OVER the past few decades, events have overtaken the policymakers as they remain stuck with a few dominant ideas that fueled socioeconomic development in the past but have now lost much of their efficacy.

The paradigm shift in the growth strategy voiced by dissenting economists in multilateral agencies and by social scientists has yet to surface in national policy making.

There is so much talk of inclusive growth, inclusive institutions, democratisation of the economy, and win-win situations for all — with no tangible progress to show in this regard.

A World Bank report pointed out more than a decade ago that “Pakistan’s fiscal deficit is overwhelmed by a wider, and in the longer run, much costlier gap — a social one”

In the case of Pakistan, the social gap is widening, adversely impacting economic growth and political stability. The country’s two major provinces have been without representative district governments for the the last six to seven years. And calls for a ‘shared growth’ strategy advocated by some international lenders remains unheeded.

Yet, a worldwide debate is now largely focused on the surging ‘inequality’ and how it impacts economic growth, while conventional wisdom is stuck with the orthodox view that ‘inequality is good for growth’.

This dogmatic thinking is increasingly being challenged by those holding contrary views — individuals as well as those within influential groups and institutions — who are seeking a sustainable, ‘shared growth’ to contain the cycle of boom and busts/bubbles being witnessed more frequently in these turbulent times.

“Contrary to conventional wisdom, the benefits of higher incomes are trickling up, not down,” says IMF Managing Director Christine Lagarde.

Widening inequality in incomes and the poor’s lack of access to assets and skills has created a mismatch between growth in production and consumption. With demand lagging behind output has resulted in a recession or depression, with falling commodity prices impacting the profits of many business enterprises carrying excess capacity.

The prolonged fiscal stimulus and monetary easing (currency printing) have not been an unqualified success while pulling western economies generally out of recession. The global economy has not gone beyond a fragile recovery since 2008. Surplus cash is circulating within the financial system and is largely invested in financial assets finding very little productive outlets in the real economy.

Pakistan’s stability, achieved by huge foreign financial inflows — from external debts, foreign sale of assets and surging workers’ remittances — is fragile, with the domestic economy suffering from major structural weaknesses.

More than a decade ago, in their World Development Report 2003 on ‘sustainable development in a dynamic world-transforming institutions, growth and quality of life,’ World Bank economists had stressed the need for identifying the ‘vicious cycles’ that keep the pace of growth and distribution of assets unequal. Unfortunately, their views were not shared by the Bank’s shareholders.

Now, the IMF and the Organisation for Economic Cooperation and Development, according to the Financial Times, are leading the charge towards a new consensus that redistribution is necessarily good for growth. OECD chief Angel Gurria says: “Addressing high and growing inequality is critical to promote strong and sustained growth”.

It is being more widely recognised that growing inequality in the distribution of wealth, assets and incomes needs to be reversed and the widening the gap in education, health and trade skills needs to be sharply reduced to boost productivity.

“As it is not possible to compensate for market imperfections,” noted World Bank economists, stressing on “the need for new institutions to give the low income groups access to assets and a voice in decision-making”.

The proposal has its own merit, and the creation of new organisations may help lead to the targeted goal. Some economists, however, advocate democracy at the workplace to boost production and manage a fair distribution of the fruits of labour.

Among the multiple constraints on Pakistan’s economic development, two seem to stand out: the fiscal deficit and the social gap. Stating that the fiscal deficit is a subject of ‘much concern,’ the World Bank report pointed out more than a decade ago that “Pakistan’s fiscal deficit is overwhelmed by a wider, and in the longer run, much costlier gap — a social one”.

The research report established deep linkages between social exclusion and political instability, making the whole society vulnerable to income shocks and conflicts over time.

The situation in Pakistan remains no different today, but for the not-so-fast expanding community organisations that have stepped in to fill some of the space created by poor government social spending and inadequate delivery service.

The WB report on ‘Pakistan Poverty Assessment’ published in October 2002, states that growing evidence suggests that not only economic growth has not narrowed the social gap, but the social gap itself is partly responsible for the slowdown in economic growth.

The poor health and education indicators have been part of the reason for the economic growth being unstable. Cutting social spending is not the answer. There is a significant link between growth and poverty.

The report argues that “if Pakistan does not close its social gap, its long-term ability to grow economically, alleviate poverty and sustain its debt will be fundamentally compromised”.

The idea has not been bought by policymakers in Pakistan. The country’s biggest province believes that indirect taxes are more conducive for economic growth, while the federal government is trying to help the poorest survive on doles rather than focus on a people-centred development strategy to put every able-bodied citizen to work and build an inclusive and sustainable economy.

Published in Dawn, Economic & Business, August 31st, 2015

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