Structural reforms: the only way to escape the poverty trap

Despite progress with service delivery, improvement in social policies and improving economic conditions, many analysts acknowledged the persistence of poverty as an issue requiring more direct actions. Economic reforms are typically split into two categories: macroeconomic reforms, often pursued under the patronage of the IMF; and structural or price reforms designed to improve resource allocation and increase efficiency. Although the maintenance of macroeconomic stability remains the cornerstone of effective economic development, there has been a stronger emphasis in recent years on 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 different areas of reform. For example, the imposition or removal of a tariff on the 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. And the same is true of changes in the wide variety of taxes and subsidies which may be imposed by the government. 2 The central characteristic of all 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.

The MIT economist Peter Temin 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 to 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 companies 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.

Seeking a superficially adorable 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 want to surge from deep poverty to advanced development in a matter of decades. In China, 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, which 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”.

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

Conventional measures of poverty, including measures of chronic and transitory poverty derived from transition matrices, do not permit to identify how many households are dynamically poor. Instead asset-based approaches which try to identify potential poverty traps would 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 now 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 theiractivities in response to a change in prices while in the long run households may well changetheir activities as a result of the price change – indeed this may be the intention of thereforms.In many circumstances, households earn an important share of their income from thelabor market and exogenous price shocks resulting from reforms may give rise tochanges in employment levels in different sectors rather than only changes in wages. So, the all structural reforms must be designed keeping the impact of reforms on households. The CGE Model helped low-income countries such as Bangladesh, Rwanda and Haitiwhich aim to give people a big and sustainable push out of poverty.

Pakistan has to rethink for structural reforms in-line with CGE Model analysis to examine the impact of changes in government policies on the economy. IMF and World Bank publish their own structural reform indexes for many developed and developing countries, unfortunately for Pakistan they only provide banking reform index. The wider criteria of 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 ex-president Musharaf came to power in 1999. The country was at the brink of many problems at that time including bankruptcy and target of terrorism. The initial period was devoted by the economic team of the new government in managing the crisis and making sure that the country avoided default. A comprehensive program of reform was designed and implemented so as to put the economy on the path of recovery and revival. The military government took some initially unpopular decisions such as imposing general sales tax, raising prices of petroleum, utilities and removing subsidies so badly needed to bring about fiscal discipline and reduce the debt burden. The IMF and the World Bank were invited to enter into negotiations on new stand-by structural adjustment programs.Pakistan’s economic turnaround during the latter part of the decade was even more impressive because the country was faced with a critical and fragile regional and domestic environment with constant threats to security. These reforms were mostly focused on: Privatization, Deregulation, Liberalization, and Financial Sector Reforms. The Corporate Governance Reforms- strong internal audits and business practices according to code of ethics were include: Capital Adequacy, Risk Management, Technology Up-gradation, Product Diversification and Innovation, Increased Disclosure and Transparency, Dealing with non-performing loans, Strengthening Regulatory and Supervisory Capacity, Legal and Regulatory Infrastructure, Liberalization of foreign exchange regime. Unfortunately, later on the democratic governments of PPP and PMLN detracted the outcomes expected from these reforms and consequences appeared to be catastrophic for Pakistan in a situation of a total failure of an effective state.In 2007 Pakistan’s rank in the Global Competitiveness Index was 91. After the five years of PPP and three years of PMLN government the rank has deteriorated by approximately 40 positions. Similarly in the ease of doing Business index, the rank of Pakistan in 2007 was at 60, while now it has deteriorated by 70 positions. These two global rankings reflect the state of our economic governance. The sharp decline set into motion by the PPP government in 2008 has not been put into reverse by the PMLN government.

Pakistan is one of the few developing countries that was able toattain an impressive record of economic growth and poverty reductionin the first forty years of its existence. GDP growth rate until late1980s averaged about 6 percent per annum and the incidence ofpoverty was lowered from 46 percent to 18 percent. Inflationremained low and despite high population growth per capita incomeshad almost doubled. This favorable situation was reversed in the decade of the 1990s and continued till present. Currently, Pakistan is facing many difficultchallenges. One third of the population still lives below the povertyline. Human Development Indicators remain low as almost half of thepopulation is illiterate, infant and maternal mortality rates are high,access to quality education and health care particularly by the poor islimited, income and regional inequalities are widespread,infrastructure shortages and deficiencies persist, skill shortages aretaking a toll in the economy’s productivity while at the same time,there is high unemployment and underemployment. The worldwide preoccupation with the largeeconomies of China and India and the ever-increasing quest to enter these markets is also working to the disadvantage of countries suchas Pakistan.

This is biggest challenge for the PTI government to formulae and effective economic policy through structural reforms to re-track the country on prosperity. The structural reforms are direly needed in 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 rightsThe lesson we must have to learn is that there is no pointin complaining and grumbling about the current situation but to get on with the job, towork even harder, to overcome these deficiencies and constraintsand to hope for the best.

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