Death of An Economy

My topic deals with Pakistan, its relationship with the IMF and World Bank, and its internal problems that are causing unemployment, poverty, economic crisis and hunger. I shall be analyzing the situation using the neo-classical theory, as it is what the economists of the Pakistan government and the IMF are using to alleviate the economic instability of the country. Situated in the sub-continent, Pakistan is a low-income country, with great promise for growth. Unfortunately, it is held back from reaching middle-income status by chronic problems like a rapidly growing population, sizable government deficits, a heavy dependence on foreign aid, recurrent governmental instability and large military expenditures. It is to address these fundamental faults in Pakistan†s economy that the IMF has initiated the Structural Adjustment Programs (SAPs) in the country. This is discussed in further detail later in the paper. Like all developing countries, Pakistan†s population is largely employed in the agricultural sector, which accounts for about 48 percent of the labor force. In today†s world the Industrial and Service sectors are the largest growing areas of a developed county†s economy. Yet Pakistan only employs 39 percent of its population in Service, and a minute 13 percent in Industry. This is a paltry figure, compared to the employment statistics of a developed country. Pakistan is also heavily dependent on a single export crop, cotton. Hence the country†s fortunes rise and fall with the cotton market. It is no wonder that there are so many poverty stricken people in Pakistan. When almost half the population is involved in a very volatile market, a lot of the time, a lot of people will be burnt by price fluctuations. The country is also subject to the mercy of the weather. Focussing on a major cash crop means very little diversification. This translates to mass hunger and hard times for the agricultural sector whenever the agrarian lands are ravaged by floods, or conversely, by droughts. Even more importantly, Pakistan†s agricultural sector is marked by large landowners, controlling most of the production. Hence, only a minimal amount of the profit from exports goes to the poor people working for the large farmers. It is these people who constitute a large portion of Pakistan†s population. It is also these people who are living in abject poverty in the rural regions of the country, devoid of the right to feed their families. This is a great illustration of a theme discussed in â€Å"World Hunger, Twelve Myths.† Lappe, Collins, Rosset and Esparza discuss the commonly believed myths about why hunger and poverty exist. In it they clarify this very important point: hunger does not exist due to a shortage of available food, but because of ‘fear† and ‘powerlessness,† resulting in the ‘anguish, grief and humiliation† felt by the hungry and poverty stricken. Pakistan is a classic example of this theory. Based on a feudal system, especially in agriculture, Pakistani society is primarily controlled by feudal overlords, (a.k.a. the politicians or relatives of politicians), who own or oversee most of the agrarian land and industrial base. Being above the law, due to their political influence, these corrupt people can literally get away with murder. Thus, keeping their laborers subdued and underpaid is no hard task. Anyone who dares to complain is used as an ‘example† for potential future unrest. As a result, the people in their ‘elakhas†, (controlled lands), remain destitute in the throes of poverty, unable to help themselves due to their lack of power and the fear of the ‘thekedars†, (large landowners). By a lack of power, I refer not to a dearth of physical prowess but to a scarcity of basic human rights. These are the same rights that people in developed countries take for granted. The right to vote for whomever one feels like is missing. Instead a lot of villagers are forced to vote for the local land owner due to a combination of fear and ignorance; a fear of the repercussions of a potential loss by the feudal lord and the ignorance of any means to escape this same overlord†s wrath. Very often there is also no choice of candidates. There are very few people willing to risk their own and their families† safety by running against their subjugators. All this goes against the very nature of the free market economy that Pakistan is supposed to be running. While the IMF and World Bank are using Neo Classical theory to address the nation†s problems in the capital, half the country is still being run under the feudal system. Till this system is broken, and the immense lower classes are empowered there is not a dent that can be made in the country†s poverty and hunger issues. Rather the problem will continue to grow right under the economists† noses. Pakistan is also set back by ethnic problems, having numerous groups including Punjabis, Pakhtoons, Sindhis, Balochis and Mujahirs. Speaking different languages, the different ethnic groups do not get along very well as is witnessed by the numerous clashes between Sindhis and Mujahirs in the violence torn city of Karachi. The language barrier also translates to a lack of mobility of labor, which is a key to economic success under neo-classical theory. Hence the large sparsely populated province of Balochistan is presently under utilized. Due to a lack of available labor, industries are tough to set up. If the language/ethnic barrier could be overcome, the rich lands of Balochistan could potentially become the saviors of Pakistan†s economy. Pakistan also has a very week industrial base. Being an ex British colony it suffers from a similar problem to the one ailing a number of the African and South American countries. This issue is that the colonists never bothered building up the necessary base for industrialization. While the rest of the world was busy building this base, greedy colonists who did not care about the country and thus paid no attention to its development were exploiting countries like Pakistan. Hence Pakistan is permanently playing catch up to the rest of the developed world leaving very little money for social services to help the situation of the poor. The literacy rate in Pakistan is also very low. In 1992, the official literacy rate for the adult population was said to be a low 36 percent. Even more dismal was the statistic that listed 45 women being educated for every man. With this dearth of qualified personnel, there is no room for economic growth as there are no new minds to head the growth. Women are also the primary food producers in Pakistan. If they are not being educated, it means that they are not up to date on the latest production techniques, which in turn translates to inefficiency and the aforementioned ignorance. Once again it all ties into the powerlessness that marks the hunger and poverty-stricken. Women represent 54 percent of Pakistan†s population. If they are not allowed to exercise their rights to an education and to vote, how can the country be expected to progress? It is like asking a man with one leg to run. Like other third world countries, in Pakistan, substandard housing, inadequate sanitation and water supply, and widespread malnutrition contribute to spread of disease and to high infant, childhood, and maternal mortality. The leading causes of death are gastroenteritis, respiratory infections, congenital abnormalities, tuberculosis, malaria, and typhoid fever, all preventable diseases. Unfortunately the poor, uneducated lower classes are not given enough attention by the corrupt officials running the country, which is resulting in their situation deteriorating year by year. These, along with other economic and social issues are causing immense hunger and poverty in Pakistan. Presently Pakistan is passing through an unprecedented economic crisis, made worse by the global recession. The turmoil in domestic markets and the imbalance between resources and liabilities threatens to roll back the modest levels of economic development and industrialization that Pakistan has achieved so far. Had it not been for a reasonably strong agricultural base, the situation would be much worse. This ‘situation† has been caused by a mixture of issues, including the near sightedness of politicians and their persistence in following politically popular, but economically disastrous policies. An example of this is the detonation of a nuclear bomb a year ago. Simply to show off to India and the rest of the world, as well as to raise their local popularity, the Pakistani government decided to go ahead with an unnecessary test that brought economic sanctions against them and also cost them a lot of their aid from western countries. However, much more important have been the structural reasons underlying this deterioration, all of which have been contributing to the growing feeling of desperation the hungry and poverty stricken have been experiencing. Before this paper begins finding solutions to the problems at hand, we need to remind ourselves of the key issues. 1) One major problem that Pakistan needs to deal with is the fact that its expenses are far more than its revenues. Partly due to decades of lax fiscal management, but more because of myopic policies in its external relations, the militaristic structure of the state and the narrow vision of its rapist elite, Pakistan is Rs 100 billion short of the money to simply keep its existing machinery operational. How is a third world country supposed to develop an infrastructure when it is spending more than its net revenues on only two items, debt servicing and defense? In fact, Rs 18 billion of its defense has to be financed to borrowing. The Pakistani government has not been governing; it has simply been acting as a debt-securing agency. 2) Lately the government has been touting the fact that it has achieved the IMF imposed budget defect target. What it neglects to mention that it achieved the target through questionable means. Firstly, it drastically reduced its developmental expenditure from 7.5 per cent of GDP in the early '90s to a paltry 3 per cent, which translates to a cutback of 140 billion in present prices. A cutback of expenditure of such extent in the governments purchases of private sector goods like cement, pipes and cables and services like engineering explains why a number of private sub-sectors are at the point of closing down, operating at a vastly reduced capacity. This is adding to the issues of hunger, poverty and unemployment being faced in Pakistan. The government has also reduced the amount it givers to the provinces by Rs 30 billion, transferring some of its debt to the provincial governments. In other words the government has done nothing to resolve the issue of structural defect. 3) What†s worse is that not only has developmental expenditure been sharply curtailed, but that the scarce resources set aside for infrastructure works have been diverted to less productive investments_like the new motorway and the new Lahore airport. This massive reduction of the public sector†s developmental activities is causing a contraction in employment opportunities for Pakistan†s growing number of middle class educated youth. This is particularly serious in the areas where the private sector is unlikely to locate due to the lack of infrastructure. Thus the really poor areas continue to live in poverty due to the government†s inability to provide adequate physical and social infrastructure or create an environment for private sector investment. It has also not been able to maintain law and order and is guilty of not living up to its contractual obligations which is further discouraging foreign and domestic investment in the country. The treatment of its foreign currency account holders and IPPs last year illustrates this point. 4) Pakistan suffers from the typical problems that all third world countries suffer. One of these is massive corruption at all levels, estimated at Rs 100 billion a year. This means that a large portion of national wealth has been stolen from the poor. No wonder, the country is unable to lift itself out of the quagmire of poverty and hunger. 5) Tax evasion is another issue that the government needs to address. Successive governments have failed to establish a tax culture due to an inequitable structure, which taxes different sources differently. An example of this is provided by the large farmers who, despite now getting higher international prices for their crop, are unwilling to pay the modest levels of provincial taxes. The political leadership itself does not pay its taxes diligently. Thus, unless companies owned by sitting ministers install invoice based systems for tax accounting, it will continue to be difficult to enforce retail taxes. Also, the repeated bowing down of the government to shutter-down threats of traders and the repeated refusal of large land-owners to meet their tax obligations is increasing the burden of taxes on the helpless poor, the organized sectors, and the honest people foolish enough to pay their taxes. If the rich are not willing to meet their responsibilities, how are the poor supposed to survive? 6) There is the additional problem of a gap of between 5 an 6 per cent of GDP per year between domestic national savings and investments which translates to approximately Rs 150 billion being financed from external borrowing. This further adds to the crippling debt that is allowing the IMF and World Bank to interfere in the formulation of domestic economic policies. 7) The external debt of around US$ 34 billion is more than 50 per cent of GDP, and four times the annual foreign exchange earnings. Pakistan can neither repay nor service this debt. So far I has only postponed the inevitable, default by piling up further debts at abominably high rates. 8) Pakistan†s exports compromise 0.2 per cent of world exports and diversification from a single crop economy has remained an elusive dream. Therefore to hope for exports to be the driving force of economic recovery, as the government is doing, would require an astronomical rise in exports, and the price of cotton. In other words it is impossible. 9) The country†s ability to export is also affected by sluggish world trade, which coupled with an over valued currency, is rendering Pakistan†s exports uncompetitive. With the rise in the price of oil, the gap between import bills and export receipts is widening. 10) Until now this gap has been met with remittances and short-term borrowing. But due to a decline in remittances for a number of reasons and Pakistan†s declining credit, this is no longer an option. It therefore seems that it is impossible to maintain the present levels of growth rates and imports as well as meet debt servicing. 11) Public sector industries are also deeply in the red due to over-manning, corruption, and the protection given to large defaulters of utilities. The combined debts of just WAPDA and KESC, (which deal with electricity and gas respectively,) are Rs 91 billion while the loans of 18 public sector enterprises is close to Rs 250 billion. 12) The government is offering 15 to 18 per cent interest rates on its saving schemes which is far to high for it to be able to generate high enough returns to service the debt and still have enough left over to finance developmental activities. 13) Most of Pakistan†s industry faces the issue of negative or nominal growth, while value-added industry is operating at 30% below capacity. The limited growth is due to a lack of comparative advantage, the lack of credit availability and a high interest rate. Despite inflation being well below double digits, interest rates are as high as 15 to 18 per cent on loans! This is too high to keep the present economy afloat, let alone raise it to a maintainable level of growth. 14) There is also a lack of confidence in the government by the private sector. How can a government that cannot even handle domestic peace issues be expected to turn around an economy that is in the throes of a downward spiral? Therefore the private sector has been occupied in short-term trading and currency speculations which do nothing for growth or the welfare of the state. 15) An obvious result of this situation is that the disparity between the rich and the poor has grown. The share of the poorest 20 per cent of households has fallen to 7 per cent while the richest 20 per cent are receiving over 45 per cent. The low rate of economic growth and the high rate of inflation over the last few years have left the poor with no buying power resulting in almost a third of the population living below the poverty line. There is also anger amongst the poor about the fact that the incidence of increased taxation has been heaviest for them; expenditures on services for them have declined. Social tensions are rising with the growth of the absolute number of poor, illiterate and jobless, as employment opportunities and wages decline due to the stagnating economy. Such conditions are hardly conducive to political and social stability, without which growth will remain a distant dream. On top of all of this, Pakistan is plagued by the curse of the IMF and World Bank. Constant defects in the current account of the balance of payments and depleting foreign exchange reserves is causing the extension of credit to become an exercise in haggling and bargaining. Each time there are negotiations along with a string of conditions attached to the loan. The release of credit is then delayed until each and every condition of the IMF has been met. The only way that Pakistan can now secure loans and vital extensions on its debt is to institute the Structural Adjustment Programs that have been drawn up by IMF economists. The problem is that the benefit of these programs is questionable. Most countries have suffered immensely from them. Instead of improving the economy, these programs have been destroying them. Unfortunately, like other countries that have yielded to the them, Pakistan is virtually being taken over by the IMF, along with the World Bank.