Inequality and the threat to Pakistan’s economic stability

Pakistan’s economy is facing a precarious state due to extractive policies that favor a privileged few. The policies have resulted in high levels of inequality, creating two separate citizenries with completely different expectations and incentive structures. While the powerful enjoy access to opportunities to pursue quality education, initiate and expand businesses, and accumulate generational wealth, other groups have limited or no access to such privileges. This situation prevents the vast majority of the Pakistani population from, as the economist Amartya Sen has noted, "leading lives that they have reason to live."

The UNDP Pakistan National Human Development Report 2020 highlights the significant wealth inequality in the country. The poorest 1 percent of the population only holds 0.15 percent of the national income, while the richest 1 percent has accumulated 9 percent of the national income in 2018-2019. Also, much of the income-generating assets are largely controlled by the country's wealthiest individuals, further widening inequality. For example, 1 percent of the country’s richest people hold 26.4 percent of all personal bank deposits, over 20 percent of farmland, and almost 16 percent of residential property. The disparity becomes even more acute once adjusted for the underreporting of income, especially among the richest households that have many avenues to conceal their wealth.

Furthermore, the underreporting of income among the wealthiest households deprives the government of revenue and impedes effective policymaking. The modified Palma ratio, which measures the ratio between the richest 20 percent and the poorest 20 percent, reveals that the richest quintile earns seven times the income of the poorest quintile after adjusting for pervasive underreporting. The report also underlines the deteriorating plight of Pakistan's middle class over the past few decades.

Despite growing inequality, powerful groups continue to leverage their unequal wealth to reinforce political influence. Policymaking is designed to protect the rent-seeking advantage of the rich through preferential treatment in laws, rules, and regulations. 

Pakistan has the second-lowest HDI value among South Asian countries, which has translated into fewer opportunities for education, healthcare, and income generation. 

Javed Hassan

Inequality resulting from non-inclusive growth policies is further exacerbated by the lack of development of people’s capabilities to lead productive and meaningful lives. Pakistan's HDI value has only increased by 39 percent in the past 27 years, considerably less than the improvements achieved by Bangladesh and India. Pakistan has the second-lowest HDI value among South Asian countries, which has translated into fewer opportunities for education, healthcare, and income generation. Social and economic inequality undermines a meritocratic environment and incentives for productivity gains. Moreover, trade and investment policies are designed to discourage greater openness to trade and investment flows to avoid external competition.

Extractive policies have denied the economy the strength of a sustaining force of productivity gain through innovation and the harnessing of the endowment of innate talent. Policymakers have relied on government borrowing as the engine of growth to fill the demand and employment gap, resulting in Pakistan's burgeoning debt, whose sustainability is now precarious. To avoid defaulting, the government will further exacerbate inequality by undertaking taxation and austerity measures that place much of the burden on the middle class and poorest sections of society. Although the statistics for real wages and unemployment will come out after a considerable lag, it can be surmised that with recent sky-rocketing inflation, increasing levels of unemployment, and decreasing purchasing power, the middle class will be further pushed down the pyramid, and those at the margins below the poverty line.

Although the IMF is an easy target for authorities to transfer blame on for the hardship the public suffers, in reality, the Fund has long recognized the importance of reducing inequality and promoting inclusive growth. The lender has prescribed policies that prioritize economic reforms that enhance social safety nets, promote access to education and healthcare, and improve the business environment. As part of the Extended Fund Facility (EFF) structural reform benchmarks, it has proposed to bring into the tax net those sectors that contribute significantly to the GDP such as retail, agriculture, and real estate. The reluctance to do so is driven by government political exigencies and the influence of powerful interest groups.

To break the cycle of debt and poverty, the government must eliminate income extraction by privileged groups and redistribute some of the savings generated towards income support for the poor and the unemployed. Furthermore, in line with IMF suggestions, an equitable tax regime should be established to generate additional resources to ensure fiscal balance while also creating space for the provision of universal access to high-quality health and education. The time has come to take bold steps that ensure inclusive growth not only to sustain social and political cohesion but also to promote self-sustaining development.

– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.

Twitter: @javedhassan