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 USD 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 context, I will indicate some of the short term policy imperatives and then the outline a medium term strategy for achieving sustained growth through equity.
I. Short Term Policy Imperatives. Three immediate economic policy measures may be considered in the context of the reconstruction effort: (i) If the winter (Rabbi) crop is to be planted and a serious food deficit next summer averted, immediate measures must be undertaken to provide farmers in the flood affected areas, good quality seed, fertilizer and pesticides together with timely provision of tube well water to enable the planting of wheat in the month ahead. (ii) 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 2 percent this year and the per capita income growth has become negative. This has not only sharply increased poverty and unemployment, but will also result in a slow down 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 percent 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. (iii) Just before the flood the food insecure population had been estimated at about 77 percent, it may now have reached over 85 percent. 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. (iv) 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.
II. Reconstruction for Economic Democracy. Pakistan’s growth pattern is characterized by spurts of growth followed by stagnation which is symptomatic of an underlying institutional structure that is unable to generate sustained growth. This is because Pakistan’s institutional structure is designed to systematically exclude the majority of the population from the growth process. It is on the basis of this exclusion that rents are generated and appropriated by a small elite. This “limited access social order”, enriches a small elite but deprives the majority of the people of the minimum conditions of civilized life, in terms of food security, safe drinking water, sanitation, quality health care and education. Such a social order that induces endemic poverty and economic deprivation can be a breeding ground for extremism, but cannot be the basis of sustaining democracy. I would propose therefore that the post flood reconstruction provides an opportunity to initiate the reconstruction of our social order for Economic Democracy.
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.
The institutional structure for economic democracy would provide opportunities to all of the citizens of Pakistan rather than a few, to have access over productive assets. By bringing the middle classes and the poor into the process of investment there would be a much broader base of investment, competition, efficiency increase, innovation and thereby a sustained and more equitable GDP growth could be achieved. Three policy initiatives could be considered for initiating a process of sustained economic growth on the basis of economic democracy:
(i) 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 5 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.), provide 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 percent of the total number of farms and 60 percent 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.
(ii) 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.
(iii) Inclusive Growth through Small Scale Manufacturing Enterprises. The 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 both 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.