Complacency over challenges

BY S H A H I D K A R D A R | 4/14/2015

Published in Dawn

A HUGE employment challenge faces the country.

Every month there are 100,000 new entrants in the labour force. These youngsters, who represent our much-flaunted demographic dividend, need jobs if we are to avoid social unrest. Without productive employment, they will add to the hordes of the visible unemployed youth roaming in our neighbourhoods.

Because they are aspirants to a good lifestyle, they are prepared to adopt whatever means necessary to acquire it. Without meaningful jobs they will earn a living by joining gangs of touts, petty brokers, criminals, couriers for smugglers, etc. Those who are able to muster some funds will pay bribes to get a job in the police, land, labour or some other government department and then fleece the ordinary public to recover the amount they paid to secure the prized sarkari naukri.

Therefore, it would be far more socially responsible for the government`s economic managers to not show their state of permanent denial by constantly talking of higher growths being achieved and the economy being ready to take off. Such facile talk is dangerous because it induces complacency when none is warranted, especially when the evidence on the growth in manufacturing output, use of energy, private-sector borrowing and investment, exports and imports of inputs for production and investment belies such claims.

Islamabad should instead talk of the huge employment challenge facing the country and the dire consequences of these young people remaining unemployed and spilling out on the streets. This fear apparently kept Deng Xiaoping awake at night and led him to initiate the Chinese economic miracle.

A related daunting challenge in the medium to long term is presented by the widening disparities between the rich and the poor. This, combined with fears of growing poverty from high inflation in recent years, is damaging social harmony.

Poverty estimates have always been a controversial matter in Pakistan. Large differences between the incidence of poverty estimated on the basis of actual calories consumed that meet the minimum requirement (the direct method) compared with the expenditure per person with respect to the poverty line (the indirect method). The former is referred to as `malnourishment` which has not declined in the same proportion as suggested by the latter.

The benefits of economic development during the previous decade have largely accrued to the richer and more educated because the bulk of this growth was witnessed in the relatively skill-intensive sectors of finance, telecommunications, IT and oil and gas, and in the capital-intensive industries of cement, motor vehicles and motorcycles, in which those with limited skills, the majority of the labour force, could not participate meaningfully.

Moreover, future employment growth under liberalisation will increasingly depend on skilled labour and the resource requirements (both financial and human) for the creation of such skills will be massive. With growing capital intensity of production processes and the attempt to make gains from economies of scale, simply to remain competitive, it will be difficult to maintain even current rates of employment let alone absorb huge additions to the potential labour force with limited skills.

It is neither desirable nor feasible to separate economic growth from distributional outcomes since they are inextricably linked through employment growth. Jobless growth is not sustainable either in economics or in politics.

Therefore, despite the massive budgetary constraints and the economic and political economy difficulties of raising tax revenues in a slow-growth environment, for political and social stability, there will have to be special efforts to stimulate growth.

There would also have to be some tweaking of spending priorities to help such groups (through direct cash grants/transfers ŗ la BISP and public works programmes for the deserving in a transparent and verifiable manner). These efforts would aim to reduce the worst levels of poverty and ensure inclusive growth.

Admittedly, this is easier said than done, considering the magnitude of financing that would be required to make even a marginal dent in the extreme levels of poverty.

The other possibility of raising the growth rate of the economy could be a lowering of the incremental capital output ratio (the investment in rupees as a proportion of the national output/GDP required for the economy to produce an additional percentage of national output), enabling the production of a higher output from fewer resources.

The prospects of higher productivity through skill improvement do not look rosy considering the poor educational base of the workforce and the lack of public or private-sector investment in skill enhancement. Much of the increase in productivity will, therefore, come from the import of better technology. And this would have to be financed either from larger national savings, higher level of exports compared with imports or foreign borrowings, with all the concerns about the ability of the economy to service the obligations of such debt.

Unfortunately, the constituency for much-needed reforms is rather narrow. The political, economic, military and bureaucratic elite have perpetually looked towards the international community for handouts to pay the bills of the event managers who facilitated this seemingly never-ending ball. On receiving this help, like unrepentant addicts, we go back to our merry ways, as if the swinging party had only been suspended for few days while the host was a bit under the weather.

In fact, we view such assistance as our right and behave as if we have an open-ended licence to mismanage our affairs, expecting the world to rescue us each time from our own brazen excesses, by holding a gun to our temple and threatening the international community to pay up.

The discussion above raises the question: when will the inflection point set in? It has been difficult to predict even in the West with good data and sophisticated models. When will market sentiment change and panic set in? It could be painful, long drawn or a sudden jump over the cliff. What is required are fundamental painful reforms. Much of the discussion tends to be around symptoms, rather like the treatment for blood pressure for a problem that is deep-seated and structural. The disease cannot be cured this way, it requires urgent life-saving surgery. And this can only be done here the patient cannot be shifted.