The “new deal” formula
Whenever there is a slowdown in the economy i.e. a retardation in economic growth, the economy is said to be in a Recession. When it gets worse i.e. the economy goes into a tailspin, it is said to be in a Depression. In the early 30s, in the wake of the great stock market crash of 1929, the US witnessed the worst Depression in its history. Millions participated happily in the euphoria of the ever increasing stock market prices that led up to that fateful day in October 29. When the stock market balloon burst, the precipitous plunge in prices of shares was like Doomsday intervening at an all-night all-comers party. Many millionaires, stockbrokers and others, became paupers overnight and unable to keep their monetary commitments (as over-valued scrips lost their value to almost nothing in one single fateful day), they jumped off Wall Street’s skyscrapers to the concrete below, their suicides were followed by that of many thousands of others, among them farmers, industrialists, hoteliers, workers, housewives, etc, a fair representative of those who had lost their complete life savings. As millions trudged through the streets and between farms looking for work but finding only “no vacancy” or “closed down” signs, soup kitchens proliferated as the only life sustenance. For the US it was a dark period and has been well recorded in their history books as well as celluloid, etched in their conscious mind of how bad things were and could be if the situation presently obtaining became worse.
Right in the worst of the economic crisis came the 1932 Presidential Elections, Governor Roosevelt easily overcoming his opponent with his “New Deal” slogan. New Deal envisaged measures by the Federal Government to break the economic logjam by a series of public sector projects to not only improve the socio-economic infrastructure but in effect would kick-start the economy by pumping money into it. History is a witness that “New Deal” worked and the US became the world’s industrial giant pre-World War 2. Many people seem to forget that Mussolini preceded everybody with his own version of Roosevelt’s “New Deal” making Italy into a World Power. Hitler’s Nazi Germany emulated the same policy some years after Roosevelt’s initiative with its Auto-bahns, railways, parks, major public buildings, etc and rose from its own Great Depression which had set in after World War I to become a world industrial power. It is a fair bet that President-elect Bill Clinton will come out with a much more sophisticated version of the New Deal and go for enormous pumping of public money into the socio-economic infrastructure across the US with the dual aim of reinvigorating the economy and make the necessary improvements to bring physical communication standards upto par levels. There are many other reforms on the anvil but without an antagonistic Congress, the gridlock on the Federal Government will vanish. With the Executive and Legislative branches working together and for a common purpose, it would not be presumptuous to presume, barring various artificial and natural catastrophes, the US economy will start looking up. The massive infusion of public money will require greater revenue generation, in the absence of which there may be spiralling inflation in tandem with the increased money supply. To keep inflation under control will require above par money market managerial skills.
If all this was so easy, why didn’t President Bush think this up and save his Presidency? For starters, in the afterglow of the 91% Presidential approval rating with the US public post Operation Desert Storm, his Advisors (or handlers as they are sometimes called) totally miscalculated the thrust of the mood of the electorate. Bereft of the war euphoria, the pocketbooks of the people had been hurting for some time and the public perception grew that either George Bush could not spare time from his foreign policy pre-occupations to pay attention to domestic issues or he just wasn’t interested. Clinton was smart enough to ask a Brain Trust of the best economic minds in the country to lay out an economic blueprint, that became his mandate for change and it attracted bipartisan support from those who were suffering because of the moribund status of the economy. A resurgent George Bush tried to correct this perception and fact in the last weeks of the campaign, it was too little too late. Clinton’s pragmatic acceptance of advice is sure to be translated into action in the first months of his Presidency, broken campaign pledges get a short shrift from the US electorate.
Investment in public works may work in the US, it also might work in Pakistan where PM Nawaz Sharif’s driving inspiration for highways, bridges, bullet trains, etc may have been derived from the 1930s New Deal experience of the western countries, democratic and fascist. However, there was something that the US in the 30s had which is still missing in Pakistan in the 90s, the Internal Revenue System (IRS), an honest and effective revenue assessment and collection system. Without a total reformation of the tax system and widening of the revenue base money to build upon, money to finance public sector projects will not be available, the substitute of borrowed money is costly and we will be overwhelmed by the red ink eventually. If the US, with all its sophisticated systems can run up trillions of US dollars as debt and be on the verge of severe economic problems we will be soon facing economic apocalypse unless we take urgent and drastic measures to correct the anomalies. There is no doubt that this government has instituted revolutionary economic reforms that will certainly invigorate the economy but far-reaching effect takes some time to set in. Meantime we are in a transition status, an unstable period where we cannot bear being subjected to external or domestic political pressures. One does not find any great disagreement between the political parties in the pattern of reforms, it is in the mode of implementation that there is controversy. While this government had the courage to enact economic reforms, it not only failed in its duty to ostracise those gentlemen that were primarily responsible for the economic mess during the 1979-1985 period, it has actually put some of them in charge of implementing the drastic charges. Whatever may be the substance of an individual’s action, and given that their present motivation may be severe, if he or she lacks credibility then all their actions become suspect in the eyes of the intelligentsia and the masses. We doubled, almost tripled our debt burden during the years (1979-1985) without any accountability whatsoever, unfortunately despite the debt no economic force-multipliers were visibly put in place during that period. The result was that instead of medium and heavy industries being constructed as well as investment in the socio-economic infrastructure that was critical to the already over-extended and dilapidated system, money was criminally directed to liberal imports of consumer products, no protection was given to local industry except where the government employees were willing participants of scams to loot the public exchequer e.g. the jute industry.
Given all the ills of the public sector, Third World economies cannot afford to become completely privatised. Even economies of the first world, like the US, UK, France, Germany and Japan need some public sector intervention, countries like Pakistan need to have a much more significant public sector participation in key areas such as rice and raw cotton, our prime foreign exchange earners. While the private sector will certainly remain the dominant force behind the US economy, it is certain that the Clinton Administration will initiate greater intervention in the economy, with public sector emphasis in the social sector, i.e on transportation, health, education, social security, old-age benefits, etc. The Nawaz Sharif Government has shown great pragmatism by investment in many key sectors, e.g. the National Highway Authority’s (NHA) mandate to criss-cross the country with modern motorways, the CAA’s mandate to improve/construct airport facilities, the idea for having a Bullet Train, the plans being laid for more seaports, coastal roads etc. All these grandiose plans can only be possible if the money-base for such extensive projects is available. Given our present revenue assessment/collection system this can never be possible, private sector enterprise is badly needed here for the emancipation of an economy that desperately requires revenue generation. Pilot projects spearheaded by the private sector can be started in selected urban and rural areas based on the available data to ascertain the income and assets of individuals from their visible lifestyles and whether it matches the present statistics available with the authorities. At the moment the tax net has only one million individuals paying a grand total of Rs 3.5 billion in income taxes, less than 2% of the government revenues. Some conservative estimates put the number of individuals at a minimum of 6 million and the annual income tax revenues are projected at 35-40 billion, this is an enormous difference and a portion of the huge gap is used to grease greedy palms and deprive the economy of its just dues. The present collection is presently estimated at about one-fifth of the actual dues, a huge amount which should really be a surplus available for us to put to use in the economy. Instead we are perennially deficit, forced to borrow money to make up our Budget shortfalls.
Any system, whether public or private or a public private sector mix is dependant upon individuals. The greed of the public servant is endless and there is no real deterrence to this given the low percentage (almost negligible) of successful prosecution of those misusing their position for various misdemeanours. Our record being thus abysmal, we must bring in widespread changes in drastic reform of the system as a priority. In effect, our taxation system must become a public sector-private sector mix with adequate monitoring by competent individuals from outside the public sector of known integrity. The government must continue to invest/sustain such public sector ventures which may not seem lucrative to the private sector but have socio-economic reasons for supporting the proposition.
The “New Deal” formula depends a lot on the smooth inter-facing between the public and private sector. Nawaz Sharif has the right idea in single-mindedly pursuing public sector projects, the private sector must respond by voluntarily cutting out the black money doled out to the corrupt in the Administration and paying it instead to the public exchequer. The political government on its part will do well to invite private sector ingenuity and objectively to force-multiply revenue generation to meet our Budgetary shortfalls.
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