The eco­nom­ics of calamity

The Pak Banker - - Editorial - Shahid Kar­dar

Aw­hole 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: 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.

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