Reconstruction for economic democracy — II

The writer is distinguished professor of economics at Beaconhouse National University in Lahore

I propose that post-flood reconstruction be used as an opportunity to initiate the reconstruction of our social order for economic democracy.
The institutional structure for economic democracy would provide opportunities to all citizens of Pakistan, rather than a few, to have access to overproductive assets. By bringing the middle class and the poor into the process of investment, there would be a much broader base of investment, competition, efficiency increase and innovation, thereby achieving a sustained and more equitable GDP growth. Three policy initiatives could be considered for initiating a process of sustained economic growth on the basis of economic democracy:
(1) Land for the tiller: a small farmer-based agriculture growth strategy. The government has 2.6 million acres of cultivable state land. It is proposed that this land be distributed amongst current landless tenant farmers, in packages of five acres each. This land for the tiller policy would need to be backed up by establishing what I have called a small farmer development corporation (SFDC) which would provide small farmers with facilities for land development, access over new agriculture technologies (such as tunnel farming, drip irrigation etc.), extension services for developing high value crops, livestock development and production of milk and milk products. The SFDC ought to be owned by small farmers who could buy equity in this corporation through government loans, but would be managed by high quality professionals.
The proposed land for the tiller policy with institutional support of the SFDC would provide small farmers with both the incentive and the ability to increase agriculture productivity. The small farm sector (farms below 25 acres) constitutes a substantial part of the agrarian economy and possesses the greatest potential for productivity increase. Small farms constitute 94 per cent of the total number of farms and 60 per cent of the total farm area. Therefore the proposed land for the tiller policy could enable a shift from the ‘elite farmer strategy’ of the last four decades to a new ‘small farmer strategy’. Small farmers could thus become the subjects of a new trajectory of a faster and more equitable agriculture growth.
(2) For inclusive growth through equity stakes for the poor, the poor can be included in the process of investment and economic growth not merely through micro enterprises, but can be engaged into the mainstream corporate sector as well. The idea here is to establish large corporations, owned by the poor and managed by professionals, in a number of strategic sectors such as milk and milk products, livestock, telecommunications, information technology services, construction and automotive parts production. These corporations could be set up through loans to the poor for purchasing equity stakes in these corporations, and the loans could be returned through dividends earned.
(3) Small scale manufacturing industries require lower capital investment and generate higher employment per unit of output and also have shorter gestation periods compared to the large scale manufacturing sector. Therefore an increased share of investment in this sector could enable a higher GDP growth for given levels of investment as well as higher employment generation for given levels of growth. At the same time if the institutional conditions could be created for enabling small scale industries to move into high value added components for both import substitution in the domestic market and for exports, Pakistan’s balance of payments pressures could be eased. The key strategic issue in accelerating the growth of SSEs is to enable them to shift to the high value added, high growth end of the product market. These SSEs include high value added units in light engineering, automotive parts, moulds, dyes, machine tools and electronics and computer software.
These initiatives for economic democracy constitute a strategy for higher GDP growth through equity. The people would thus become both the subjects as well as the beneficiaries of GDP growth. It would be economic democracy because it would enable growth for the people and by the people. Such an economy could become the basis of sustaining Pakistan’s political democracy for which the people have struggled so long and for which Mohtarama Shaheed Benazir Bhutto gave her life. The best homage to her memory would be to strengthen the foundations of democracy by giving a stake in the country to the poor.
Published in The Express Tribune, October 9^th, 2010.

Reconstruction for economic democracy — I

The writer is distinguished professor of economics at Beaconhouse National University in Lahore

Consider the scale of the destruction resulting from the great flood: over 20 million people affected, homes destroyed, livelihoods lost, canals, barrages, water courses, tube wells and electricity stations damaged, roads and bridges wiped out. My own rough estimate of the reconstruction cost is about $18 billion.
The scale of the required reconstruction effort, while it presents a formidable challenge, also provides a great opportunity. The opportunity is to undertake the structural reforms necessary to place Pakistan’s economy on a new path of sustained and equitable growth. Such a growth process, if achieved, could give a stake in the economy to all of the people rather than a small elite and thereby lay the basis of what in my recent work I have called economic democracy. In this part of the article, I will indicate some of the immediate policy initiatives required, and in the second part, an outline of strategy to achieve economic democracy will be articulated.
For short-term policy imperatives, four immediate economic policy measures may be considered in the context of the reconstruction effort:
1. If the winter (rabi) crop is to be planted and a serious food deficit next summer is averted, immediate measures must be undertaken to provide farmers in the flood affected areas, good quality seed, fertiliser and pesticides together with timely provision of tube well water to enable the planting of wheat in the month ahead.
2. It is time now to consider shifting away from the IMF approach of economic contraction to a new policy of economic stimulation that aims to revive economic growth. Pakistan’s GDP growth has declined sharply to two per cent this year and the per capita income growth has become negative. Not only has this sharply increased poverty and unemployment, it will also result in a slowdown in the growth of government revenues. The former will place further stresses on the fragile democratic structure and the latter will increase the budget deficit. The earlier attempts to cut down the budget deficit (6.3 per cent of GDP this year) through expenditure reduction have failed, and in the years ahead the only viable policy of controlling the budget deficit is by increasing revenues through accelerated GDP growth. Infrastructure projects in the flood affected areas provide an opportunity of doing so.
3. Just before the flood, the food insecure population had been estimated at about 77 per cent, it may now have reached over 85 per cent. There is clearly an urgent need to provide food security to the people of Pakistan in general and in the flood-affected areas of the country in particular, where food insecurity is most intense. In this context the coverage of the social protection measures needs to be enlarged, and the identity and locations of the flood-affected population quickly established so that ATM cards under the Benazir Income Support Programme can be issued as soon as possible.
4. At the same time an employment guarantee scheme in the form of a cash for work programme ought to be launched in the flood-affected areas in the first instance, followed by the rest of the country.
Published in The Express Tribune, October 6^th, 2010

Changing the social order

The writer is distinguished professor of economics at Beaconhouse National University in Lahore

The problem with ongoing discussions in the spheres of economic and political policies is that policy options for change in one sphere are being considered in isolation of the other. Thus issues of corruption, democracy and the rule of law are being divorced from the issues of reviving the economy on a sustainable basis, overcoming poverty and providing basic services to people. When the required changes involve not just tinkering with policy but rather fundamental changes, we must consider an important proposition: Political and economic systems are organically linked within the social order and are subject to what has been called the theory of ‘double balance’: Sustaining fundamental changes in the political system requires changes in the economic sphere and vice versa.
The New Institutional Economics suggests that a social order encompasses the political, economic, cultural, religious, military and educational systems. Therefore, changing the social order involves changes in each of these elements and the relationship between them. There are two kinds of social orders in the contemporary world. The Limited Access Social Order of the undeveloped countries and the Open Access Order of the developed countries. The institutional structure of the former is characterised by a coalition of elite that excludes the majority of the population from the process of governance and growth. On the basis of this exclusion, it generates unearned income for itself, uses its power to structure markets in its favour and creates wide interpersonal and inter regional inequalities. Poverty is endemic in such a social order because it precludes thriving markets and sustained long-term growth. By contrast, the Open Access Social Order exhibits systematic competition in both economic and political spheres, free entry and mobility and hence long-term development.
The policy issue in Pakistan is not merely which sector to select as a ‘driver of growth’, or ending corruption by making an example of a few, but must address the question of why attempts at such policies in the past have failed. Changing the social order is the central challenge for both democracy and development in Pakistan.
The essential feature of this change process, as shown by Douglass C North, John Joseph Wallis and Barry R Weingast (in Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History), is that it initiates “a series of reinforcing changes in institutions, organisations, and individual behaviour such that incremental increases in access are sustained by the existing political and economic systems at each step along the way”.
Let us indicate the doorstep conditions for initiating the process of changing Pakistan’s social order: (1) Rule of law. This involves subordinating individual or party interests to the obligation of maintaining the balance between various organisations of the state as specified in the constitution. The rule of law also requires the development of new norms that can underpin and are consistent with the formal rules specified in the constitution. (2) The military must maintain the integrity of the state by subordinating itself, in actual practice, to elected civil authority as stipulated in the formal rules of the constitution. This change could be facilitated, if elected governments enlarged their space within the power structure, by delivering economic and social justice to the people who are the source of legitimacy. (3) Foreign policy must be driven not by a ‘national security paradigm’ but by Pakistan’s economic interests and the logic of human security. (4) Social and political organisations that align themselves behind the Change Agenda need to develop democratic rules and norms in their organisational structures and should network amongst themselves to create a mutually reinforcing momentum.
In the present critical crisis, creating the basis of a fundamental change in the social order is necessary if state and society are to survive and prosper.
Published in The Express Tribune, November 1^st, 2010.