Challenge of imbalances
By SHAHID KARDAR

INFLATION is certainly a challenge today but then growth is a bigger challenge. With the latter are associated issues of employment, savings, investment, trade, external capital inflows and the overall balance of payments situation.

Striking the right balance between growth and inflation will facilitate supply improvements, thereby addressing both the fiscal imbalance and inflation in the medium term.

Similarly, there is a need to balance the requirement for low interest rates to stimulate investment activity and thereby growth and high interest rates to defend the exchange rate and attract capital inflows. All this is not an easy task by any means.

It will continue to require directional perseverance that is difficult to sustain in the face of external factors beyond our control and the limited life spans of elected governments.

It will also need a great deal of imagination, more research for innovation on what can work and fine-tuning of strategies, policies and instruments going forward, and, of course, the patient support of our donors like the IMF, World Bank and the Asian Development Bank.

Most serious analysts would rightly argue that the structural drag on Pakistan’s economic growth and the country’s budgetary dilemmas can only be addressed over time through deep-seated fundamental reforms.

The technocratic solutions to our problems are well known. The issue is how we implement them even in the medium to long term by achieving and managing the balance argued above.

Admittedly, the test of the deftness and acumen of leadership lies in creating an environment in which a constituency for reforms can flourish over time. The reality at present is that there is no constituency for serious reform, considering the long slog out of this valley of despair and the pain that will have to be administered to correct these wrenching imbalances — albeit on the basis of the ability of different social classes to bear this burden of adjustment.

How will these fundamental reforms be launched and who will launch them? It is chronically difficult to tell home truths to people whose votes have been courted, especially if the leadership itself is not seen to be tightening its belt while expecting the rest of the population to tighten its own.

Moreover, most of us are not aware that sacrifices will have to be more broad-based than hitherto realised. The top 5pc account for, at best, 12pc to 15pc of the national income. Therefore, some contribution will be required from households earning Rs20,000 per month.

How do you get traction for such adjustments when the leadership and richer segments of society are seen as not just enjoying luxurious living but also successfully resisting any change to it? Especially if much of their lifestyle is at the expense of those being asked to forgo some improvement in their own lives that they have attained after prolonged hard work and effort?

Resultantly, each economic group or social class is seen to be blaming others for the mess we find ourselves in. They contend that while they are bearing more than their fair share of the burden of a bloated, corrupted state structure, it is other interest groups that need to contribute more to the running of the state and the creation of a more equitable, just social order.

While all this is critical, a huge employment challenge faces the country. Every month there are 250,000 new entrants to the labour force, a majority of whom are ill-equipped in terms of marketable education and skills.

These youngsters, who represent our much-mentioned demographic dividend, need jobs if we are to avoid social unrest. Without productive non-agricultural employment, they will add to the hordes of visible unemployed youth roaming in our neighbourhoods. They aspire to a good lifestyle, for which they are prepared to adopt whatever means necessary to acquire it.

Without meaningful jobs they will earn a living by joining the gangs of touts, petty brokers, criminals, smugglers, etc. Those who are able to muster some funds will pay a bribe to get a job in the police, land, labour or some other government department and then fleece the ordinary public to recover the bribe they paid. Apparently, this fear kept Deng Xiaoping sleepless at night and helped launch the Chinese economic miracle.

Another daunting challenge is presented by the widening disparities between the rich and the poor. This, combined with strong perceptions of growing relative poverty and slowing down in the availability of job opportunities, is damaging social harmony.

The benefits of economic development during the previous decade have largely accrued to the richer and more educated because the bulk of this growth was witnessed in the relatively skill-intensive sectors of finance, telecommunications, IT and oil and gas, and also in the capital-intensive industries of cement, motor vehicles and motorcycles. Those with limited skills, the majority of the labour force, could not participate meaningfully.

Moreover, future employment growth under liberalisation will increasingly depend on skilled labour, and the resource requirements (both financial and human) for the creation of such skills will be massive.

With growing capital intensity of production processes and the attempt to make gains from the economies of scale, simply to remain competitive, it will be difficult to maintain even current rates of employment let alone absorb huge additions to the potential labour force with limited skills.

It is neither desirable nor feasible to separate economic growth from distributional outcomes since they are inextricably linked through employment growth.

Therefore, despite budgetary constraints and difficulties of raising tax revenues in a slow growth environment, for political and social stability there will have to be special efforts to stimulate growth, and tweaking of spending priorities to launch initiatives to help such groups (through, say, public works programmes and direct cash grants/transfers). This would thereby reduce the worst levels of poverty and ensure inclusive growth.

Admittedly, this is easier said than done, considering the formidable constraints and the magnitude of financing that would be required to even make a marginal dent in the fate of those living in extreme poverty.

The writer is a former governor of the State Bank of Pakistan.