Since the return to democracy in 2008, and faced with a shattered economy (starting with Musharraf’s inglorious exit), people have voted in elections for political parties’ promises of prosperity for all – only to boot them out because recovery was short lived and elected governments created macro-economic crises as severe as the ones they inherited. This happened to PPP and to PMLN.
Whether PTI will be any different depends on the economic decisions it takes around now.
Our recurring macro-economic crisis is a massive failure of economic governance. The private sector is not the culprit. If it were, the banks would be in trouble because private firms would not service their debt. This would be a much harder crisis to resolve, as we saw in East Asia in the late 1990s. Fortunately, we have avoided that.
The mechanics of our economic crises are straightforward. The elected government inherits huge macroeconomic difficulties (Musharraf to PPP, PPP to PML-N, PML-N to PTI) and spends half its term taking unpopular decisions to implement the International Monetary Fund (IMF) palliative instead of fulfilling the election promises. It takes about two years for the government to balance the books under strict IMF surveillance and regain macro-economic stability. By mid-term, with stability in hand, the government parts ways with the IMF and launches an expansion of the economy to benefit in time for the next election.
As we saw, neither the PPP nor the PMLN expansion paths were sustainable - and did not deliver the coveted second term. They ended in balance of payments (BoP) crises in 2013 and 2018 and we were back to the painful, growth disruptive, yet inevitable IMF programmes (the alternative is MBS!!!). The crises have weakened the democratic governance framework and the desperate need for foreign assistance has dented our ability to craft a strategic foreign policy, suited to our long term interests.
To its credit, the PTI government is on the path to macroeconomic stability despite the Covid-19 disruption and the initial delay in launching the IMF programme. Understandably, it is now eager to deliver on the promises made in the Prime Minister’s moving inaugural speech of September 2018. The question is: will the PTI fiscal expansion be different from the ones in the past? And two years from now, will the Prime Minister campaign for a second term on the strength of macro-economic stability and sustained economic growth? Will the Sisyphean curse be lifted?
Here are six rules that will help:
One, set stability consistent expenditure targets. Till Islamabad (ministries of planning and finance) acquires the capability, let’s look to the technically competent State Bank in Karachi to do this.
Two, plug the energy sector’s sinkhole of mistargeted subsidies. The Prime Minister has put it well: the residential subsidy for energy should only go to the poor and the input subsidy to firms that export and create employment. Monitor and evaluate that this happens.
Three, the rapidly growing Ehsaas builds on the solid foundation of BISP and effectively delivers unconditional cash support to the poor. It will be even more effective as it updates the data for identifying the poor, especially in the urban areas. For budgetary and administrative efficiency, the Ehsaas platforms should be used also to funnel conditional subsidies, including the energy subsidy, to the poor.
Four, design large public projects with a regulatory framework that makes it attractive for private investors to partner with the government; assess contingent liabilities of projects and include them in stability consistent expenditure targets.
Realistic, better targeted and private investment encouraging public programmes will help towards a stable expansion of the economy. But this will not be enough to create two million productive jobs a year for the new entrants into the economy. We will need additional resources to upgrade their skills and health status to take advantage of opportunities at home and abroad.
So five, good research shows that we can collect an additional 1 percent of GDP in tax revenue every year for the next several years. No need to increase the tax rate. Just implement the principle of fairness: i.e. all the businesses, properties and individuals who should be paying taxes are in the tax net, and not lurking behind exemptions and enforcement glitches. Piling it on just those who pay their taxes is grave injustice.
Finally six, 2023 will be upon us soon and the gap between our aspirations and implementation is large and persistent. The political leadership will need to acquire, urgently, the capacity to monitor and evaluate, on a continued basis from now till 2023, whether the expenditure and revenue targets are being met.
(The writer is Country Director at International Growth Center, London School of Economics. He’s also a former Professor and Dean, LUMS and Manager, Economic Policy for South Asia, World Bank)
Copyright Business Recorder, 2021
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