The economic model pursued by the successive governments since the establishment of Pakistan has premised mainly on the fact that the creation of enabling environment for the big businesses through favourable economic policies, tax exemptions and rebates will pave the way for growth. The idea governing the formulation of business-friendly policies has been that the emergence of a powerful business class will serve as an impetus to industry and commerce and will spur macroeconomic growth that will automatically take care of the poor and the less-privileged sections of society.
The same debate was at the centre stage in recent elections in India. Narendra Modi, the new prime minister, has been touting Gujarat model of development as a slogan in his campaign with a clear message to the Indian electorate that if elected, he would pursue the same neoliberal policies and will replicate the Gujrat development experience at the national level. However, the claims drew much flak from the economists and rights leaders who believed that growth per se is not an end in itself but a means to an end i.e. the improvement in the standards of living of the people.
In Pakistan, the media debates after Budget 2014-15 also appeared to be sharply divided as critics described the budget as being pro-rich, business-friendly and having nothing to offer to the poor. Rather the very management of economy by the PML-N government has come in for a great deal of criticism. The government’s economic managers claim that in order to kick-start the stalled economic activity, business class needs to be given concessions to attract them to invest their money in the country as it will help create jobs and expand country’s economy.
Professor Jean Dreze in his piece ‘The Gujarat Muddle’ (The Hindu, April 11, 2014) writes:
‘Anyone who travels around Gujarat is bound to notice the good roads, mushrooming factories, and regular power supply. But what about people’s living conditions? Whether we look at poverty, nutrition, education, health or related indicators, the dominant pattern is one of indifferent outcomes.’
There is no denying the fact that if the benefits of economic growth aren’t widely shared in the society, people become resentful, tensions rise, the tectonic plates drift, social bonds fray and a day comes when volcano erupts. This phenomenon was very much behind the Arab Spring. The Occupy Wall Street was another manifestation of the tensions brewing in the western society due to crony capitalism and inequitable growth since decades. However thanks to such protests that a process of rethinking about economic growth has started at the intellectual and global economic policymaking levels. Concepts like inequality, inclusive growth, and pro-poor have come at the forefront.
In fact, the idea of growth with equity has now gone global. The multilateral donors and international organizations like UNO are advocating this concept with much fervour. Economic growth per se advocated by the economists since long is now seriously under question. The argument that you take care of growth and growth will take care of you is loosing universality among the economists and policymakers.
Economic growth, though a necessary condition for development, is not sufficient if it is not equitable. For example, Tunisia, the starting point of the Arab Spring, was long considered by the International institutions as one of the best performers in terms of macroeconomic stability and economic competitiveness. Its public debt ratio stood around 43% of the GDP, same as that of other economies like Turkey and Argentina. Economic growth had averaged 5% per annum since 1990 and it was rated as the best in terms of economic competitiveness in Africa but all competitiveness and good economic indicators masked a pattern of growth which was inequitable in nature and ultimately the lid hiding the social unrest resulting from inequitable growth was torn apart with the self-immolation of a young guy which triggered the later upheavals.
Why growth alone is not sufficient? After all when economic growth catches on, the broad segment of the society benefits from this increased size of the cake but structural rigidities do not let the market work for the poor and the disadvantaged. They are shut out of the process by poor health, lack of education, limited access to credit and savings, and other rigidities due to imperfect markets. Then, how a balance can be struck between growth and equity, meaning what policies are needed to ensure that fruit of growth are widely shared among the society.
First market imperfection especially with reference to developing countries like Pakistan is the market for the credit. It is an open secret that there is a wide gap between what is paid by the lender and what is paid to the depositors. Credit access and interest rate charged depend on a number of variables. For example, credit access will be easy for those having some type of collateral assets. Then rate of interest is not same for all creditors. It may be low for big businesses but very high for the informal businesses and in rural areas it is generally far higher if loan is taken from the informal money lenders. The literature has also documented that access to credit and interest rates in developing countries depends on social status as well. It is also well documented that political power and connections also matter.
Ours is a pertinent example as how loans were obtained by the politically influential and well-connected people and how were large chunk out of them were got written off from the State Bank of Pakistan (SBP). On the other hand, there have been instances where non-payment of agricultural loan of just Rs 50000 became the reason of landing in the jail. So the point here is that credit markets in the developing countries like Pakistan are imperfect.
Second market imperfection relates to savings. Due to absence of formal financial institutions in the rural areas where majority of the poor resides, there is always risk of fly-by-night operators absconding with the savings of the poor. Very few households have savings account especially in the rural areas. According to Professor Esther Duflo, lack of savings account has got serious implications for the poor. First of all, it is difficult for them even to save small amounts which they can use for purchasing some household durables like TV, fridge, or paying school fees. Second, imperfections of credit markets mean that they are not only handicapped to take advantage of the growth opportunity by setting up new businesses in the productive sectors but market imperfection also constrains them from taking advantage of the growth in an indirect way by offering their savings to the banks which can take care of the intermediation and lend their money to somebody else who has sufficient collateral assets.
Third, market imperfection relates to land market. The ideal land market is the one where you can sell and buy the land as you wish to anyone. Moreover, land titles are not disputed and property rights are clearly defined. But such is not the case in developing countries like Pakistan where property rights are not well enforced. Uncertainty in property rights means that land remains dead capital especially for the poor and underprivileged who may own small land holdings or a small house but due to unclear titles they are unable to use it as productive capital. Similarly acute market imperfections exist in insurance and human resource markets.