The Paris Club withered away immediately following the end of the Cold War and in its place emerged what was called Pakistan Development Forum which largely remained a lecture theatre where the donors hectored our official economic managers on the so-called Washington Consensus (WC). It was free advice both ways. No charges both ways.
The 1990s were the lost decade as for as national economy was concerned. Agonizing under severe sanctions for crossing the nuclear red-line, and then for actually testing the bombs and finally for the military take-over, the country kept making hand-to-mouth budgets but still on lines prescribed by WC. The result, however, was the same as was seen during the Paris Club days. A handful of small little islands of individual prosperity were seen floating in an expanding sea of poverty.
The unencumbered dollars that came our way during the first five years of the second Afghan war further reinforced the expanding and deepening inequality with most budgetary measures designed to make the rich richer and the poor poorer. The subsequent budgets though suffered the usual acute resource constraints the approach to their preparations had remained unchanged - the WC way.
The next budget scheduled to be announced on May 26, 2017, therefore, is not expected to be anything different from all those previous ones announced over the last at least 40 years. More likely, it would be worse as the balance sheet is expected to be even more debt ridden while fiscal and monetary measures per force are likely to deepen and widen inequality.
Our official economic managers need to understand that without reallocation of resources where they are needed the most for establishing an equitable society it would not be possible to arrest the rot of expanding inequality. And for sustained reallocation of resources intervention of the state has been found to be necessary, even essential. But before that to happen we need to unlearn all that we had been taught by WC.
According to an article (Thatcher, Reagan and Robin Hood: a history of wealth inequality by Andrew Newell, Professor of Economics, University of Sussex) co-published with Conversation on 19 Apr 2017 in World Economic Forum's The Agenda, history provides some clues to how we might go about tackling the inequality problem.
In some Western advanced countries the period after World War II was one of inclusive economic growth. Indeed, income inequality fell and stayed low in most Western countries roughly between 1910 and 1980. What made it fall?
In the earlier years of the 20th Century there was a clear trend of state intervention in the economy, albeit institutionalized differently across countries. It was generated by a mix of factors: social solidarity engendered by the wars, wartime experience of governing the economy, unemployment in the 1930s and the rise of socialist ideas. It accelerated for a decade or so after World War II.
Key features were nationalization, increased provision of welfare, public health and education, and the development of public amenities. Scholars have discerned regional variants: the Nordic Model, Rhine capitalismand so on. Arguably the most important aspects that directly affected income inequality were state involvement in wage setting and redistributive taxes and transfers.
In many countries there were moves to centralize collective bargaining over wages and conditions of work. In the UK, Wages Councils which controlled wages in low pay sectors were introduced in 1909, and national wage setting was introduced during both world wars. From 1945, government-imposed ceilings on pay rises, agreed with unions and employers, were in place much of the time until 1979.
In other countries the process was different. In Sweden, national level bargaining between employers' federations and unions was agreed initially in 1938 to avoid government intervention. In West Germany after World War II, employers' confederations and unions were restructured along industry lines and wage bargaining took place nationally, by industry. In France, unions and employers organisations, together with government, were brought together in Le Conseil Economiquein 1946.Even in the US, the Treaty of Detroit of 1945 created a tripartite system aimed at maintaining industrial peace. Moderation and duty were virtues to be applauded.
Taxation was changing as well. In most Western countries, income tax became a major revenue source in the early 20th Century. As the political tide changed, both Reagan and Thatcher heavily reduced the progressivity of income tax - the extent to which the rate of taxation increases with income. The Organisation for Economic Co-operation and Development (OECD) calculates the extent to which taxes and transfer payments moderate income inequality in its member countries. Their calculations illustrate what economic historian Peter Lindert callsthe Robin Hood Paradox, which is that the highest levels of redistribution occur in countries with the least pre-tax inequality. For instance, among OECD countries, the highest levels of redistribution occur in the Scandinavian countries and the lowest in Mexico and Chile.
Can we infer from this that redistribution works? Could the Mexican government eliminate massive inequality with deep historical roots simply by increasing the progressivity of taxes and transfers? Their Progresa and Prospera programmes have made cash transfers to the poor conditional on them ensuring their children attend school and that the family receive preventative health care. An analysis of these programmes tell that they work well.
There is also international evidence that increases in tax and transfer progressivity do reduce income inequality directly. Calculations have shown that changes in progressivity and changes in income inequality across the OECD countries 2007-2014 are strongly negatively correlated.
In an article (Lessons from Norway, the world's most inclusive economy-published on 12 April, 2017 in World Economic Forum's The Agenda) Gemma Corrigancontends that Norway which tops the 2017 index of inclusive economiesdoes things differently. The small Scandinavian country of 5 million people has the lowest income inequality in the world, helped by a mix of policies that support education and innovation. It also channels the world's largest sovereign wealth fund, which manages its oil and gas revenues, into long-term economic planning.
Norway has managed to translate economic growth into high and rising living standards, with a GDP per capita of $89,741, well above the average of $44,656 for 30 advanced economies covered in the report. Although the cost of living is also high in Norway, when adjusted for purchasing power parity it still has the highest median income of the economies covered, at $60.4 per person per day.
How does it achieve this? Like the other Nordic countries and Switzerland, Norway does not have a statutory minimum wage, but 70% of its workers are covered by collective agreements which specify wage floors. Furthermore, 54% of paid workers are members of unions, compared to 11% in the United States and 25% in the United Kingdom. Overall, Norway tops the employment part of index, both in terms of how accessible and stable employment is, and how well workers are paid.
Inclusiveness goes beyond employment to take into account other key factors such as education, efforts to close the gender gap and the carbon intensity of its economy.
On the education front, Norway comes in second on the index for the quality of the schooling it delivers, while it also tops PISA's ( Program for International Students Assessment ) Social Inclusion Index, a measure of how socio-economically diverse its schools are.
The government has prioritised education as a means to diversify its economy and foster higher and more inclusive growth. It promotes Science, Technology, Engineering and Mathematics (STEM) subjects, along with vocational and entrepreneurial skills. This year, it has launched a five-year Masters course for teachers, aimed at raising the quality of teaching and raising the status of the profession. In the business sphere, it runs a Research Based Innovation (BIA) program allowing companies to apply for Research and Development (R&D) grants as long as value is created not only for the company but for society too. Similarly, the SkatteFUNN R&D tax incentive scheme offers a tax credit to encourage R&D spending by Norwegian companies.
Copyright Business Recorder, 2017