During the postwar era governments actively shaped economic outcomes with the help of state capital in response to the needs of their citizens. During the late 20th century, however, this postwar order began to decay and today private capital through markets dominates politics, leaving governments unable to shape economic outcomes and respond to the needs of citizenry.
In some Western advanced countries, the period after World War II was one of inclusive economic growth as more and more use of state capital was the name of the economic game then. Indeed, income inequality fell and stayed low in most Western countries roughly between 1910 and 1980. What made it fall?
In the earlier years of the 20th Century, there was a clear trend of state intervention in the economy, albeit institutionalized differently across countries. It was generated by a mix of factors: social solidarity engendered by the wars, wartime experience of governing the economy, unemployment in the 1930s and the rise of socialist ideas. It accelerated for a decade or so after the World War II.
Key features were nationalization, increased provision of welfare, public health and education, and the development of public amenities. Arguably the most important aspects that directly affected income inequality were state involvement in wage setting and redistributive taxes and transfers.
In many countries there were moves to centralize collective bargaining over wages and conditions of work.
Taxation was changing as well. In most Western countries, income tax became a major revenue source in the early 20th Century. As the political tide changed, both Reagan and Thatcher heavily reduced the progressivity of income tax - the extent to which the rate of taxation increases with income.
There is also international evidence that increases in tax and transfer progressivity, do reduce income inequality directly. Calculations have shown that changes in progressivity and changes in income inequality across the OECD countries 2007-2014 are strongly negatively correlated.
Norway the small Scandinavian country of 5 million people has the lowest income inequality in the world, helped by a mix of policies that support education and innovation. Norway does not have a statutory minimum wage, but 70% of its workers are covered by collective agreements which specify wage floors. Furthermore, 54% of paid workers are members of unions, compared to 11% in the United States and 25% in the United Kingdom. Overall, Norway tops the employment part of index, both in terms of how accessible and stable employment is, and how well workers are paid.
There is, therefore, a lot of economic sense in discarding the practice of using private capital through markets and instead investing the limited resources we mobilize through various means, including costly borrowing in public-sector projects aimed at expanding the much-needed physical infrastructure, like irrigation systems, power plants, roads, bridges, housing schemes, motorways and metro buses, etc. Such projects generate all kinds of jobs and most of these are highly labor intensive. Also, such projects do give a fillip to the manufacturing sector as demand for building material, such as cement, electrical fittings, plastic materials, etc., goes up. More jobs would mean more money in the hands of more people belonging to all classes: upper, middle and lower. More money in the hands of more people would mean steep escalation in the demand for all kinds of essential and non-essential consumer goods, necessitating expansion in production capacities of the goods in demand leading to significant growth in the real economy.
If one were to follow this economic path single-mindedly, totally ignoring the needs of the social infrastructure like health, education, potable water etc., one cannot rule out the possibility that the pace of economic growth will slow down considerably because an illiterate and physically unfit manpower, with only limited access to even clean drinking water would hardly be able to accomplish all that the front-loading of investment in accelerated expansion of physical infrastructure requires. It would need a great deal of balancing in the allocation of limited resources to physical and social infrastructure so as to make the two develop in a way that the opportunity cost is not too high. The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.
According to one of Pakistan's most renowned economists, the late Dr Mahbubul Haq, approximately 40 per cent of money allocated to brick and mortar projects disappear without any trace. The implication was, either it was siphoned off or just slipped through inefficient fingers. This was actually the manifestation of believing in the magic of free market and its underpinnings, the so-called 3Ds - decontrol, disinvestment and deregulation.
The result has been devastating. Today, the top 20 per cent of the population accounts for almost 52 per cent of property income, while the top one per cent of depositors account for 80 per cent of deposits. Banks extend 77 per cent of credit to the top one per cent of borrowers.
And due to continued under-investment in the people, the rate of improvement of Pakistan's Human Development Index is estimated to be slowing down considerably. The reason why this is so is the regulatory bodies constituted under the Constitution for intervening in the market to ensure equitable distribution of the fruits of development are not doing what they are supposed to be doing.
There are about 18 regulatory bodies in the country: the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan, the Competition Commission of Pakistan, the Pakistan Electronic Media Regulatory Authority, the National Electric Power Regulatory Authority, the Oil and Gas Regulatory Authority, the Drug Regulatory Authority, the Civil Aviation Authority, the Pakistan Nuclear Regulatory Authority, the Pakistan Standards and Quality Control Authority, the Public Procurement Regulatory Authority, the Private Education Regulatory Authority, the Pakistan Medical and Dental Council, the Pakistan Engineering Council, the Pakistan Nursing Council, the Pakistan Tibb Council, the Pakistan Veterinary Medical Council and the Pakistan Environmental Protection Agency.
But all these regulatory bodies function directly under the government and those who man these bodies are also hired and fired by the government, which makes a mockery of the very concept of market regulation. It is, therefore, necessary to liberate these bodies from government control and turn them into autonomous statutory bodies. Delegation of authority away from the government would prevent these bodies from becoming partisan entities and would also make them more accountable.
This brings us to the most worn-out story line in our decades-old economic narrative which has not changed a bit since independence: the promise of successive governments, both the military and the civilian, to broaden the tax base. Most of the revenues collected are through indirect taxation which is a regressive practice and a big chunk of direct taxation is collected through what is known as withholding taxes which again amounts to no more than a minuscule residual of huge settlements made through black cash in most of the major transactions.
All attempts to document the economy over the last so many years have been foiled by the personnel of the Federal Board of Revenue with the connivance of the ruling elite, political as well as the military. In this digital age, there is no reason why there should be any physical contact between the taxpayer and the tax collector. But no government seems willing even to take a look at this aspect of governance.
Another impediment to growth has been the IMF. We go to the Fund because we have explored and exhausted all other avenues except our own ability to raise the required resources from our own economy. The Fund in order to ensure that it would get back its loan imposes a lot of austerity conditions on the borrower assuring it at the same time that in the long run its economy would start growing at an accelerated rate.
'In the long run we are all dead,' so said John Maynard Keynes (1883-1946). But the fundamentalists of the so-called 'Washington Consensus' have been coming up with their own self-serving definitions of the term 'long run' so as to sell 'austerity' to the poor countries of the Third World as the panacea for all their economic ills. But the austerity formula has proved, in the long run, to be a stagnation trap for countries that went to the Fund seeking help.

Copyright Business Recorder, 2019


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