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.



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