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Articles |
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Our economic development paradigm
- IV
BY MIAN ASIF SAID
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ARTICLE (March 02 2010): Part I of the captioned series of articles that
appeared in these columns on February 1, 2010, had enlarged upon historical
failure of our financial managers to enunciate a coherent set of policies
for long term economic development. By accepting a WB/IMF programme for the
umpteenth time, the present government has demonstrated that it is equally
at sea.
For Third World countries, caught in a fiscal bind, the Washington
institutions famous "one-size fits all" tool-kit of Demand-Suppression
remedies often aggravate miseries of common folk. Part II published on
February 9, 2010 outlined key pillars of an alternate model of economic
development implemented by the Asian Tigers and China. Of course, one can
argue that a large measure of their success was attributable to their
visionary leaders like Deng Xiao Ping, Lee Kuan Yew, and Mahatir Mohamed.
However, the common thread that ran through their development models was a
single minded focus on the following four fundamental initiatives:
1) Rapid reduction in the rate of population growth that enabled transfer of
national resources away from subsistence and survival;
2) High level of spending on health and nutrition to improve labour
productivity;
3) Persistent commitment to and allocation of large resources for primary
and vocational education; and,
4) Promoting a culture of savings among the masses; savings that formed the
bedrock of a high rate of investment in infrastructure year in and year out
without significant recourse to foreign capital.
Our national failure on all of these variables is today evident from the
consequences thereof, ie a teeming humanity, which we can barely feed, high
incidence of infant mortality and disease, an illiterate labour force with
perhaps the lowest productivity in the world, and a pathetic rate of private
savings and hence negligible investment in basic infrastructure (schools,
hospitals, dams, roads, railways etc).
Consequently, we seem condemned to perpetual current account and budgetary
deficits with a high and rising foreign debt (for budgetary support rather
than development), rapid currency depreciation, and persistent inflation,
which in turn has already pushed 40% of the population below subsistence!
It is this scribe's contention that unless our economic managers temper the
WB/IMF bromides in favour of output enabling (Supply Side) policies that
leverage off primary drivers of GDP growth (our abundant natural resources),
while devoting all development resources to the abovementioned four pillars,
we shall be forever condemned to a "Hindu Rate of Growth" of 3% per annum.
Yes, we have occasionally witnessed episodes of rapid growth fuelled by
massive injections of motivated foreign assistance (Ayub, Zia, and Musharraf
eras for instance). But, in each instance, the moment Consumption-Spending
steroids were withdrawn, our GDP growth rate plummeted.
The first three of the named policy initiatives were addressed in Part III
of this series on February 21, 2010. In the current segment, we shall
address the fourth critical policy initiative, ie a high rate of savings and
investment without which a sustained high rate of GDP growth will remain a
pipe-dream. Here's a 2005 comparative snapshot of Gross Savings rate as
percentage of GDP for some relevant countries:
======================================
China 50% Singapore 40% Malaysia 38% India 32% Hong Kong 32% South Korea 32%
Nepal 31% Bangladesh 29% Pakistan 18% ======================================
We have by far the lowest rate of gross savings. Our Net Savings Rate (after
depreciation) is even lower, a pathetic 9.5%. No wonder that all
international institutions and independent economists (employing the usual
3:1 Incremental Capital Output Ratio) project our likely GDP growth for the
foreseeable future at 3% per annum.
To double this projected growth rate, we'd have to save like India, Hong
Kong, and South Korea, and if we wish to grow at 10% per annum, we need to
save like the Chinese. This is not a theory; it is a mathematical certainty!
For proof that all successive governments have been oblivious of this
reality one need only refer to our national economic policy document, the
Pakistan Economic Survey, which comes out each May. Each issue pontificates
ad nausea on government policies and initiatives on every thing under the
sun; that is everything except National Savings.
In fact, our monetary policy actively discourages savings by ensuring that
the country's banking system sets a rate on customer deposits, which is on
average no higher than 50% of SBP discount rate and a third the average CPI
(the former is currently 12.5% and the latter 18%).
Consequently, total deposits of the banking system (worth PKR 4.5 trillion
today) have struggled to keep pace with annual monetary growth that has
averaged 16% over the past 5 years. Similarly, the National Savings System (DSCs,
SSCs, etc) has barely generated PKR 1.3 trillion over 20 years.
The result of such a policy of neglect is before us. Being assured of losing
a large chunk of their savings to inflation each year, citizens have opted
to put their savings into real estate, agricultural land, and for the past
ten years (when inflation was subdued) into listed shares. We thus have one
of the most expensive urban lands in the world.
A plot measuring 500 square yards in key cities like Karachi, Lahore, and
Islamabad today go for as much as PKR 15-25 million. For an equivalent sum,
one can buy a decent 2-bedroom apartment in downtown Manhattan, New York. To
give us an idea of the kind of capital locked up in rural agricultural land
alone, we can multiply the country's arable acreage of 55 million with its
average cost of PKR 300,000 per acre.
The sum involved comes to a staggering PKR 16.5 trillion. Again, perhaps
twice as much is locked up in equity financed urban land. These are all
savings of past generations which when unlocked by secured modes of
financing can unleash massive amounts of capital for development.
Remedial policy: To generate resources for the massive investments required
by population planning, health, and education, and for the large
infrastructure needs of schools, hospitals, roads, dams, and railways, etc
we must urgently double our rate of savings, and then perhaps increase it
some more! Two immediate and key legislations come to mind:
1) The National Assembly needs to pass a bill that puts a floor under the
profit rate offered on citizen's savings by either the banking sector or the
National Savings System. This floor rate, to be revised periodically, should
be set equal to the Consumer Price Index. Once implemented, our national
savings rate is sure to rise rapidly and perhaps double in a couple of
years. And,
2) Title to land needs to be computerised across the country in double quick
time (say within 12 months) and hassle free one-window transfer of title
mechanism should be implemented. This would free trillions of rupees worth
of capital so far unproductively locked up in land.
In its current budget, the present government is struggling to close the gap
between revenues projected at PKR 1.6 trillion and expenditures that
threaten to exceed Rs 2.4 trillion. Based on our running rate GDP of Rs 15
trillion, the financing deficit will easily exceed 5%, even if, as recently
announced, the government slashes its Development Budget by 60% down to a
miserly PKR 250 billion.
Implementing the two suggested policies will, in one fell swoop, eliminate
the resource gap as national savings, both in the banking sector and the
National Savings System; explode from their meagre level of 35% of GDP to
well over 50% within 12-24 months. This is the key to magnetisation of our
economy and to bring the 60-70% "Black Economy" into the mainstream of
economic life of the country.
Government misgivings: Before our government mandarins pooh-pooh your
scribe's policy initiatives noted above, let me address their likely
objections to it:
-- How will these policies improve the abysmal tax to GDP ratio that has
been declining persistently over years and currently stands at 8.8%? And,
-- If the government borrows heavily from the banking sector and via the
National Savings System (which by itself is preferable to inflationary
borrowings from SBP), won't it cause the national debt to balloon? And won't
the higher rate of profit paid on these borrowings swamp the already
strained budgetary process?
The answer to the first question is that when we talk of Rs 1.3 trillion in
budgeted taxes on a Rs 15 trillion economy, for an 8.8% yield, we ignore the
black economy. The aforementioned policies are guaranteed to "whiten"
several trillions of rupees of our large invisible economy.
We are, therefore, likely to see a quantum leap in our white economy as
money pours out of real estate into high yielding deposits and savings
schemes. Even if only a third of the current estimate of our black economy
is monazite, within the next 12 months we would be looking at a Rs 20
trillion economy. An 8.8% tax yield on this larger cake amounts to Rs 1.76
trillion, ie a net growth of Rs 360 billion in tax revenues!
The second fear, one of sharply escalating national debt, is also easily
addressed. As I have mentioned in earlier instalments of this article, our
current national debt stands at approximately PKR 9 trillion divided roughly
50-50 between domestic and foreign currency.
That is 60% of our "white" GDP...the maximum allowed by legislation. But,
that is only a static picture. As compared to several developed nations like
Japan (190%), Italy (120%), and USA (90%), we are not too badly off. A more
logical approach to viewing national debt is to judge the burden imposed by
its annual servicing (interest plus amortisation of principal).
Since domestic debt can always be rolled over (fresh debt issued to retire
old, and then some more), only its interest is a burden on the budget.
Foreign currency debt is, therefore, more dangerous in not only that
principal instalments have to be paid on time, but also because its rupee
burden escalates rapidly as the rupee depreciates against foreign
currencies. Thus, for a developing country like ours, it is better to borrow
in local rather than foreign currency.
Our current annual budgetary burden of debt service stands at PKR 675
billion. Of this, only Rs 110 billion (USD 1.3 billion) is serviceable in
foreign currency. That is hardly alarming. The balance of PKR 560 billion
represents interest on domestic debt. According to official records, the
average rate paid on domestic debt (which includes government bonds,
T-bills, and National Savings Schemes) is approximately 14-15% per annum.
The important thing to note is that with current inflation of equal
magnitude, if not higher, the real burden of domestic debt is not rising! In
other words, the government's real rupee borrowing cost is practically zero.
Yes, domestic debt will and should rise in absolute terms as the government
attempts to bridge its tax revenue shortfalls, and works on improving its
tax to GDP ratio. But as long as it's primary deficit (excess of
expenditures over revenues net of debt service) as a percentage of GDP is
lower than the annual growth in GDP, overall debt burden will not rise as a
ratio of GDP.
In other words, the WB/IMF's scowls at our current budget deficit of 5% are
a red herring. The US and most 3 OECD countries are currently running budget
deficits of over 10% of GDP. Have we heard these Washington institutions
admonishing them? Of course not. That would be L'ese Majeste!
Having outlined the four fundamental principles of growth for a
factor-driven economy like ours, and hopefully convinced readers that our
current economic managers are clueless about them, sequels in this series
will address the structure of budgets going forward, ie how our proposed
model of growth can be funded with judicious reordering of our spending
priorities.
mianasifsaid@gmail.com
(Concluded)
Copyright Business Recorder, 2010 |
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