Basics of Political Economy

GDP

- A measure of economic activity. Gross Domestic Product (GDP) is a measure of National Income. It isthe total value of all goods and services produced over a given time period (usually a year) by a country. Itexcludes money sent from abroad by citizens. Economic Growth means the increase in GDP.•

GDP = C + I + G + X – P C = consumption – what people spend, I = investment – what peoplesave to invest, G = government spending , X = exports, P = ImportsThe higher the ‘I’, the higher the chances of better future through investments in education, health andemployment generation. Pakistan has a Low savings rate compared to China or India.

Fiscal Policy

: The government generates revenue for itself through taxes and spends this money over the courseof the year. A Fiscal Deficit (Budget Deficit) means that the government has spent more money than what it hasgenerated through taxes. Thus the government will have to take loans from domestic or foreign sources and alsopay interest on it the next year. An important part of fiscal policy is the tax structure – a progressive structuremeans that the government taxes the rich more than the poor? A regressive structure means that poor are taxedmore than the rich. Currently in Pakistan, only the salaried class pays taxes while businesses (including smallshop keepers) usually don’t, thus Direct Taxation (taxation on personal income) is extremely low. To generaterevenue, the government charges Indirect Taxes (Sales Tax) which is regressive as a person who earns 5,000 or50,000 will pay same amount of tax, but in reality the poor pays a much higher %age of tax to income. Pakistangenerates 70%+ taxes through indirect tax. Pakistan has a big black/parallel economy (corruption, drugs)

Budgetary Allocations

: It is also important to understand the breakdown of G – government spending

Is themoney being spent on security - arms, atomic bombs & missiles or is it being spent on education, health &sanitation.

Labor Structure:

It is also important to note that 70%+ people in Pakistan work in the informal sector and thusare not impacted by increase in government’s minimum wage as Minimum Wage only applies to people whowork in factories/industries where labor laws apply. While in agriculture, domestic workers, daily wagers &small entrepreneurs, minimum wage does not apply as their wage is purely market based. The more people, theless the pay. Thus population increase is an important factor which is seldom discussed.

Capitalist, Socialist: Competing Visions:

The descriptions are generalized and current economies are a mix of these visions. Capitalism means that people have the right to Private Property & Free Enterprise (they canstart/run a business). It promotes an individualistic structure and leads to Liberalization of the economy(Privatization of state enterprises and letting the market dictate commodity prices rather than the State fixing it)and Free Trade / Globalization (removal of Tariffs - goods can move from one country to another without anytaxes on imported goods). The socialist vision argues for a collective structure including state owned enterprises(& prices decided by the state) and restricted trade (Import Substitution - A government policy when thegovernment attempts to replace imports with domestically produced goods)From a capitalist perspective, one argues for Trickle down

(The process whereby economic gains fromeconomic growth pass down through entire society ending up with the poor) to improve the conditions of thepoor. From a socialist perspective, to improve the conditions of the poor, Redistribution of Wealth (takingmoney from the rich to give to the poor as state policy – land reforms etc.) is required as wealth is highlyconcentrated and trickle down does not work.

Capital Intensive vs Labor Intensive:

A process which requires a higher proportion of capital (money,investment, machines) to labor is capital intensive. Agriculture before tractors was highly labor intensive. Thecar industry is more capital intensive than the textile (sewing) industry. For countries with high unemployment& huge populations, it makes sense to invest in labor intensive industry to generate more employment.Pakistan

has no

Balance of trade

as Import > Exports. To pay for extra imports, money is used from whatOverseas Pakistanis send, from FDI (foreign direct investments). If it still does not balance (balance of payment

), it will eventually lead to devaluation of the rupee.

For IPSS Political School

Time for land reform

By I.A. RehmanTHE chapter on agriculture in the latest Economic Survey begins with a plea to “developing countries likePakistan to get their acts together and benefit from the current situation by giving more serious attention toagriculture”.The advice is especially relevant to Pakistan because “agriculture is still the single largest sector, contributing21 per cent to GDP and employing 44 per cent of the workforce. More than two-thirds of Pakistan’s populationlives in rural areas and their livelihood continues to revolve around agriculture and allied activities”.This opening paragraph of the chapter takes note of poverty in Pakistan being largely a rural phenomenon; “and,therefore, development of agriculture will be a principal vehicle for alleviating rural poverty.” (And, of course,the global food crisis is offering Pakistan opportunities to get richer by exporting more food).What is to be done about agriculture and for the well-being of the 44 per cent of the workforce and the two-thirds of the population? While asserting that “agriculture will continue to acquire the highest priority from thegovernment”, the Survey merely advocates a shift towards yield enhancement and attention to farm needs. Thisanalysis is characteristic of the policy various governments of Pakistan have followed, that is, to makeagriculture more productive in the interest of the national economy. The interest of two-thirds of the populationis not the focus of government thinking. It is assumed, despite evidence to the contrary, that if agriculture showsa good rate of growth the rural have-nots will automatically receive windfalls.The most critical omission in official thinking was pointed out by a perceptive journalist in this daily: “Theminister evaded the issue of land-holding structure in rural Pakistan that has been identified by economists anda report of the agricultural reform commission as the major hurdle to increasing agricultural productivity.”It is not surprising therefore to find the volatility in agricultural growth (1.5 per cent to 6.5 per cent over sixyears) attributed to vagaries of nature, losses caused by pests and use of adulterated pesticides, and that noreference is made to the plight of small cultivators and landless tenants. For promotion of agriculture reliance isplaced on the inputs formula in vogue since the 1960s. Steps will be taken to ensure greater and betterutilisation of fertilisers, improved seeds, machines, plant protection, better irrigation, and disbursal of largeramounts of credit to farmers. Again, no mention is made of the millions of men and women who toil againstheavy odds except for a reference to an initiative for “upgradation of socio-economic conditions of thefishermen’s community”.There is need to seriously ponder the contribution to stagnation and reverses in agriculture made by thecultivators’ lack of ownership of the means of production. The fact is that small landowners, tenant-cultivatorsand the voiceless haris have been abandoned to adjust themselves to the vagaries of the market, deadlier thanthe vagaries of nature. Largely denied the guidance of the once efficient extension services, the under-privilegedfarmer is changing crop patterns, in panic, that produces results such as replacement of wheat cultivation withsugarcane, unions or tomatoes. It is time the impossibility of moving forward without raising the status of thecultivator was duly appreciated. That will lead to the urgency of land reform, which was high on the nationalagenda for decades till the Zia-created religious courts issued the incredible verdict that land reform is un-Islamic (because one of the regular judges of the Shariat Appellate Bench joined the two ulema-judges toproduce a retrogressive decision by majority). The way peasants were subsequently forced to give up landsacquired under land reforms — by force in Pakhtunkhwa and by legal chicanery in Punjab and Sindh — is amatter of abiding shame for all conscious citizens of Pakistan.Land reform was always advocated on two premises — one economic and the other social. The economic

For IPSS Political School

argument was that smaller owner-cultivated farms achieved higher productivity than large farms operated byabsentee landlords. This view has been challenged by advocates of mechanised, capital-intensive farming onhuge tracts, (including corporate farming). They are not concerned with the consequences of displacement of hundreds of thousands of tenants without any prospects of alternative employment (decent and gainful).However, one may concede that the economic grounds for land reform can be re-examined. But, nothing hashappened to reduce the force of the social argument for land reform. A system of self-cultivated farms isrequired to break the suffocating rule of feudals who prefer dictatorship to democracy, obscurantism to ijtihad,and rule by force to supremacy of reason. Land reform is also necessary to pull a large body of citizens out of medieval bondage, help them realise themselves, and thus avoid the huge loss of human capital Pakistan incursyear after year by denying the people their basic right to land. The case for land reform is as strong as ever. Thefood crisis lends the matter greater urgency.That something can be done to alleviate the misery of tillers of the soil short of an over-arching land reformcannot be denied. The many sound proposals in this area include a plan to abolish bonded labour in agriculturenot only in Sindh but also in Punjab, the International Labour Organisation — supported move to settlehomeless haris in new villages, settlement of cultivators’ claims on military farms in Okara and elsewhere,creation of education and skill-development facilities for hari/kisan children; unionisation of agricultural labour,et al. While such measures are welcome, they will only ease the rigours of the archaic land ownership patternPakistan has maintained at a terrible cost to the present and future generations. They cannot be a substitute forland reform.Perhaps this is an appropriate time to plan land reform, not merely in terms of revision of land ownershippattern but also, and more essentially, in terms of land utilisation practices and social justice to a large mass of people. There may still be in the PPP some who could own the legacy of Zulfikar Ali Bhutto. Nawaz Sharif andShahbaz Sharif also have been known to favour land reform. At least they did so a few years ago when theyasked the World Bank to present the case for land reform before the members of the Punjab Assembly.