Finally, a Middle-Income Country – By Dr. Niaz Murtaza

Despite challenges, we see the movement upwards

As expected, a recent World Bank report has confirmed Pakistan’s graduation to the ranks of middle-income countries. However, this elevation has generated little national euphoria and even the beleaguered government has forgotten to take credit.  Does this elevation represent anything significant?

The per capita gross national income (GNI) measure generally serves as the official bottom-line for evaluating developmental success and is used to classify countries as low- (below $1,000 per person in 2009), middle- or high-income (above $12,000 per person in 2009).  The GNI’s reliability is often questioned because of measurement challenges. More strategically, people question its validity as a developmental bottom-line since it ignores critical elements of national economic fortune.

The process of development must ensure rising welfare for all citizens. However, a rising per capital national income may not necessarily benefit all citizens if growth is inequitable. The GNI reveals nothing about the extent of inequality and poverty. Growing environmental consciousness has highlighted a second GNI drawback. Given the inescapable limits imposed by nature, states must not aim to maximize but optimize national income. They must ensure reasonable levels of welfare for the current generation while minimizing environmental degradation and leaving adequate natural resources for future generations. Thus, the GNI fails to reflect two critical “outcome” dimensions: equity and sustainability.

The GNI also fails to reflect critical “input” dimensions: capability and vulnerability. First, it fails to reflect the nature of the inputs driving GNI growth. A glance through the roster of high-income countries reveals two sub-groups: those thriving on natural capital (mainly oil producers) and those on high-end human and technological capital.  The second sub-group is obviously on a stronger footing since natural capital is finite. Second, the GNI gives little indication of whether states are diligently minding critical gaps, especially on the external trade balance and the internal governmental fiscal balance, which can trigger economic crises.

A deeper analysis along these four dimensions highlights Pakistan’s multiple weaknesses compared with other middle-income countries. While inequality in Pakistan is relatively modest as reflected by its Gini Coefficient score, almost 60% Pakistanis earn less than the $2 per day poverty benchmark. Moreover, Pakistan’s status on social indicators such as gender equality is poor. While Pakistan’s per capita contribution to global warming is lower than average for middle-income countries, the degradation of its own air and water sources, forests and agricultural land is high.

Pakistan’s status on human capital possession is mixed. Almost half the population is illiterate while the percentage possessing secondary school certification, probably the minimum requirement for even a laborer position in a high-tech factory, is much lower. However, Pakistan produces large numbers of high-quality degree professionals and is probably among the top five exporters of such human capital. Pakistani manufacturing generally utilizes low-end technological capital. Thus, only 1% of its exports are considered high-tech compared with an average of 20% for middle-income countries.

Pakistan’s fiscal position is poor due to a failure to collect adequate taxes and control government expenditures, especially on defense. While the external balance is currently under control, it could deteriorate rapidly if commodity prices increase globally. Moreover, the fiscal imbalance is rapidly taking external debt to unsustainable levels. Thus, the newly-acquired middle-income status veils serious economic problems resulting from mismanagement by successive governments.

Pakistan’s Planning Commission is currently crafting a growth strategy to tackle these challenges. Unfortunately, the current draft is little better than past failed strategies and heavily reflects neoliberal IMF thinking. Stung by the manifest failure globally of its earlier advice for states to focus only on macroeconomic stability and economic liberalization, the IMF has superficially added buzzwords like institutional development and governance to its prescriptions. But the state is still prescribed a minimalist role focused on additionally providing the rule of law and infrastructure and reducing bureaucratic encumbrances for the benefit of the private sector.

However, the history of successful countries in East Asia reflects a more expansive role for the state than under neo-liberalism though well short of that under communism. These states progressively identified more sophisticated industrial and export sectors and actively shepherded their private sectors into them with the help of their Diaspora and/or beneficent superpowers. They generously provided their private sectors with credit, subsidies, market information, infrastructure, technology, human capital and protection from competition while pushing them to achieve stringent performance standards around export targets, product quality and productivity. Neoliberal prescriptions, which the IMF dangles as strategies and end goals, served merely as worthy tactics and means to higher ends under their strategies.

Pakistan should thus abandon IMF advice and emulate the Asian tigers. Unfortunately, recent IMF and WTO policies have drastically reduced the ability of developing countries to adopt similar policies, e.g., smart subsidies and protection for strategic industries. Additionally, the US, hamstrung by its own economic blues, cannot provide the same crucial support to Pakistan that jumpstarted Korean and Taiwanese development.

Thus, in order to proactively shepherd its private sector into more sophisticated sectors, Pakistan will have to creatively scavenge the remaining developmental space still allowed by the global economic czars and link more closely with its two rapidly developing giant neighbors as the center of the global economy fortuitously gravitates to its doorsteps. This will help Pakistan accumulate human and technological capital, increase tax and export revenues, maintain external and fiscal balances, and increase employment opportunities for and the welfare status of the poor.

A sensible agricultural strategy will also be required since 50% of Pakistan’s population lives off agriculture. Fortunately, the rural livelihoods base in Pakistan is still generally viable and with the adoption of suitable policies can provide a comfortable standard of living. The key required policies include land reform to enhance equity and investment in irrigational infrastructure and organic farming methods to enhance environmental sustainability. Such policies can help make Pakistan’s middle-income status a more praiseworthy achievement. However, a celebratory half-cheer is in order even today.

The writer works as a Research Associate on political economy issues at the University of California, Berkeley.

6 responses to “Finally, a Middle-Income Country – By Dr. Niaz Murtaza”

  1. I think the author despite going to Berkeley is on crack. Where are your sources? If Pakistan is really a middle income country, they how come it’s citizens don’t see the trickle down effect?

  2. Trickle down effect is not something that appears in a day. It’s a gradual process. Yes, there are income disparities but the magnitude of inequality will disappear in the long run. Subsequent governments will have to adopt developmental approach.

  3. Hamza, please read the article in entirety and not just the headline. As mentioned by Haider, trickle down has to take time. Hatheli pay sarson uganay say taraqqi nahee hoti!

  4. Hillary Clinton’s false claims on US Aid to Pakistan

    We are all aware of Hillary Clinton’s recent boast in front of the Pakistan media. “We provide more support than Saudi Arabia, China, and everybody else combined, but I will stand here and admit that I’m not sure many Pakistanis know that,” US Secretary of State Hilary Clinton said in Islamabad on May 27. Various media sources in Pakistan and the US have started to scrutinize this boast.

    According tot he Economic Survey of Pakistan “The direct and indirect cost incurred by Pakistan on operations against terrorism during the past 10 years amounts to about USD 68 billion, which is equivalent to almost half of the country’s total debt.”

    * The direct and indirect cost of the anti-terror campaign rose from USD 2.669 billion in 2001-02 to USD 13.6 billion in 2009-10 and the figure is projected to rise to USD 17.8 billion in the current fiscal, roughly equivalent to the year’s tax target.
    * “Since 2006, the war has spread like a contagion into settled areas of Pakistan that has so far cost the country more than 35,000 citizens, 3,500 security personnel, destruction of infrastructure, internal migration, nose-diving of production and growing unemployment.”
    * The US has so far provided USD 13 billion in aid to Pakistan, of which almost USD 9 billion were military disbursements. The government expects to receive USD 1.45 billion this year from the US Coalition Support Fund , under which reimbursements are made for funds that have already been spent.
    * The US has made the process of auditing Pakistan’s requests for reimbursements more stringent and rejected several claims in recent years

    Under scrutiny, Ms. Clinton’s message does not hold water. “Aid” for Pakistan is exaggerated. A lot of it is in the form of loans.

    The US “Aid” is overblown and helps US interests. 50% of the so called US aid has to be spent on US contractors (US law–so this goes back to America), 25% is wasted on administrative expenses, and the rest is given to the US Ambassador’s favorite NGO to be duly deposited in US accounts. Almost none makes it to the Pakistanis. China is spending $30 billion in colossal infrastructure projects like dams, Heavy Mechanical Complex, Electricity grids, power plants, and freeways.

    Much of the American military aid is not “aid” at all, it is reimbursement for monies spent by Pakistan. Most of it comes, in what are called “coalition support funds,” which are intended to reimburse allied militaries for operations beneficial to the United States.

    * The Pakistanis submit their costs; the U.S. decides whether to pay.
    * More than 40 percent of Pakistan’s requests have been rejected. Some of these requests may have been bogus — but a senior U.S. official says not all were.
    * The problem has more to do with American bureaucratic rules than with Pakistani mistakes. The U.S. is now declining to pay for death benefits which it used to pay.
    * The U.S. Agency for International Development commitment to civilian aid has never been vast.
    * Even successful projects can get lost in a roiling nation of perhaps 175 million people that is in the middle of a brutal conflict.
    * Afghanistan gets more than $100 billion and Iraq gets more than $600 billion in aid. Pakistan is about six times larger than either Afghanistan or Iraq, both of which have badly strained American knowledge, resources and patience.
    * Effort to increase civilian assistance to $1.5 billion per year has failed miserably.

    Hillary Clinton recently made the claim.

    “America cannot and should not solve Pakistan’s problems. That’s up to Pakistan. But in solving its problems, Pakistan should understand that anti-Americanism and conspiracy theories will not make problems disappear. It is up to the Pakistani people to choose what kind of country they wish to live in and it is up to the leaders of Pakistan to deliver results for the people.”

    Most Pakistanis think that it is the US that continues to cause problems for Pakistan.

    Figures from US officials reveal that Security-related funding, including the Coalition Support Funds (2002-2010) amounted to about $14.14 billion.

    * This included the operational cost of the 140,000 Pakistani troops deployed along the 2,560 kilometre border with Afghanistan and training programs for the paramilitary Frontier Corps.
    * Almost two-thirds of the amount going into security-related heads, while the social sector and economic infrastructure received the remaining one-third.
    * The USAID and private contractors spent more than 70 percent of the funds allocated for socio-economic development on their own support infrastructure in the recipient country.
    * Half of the money never leaves the company accounts in the USA. The situation in Iraq and Afghanistan is the same.

    This prompted the Pakistani Ministry of Finance officials to seek US clarifications on how $488.537 million being provided under the Kerry Lugar Law Burmen (KLL) were being spent.

    * KLL provided for two modes of assistance: a) ”the budget money worth $1,025.335 million for the year 2010-11, and b) “off the budget” $488.537 million.
    * “Off the budget” assistance: Of the $488 million the USA plans to spend $170 million for International Narcotics Control and Law Enforcement (INCLE), $106.387 million for Office of Transition (OTI) and $60 million for humanitarian assistance, OTI chief mission (small grants funds).
    * The remaining amount of over $240 million will be spent through international NGOs and local NGOs. Pakistani authorities did not know details of this spending.
    * The American “Spent Plan” showed that Washington had so far obligated $1.025 billion for Pakistan after completing congressional procedural requirements.

    The fact remains that the impact of US AID to Pakistan is insignificant.

    * “If US civilian assistance is completely withdrawn, it will only have an impact of 0.14 percent on Pakistan’s GDP growth,” said Shahid Javed Burki, a former finance minister and an ex-vice president of the World Bank (The News, Karachi, April 29, 2011).
    * Burki reached this conclusion after a study he conducted for the Washington-based Woodrow Wilson Centre.
    * The calculations were based on gross aid, and around 40 percent of that amount goes to the American consultants, while Pakistan only receives approximately 60 percent. These are conservative estimates compared with how US aid is being spent in Iraq and Afghanistan, where more than 60 percent of the money remains with the American contractors and consultants.
    * Ishrat Husain, a former governor of State Bank recently said that American aid does not help the government’s precarious fiscal situation in any meaningful way. Only “12-15 percent of the total amount is channelled for budgetary support… Assuming that the whole $3 billion (per annum) in economic and military is disbursed fully, this accounts for less than seven percent of the total foreign exchange earnings of the country… The increase in export revenues and remittances in the current year was almost twice that amount.”
    * World Bank figures also show the net Official Development Assistance (ODA) from all sources to Pakistan has averaged less than 1.5 percent of its Gross National Income in the last five years.
    * According to Sartaj Aziz, a former finance minister, “as long as the multilateral aid continues, it won’t impact Pakistan’s economy.” Out of $1.5 billion per annum authorised by Kerry-Lugar-Burman Act, actual disbursements have been $275 million and $676 million during 2009 and 2010 respectively (including the $500 million for relief and recovery after the floods of last summer).

    The US media is screaming about the “Billions of Dollars” of aid to Pakistan. The reality is different. A recent study found that Pakistan has lost $68 billion in revenue because of the US war on terror. US Aid doesn’t come close to funding the difference. The US public overlooks the cumulative impact of Pakistan’s role in GWOT in terms of loss of domestic and foreign investments, decline in industry, capital-flight. The US and NATO forces abuse Pakistan roads and bridges and do not pay for their maintenance. The loss of infrastructure losses due to the militant activities has created a net loss for Pakistan.

    US Aid in effect creates more problems for Pakistan than it is worth.

    Sources: Agencies, NPR, AFP, BBC, Economic Survey of Pakistan, The Friday Times, Nation, Dawn, Economic Times.