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April 22, 2019

Welfare in times of austerity


April 22, 2019

On March 27, the PTI government launched ‘Ehsaas’, which aims at transforming Pakistan from an elitist to a welfare state – one of the pre-poll pledges of the ruling party.

Touted as the most comprehensive pro-poor programme ever launched in the country, Ehsaas, translated as empathy or care, is essentially a scheme for poverty alleviation through four means: countering elite capture and inequality in the system; strengthening social safety nets; fostering human capital development; and providing jobs. A dedicated Ministry of Social Welfare will oversee implementation of the programme.

Ehsaas builds on the PTI’s promise to create 10 million jobs, build five million housing units for low-income people, and introduce a ‘pro-worker’ labour policy to harness the capacity of the workforce.

Pakistan has often been described as an elitist state. According to Dr Ishrat Husain, a former governor of the country’s central bank and the author of ‘Pakistan: The Economy of an Elitist State’, the national economy was captured by a narrow elite, who rigged the market and controlled the state. The result was an unenviable combination of an inefficient resource allocation (market failure) and an inequitable income distribution (government failure). This elite has been so powerful that a change in government, or even a transition from despotism to democracy and vice versa, failed to hold it in check. Dr Husain is currently Prime Minister Imran Khan’s advisor on institutional reforms. One hopes his expertise will be instrumental in throwing off elite capture.

The PTI has been a vehement critic of everything ‘old’ Pakistan represented, including its elite capture. As the narrative goes, the previous governments, particularly those of the PML-N, promoted cronyism and rent-seeking. They gave short shrift to social sector and human resource development, and instead (mis)allocated substantial resources to grand infrastructure-related projects. Such projects served as a source of rent for businesses and commissions and kickbacks for the rulers. The outcome, as Dr Husain points out in a general context, was both inefficient and inequitable.

Elitism is a problem that most countries have faced. According to the elite theory popularized by Italian social scientists Pareto and Mosca, all societies are governed by one or more political elites. Democracy is a system in which competing elites vie for supremacy. In the words of Mosca, a parliamentary representative is not someone the people had elected but someone whose friends had arranged for him to be elected. Once elected and in office, the representative has to repay his debt to the friends.

Coming back to Pakistan, it can hardly be denied that by and large governments in Pakistan have put their faith in the trickle-down growth strategy, which has resulted in stunted human capital development and glaring inequalities in income distribution. Not surprisingly, Pakistan is currently ranked 150 out of 189 nations on the UNDP’s Human Development Index (HDI), which comprises three broad indicators: life expectancy at birth, expected and mean years of schooling, and per capita national income. Our ranking is the lowest in South Asia, behind Sri Lanka (76), the Maldives (101), India and Bhutan (130 each), Bangladesh (136), and Nepal (149).

Between 1990 and 2017, Pakistan’s HDI value has gone up from 0.404 to 0.556 registering an average annual growth of 1.23 percent. In comparison, India’s HDI value has increased from 0.427 in 1990 to 0.640 in 2017, recording an average annual growth of 1.51 percent. During the same period, Bangladesh improved its HDI value from 0.387 to 0.608 with an average annual growth of 1.69 percent. Thus although, over the years, Pakistan’s human development performance has improved in absolute terms, other countries in the region have fared much better.

The HDI doesn’t directly take into account income distribution. However, countries’ HDI performance is adjusted for inequality in income distribution and other relevant indicators. Pakistan’s current inequality-adjusted HDI value is 0.387 compared with Bangladesh’s 0.462 and India 0.468. Pakistan’s coefficient of human inequality is 29.6 compared with Bangladesh’s 23.4 and India 26.3. Pakistan’s gini coefficient, which measures inequality of income distribution, for 2010-17 is as high as 30.7; however, it’s marginally better than Bangladesh’s 32.4 and India’s 35.1.

The antithesis of an elitist state is social democracy, which represents arguably the most successful synthesis of mutually incompatible doctrines of capitalism and socialism. In a social democracy, resource allocation is done primarily through market forces but the state intervenes to enhance economic security and redress economic inequality and ensure that the benefits of economic growth reach the public, whom democracy in the end is supposed to serve. The most powerful expression of social democracy has been the welfare state as it worked in the industrial world.

The welfare state arose in Germany and Britain in the late 19th century; however, it developed in Western Europe after the Second World War. The post-war threat emanating from communism, which promised to set up a classless society, was one of the most powerful factors behind the rise of the welfare state. Instead of a revolutionary approach to social justice, it promised an evolutionary path. Intellectually, the welfare state or social democracy questions one of the cardinal assumptions of market economy – that, left to themselves, market forces usher in an optimal outcome. Instead it affirms that the government’s affirmative action – free or heavily subsidized public education and health, social security, pensions, and unemployment insurance – can reduce poverty and unemployment, and increase security and happiness. At the same time, seen from a wider perspective, social democracy served capitalist interests by providing a healthy and skilled workforce, ensuring high levels of consumer spending, and holding social discontent in check.

It was in Nordic or Scandinavian countries – Denmark, Norway, Sweden, and Finland – that social democracy proved a stupendous success. In these countries, social democracy was undergirded by at least four factors: nationwide support for a welfare state, not as a matter of rhetoric but as a matter of contributing to its cause; a general agreement that wages and other working conditions would be determined by a tripartite arrangement of employers, workers and the government; strong contract enforcement; and the willingness and capability of the government to finance social expenditure through taxes.

The greatest challenge in establishing a welfare state is how to finance it. Needless to mention, a welfare state requires an expansionary fiscal policy. Such a policy can be financed either through taxes or through deficit financing, though the latter isn’t sustainable in the long run. Therefore, strong finances are essential for pursuing welfare policies. In Nordic states, where the tax-to-GDP ratio has been on average as high as 40 percent, fiscal expansion was underpinned by tax revenue.

By contrast, in Pakistan, the tax-to-GDP ratio has been as low as 10 percent and public revenue typically fails to meet even current expenditure. Unlike the residents of the Nordic states, Pakistanis by and large are averse to paying income or wealth taxes; they may contribute charity, of course. Therefore, a welfare state can only be set up by racking up public borrowing and thus accumulating fiscal deficit. It is primarily weak finances, not the absence of political will or presence of corrupt leadership, that has made a welfare state a pipedream.

The paramount need to contain the burgeoning fiscal deficit has already stampeded the PTI government into cutting development spending, which sets the stage for putting in place a welfare state. At any rate, contractionary and welfare policies run counter to each other. As another agreement with the IMF is round the corner, the government will have to further tighten its purse strings, which will put the skids under its noble intentions to replace an elitist state with a social democracy.

The writer is an Islamabad-based columnist.

Email: [email protected]

Twitter: @hussainhzaidi

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