ECONOMYWATCH: Focusing on reforms with a human face

By Kaleem Omar

In South Asian countries even periods of high GDP growth have tended to leave huge numbers of rural and urban poor outside the loop. Pakistan’s budget makers therefore need to focus on policies aimed at improving the economic lot of the poor, creating more jobs for them, providing them with basic services such as electricity and potable water and addressing some of the country’s most chronic social sector problems, including insufficient, ill-equipped and poorly funded government schools and colleges and the lack of proper healthcare facilities in the rural areas.

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Incoming Indian Prime Minister Dr Manmohan Singh, who, as finance minister in the Narasimha Rao government, oversaw India’s first round of economic liberalisation in 1991, struck the right note on Thursday when he said that he would reshape economic reforms to benefit millions of India’s poor, protect workers in state-run companies and boost farm output.

“I have always been saying that we need reforms,” said Singh, 71, an Oxford-educated economist and a former governor of the Reserve Bank of India. “We will increase reforms, but it will be reforms with a human face, reforms that benefit the common man of our country,” he told a news conference in New Delhi.

When Singh launched his economic liberalisation policy in 1991, he candidly admitted that many of its key measures had been inspired by the deregulation of Pakistan’s economy initiated by the Nawaz Sharif government a year earlier.

The Nawaz government, however, went back on one of the central elements of its deregulation policy when it froze foreign currency accounts in June 1998, reducing remittances from overseas Pakistanis and other private foreign currency inflows to a trickle, and resulting in a severe loss of investor confidence – a setback from which it took Pakistan years to recover.

After the Musharraf government took over in October 1999, one of the first things it did was to appoint New York-based, Citibank executive Shaukat Aziz finance minister. When the elected Jamali government took office in November 2002, President Pervez Musharraf made sure that Aziz was retained as finance minister in the new government to ensure continuity of the economic policies and reforms initiated by the Musharraf government.

Aziz, who holds an MBA degree from Karachi University’s Institute of Business Administration, has been finance minister now for four-and-a-half years. During that time he has presented four federal budgets and presided over a dramatic improvement in the economy, with most macroeconomic indicators, including foreign exchange reserves, remittances, exports and aid inflows, showing an upward trend.

What Aziz now needs to do, starting with the budget for fiscal 2004-05 due to be announced on June 5, is to take a leaf out of Manmohan Singh’s book and focus on economic reforms with a human face.

One of the key areas of focus should be education, including providing more money for poorly funded government schools and colleges, boosting adult literacy, and building a chain of polytechnics across the country – at least one in each tehsil of every district, for starters – to provide vocational training to large numbers of young people in the rural areas and urban population centres to equip them with the skills they will need to find jobs. Tokenism will not do the trick. It has to be a massive programme, commensurate with the magnitude of the problem in a country of 150 million people.

“Knowledge is like light,” says a World Bank report. “Weightless and intangible, it can easily travel the world, enlightening the lives of people everywhere. Yet billions of people still live in the darkness of poverty – unnecessarily. Knowledge about how to treat such a simple ailment as diarrhoea has existed for centuries, but millions of children around the world continue to die from it because their parents do not know how to save them.”

Health problems are especially common in rural communities, including those in Pakistan where there are often no healthcare services or medical clinics within easy reach. And even where such facilities do exist, they are often poorly funded, ill-equipped and lacking in sufficient numbers of properly trained staff. Water-borne diseases, most of whose victims are children, are also all too common in rural areas, due to people not having access to safe drinking water and lacking the knowledge to adopt even low-cost water-purification techniques. It is estimated that nearly 70 per cent of all diseases afflicting children in Pakistan’s rural areas are water-borne.

Pakistani policy makers need to address such health problems on a priority basis. The quantum of money to be allocated for healthcare in the forthcoming federal and provincial budgets, and future budgets, should reflect these priorities, with the expansion and upgrading of health services in the rural areas getting special attention.

Poor countries – and poor people – differ from rich ones not only because they have less capital but because they have less knowledge. As the World Bank report notes, “Knowledge is often costly to create and that is why much of it is created in industrial countries. But developing countries can acquire knowledge overseas as well as create their own at home.” Forty-five years ago, Ghana and South Korea had virtually the same income per capita. By the early 1990s, however, South Korea’s income per capita was six times higher than Ghana’s. Some analysts reckon that half of the difference is due to South Korea’s success in acquiring and using knowledge.

“Knowledge also illuminates every economic transaction, revealing preferences, giving clarity to exchanges, informing markets,” says the World Bank report. “And it is lack of knowledge that causes markets to collapse, or never come into being. When some producers began diluting milk in India, consumers could not determine its quality before buying it. Without that knowledge, the overall quality of milk fell. Producers who did not dilute their milk were put at a disadvantage, and consumers suffered.”

Sometimes, however, it is not lack of knowledge but market manipulation by individuals or companies in rich industrial countries that cause markets in developing countries to collapse. That’s what happened in Southeast Asia, for example, when Western speculators suddenly pulled their money out of Thailand’s share market in July 1996, causing the country’s currency (the baht) to collapse and triggering a financial crisis across the region that lasted for more than three years.

Poor countries also differ from rich countries in having fewer institutions to certify quality, enforce standards and performance, and gather and disseminate information needed for business transactions. Often this hurts the poor. For example, village moneylenders often charge interest rates as high as 80 per cent, because of the difficulty in assessing the creditworthiness of poor borrowers.

Following the pioneering successful example of Bangladesh with its Grameen Bank scheme to provide low-interest loans to the rural poor for income-generation mini projects, other developing countries have begun setting up similar schemes. Pakistan’s Khushalli Bank scheme is a case in point. Set up by the Musharraf government three years ago, the bank is now expanding its operations to cover more rural communities. But the pace of expansion is still too slow and needs to be sharply speeded up in order for the scheme to have a significant impact on poverty alleviation across the country.

Like many other developing countries at the low end of the income scale, Pakistan needs to look at the problems of development in a new way – from the perspective of knowledge.

As the World Bank report notes, there are many types of knowledge, but two sorts of knowledge and two types of problems are especially critical for developing countries.

The first is knowledge about technology or simply know-how. Examples are nutrition, birth control, sanitation and hygiene. Typically, developing countries have less of this know-how than industrial countries, and the poor have less than the higher income groups. These unequal distributions across and within countries is sometimes called the knowledge gap.

The second is knowledge about attributes, such as the quality of a product, the diligence of a worker, or the creditworthiness of a firm – all crucial to effective markets. The difficulties posed by incomplete knowledge of attributes, or lack of such knowledge, are information problems. Mechanisms to alleviate information problems, such as product standards, training certificates and credit reports, are fewer and weaker in developing countries. Information problems and the resulting market failures especially hurt the poor.

“The twin issues of knowledge gaps and information problems cannot be untangled in real life: to unleash the power of knowledge, governments must recognise and respond to both types of problems, often simultaneously,” says the World Bank report.

Closing knowledge gaps will not be easy, however. For one thing, developing countries like Pakistan are pursuing a moving target, as the high-income industrial countries constantly push the knowledge frontier outward. Indeed, even greater than the knowledge gap is the capacity to create knowledge. Differences in some important measures of knowledge creation are far greater between rich and poor countries than even the huge difference in income.

High income economies, those with a GDP per capita of $ 16,000 or more, spend about $ 220 per million of population on R & D (Research & Development). By contrast, low income economies, those with a GDP per capita of $ 328 or less, spend only about $ 1 per million of population on R & D. Thus, while the GDP per capita of high income economies is 48 times more than the GDP per capita of low income economies, R & D spending by high income economies per million of population is a staggering 328 times more than R& D spending by low income economies per million of population.

These figures show that, in R & D spending terms, the creation-of-knowledge gap between high and low income economies is almost seven times greater than the GDP per capita income gap.

But developing countries can acquire knowledge that is readily, and, thanks to the information revolution, increasing easily and cheaply, available in rich countries and do need to reinvent the wheel in order to get their economies moving toward high rates of growth, as the example of China shows. For the past quarter of a century, the Chinese economy has averaged an annual growth rate of 9 per cent or more, doubling its GDP every ten years – a feat that took the United States 50 years to achieve in the 19th century (from 1850 to 1900). If China can do it, so can other developing countries like Pakistan.