By Mina Sohail –
Dr. Akmal Hussain is an economist, author and social activist. He is currently a Professor of Economics, Forman Christian College. He recently advised the Federal Government of Pakistan on economic policy as Chairman, Working Group on Institutions for Development, Panel of Economists and as Chairman of the Working Group on Poverty Reduction for Pakistan’s Tenth Five Year Plan. Dr. Hussain has helped build organizations for overcoming poverty at the provincial and national levels in Pakistan. These include the Pakistan Poverty Alleviation Fund and Punjab Rural Support Program. He has authored three books on development policy and has co-authored 29 other books that have been internationally published.
The government has been in power for almost 6 months, what are your views about its performance and efforts to bring an economic turnaround.
The government is yet to come up with a coherent medium to long term strategy. We need to formulate a strategy of economic growth combined with equity. Our central problem at the economic and social level is that about 35.6 percent of population is living below poverty line. When majority is deprived of minimum conditions of dignified existence, this makes the country a breeding ground for extremism. Pakistan needs not just a strategy of economic growth, but one in which the middle classes and the poor could be involved as active subjects of the growth process. This will involve changing the institutional structure of the economy so that the poor begin to have access to high wage employment and middle classes have access to quality health care and education.
Since the deal with IMF is on, how do you see our economic health in short and long term?
When this government came to power, it was faced with two immediate and critical problems. First was that we had a severe electricity crises. Even the existing production capacity was not being fully utilized because the companies that were generating the electricity were not being paid dues because of the fiscal debt constraints of the govt. The government inherited a circular debt problem of alarming proportions. Paying off the debt was the government’s first challenge.Increasing the production capacity of electricity involves more medium term initiatives, building dams, which will produce electricity more cheaply. We need to switch from furnace-based power to hydro electric power projects and in shorter term we need to move from furnace based system to coal power based electricity system. This technical shift can take place quickly than building dams that take 5 to 10 yrs.
Do you think IMF conditions helped the economic performance in the country?
We had no other option but to go to the IMF. We had no money in the state bank and IMF came in to prevent a default on its own earlier loan. The current extended fund facility with IMF has some problems, as the IMF perspective is that the way to control inflation is to contract the economy. When the government is asked to drastically reduce public expenditures, it cannot reduce unproductive expenditures as it is locked into those in running the government, paying subsidies and running the security apparatus. Thus, it reduces development expenditure, which slows down growth and has an adverse impact on poorer sections of society.
The program is counterproductive in my view. The two principal objectives of this IMF program to control inflation on one hand and to reduce the budget deficit on the other are not likely to be achieved. A couple of years down the road, we will get the worse of both worlds; continued inflation and high fiscal deficits but slow growth.
What steps do you recommend to help improve our economy?
We need to drastically reduce government’s own expenditures. Ministers can’t live like kings when the country is on the verge of bankruptcy. Drastic reduction is needed on huge travel expenditures and new ministries created where millions are spent. We have subsidies across the board hemorrhaging the exchequer. It is not feasible to subsidize all consumers of electricity. Government needs to pull the subsidy away from the rich and give it to the poorer consumers. Electricity thefts need to be identified and a mechanism of coming down hard on people who are stealing from the people should be developed. The government must also stop borrowing from the state bank because borrowing is the same as printing currency. It means there is too much money chasing too few goods and that will cause inflation.
Are you in favor of providing subsidies or should the government should withdraw these gradually?
I am in favor of targeted subsidies like in power cases. Houses that have two or three fans, that level should be subsidized. In the case of subsidies on fertilizers, rich farmers will get same advantage as small farmers, but if you target the subsidy to poorer farmers with less than 12 acres, that will be effective. Instead of subsiding fuel you subsidize bus tickets. Subsidies on electricity, fertilizer and fuel need to be reduced and targeted better so we subsidize the poor rather than everybody. Government is beginning to adopt this although it will be increasingly difficult.
What steps should have been taken by the government?
The fact that we are unable to sustain growth over a long period of time is one of the reasons why mass poverty has persisted. The structure of the growth process has generated acute inequalities. You have to do two things to reduce poverty in the present situation. Accelerate the overall economic growth but simultaneously restructure the growth process, in a way that the capacity for poverty reduction is enhanced. We need to have a bigger dent on poverty. The way to do that is to have a new kind of growth process where the middle classes and poor get involved in the process of investment and high wage employment.
That is growth fueled by equity.Another short term measure we can take to reduce pressure on balance of payments is to ask our friends like Saudi Arabia, UAE and China to park some of their massive central bank reserves, about 8 or 10 billion dollars into Pakistan State Bank. If we give a sovereign commitment that we won’t spend the money and this happens, it will stabilize the exchange rate. IMF measures to stabilize exchange rate won’t really work because they are based on the assumption that if you devalue the currency by making dollar value of exports cheaper, that will increase your foreign exchange earnings. This does not happen at technical level in case of a country whose price elasticity of exports is less than one.
What are your views regarding privatization of departments like railways, and steel mills that are causing huge losses to the national exchequer?
Three things are hemorrhaging the exchequer. Firstly, subsidies that are consuming one third of revenues need to be reduced and targeted. Secondly, on the fiscal side, government is engaged in food grain trading and that has locked up 500 billion rupees. It needs to pull out of grain and let the private sector run it. Government finances state owned entities that are in loss of 400 billion rupees every year. This government does not have the governor’s capacity to make these profitable and should sell them because they are brining losses to the govt. Thirdly, labor interests need to be protected as there are humans in these companies who worked their entire lives and it is not their fault companies are at a loss.
However, the privatization process has to be institutionalized with clear rules of transparency. Government does not have to give away entire equity. It can maintain a share and hand over the remaining share and management. A new management will turn around a company like PIA or steel mills. We need an independent evaluation, a credible international rating agency or auditing company that will put a value on the assets.
Do you think that taxation policy of this government is equitable? If not, how can it be made more egalitarian?
Current policy is highly inequitable. 70 percent of our total revenue comes from indirect taxes, which have a disproportionately high impact on the poor than rich. People have been saying for so many years to broaden the tax base that it has become a mantra now. There is so much tax evasion in Pakistan because ultimately the ability of the government to tax is based on an implicit social contract between society and the state. The government gives a credible commitment to its people that the tax revenues will be spent on welfare, providing national security, defence, health, and infrastructure and on law and order. This will become a moral obligation on people to pay.
Currently, a large portion of tax revenue is being stolen; another portion is being wasted by senior government officials and ministers on their travel etc where they go with an entourage. People feel this is ostentatious. We need to revamp the civil service reform in which bureaucrats are hired on the basis of their professional merit and are paid market salaries. We need to go into universal provisioning of basic services, which are social insurance, health and education.
Do you think the country’s economy is heading towards recovery?
We are floundering now and have no strategy of our own. This brings us to what needs to be done. In the short term, it can be handled by other people’s money in state bank. Privatizing alone will save a lot of billions for the government. Target subsidies and selective import controls are needed. Unnecessary imports need to be reduced and increasing tariff on luxury items required.
There are contractual commitments that any government has with people, such as commitments to pay salaries, spending on defence, services, hospitals, maintaining embassies abroad. These expenditures are difficult to control, the government has been trying but it will be difficult.
