Global Policy Forum

By Mahnaz Fatima

The controversy about growth-stabilization has been arousing considerable interest, of late. During the mid-1990s, the dominant official view was that the IMF-prescribed stabilization measures would spur the growth. The belief was that fiscal deficits crowd-out private investment. So, the emphasis should remain on fiscal deficit reduction to encourage private investment.

The other view was that the sole emphasis on fiscal deficit reduction would impede growth as the deficits were addressed mainly by reducing development expenditure and increasing the direct taxation, both of which would discourage private investment and productive efforts. So, the development expenditure with an accommodative monetary policy would actually crowd-in investment and not crowd it out as per the textbook approach promoted at that time by the government in association with the IMF.

Another aspect that discouraged the domestic investment and growth was a tied prescription about rapid custom duty reduction which exposed the domestic industry to foreign competition, rather prematurely. A playing field thrown open to foreign goods would deter domestic investment in a country which has remained diffident (lacked confidence) about its industrial potential and enterprise. Against the above backdrop, it should not be too surprising to find that investment and growth could not be encouraged despite continued pressure on stabilization. So, while the domestic concern was all about investment and growth, the soother from the government and the IMF was that fiscal deficit reduction would encourage investment and growth as though we were operating at the full employment level when an easy fiscal policy would heat up the economy and brakes would then need to be applied that would crowd-out further investment. While the dissent fell on deaf ears, only time proved the IMF-led prescription wrong. Consequently, in 1977, another government decided to reduce the tax rates thinking that tax rates' reduction would increase tax revenues by encouraging investment as though we were on the right hand side of the Laffer curve. The government stumbled again as neither was the fiscal deficit affected favourably nor could the above measure trigger investment and growth.

Thus both, the restrictive and expansionary fiscal policies have been tried out on the basis of the linkages mentioned above but none could stimulate investment and growth. A government getting wiser has, therefore, changed its tack. The new sequence being touted by the government is: stabilization first, investment next, and the growth later. Some of our ex-finance wizards, when they were at the helm, focused upon stabilization as religiously as the current incumbents. However, their out-of-office beat changed to growth first, stabilization later. Either the futility of the IMF-led prescriptions dawned on them more clearly as they stepped out of the stifling shadows of the IMF. Or, they were then free to express their disillusionment with IMF's remedies. Nonetheless, a consensus has almost emerged that IMF's stabilization or structural adjustment measures would not give growth at the same time. Thus the government wants people to accept to grow at a later date and the disillusioned want to change the government-aided sequence by emphasising the growth first and the stabilization later. And, growth is once again being emphasised by expansionary fiscal and monetary policies.

The upshot of an expansionary fiscal policy adopted in 1997 was mentioned above. As for the expansionary monetary policy, this too was used for a long time but to little avail, following which the SBP decided to go the restrictive route since 2000 to comply with the strictest IMF's conditionalities and propping up the rupee. However, hopes are once again being pinned on expansionary policies to achieve higher growth, the effect of the drought notwithstanding. The question, therefore, is that why must reliance be made only on the fiscal-monetary policy mix when the same did not show the desired results in the not-too-distant past? Is there more to life than the mere interest rate, taxation rate, government expenditures and investment-growth linkages? And, is the rise in unemployment and poverty a mere function of investment and growth or are there other contributory variables?

The model in our mind will remain under-specified if we only consider the above variables to influence investment, growth, unemployment, and poverty as we are neither in America nor in Britain. We are a terribly underdeveloped country with an intricate web of relationships among the various aspects of underdevelopment. Our solutions should, therefore, not be set in the American or the British or the developed world's context. Rather, they should be determined indigenously to influence the macro socio-economic scene. By indigenous is usually meant self-help operations at the micro level which are appreciable efforts to merely get by in an exploitative macro socio-economic environment that neither grows nor distributes equitably. For nations to grow, develop, and have a presence on the world map, it is exceedingly important that a macro-level turnaround is staged so that all and sundry become partners in growth and development. Our fiscal and monetary policies clearly do not have the power and the leverage to effect the above turnaround. Their application in our environment merely indicates some theoretical lessons learnt well in the context of the developed world but whose significance for chronically underdeveloped societies is minimised due to a host of other variables affecting investment: growth, unemployment, and poverty.

Why the decrease in interest rates or even in tax rates did not spur investment in the recent past was because the relationship was not as clear-cut as was made out in a simple bivariate relationship assuming everything else constant which is not so in real life. Interest and tax rates' cut will not induce investment if the overall climate is not optimistic. The business climate is murky primarily due to the uncertainty that prevails vis-e-vis both the political and the economic situations. The economic climate is less than certain as the tariff barriers are being brought down rapidly as a part of IMF's structural adjustment. With lack of skills to operate in a dynamic business environment or paucity of time allowed to adjust, domestic investment remains shy. No matter how much the interest and tax rates are reduced or even development expenditure increased, the above non-quantifiable variable remains a formidable hurdle to investment and growth. While appropriate fiscal-monetary mix would be in order, it will work only in the presence of a visible hand that would guide industrial development with the participation of players from business, industry, and academic.

The day of guided development will not be over until the underdeveloped countries develop. To expose underdeveloped societies to the invisible hand of the markets will leave them groping in the dark, like we have been doing for over a decade. Consequently, it is the process of development that gains salience over the best plans laid out single-handedly. on the basis of wisdom gathered from the developed world which is primarily meant for them. Assuming that the growth process gets triggered as above, will it lead to full employment and poverty eradication? The answer is again in the negative unless people are also engaged in the development process. The neo-liberals will argue that more growth will mean more employment and less poverty. This might be true for a developed economy that comes out of a recession to recall the laid-off workforce for production in a system that already has the necessary infrastructure in place. But this may not necessarily be the case for an underdeveloped economy where the bulk of the population exists on the fringes of a smallish formal economy. The bypassed cannot get automatically engaged in a growing formal economy until pushed into it by a visible hand.

For, first, if growth alone is emphasised for a formal economy, it will tend to grow through capital-and-technology-intensive labour-saving technology which rational private investors in the modern sector would be compelled to adopt. Here the individual and the sectoral rationality diverges from the national need to engage the labour force and raise employment which would also reduce poverty. Therefore, secondly, growth will then redistribute in favour of the asset-owning classes which would not alleviate poverty or decrease unemployment significantly. The traditionalists might keep calculating the meaningless percentage points by which unemployment and poverty might reduce as a result of the above kind of growth. However, this would not bring about a perceptible change on the scene of unemployment and poverty that would still remain highly visible to the naked eye.

The neo-liberals might then focus on welfare programmes for which the growth process might generate resources. But who can be sure that the resources will not continue to get consumed in defence if the external tensions continue to simmer and in debt-servicing if the moot "debt-reduction strategy" fails to show the results? While some of the answers transcend the realm of economics as for defence, some others as for debt-servicing remain trapped in the neo-liberal ideology highly disputed for its appropriateness in the country. Assuming there will be resources for welfare, will we expect the people to remain on it forever? Certainly not. Welfare is supposed to be temporary. Those on it are supposed to get off it soon by getting gainfully employed. The question, therefore, boils down to employment opportunities all of which even a capital- and-technology-based rapidly growing industrial sector cannot provide to a fast- growing labour force for reasons mentioned earlier. They can best be engaged in a formal sector where still the bulk of the population is concentrated, such as rural-agricultural, rather than engaging them in informal sectors on the fringes and the arteries of the cities thus making the society more dualistic than it already is.

Alas, even agriculture is to be corporatized with heavy reliance on capital and technology. We, therefore, have no recipe for employment. At best, the recipe will generate more labour displacement, poverty, and more instability despite the focus on some kind of "stabilization." This ought not to be dismissed as a pessimistic view, especially by those who look the other way from what the reality is. It is important to see the reality as it is, so that the sordid reality may be sorted out. Attempts at addressing the reality is optimism and not pessimism as the supporters of IMF-led stabilization or the neo-liberals might try to make the people believe.

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