STRENGTHENING DEMOCRACY THROUGH INCLUSIVE GROWTH

1. STRENGTHENING DEMOCRACY THROUGH INCLUSIVE GROWTH By Dr. Akmal Hussain Distinguished Professor of Economics, Beaconhouse National University, and Member, Governing Board, South Asia Centre for Policy Studies (SACEPS) Presentation at the SACEPS/RIS World Conference on Recreating South Asia: Democracy, Social Justice and Sustainable Development, New Delhi 24-26 February 2011

2. STRUCTURAL CONSTRAINTS TO GROWTH • Economic Growth in Pakistan has not been sustainable because of structural constraints, the most important being: • The savings rate is less than 12 percent of GDP which is half of what is required to sustain GDP growth rate of 6 percent. • With the narrow export base concentrated in low value added textiles, export growth is insufficient to finance the foreign exchange requirements of a high GDP growth. • Consequently, the GDP growth has a stop-go pattern, whereby growth occurs only during periods when large foreign aid inflows are available.

3. INEQUALITY AND POVERTY A highly unequal distribution of productive assets and extremely low levels of education and training, have resulted in: • Growing income inequality. • A constrained capacity of growth for poverty reduction.

4. PARADIGM SHIFT FOR INCLUSIVE GROWTH • If growth is to be sustained and poverty overcome quickly a paradigm shift is required in our understanding of both the determinants of growth and the nature of poverty. • Sustained growth with rapid poverty reduction requires establishing the institutional structure for INCLUSIVE GROWTH.

5. POVERTY, INSTITUTIONS AND POWER • The existing institutional structure systematically excludes the majority of the people from the process of investment and high wage employment. • The poor are locked into a nexus of power within the existing institutional structure which gives them insufficient access to productive assets, health, skill development and education. • The poor face markets, state institutions and local power structures, which discriminate against access of the poor over productive assets, financial resources, public services and governance decisions which affect their immediate existence.

6. ACHIEVING HIGHER AND SUSTAINED GROWTH THROUGH EQUITY • A new approach to Inclusive Growth requires establishing an institutional framework for the provision of productive assets to the poor as well as the capacity to utilize these efficiently. • The poor by being enabled to engage in the process of investment, innovation and productivity increase could become the subjects of a higher and more equitable growth process.

7. FOUR DIMENSIONS OF INCLUSIVE GROWTH • A process of localized capital accumulation through Participatory Development. • A small and medium farmer strategy for accelerated agriculture growth through the provision of land ownership rights to the landless and institutional arrangements for yield increases. • Accelerated growth of small and medium scale industrial enterprises through an institutional framework for increasing the production and export of high value added products in the light engineering and automotive sectors. • An institutional framework for providing productive assets to the poor through equity stakes in large corporations owned by the poor and managed by professionals.

8. Participatory Development in its broadest sense is a process which involves the participation of the poor at the village/mohalla levels to build their human, natural and economic resource base for breaking out of the poverty nexus. It specifically aims at achieving a localized capital accumulation process based on the progressive development of group identity, skill development, and local resource generation. THE NATURE OF PARTICIPATORY DEVELOPMENT

9. A SMALL FARMER GROWTH STRATEGY • State land for the landless: Transfer existing 2.6 million acres of state owned land to landless tenants in 5 acre packages, together with an institutional framework for providing them access over credit, high quality seeds, fertilizers, water and extension services. This would provide land ownership to 520,000 tenants, i.e. 58 percent of the existing tenant farmers. This would give them both the incentive and ability to raise yields per acre. • Create a US $ 3.62 billion tenant farmer credit fund to provide the remaining 42 percent (377,000 households) of the remaining tenant farmers to buy land at the current market rates. • Establish a Small Farmer Development Corporation (SFDC) with equity stakes for small farmers and managed by professionals. It would provide small farmers with technical support services, credit and equitable access over markets for inputs and outputs.

10. INSTITUTIONAL FRAMEWORK FOR RAPID GROWTH OF SMALL SCALE INDUSTRIES Establish Common Facilities Centres (CFCs) through public private partnership to enable small scale industries to produce high value added components in the light engineering and automotive fields. These CFCs would have the following functions: • Marketing • Monitoring and Quality Control • Skill Training and Product Development • Forging and Heat Treatment Facilities • Credit

11. INCLUSIVE GROWTH THROUGH LARGE CORPORATIONS OWNED BY THE POOR AND MANAGED BY PROFESSIONALS • Establish through public private partnership the Pakistan Dairy Corporation (PDC) whose equity is acquired by poor peasants through credit. The aim would be to buy milk from poor peasants and produce milk and milk products for the domestic and export market. • Pakistan is the fifth largest producer of milk in the world, with annual production of 177 billion rupees worth of milk, thereby making milk the largest agriculture product. Evidence shows that the output of milk can be doubled within two years through better feeding, and animal husbandry. If this additional output can be exported by the PDC it could fetch over US $ 4 billion annually. This would simultaneously solve Pakistan’s Balance of Payments problem and increase the incomes of the poorest sections of rural society.

12. CONCLUSION The proposed institutional structure for inclusive growth would enable growth for the people and by the people. It would therefore strengthen democracy and become vital element in the war against extremism.