By Shahid Javed Burki
June 12 2014
It was the push of the state to back the economic system in the early 1990s in both India and Pakistan that increased the rate of economic expansion. The Indian economy ‘awakened’ following the reforms introduced by the then finance minister, Manmohan Singh. The rate of GDP increased almost three-fold. This burst of economic energy lasted for a quarter century. Pakistan’s growth spurt lasted for a much shorter period since the Indian fundamentals –– in particular the rates of domestic savings and investment –– were much more robust than those of Pakistan. But economic growth stalled in both countries in the early 2000s and produced the political convulsions that came with the elections in both countries.
Both the PML-N of Nawaz Sharif and Bharatiya Janata Party (BJP) of Narendra Modi promised the same approach to economic revival. As The Washington Post editorialised, the Modi victory “reflected a deep popular dissatisfaction with the declining momentum of what was once known as ‘rising’ India. The incumbent Congress Party suffered a historic defeat that can be attributed to its failure to sustain India’s economic growth or effectively combat corruption. Mr. Modi offered a compelling alternative as a leader with a record of overseeing a decade-long boom in the state of Gujarat”.
Nawaz and Modi’s electoral programmes and speeches used the same approach to attract voters to their side. There was to be economic growth, improved governance, better provisions of public goods, large investments in infrastructure and jobs for the youth. The energy of the private sector was to be mobilised to lead the economies out of stagnation and towards buoyant growth.
The disgruntled elements in the two countries bought the message; many of them switched sides from the populism of the left to the right. Thomas Friedman of The New York Times has called this group the ‘square people’. They are the “newly connected and aspiring middle classes who have gathered in the squares from Cairo to Kiev, Istanbul to Tehran, and Tunis to Moscow to demand a greater voice in their future and for better governance. A lot of leaders are discovering that these Square People are like a spontaneous third party that has emerged between themselves and their tame traditional opposition, and as a result, their politics is getting a bit crowded…”.
In the case of India and Pakistan, the ‘square people’ description can only be applied metaphorically. Those who voted out the old order and ushered in a new one did not gather at a public place but under the tents of established political parties. They will stay there only if the parties they have chosen can deliver what they, the people, expect. This leads us to the question whether the models presented in the barest outlines to the people –– by the parties and their leaders –– will deliver the results that are expected?
If this question were to be posed to Thomas Piketty, the author of the book Capitalism in the Twenty-First 21st Century, that has taken the world of economics by storm, the answer will be ‘probably not’. In giving that answer, Piketty has history on his side. Using data collected admittedly from the countries in the developed world, the French economist shows why there is inherent tendency in the type of capitalism promised by Nawaz and Modi to take the countries towards extreme inequality. Piketty’s arithmetic is simple. Over time, output per person –– productivity –– trends to increase at an average of one to 1.5 per cent. On the other hand, the average return on investment over the long-run ranges between four and five per cent. Compound this difference over time and we begin to see why the top one to five per cent has accumulated much of the incremental wealth, leaving little to be shared by the vast majority. We are back to Mahbubul Haq’s ‘22 families’.
There is, of course, a way out by investing in human capital, and thus, increasing the rate of growth in productivity and income from the use of labour. This will require an active and honest state –– a state that is able to collect a much larger share of incomes of the rich to improve the human capital of the poor. Piketty’s prescription is an annual global tax of up to two per cent combined with progressive income tax rates as high as 80 per cent. Will the Sharif and Modi governments be able to go anywhere near these levels of taxes, especially when they are beholden not only to the ‘square people’ but also to those who want unconstrained capitalism to prevail? We will get an answer to this question in the budgets the two governments will present in the next few weeks.
Originally published by Tribune Pakistan
By Shahid Javed Burki
June 12 2014
It was the push of the state to back the economic system in the early 1990s in both India and Pakistan that increased the rate of economic expansion. The Indian economy ‘awakened’ following the reforms introduced by the then finance minister, Manmohan Singh. The rate of GDP increased almost three-fold. This burst of economic energy lasted for a quarter century. Pakistan’s growth spurt lasted for a much shorter period since the Indian fundamentals –– in particular the rates of domestic savings and investment –– were much more robust than those of Pakistan. But economic growth stalled in both countries in the early 2000s and produced the political convulsions that came with the elections in both countries.
Both the PML-N of Nawaz Sharif and Bharatiya Janata Party (BJP) of Narendra Modi promised the same approach to economic revival. As The Washington Post editorialised, the Modi victory “reflected a deep popular dissatisfaction with the declining momentum of what was once known as ‘rising’ India. The incumbent Congress Party suffered a historic defeat that can be attributed to its failure to sustain India’s economic growth or effectively combat corruption. Mr. Modi offered a compelling alternative as a leader with a record of overseeing a decade-long boom in the state of Gujarat”.
Nawaz and Modi’s electoral programmes and speeches used the same approach to attract voters to their side. There was to be economic growth, improved governance, better provisions of public goods, large investments in infrastructure and jobs for the youth. The energy of the private sector was to be mobilised to lead the economies out of stagnation and towards buoyant growth.
The disgruntled elements in the two countries bought the message; many of them switched sides from the populism of the left to the right. Thomas Friedman of The New York Times has called this group the ‘square people’. They are the “newly connected and aspiring middle classes who have gathered in the squares from Cairo to Kiev, Istanbul to Tehran, and Tunis to Moscow to demand a greater voice in their future and for better governance. A lot of leaders are discovering that these Square People are like a spontaneous third party that has emerged between themselves and their tame traditional opposition, and as a result, their politics is getting a bit crowded…”.
In the case of India and Pakistan, the ‘square people’ description can only be applied metaphorically. Those who voted out the old order and ushered in a new one did not gather at a public place but under the tents of established political parties. They will stay there only if the parties they have chosen can deliver what they, the people, expect. This leads us to the question whether the models presented in the barest outlines to the people –– by the parties and their leaders –– will deliver the results that are expected?
If this question were to be posed to Thomas Piketty, the author of the book Capitalism in the Twenty-First 21st Century, that has taken the world of economics by storm, the answer will be ‘probably not’. In giving that answer, Piketty has history on his side. Using data collected admittedly from the countries in the developed world, the French economist shows why there is inherent tendency in the type of capitalism promised by Nawaz and Modi to take the countries towards extreme inequality. Piketty’s arithmetic is simple. Over time, output per person –– productivity –– trends to increase at an average of one to 1.5 per cent. On the other hand, the average return on investment over the long-run ranges between four and five per cent. Compound this difference over time and we begin to see why the top one to five per cent has accumulated much of the incremental wealth, leaving little to be shared by the vast majority. We are back to Mahbubul Haq’s ‘22 families’.
There is, of course, a way out by investing in human capital, and thus, increasing the rate of growth in productivity and income from the use of labour. This will require an active and honest state –– a state that is able to collect a much larger share of incomes of the rich to improve the human capital of the poor. Piketty’s prescription is an annual global tax of up to two per cent combined with progressive income tax rates as high as 80 per cent. Will the Sharif and Modi governments be able to go anywhere near these levels of taxes, especially when they are beholden not only to the ‘square people’ but also to those who want unconstrained capitalism to prevail? We will get an answer to this question in the budgets the two governments will present in the next few weeks.
Originally published by Tribune Pakistan