By Dr Muhammad Yaqub
The News, Sept. 26, 2011
In an article that appeared in the Money Matters Section of the News on September 12, 2011, I summarised the extent and causes of poverty. It concluded that successive governments failed to take steps to reduce poverty and in fact followed policies that accentuated it. By now the problem has become deeply entrenched, and a determined and sincere effort would be needed to arrest the deteriorating trend and reverse it. Whether such an effort will be mounted is an open question and would depend on the emergence of a political leadership that can usher in good governance.
The essential socio-political prerequisites for formulation and implementation of pro-poor economic policies are good governance that is practiced across the board and a strong and impartial accountability system, enforced universally. It also requires adherence to the constitutional provisions, protecting the fundamental rights of all citizens, including the right to have food, shelter and clothing.
The achievement of these prerequisites would require a change in leadership that can only be brought about by a general awakening of the silent majority and its determination to choose honest, sincere and competent leaders. They would need to bury the existing practice of voting for the so-called elite, who approach people only in the election season for votes to secure key leadership positions for self-service and plunder of the national wealth. If a sincere leadership, accompanied by good governance emerges, it should not be difficult to launch policies and programmes to redress the problems of rural and urban poverty.
In the rural economy, while at this stage land reforms may not be possible without major disruptions due to the entrenched position of the landed aristocracy, a sincere leadership can formulate polices that would achieve the same results without land reforms. These policies should cover all areas of agricultural operations including pricing policy, income sharing formula, education and health facilities and rural infrastructure.
First, the government should allow agricultural output prices to be determined based on the global prices and ensure timely availability of unadulterated agricultural inputs. The government should not create a wedge between the world market prices of agricultural inputs and outputs and the actual prices through fiscal or regulatory intervention. At the same time adopt policies to curb hoarding, black marketing and smuggling by market operators.
Second, the government should take long term measures to develop water resources for irrigation and to do water management to ensure its availability to all farmers without discrimination. Canal water supply could be priced properly and its revenue be set aside exclusively for water resource development and management. The machinery, electricity and other inputs used in farming should be preferentially treated in policy making in the same way as capital goods and raw materials are treated for industry.
Third, the State Bank of Pakistan (SBP) should stop printing notes to finance government expenditure to moderate price pressures so that the poor are no more taxed through inflation. At the same time, it will create scope for more bank credit to the private sector at reasonable interest rates. Within the larger credit availability to the private sector, the SBP should ensure increased flow of credit to agriculture. Banks should be made to at least plow back as loans in agriculture an amount equivalent to deposits that they collect from that sector. It should also provide credit for small and medium agro-based business and industry to create job opportunities in the rural areas, reducing the need for large scale migration to cities in search of jobs.
Fourth, the government should focus on agricultural research and extension services meant to help improve yield and also undertake projects that could prevent or minimise the devastation of floods and other natural calamities. Development of critical rural infrastructure to help increase market access for agricultural products would also help raise income levels of farmers.
Fifth, as these and other steps increase agricultural yields and incomes, the government should enact new tenancy laws and compensation policy for farm workers that ensure them a fair share in agricultural income. Their share in income should not be allowed to be determined arbitrarily by the landowners, who have a conflict of interest and overwhelming bargaining weight on their side.
Sixth, agriculturists making more in annual income than the exemption limit of the federal income tax should be taxed at the same rates and in the same manner as urban population. The constitutional provision of agricultural taxation being a provincial subject is used as an argument to avoid this tax. Either, the constitution be amended or its limitations overcome through appropriate adaptations to impose agriculture tax. For example, either an agricultural income tax parallel to the federal income tax could be applied by provinces or the Federal government could be used as a collecting agency to collect it by extending the application of urban income tax to agricultural income with the understanding that the revenue collected from the agricultural sector will stand transferred to provinces. The argument that lack of education and modern accounting practices will stand in the way of introduction of a modern agricultural income tax does not hold water because it will mostly be confined to landlords who do not fall in that category and could in any case be taken care of through imposition of an alternative presumptive income tax based on land holdings or produce index units. Income tax collected from large land holders could be earmarked for developing rural infrastructure and promoting welfare of rural population.
Seventh, the provincial governments should develop a provincial and local taxation system to finance compulsory free education up to high school, to develop skills that will help improve agricultural productivity, and to provide basic rural medical facilities and clean drinking water under a local self government system. At the grass root level, people should be able to see the link between tax payments and provision of education to their children, clean water supply and adequate medical facilities at their door steps.
Eighth, the rural sector should get a share in the federal and provincial development expenditure in proportion to their share in the population and proper checks and balances should be instituted to ensure their efficient and proper utilisation.
Currently, the bulk of development expenditure is used for large and mostly prestige projects in the urban sector and whatever amount is earmarked for the rural areas, it is largely wasted and siphoned off through corruption.
As regards to the urban poverty, it has its origin in lack of employment opportunities and erosion in real income of those who do have jobs due to rising inflation. The eradication of urban poverty is very much linked with macroeconomic policies that can raise the rate of non- agricultural growth and employment within the framework of relative price stability. Several policy measures can be put in place for this purpose.
First, it is important to realise that the solution to urban poverty problem does not lie in creating more unproductive jobs in the public sector and their non-merit based filling up. In fact, the size of the government should be reduced and policies strengthened to promote private sector investment. Government downsizing should begin with the federal and provincial cabinets. Similarly, the size of the civil and military bureaucracy should be reduced and wasteful expenditure minimised. Loss making public sector enterprises should be privatised. These steps will help reduce government borrowing.
Second, macroeconomic policy framework should be reoriented to encourage private saving and investment and curbing waste. At present, private sector investment is on the decline for a number of reasons including lack of security, political uncertainty and daily disruptions in the energy supply. Similarly, the rate of private sector saving is low due to inflation and other factors. Even a part of that saving is siphoned off by the government for its unproductive expenditure. The fiscal, monetary and exchange rate polices need to be refocused on promotion of private sector saving and investment. It is a growing and productive private sector that will boost employment opportunities, help cut inflation and reduce poverty.
Third, while encouraging the expansion of private saving and investment, the government should create a comprehensive legal framework to regulate the employment and compensation system in the private sector. Legislation to ensure a live minimum wage, medical and other facilities and a comprehensive social security and retirement saving system should be developed to reduce exploitation of the urban labour force and reduce poverty. Fourth, strict austerity measures on the expenditure side and broadening of the tax base on the revenue side should be taken to reduce the budget deficit and help control inflation. Inflation hurts the poor most. Urban poverty cannot be controlled without controlling inflation -- and inflation cannot be controlled without a sharp reduction in the budget deficit and government borrowing.
Fifth, the government should shift focus from housing schemes for the rich to the low income groups. Town planning for low income housing needs to be given a priority and should be facilitated in all possible ways.
Sixth, a revamping of the entire educational system is long overdue. Skills in demand in the country and abroad should be taught in schools, replacing the present system of education that produces “clerks” and unskilled workers.
If a sincere new leadership does not emerge to address the poverty problem of the majority on a priority basis, the country would drift towards class conflict, whose outcome is difficult to predict and impossible to control.
The writer is a former SBP governor.