There are several economic and social issues that are under discussion in Pakistan at this time as people with different political persuasions begin to look seriously for the areas in which they believe that the government stands on weak ground. The two issues that have attracted much attention are persistent poverty and income inequality. My focus will be on inequality.
Inequality became a much-discussed issue with the publication in 2014 of a book titled Capital in the Twenty-First Century by the French economist, Thomas Piketty. In the book, he demonstrated something close to an iron law of capitalism. Relying on his knowledge of copious amount of economic data, he argued that wealth concentrates because the return on capital tends to exceed the general rate of economic growth. Since income broadly tracks wealth, economies become relentlessly more unequal over time. He demonstrated this relationship for all major nations and all historic periods for at least 200 years, with one notable exception – the mid-twentieth century when income and wealth in Europe and the United States became more equal. This happened because of the two great wars which tended to wipe out assets owned by the rich. Since the wars were fought in Europe, this happened more in that continent than in the United States. In fact, the vast expansion of production for the equipment needed for fighting the wars, the opposite occurred in America.
The end of the war turned the attention of American rulers once again to poverty and inequality. It needed Franklin Delano Roosevelt’s New Deal for the state to intervene to help the less advantaged segments of the population. Post-war Europe and America changed the dynamics of political power in both continents. The Great Recession hurt those that had wealth; in Europe, the fascist right and free-market conservatives lost out. However, the Piketty pattern returned after 1973 with deepening inequality. Globalization with freer trade, easier capital and information flows aided the wealthy and punished the poor. This was the case in particular in countries such as the United States that saw a number of industries close their operations and move to the areas where labour was cheap, disciplined and well-trained. China was the main beneficiary. Is there a solution to this problem without going to war to reduce the accumulated wealth of the very rich? Piketty has an answer to this in his latest book, A brief history of Equality which at only 274 pages is considerably shorter than his earlier works. In the new work, he focuses in particular on the revolution in government that liberal and left forces in the industrialized world undertook between 1910 and 1980. During this period, Western societies built robust welfare states, invested heavily in education and other public goods, and considerably narrowed economic inequality – and thus the gap in life chances – between rich and poor. Piketty calls this transformation an “anthropological revolution; for him it represents a social democratic triumph. Taxation was the revolution’s key instrument. In country after country, total tax receipts exploded from less than 10 per cent of national income in 1910 to between 30 and 40 per cent by the century’s middle decades. These tax regimes were highly progressive with the United States surprisingly leading the way by imposing an average top tax rate of 81 per cent of the highest-income earners between 1932 and 1980.
The writer is a professional economist who has served as a Vice President of the World Bank and as caretaker Finance Minister of Pakistan. He can be reached at sjburki@gmail.com
In its landmark report, Pakistan@100: Shaping the Future, the World Bank projects two scenarios. One would take Pakistan to a $2 trillion economy by the year 2047, placing the country in the middle-income Second World group. This is a highly optimistic scenario that requires the country to achieve sustainably high economic growth rates for approximately the next three decades.
The second scenario is extremely depressing. Failing to change the country will cause it to slide further into the abyss of poverty. Pakistan today is standing at a crossroads and, as the report warns, decisions over the next decade will decide Pakistan’s future.
Pakistan occupies a pivotal position in what is described by Peter Frankopan, an Oxford professor, as a ‘silk road’. According to the author of The New Silk Roads, “We are living in the Asian century already, a time when the movement of global GDP from developed economies of the West to those of the East is taking place at an astonishing scale and at an astonishing speed”. Its geographical position provides Pakistan a massive opportunity to transform the country into a trade and transit hub.
Given its geostrategic position, Pakistan has the potential to serve as a nexus for the two routes— the continental Eurasian ‘silk road economic belt’ and the Southeast Asian ‘maritime silk road’.
According to the report, increasing regional integration within South Asia could cause Pakistan’s economy to expand by 30pc by 2047. Stronger regional relations can support Pakistan’s economic transformation and security objectives, increasing its leverage to resolve disputes with its neighbours and freeing up resources for public investment in economic and human development.
But that requires a clear strategy for greater integration with other countries in the region. With clear policy direction and political will, Pakistan could join the other countries as a formidable economic power at the age of 100.