structural reform indices for many developed and developing countries. For Pakistan, they only provide a banking reform index. The criteria for structural reform include: fiscal discipline, financial reforms, public expenditure priorities, tax reform, liberalizing interest rates, competitive exchange rates, trade liberalization, liberalization of inward foreign direct investment, privatization, governance, and property rights.

Pakistan underwent massive changes after former president Musharaf came to power in 1999. The country was at the brink of bankruptcy and a target of terrorism. Initially his economic team focused on managing the crisis and avoiding default. A comprehensive programme of reform was designed and implemented to put the economy on the path of recovery and revival. The military government imposed the general sales tax, raised prices of petroleum and utilities and removed subsidies to reduce the debt burden. The IMF and the World Bank were invited to negotiate new stand-by structural adjustment programmes.

Pakistan’s economic turnaround during the latter part of the decade was even more impressive because the country faced a fragile regional and domestic environment with constant security threats. These reforms were mostly focused on: privatization, de-regulation, liberalization, and financial sector reforms. The corporate governance reforms – strong internal audits and business practices according to code of ethics were included: capital adequacy, risk management, technology upgrade, product diversification and innovation, increased disclosure and transparency, dealing with non-performing loans, strengthening regulatory and supervisory capacity and legal and regulatory infrastructure, liberalization of foreign exchange regime.

The governments led by the Pakistan Peoples Party and the Pakistan Muslim League-Nawaz detracted the outcomes. In 2007 Pakistan’s rank in the Global Competitiveness Index was 91. After five years of the PPP and three years of the PML-N government the rank had deteriorated by approximately 40 positions. Similarly in the ease of doing business index, Pakistan’s rank in 2007 was 60, now it has deteriorated by 70 positions. The two global rankings reflect the state of economic governance. The sharp decline set into motion by the PPP government in 2008 has not been reversed by the PML-N government.

Pakistan is one of the few developing countries that was able to attain an impressive record of economic growth and poverty reduction in the first 40 years of its existence. The GDP growth rate until late 1980s averaged about 6 per cent per annum and the incidence of poverty was lowered from 46 per cent to 18 per cent. Inflation remained low and despite high population growth per capita incomes almost doubled. The situation reversed in the 1990s.

Currently, a third of the population lives below the poverty line. The human development indicators remain poor as almost half of the population is illiterate, infant and maternal mortality rates are high, access to quality education and health care particularly by the poor is limited, income and regional inequalities are wide, infrastructure shortages and deficiencies persist, skill shortages are taking a toll in the economy’s productivity and there is high unemployment and under-employment.

The worldwide preoccupation with large economies and the ever-increasing quest to enter these markets is also working to the disadvantage of countries like Pakistan.

The biggest challenge for the PTI government is to formulae an effective economic policy through structural reforms. Structural reforms are direly needed in areas like fiscal discipline, financial reforms, public expenditure priorities, tax reform, liberalizing interest rates, competitive exchange rates, trade liberalization, liberalization of inward foreign direct investment, privatization, governance, and property rights.

The writer is an Associate Professor and Head of Process & Energy Systems Research Center (PRESTIGE) at COMSATS University Islamabad, Lahore Campus