Thread: The economics of calamity

The economics of calamity
Monday, August 30, 2010
Shahid Kardar

A whole raft of estimates is floating around on the likely economic impact of our worst floods in living memory. These guesses relate to (a) the loss of some momentum this year in the rate of growth that was already uncertain; and (b) the long-term implications of the damages caused to physical infrastructure and people’s morale. That there will be a major impact on this year’s agricultural and industrial growth rate, exports, the trade deficit, the exchange rate of the rupee, food inflation, poverty (especially with loss of food grain and livestock by small subsistence farmers), government resource availability and budget-deficit targets is fairly obvious.
More accurate estimates of likely losses will become clearer over the next four to six weeks as the waters recede, when it will become possible to conduct realistic assessments of the extent of the destruction.
A worst-case, highly exaggerated, scenario suggests a zero GDP growth rate against a “target” of 4.5 per cent and inflation touching 25 per cent for the year. Since 80 per cent of the country has not been affected and policy options available to the government to facilitate speedy import of essential food items, to ward off shortages owing to crop losses or destroyed road networks and cartels (like the sugar industry seizing this opportunity to make monopoly profits by feeding on the misery of the people), the impact on this year’s growth and indicators of macroeconomic stability is likely to be less drastic. Early estimates in terms of a 15-20 per cent loss of the cotton, sugarcane, maize and rice crops (mainly Irri in the last case) and of livestock, suggests a shaving off of roughly 1-per-cent point of the GDP, and another 1-per-cent point of the GDP owing to reduction in industrial output and exports (lack of availability of cotton has already resulted in the closing down of many textile mills) and the deaths of more than 20 per cent of cattle and livestock which will adversely affect the leather industry and its exports.
Inflation, food inflation in particular, was on the rise even before this devastation. Food prices are set to shoot up—and not just in the directly affected areas—unless steps are taken urgently to open up trade, especially with neighbouring countries. It also remains to be seen if the IMF will relax the conditionality with respect to upward revisions of electricity tariffs in these difficulties circumstances, simply to ease inflationary pressures that are building up. The government can also relieve the bottlenecks in supply pertaining to food crops, especially food grains, at a time when wheat prices are on the rise internationally and 15 per cent (600,000 tons) of last year’s stocks have been washed away by the floodwaters. This it can do by providing seeds, fertiliser and credit speedily to small farmers. It is encouraging to note that the government has decided to launch this effort. Such a measure will also get the small farmers back on their feet quickly.

The unimaginable havoc wrought by the raging waters and the overwhelming nature of the disaster is only partly captured in the painful images of human suffering, the emotional trauma of shattered lives terrified about their future and the thought that one million homes and the combined landmass of Austria, Switzerland and Belgium has been destroyed.

Will this catastrophe that requires a remaking of the country unite us or divide us? The spectre of social unrest stalks the country, reinforced by the trust deficit founded on years of social injustice, poor governance, misallocation of scarce resources and bad policies, and tax mobilisation efforts that continue to widen individual and regional disparities of incomes and wealth by fattening the rentier elite.

What looks like a long and tortuous recovery process could be shortened and made less excruciating by an inspired political leadership which gives people hope by forgetting its petty differences and by grasping at this lifetime opportunity to rehabilitate its credibility. But, then, given their track record, their multiple failures, their efforts since this tragedy started to unfold, the divisive character of their politics and the manner in which the media has reinforced the already poor perception about the competence and corrupt practices of the political elite, the odds of such an outcome look distinctly bleak.

The elimination of this trust and image deficit and the integration of various nationalities and groups will require a Herculean effort and a large measure of sacrifice by the governing elite in its own enlightened self-interest. The international community, despite its fears and perceptions about a dysfunctional state, is willing to help, but it would expect to see responsible behaviour from us. Although we will need all the help we can get, it is the government that must take the lead.
Given the nature, scale and dimension of the devastation, it can no longer be business as usual. We should show our determination to tackle with earnestness what is essentially Pakistan’s own problem. To this end, and particularly to finance the rehabilitation of those dispossessed of their meagre assets built from life-savings and driven into poverty, the government must immediately take the following measures:

1. Levy higher taxes on the relatively well-to-do (an income-tax surcharge on those earning more than Rs100,000 a month and on corporate incomes), raise the GST on motorcars and large electrical appliances, and impose a onetime tax on larger properties.
2. Apart from devising programmes for the early privatisation of National Bank, PIA, the Steel Mills and other concerns, consider for this year—as a resource-mobilisation measure for financing flood-related spending—offloading on the stock exchange shares of National Bank, OGDC and the power distributions companies.
3. Lay out a clear policy on how the tax-to-GDP ratio will be raised over the next two to three years, based on the principle that all incomes, from whatever source, will be taxed at the same rate, and that taxation of properties will become a key source of financing the provision and maintenance of infrastructure in urban areas.
4. Divert low-priority expenditures and allocations for new projects for the rehabilitation of flood-affected people at Rs100,000 per family—expenditure heads from which this can be initiated this year include Rs50 billion for the BISP and Rs43 billion allocated for the IDPs (surely those who have lost everything are more deserving, especially the IDPs of Malakand and Swat who have been rendered homeless again by the ravages of these unprecedented floods), Rs30 billion for MNA and senator programmes, Rs40 billion for subsidies other than electricity, and a host of other non-development and development expenditures in the federal and provincial budgets.
5. Announce austerity measures like bans on purchases of new motor vehicles, foreign trips, except those expressly permitted by the office of the prime minister, cuts in foreign visits and sizes of delegations accompanying the president, prime minister and foreign minister, discontinuation of Haj and Umrah at government expense, reduction in the number of ministries.
6. To address the issue of trust deficit and rehabilitate the credibility of the political and bureaucratic leadership, ensure that the systems for recording receipts and flood-related expenditures become transparent by making the books of account public documents open to any scrutiny.
Such initiatives would simply represent the beginning of the belt-tightening and the building of a fairer and more equitable society that we have postponed for these 63 years.

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