Widening income gaps
 

SOME of us have been worrying about the growing disparity in the distribution of incomes in Pakistan. Income inequalities have increased in several different ways. They have widened among different segments of the population.

The share of total incomes being claimed by the top 10 per cent of the population has increased significantly while that of the poorest 40 per cent has declined.

The income gap has also widened among different political jurisdictions. Although Pakistan does not have good data on provincial gross output and income per head of the population in the various provinces, it is my guess that the income gap between Punjab, the country’s most affluent province, and Balochistan, its poorest, has widened over the last several years.

There is also a growing gap in income distribution within the provinces. Income per capita in Punjab’s southern districts has lagged behind that in the province’s central districts. The same is true for Sindh. There is a yawning gap between Karachi and rural Sindh. In spite of the problems Karachi has had to deal with in recent years, the income per head of the city’s citizens has increased at a rate significantly higher than that of rural Sindh. In the country’s more backward provinces — the North West Frontier Province and Balochistan — the capital cities have done much better than the rural districts.

The income distribution trends in Pakistan are part of a global phenomenon where the well-to-do have done much better than the average citizen. An unprecedented distribution of income and wealth is occurring at this time. This involves both individuals and nations.

According to David Rothkopf, who has been investigating these developments, the growth and reach of “of international finance has been one of the transformational trends of our times — in just over a quarter century, capital flows became massive, instantaneous and controlled by a new breed of traders representing a handful of major financial institutions from a few countries. The concentration of power has also steadily grown. The top financial institutions control almost $50 trillion in assets, roughly a third of the global total. Ten thousand hedge funds are estimated to account for 30-50 per cent of all equities trading worldwide, but the top 100 control 60 per cent of hedge fund assets.”But financial rewards have not only gone to financial institutions and those who control and manage them. Corporate bosses have also done very well. “Multinational chief executives 30 years ago made 35 times the wages of an average employee; today it is more than 350 times … the world’s 1,100 richest people have almost twice the assets of the poorest 2.5bn.”

These changes have had their impact on the developing world as well, including Pakistan. In Pakistan’s corporate sector, top salaries are now 200 times the government-mandated minimum wage. Entry-level managers now demand and get 10 times the minimum wage. These differentials are a multiple of what was possible, say, during the time of Ayub Khan, another period in the country’s history that was marked by rapid growth and increased inequities.

Then, a person entering the corporate world could expect to receive emoluments three to four times those offered to entry-level managers in the few multinationals that were then operating in the country. An individual selected for the elitist Civil Service of Pakistan (CSP) in 1960 was paid Rs350 a month while a junior executive recruited by Pakistan Tobacco Company, then the largest multinational, could expect to be paid Rs1200. The multiple of three that was common then has increased to six in the early 2000s.

The differentials are much more pronounced at the top levels of the civil services and the private corporate world, especially when non-salary benefits are factored in. A senior government executive has a gross compensation of Rs200,000 a month; a senior corporate manager receives 10 times as much i.e. two million rupees. These differentials have two consequences, both damaging to public service.

First, sharp differences encourage migrations from public to the private sector at all levels. This seriously affects the quality of the public sector. Second, it leads to corruption. Even when the private sector has begun to play a leadership role in economy, the government still wields enormous authority over private enterprises. This leads to rent-seeking behaviour among public servants.

Let us now consider the redistributive feature of the emerging global economy which involves the world’s nations. In the last one decade, the Persian Gulf, Russia and China have accumulated vast amounts of financial reserves. These are the consequence of both the increase in the price of oil as well as redistribution of industrial production around the globe.

The first phenomenon has transferred a significant amount of wealth from large oil-importing countries such as the United States, the European Union and Japan to Russia, Venezuela and the Gulf, the areas that continue to dominate the oil market.

The second development has done the same for the new centers of industrial production in East Asia, particularly China. If oil prices remain high and Asian economic growth is strong, sovereign wealth funds, which are concentrated in these countries, are forecast to increase their accumulated assets four- to five-fold; from an estimated three trillion dollars now to $15 trillion within a few years. The top creators of great new personal fortunes are now in China, India and Russia.

What are the public policy imperatives of these developments for a country such as Pakistan? Policymakers cannot ignore the distributive consequences of these developments. Their mindset must change from promoting growth to making it inclusive. They must deal with the growing gap between incomes and wealth in the public and private sector. The most effective way would be to use fiscal policy to tax the rich and to use development policy to aid the poor.

There is also the need to drastically restructure public services, cutting down their size while allowing larger compensations to those who remain with the government. Another area of public policy should be to encourage sovereign wealth funds to invest in the domestic economy.

This has begun to happen as the funds in the Middle East and East Asia take prominent positions in such modern services as banking and telecommunications. While this helps the economy such investments do little for the poor. It is important to get them to invest in the real sectors of the economy. Policies aimed at improving distribution must become part of the strategy to develop the economy.

By Shahid Javed Burki