By Ali Salman

International lending agencies want Pakistan to launch public works programmes to contain rising unemployment and poverty, instead of focusing only on growth. This is a mirage hidden in a trap.

The scheme seems to represent the collective wisdom of the World Bank, the Asian Development Bank, USAID, and the UK’s Department for International Development. They say India and China have failed to eradicate poverty despite impressive growth, so Pakistan should focus on living standards instead of growth, Pakistani press reported on 12 May.

For every complex problem, there is a solution which is neat, simple and wrong. This is a classic example.

Many corrections are in order.

Since China opened up its economy in 1978, more than 400 million people have lifted themselves out of poverty. India started much later, in 1992, and is still far from embracing a full free-market economy yet it has high growth combined with very low inflation. On this alone, the consensus of the international lending agencies is wrong and it is hard to understand how they think growth has failed to improve living standards, whatever poverty still remains.

The agencies also seem to have a false belief in full employment. Current unemployment in Pakistan is around 7%, very close to a natural rate of 6% (because of changes in skills, searching for a job, or simply unwillingness to take a job). On this too, the aid agencies are creating a false alarm.

Creating jobs without production is the world turned upside down. In their book “What Everyone Should Know about Economics and Prosperity,” James Gwartney and Richard Stroup, like many other economists, explain that “focusing on jobs is a potential source of confusion. More employment will not promote economic progress, unless the employment expands output. We do not need more jobs, per se. Rather we need more productive workers, more productivity-enhancing machinery, and more efficient economic organization so we can produce more output per capita.”

The Pakistani government has tried public works programmes in various forms under different regimes. Such Keynesian approaches of increasing demand through supply-side measures have only resulted in large fiscal deficits. They have also caused a rise in inflation as the investments in public works produced nothing: they increased income per worker but did not increase production. As a result, there was more money than goods. We call this inflation.

The government can fund such programmes only through taxes or from borrowing, if not printing money. A populist government cannot take the risk of imposing high taxes so it borrows. The Ministry of Finance Debt Policy Statement 2009-10 shows that Pakistan has doubled its debt in last five years. Domestic debt increased from USD26 billion to USD48 billion, while foreign debt increased from USD23 billion to USD50 billion. Borrowing per se is not bad, as Geoffery E. Wood, in his ‘Fifty Economic Fallacies Exposed’ has explained, “there is nothing wrong with borrowing; what matters is what it is for.” Unfortunately, Pakistan has not used borrowed money sensibly. Borrowed money has been funneled into servicing of debt or government on-going expenditures. Unlike private sector borrowing, where possibility of repayment remains bright, public sector borrowing does not have this advantage.

The international lending agencies also say the lack of private sector capacity is a reason to invite the government to assume the role of job creation. Sadly, these agencies have only ensured that their fears about Pakistan’s private sector become reality. We can only enhance the capacity of the private sector by giving it more space, not by crowding it out.

So the lending agencies’ advice is thoroughly wrong. But it will be welcome to the socialist-populist tendencies of the present government (reversal of privatisation, restoration of labour unions, price controls, etc.).

Ultimately, the burden of such schemes will be borne by businesses and the relatively prosperous professional and business class through taxes and other levies, plus even more borrowing beyond our means. Ultimately, the whole country bears this burden and gets nothing in return.

Focusing on jobs alone as an economic development strategy is patently wrong. There is no useful employment without actual production, meeting real demand. Armies give the job of digging a hole to fill it in, just to keep the men in shape. But for a nation, such holes can only bury our future prosperity.