Dr Abid Qaiyum Suleri
suleri@sdpi.org
Assessing micro-economic implications of macro level policies in international trade is one of the difficult questions today. One hears convincing arguments from proponents of economic reforms and their opponents on the issue.
One would like to raise some fundamental questions whose answers may provide the readers a framework for further debate:
Rising inequalities do matter in the context of rising growth. However, it serves the political interest of governments to project rising growth and to ignore rising inequalities. It is easy in our circumstances to confuse growth strategies with distributional implications of growth.
“Increased per capita income” is used as a common indicator to assess distributional implications of growth. However, such increase may be associated with rising income inequality or a growing incidence of poverty. Likewise “development” is another vague term that is often misused by various players of the game. Macro-development as a result of increased economic growth may lead to decreased social development. It has been admitted by various studies conducted by the ADB, World Bank, UNCTAD, WTO and independent researchers that macro-development had adverse effects, including a sense of increased marginalization, upon the poor.
Though it is not easy to measure poverty, the negative or positive effects of economic reforms on poverty reduction cannot be studied in isolation.
In order to assess whether the decision to undertake economic liberalization by most developing countries was a well-informed one or undertaken to assuage creditors, we can take major South Asian countries as a case study.
Bangladesh started implementing trade reforms in 1980s due to Washington Consensus, GATT, and due to WTO. Since then, it achieved food sufficiency. Its’ GDP broke the 4 percent syndrome and entered the 5 percent bracket in the second half of 1990s, with its annual population growth lowered to 1.5 percent (half compared to 1971).
However, to achieve the macro development targets, Bangladesh economy had to shift from agriculture to industry and to services. The contribution of agriculture to GDP, therefore, has declined from more than 50 percent in 1970 to 25 percent now, whereas the contribution of services sector has gone above 50 percent. This has raised the question of food insecurity (food sufficiency and food security are two entirely different phenomena).
Personal income inequality in Bangladesh, meanwhile, has increased during the market reform period (1991-1998). Moreover, consumption/income inequality is much greater in urban areas, and there is no reduction in the incidence of rural poverty due to economic reforms. Apprehensions of mass unemployment after the phasing out of textile quota regime is evidence that “imported” economic reforms in Bangladesh have turned its economy into a highly specialized one, and “putting all eggs in one basket” is leading to economic insecurity now.
In India, one of the major stimuli for economic reforms was the serious balance of payment situation in the second half of 1991 (The reform process was started by Prime Minister Manmohan Singh who was then finance minister).
However, much of the focus was on macro aggregates such as growth rates, trade figures and export targets with relatively very little attention to the household level. One can argue that had economic growth been the only criterion for assessing the success of a government, then the BJP government was doing extremely well in 2004 and voters should have reelected it. It is an established fact now that there was, and still is, little linkage between trade and poverty reduction in India.
In 1985-86, “import substitution industrialization” policy was abandoned in Nepal under the pressure of Brettonwood institutes. Although Nepal's macro-economic growth improved during the post reform period, measures to achieve the fiscal balance have resulted in contraction of infrastructure budget and social expenditures, making access to basic services difficult for the poor.
On the basis of the Nepal experience, the annual UNCTAD report in 2002 concluded that liberalization has in fact increased poverty in the least developed countries. Nepal has failed to sustain higher GDP growth, and diversify and sustain growth in labor-intensive exports. Nepal's case clearly shows that macro-economic growth cannot be translated into poverty reduction in the absence of physical and human capital and the quality of governance and institutions.
In Pakistan’s case, the impulse to liberalize came from the unsustainable current account deficit, which was the outcome of the overvalued exchange rate and service restrictions in trade and payment regime.
The IMF and World Bank proposed the structural adjustment programme (SAP) to reduce the current account deficit. It was thought that SAP would attract foreign direct investment, facilitate employment and intensive exports, leading to poverty reduction. Resultantly Pakistan has abandoned import substitution strategy, and tariffs in Pakistan (barring auto industry) are now well below the bound tariffs under the WTO.
The decade average for unemployment in Pakistan during 1970s was 2.4 percent, whereas the real GDP growth was 4.8 percent. Unemployment was 3.5 percent in 1980s against a real GDP growth of 6.1 percent during the decade. Interestingly in 1990s, average unemployment further increased to 5.7 percent, while the real GDP growth was 4.6 percent. The statistics indicate a meager relationship between macro economic growth and poverty reduction.
Two factors appear common in South Asian economic reforms. First, all of them were carried out under compulsion or on external advice. Second, due to these economic reforms, trade and exports became the end goals in themselves, and the development of common people was ignored.
According to UNDP's Human Development Report of 2004, almost half of the children under five years of age in India, Nepal, Pakistan and Bangladesh are malnourished and sleep hungry; 107 children out of 1000 die before celebrating their fifth birthday in Pakistan, 93 out of 1000 in India, and 91 out of 1000 in Nepal.
Bangladesh houses 58.9 percent of illiterate adults, Pakistan 58.5 percent, Nepal 56 percent and India 38.7 percent. Moreover, 82.8 percent of Bangladeshi population, 82.5 percent of Nepal's population, 79.9 percent of India's people and 65.6 percent of Pakistan's population are living on less than two dollars a day.
The most worrying thing is that Pakistan was the worst performer from South Asia, and was placed at 142nd in human development ranking (against Nepal's 140th, Bangladesh's 138th, India's 127th, and Sri Lanka's 96th position).
The situation is further aggravated by income and consumption inequalities, as rulers across South Asia are blowing the trumpets of economic successes.
One only has to look at the level of inequalities. According to a news item, 12 Indians were placed in world's richest club. The total worth of the 12 Indian billionaires is 61.3 billion dollars. An average Indian billionaire's worth is 9 million times more than average common person's worth in terms of per capita GDP.
It is time to stop satisfying hungry stomachs with attractive figures on economic growth. Strengthening positive linkage between economic growth and human development can be achieved through a change in paradigm.
We give more importance to equipments of production than human beings. Even today we report human beings as liability and equipment/machines as an asset in our profit/loss statements. We should start thinking other way round if we are sincere in reducing poverty through economic growth.
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