Pakistan’s One Percent

Why aren’t we able to see any qualitative changes in Pakistan? Why can’t we arrest the rising inequality, governance and corruption and environmental degradation? Some will point to the dismal GDP of past year and may even argue that civilian government is to blame for the faltering economy.

But all is not that bad in Pakistan. Adnan Ahmed Yousif, chairman of Al Baraka Bank Pakistan, said last week: “Given the difficult political and economic conditions that continued to prevail in the global markets in general and in Pakistan in particular specially in the year 2011, where the Pakistani economy only achieved a 2.4 per cent growth, we are pleased with the financial results achieved by the Bank in 2011.”

And pleased, he should be, for achieving 177 percent increases in total operating income in 2011. Ask yourself if the success of Al Baraka Bank is an aberration.

We know that numbers don’t lie but can be easily manipulated. Some argue that lack of growth is solely because of the failure of the civilian government and using the same data, others can demonstrate how military rule is lethal for economy. Both these positions, however, focus on the pace of growth. Statisticians and economist have a way with numbers and can explain away aberrations and trends that gloss over the key questions: why can’t we see “the type of economic growth that especially reduces extreme poverty, narrows structural inequalities, protects the environment, and sustains the growth process itself?” The key questions that need to be understood about economy is type of growth.

Economist often stick to tangible, ‘hard numbers’ because GDP is easier to quantify than intangible value gained from reducing extreme poverty, narrowing inequalities, protecting the environment, and sustaining the growth process itself.

I believe intangible values can be quantified as well. By the process of reducing uncertainty, we can speak with a level confidence about the value and thus quantify elements like poverty reduction. But I don’t want to go off on a tangent. Several studies have demonstrated (I am referring to Ramon Lopez of World Bank) that “some growth patterns systematically reduce poverty and inequality, but others do not. And some growth patterns lead to underinvestment in human capital, overexploitation of natural resources, and degradation of the environment – patterns inimical to the sustainability of growth.”

A recent article in the Islamic Business and Finance magazine quotes the former governor of the State Bank of Pakistan, Ishrat Hussain, as saying: “the Islamisation of the economic system will strengthen the economy, particularly income distribution and poverty alleviation, which have proved elusive under the present western economic model.” I will leave it up to you to either agree or not that a particular type banking system alleviates poverty. But a stated goal has been: “to explore the unique features of Islamic finance for the larger good of society particularly in the context of economic growth and poverty alleviation. Islamic finance can be a powerful tool for inclusive growth and amelioration of the conditions of poor in Muslim countries.”

The same publication also quotes Saleem Ullah, the director of the Islamic banking department at the State Bank of Pakistan, as saying: “the share of the industry in the banking system has risen to over seven per cent from just 0.5 per cent in 2002.”

Now that’s sizable growth. Now ask yourself has this growth in Islamic banking reduced poverty in Pakistan? Another interesting statement in this feature attributes growth in Islamic banking to “aggressive advertising.”

Zahid Mansoor, treasurer at Dubai Islamic Bank (DIB) Pakistan, is quoted saying: “If you create awareness in the minds of these people, there is significant potential to take Islamic finance beyond a niche market and make it the main choice for banking.” I agree, but wouldn’t that apply to any other form of banking?
Nevertheless, the main question that I ponder most is that structural inequalities in Pakistan are growing faster. I know it is a cliché but rich are getting richer in Pakistan. For several reasons, mostly because of the similarities in our political history, I like to compare Pakistan with Chile.

Economists agree that Chile has been a successful case of development. Economic growth, indicated by growth in banking sector as well, is coupled with a significant reduction in extreme poverty. With average per capita growth rate of slightly over 4 per cent over a period of twenty years, Chile has halved extreme poverty from approximately 40 percent down to less than 20 percent of the population.

If you average out Pakistan over last 20 years, per capita growth is similar but unlike Chile, Pakistan has failed to reduce poverty. The main reason is the lack of an adequate public expenditure policy which emphasizes the provision of public goods and social expenditures; a policy that is committed towards poverty reduction. Pakistan’s tax system has failed to raise sufficient revenues to afford expenditure policies at sufficient levels and an abnormally high defence spending has eroded whatever little revenue is collected. Enormous legal tax loopholes benefit mainly the very rich.

With an inadequate public expenditure policy, a failed system of revenue collection there is not much that Islamic banking or Takaful (insurance) industry can do to reduce poverty. But it will make the Islamic bankers and insurance firms very, very rich, indeed!

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This article appeared in The News on 4/1/2012 http://e.thenews.com.pk/4-2-2012/bfr_page3.asp