Every year during the federal and provincial budget speeches, there is a pronounced announcement by the government on job creation. Rarely are these jobs actually created. The evaluation of the promises made in the past budgets is also not discussed. The economic team in their enthusiasm even comes up with arbitrary projections on precise number of jobs that the country will witness as a result of new fiscal measures.
Why is job creation not realised? A disconnect between planning and budgeting exercises may provide one of the answers. While the government’s plan (Vision 2025) mentions specific programmes, such as fund for university job creation, job counselling scheme, job schemes for rural non-farm sectors, enhancing labour market efficiency in small and medium enterprises (SMEs) and export sectors, however, we do not see any budget being allocated and protected by the Finance Division for such employment enhancement initiatives.
The responsibility of this disconnect between finance and planning lies with the Chairperson Planning Commission, who as per the constitutional requirement is the Prime Minister — also the final authority for approving vision, five-year plans and annual budgets.
A similar disconnect is also seen in the provincial development strategies and budgets. There is weak coordination across federal and provincial development programmes, which lead to multiplicity of same kind of projects (e.g. capacity building schemes) in turn implying a waste of scares fiscal resources.
Government’s own data for fiscal year 2015 indicated that the number of unemployed persons was 1.5 million — higher than when the government assumed office in 2013. The past fiscal year saw an addition of 700,000 According to economists, the target was not missed primarily due to the law and order, and energy constraints. It was, in fact, the distortive taxes and ad-hoc regulatory regime introduced through statutory regulatory orders, which fractured the domestic business confidence and exhibited an uncertain policy environment for the foreign investors. The outcome of such actions is seen in exports coming down to $13.9 billion during July 2015 to February 2016 as against $16 billion during the same previous period.
The repatriation of profits on foreign direct investment (FDI) was also greater than the net inflow of FDI in the first seven months of 2015-16. The countries which saw a major outflow from Pakistan include US, Saudi Arabia, and Germany. According to the assessment by State Bank of Pakistan, major FDI divestments have taken place in cement, metal, ICT and pharmaceutical sectors. This situation certainly has consequences for future job prospects in Pakistan.
What can the upcoming federal and provincial budgets offer? Perhaps the single most important objective of this year’s budget exercise should be to kick start growth in the real sector and create better jobs. The government’s fiscal policy can reduce cyclical unemployment and in times of low growth, increased and well spent government expenditure can create jobs. This move is not without limitations and should be carefully balanced with other government priorities. For example, government spending (through domestic borrowing) beyond a certain limit can crowd out private investment.
The limitation of fiscal policy is acute under structural unemployment — occurring when workers do not have the right skills or technological readiness. Under such a situation supply-side policies that focus on improving skills, productivity, mobility of labour, research and development, and reduction in cost of doing business can help. While some of these may require one-off public investment in skill development, the rest largely focus on cutting the red-tape and reduction in regulatory burden faced by the private sector.
Long term job creation potential is only certain if a carefully planned growth strategy for agriculture, industry and services is backed by appropriate fiscal reforms.
If this year’s budget has to be job-oriented then it should first focus on the key variables due to which Pakistan, this year, slipped downwards by 10 ranks in the cost of doing business rankings (conducted by the World Bank). These barriers must be addressed if formal businesses have to be facilitated in their expansion, informal businesses are lured to formalise and greater foreign investment, skill and technology transfer is promoted.
Many of these cannot be done through federal-level Finance Act and will require provincial governments to reform their labour market regime. The latter usually includes improving labour-employer relations, flexibility of wage determination, and hiring and exit laws.
Second, taxes on labour intensive, formal businesses may be reduced through a revenue-neutral increase in other taxes. The new sources of revenue may include modified property taxes, sales tax on services, motor vehicle tax, environment taxes and excise duty on luxury items. The taxes on formal businesses may also be consolidated to reduce compliance cost of taxes. For example, currently, businesses are faced with more than 3 dozen taxes, levies, surcharges and licence fees collected at federal, provincial and local level.
The argument here does not imply a permanent tax concession but to offer short term and time bound breather to the private sector for investing in expansion. A recent market survey conducted by the Sustainable Development Policy Institute (SDPI) reveals that the highly skilled professionals in Pakistan are being laid off. Many are searching for suitable opportunities in the Middle East. A key reason highlighted was the cost cutting measures and consolidation in food processing, cement, telecom and textile sectors.
Third, enhance the self-employment potential of youth, women and marginalised segments in the society. While the growth of start-up incubators in Pakistan is very encouraging, an evaluation is urgently needed to answer why sustainability of start-ups and their growth still remains a challenge.
Current research shows that SMEs in the country are not graduating in to larger entities. After 2007 it became more difficult to find examples of firms who are able to become exporting enterprises. This can be corrected if the upcoming budget, refrains from regressive and distortive changes in tax regime, arbitrary imposition of ad hoc withholding taxes, allows faster processing of tax refunds, and reducing governments share in bank borrowing (allowing greater liquidity for private sector). Some administrative measures may also be required to reduce harassment of businesses by tax, labour and environment departments.
Fourth, wage- and self-employment of women and marginalised segments in the society can benefit through coordinated social safety nets and growth of social enterprises in the country. Removing any duplication across efforts by the federal government (e.g. Benazir Income Support Programme) and programmes by rural support organisations in the provinces can imply that both social insurance programmes and social assistance schemes will make this public spending more targeted towards the beneficiary population.
A higher budgetary allocation will need to be supplemented with administrative measures that ensure further ease of access through simplification of application process, inclusion of population involved in agriculture and informal sectors, outreach activities by social welfare and women development departments in the provinces.
Fifth, SDPI research exhibits that employment potential of women-led SMEs can be enhanced through appropriate fiscal policy measures which may include: ensuring targeted bank finances for women businesses trying to enter regional and global trade, relaxed fee and participation terms for exhibitions organized by Trade Development Authority of Pakistan. Increased funding to enhance the geographical capacity and outreach by SMEDA can help build capacity of new and existing entrepreneurs and their managers.
There are some gender-specific trade barriers which should be carefully evaluated by the Ministry of Commerce and appropriate recommendations forwarded to the Ministry of Finance and Federal Board of Revenue.
Sixth, some province-level initiatives may strengthen labour market efficiencies. These include strengthening of labour market information systems, revival of employment exchanges and apprenticeship programmes at the sub-province level, and encouraging the private sector (through appropriate fiscal measures) to develop own training facilities. Some of these initiatives can be launched through allocation in annual development programmes.
While the above mentioned recommendations may or may not find their way in the upcoming budgets, civil society organizations, academia and think thanks will need to do their part in advocating for more and better jobs in the country. Unless the state realises its responsibility towards reforms for inclusive economic growth and providing decent work, it will not be possible to absorb the new entrants in labour market. This can have implications for poverty reduction goals set by the government.
Experience from East Asian economies explains that economic growth will not result in poverty reduction if not accompanied by a sustained increase in jobs and labour market reform.