Why Pakistan Cannot Borrow Its Way to Prosperity, ...

Summary

• To see that this arrangement is a choice and not a law of nature, it helps to look at a place that made the opposite choice, and then paid for abandoning it.
• But the loop was not broken by its own high wages.
• The wage is not a charity to the worker.

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By Barbara Wright

The Wage Is the Engine: What Zanesville Knew and Pakistan Forgot

When a developing economy runs short of foreign currency, the script is familiar. Officials travel to meet lenders, negotiate another restructuring, and explain at home that the trouble began abroad: inflation in the West, weak consumer demand in Europe and America, shifts in global trade. Pakistan has performed this routine so many times that it has the feel of a seasonal ritual. The explanation is not entirely false, since a country that borrows to cover its consumption is exposed to every tremor in foreign markets. But it conceals the more uncomfortable fact that the exposure was designed at home. Pakistan is not failing because it is connected to the world. It is failing because of how it treats the people who do its work.

The numbers show the shape of the problem. By the figures of the World Bank and the government’s own economic surveys, household consumption accounts for more than four-fifths of national output. Meanwhile the Pakistan Bureau of Statistics’ labour force survey finds that roughly eighty percent of the employed work in the informal sector, without written contracts, wages tied to prices, or any statutory protection. Put the two together and a contradiction appears. The economy depends overwhelmingly on household spending, yet most households are paid too little, too irregularly and with too little security to spend it. The engine is starved of fuel while the nation wonders why it stalls.

The consequences feed on each other. Suppressed wages mean thin purchasing power and a narrow base of taxpayers. Narrow tax revenue means chronic deficits, and the state fills the gap by borrowing abroad and paying for imported necessities in scarce foreign currency. The loans arrive with conditions: higher indirect taxes, removed subsidies, and rising food prices, all of which land hardest on the people whose wages were lowest to begin with. Their purchasing power falls further and the cycle begins again. Alongside it grows a political economy of rent-seeking, in which fortunes are made in speculative real estate, commodity hoarding and cartels protected by connection, rather than in building things people can use.

To see that this arrangement is a choice and not a law of nature, it helps to look at a place that made the opposite choice, and then paid for abandoning it. I have ties to the clay country of southeastern Ohio, where the Muskingum River runs past Zanesville, Roseville and Crooksville. For much of the last century those towns made stoneware and pottery that found its way into kitchens across America. The economics of the place were simple and, for a time, remarkably durable. The factories drew on local clay and local fuel. They paid wages high enough that a kiln worker could feed a family and also afford the very crocks and dripware he had fired that week. Those wages did not leave town. They went to the grocer, the homebuilder, the dentist and the church, and each of them paid taxes that kept the schools and roads in repair, without anyone needing a distant benefactor to do it. The money circled through the community many times before any of it escaped, and the community grew rich on the circling.