Commentary

The Economy Is Growing, but for Whom?
By Khurram Husain
Pakistan

If you are a little puzzled by the triumphant talk of a return of growth in the economy, you are not alone. Salaried people, as well as wage earners, are asking themselves the same question: If the economy is growing, why don’t I feel it?

Many are confused as the government touts its economic growth figures in the media. Overall growth has risen to four percent this year, beating all forecasts and projections, as well as regional benchmarks. Only a few weeks after Pakistan’s figures were announced, the growth figures from neighboring India came in, showing a negative growth of 7.3 percent — meaning the miracle economy that had powered on for decades since the early ’90s, and was routinely held up as an example for Pakistan, is mired in a deepening slump that began long before the arrival of the pandemic.

This contrast between what is happening in Pakistan versus its neighbor provides more grist for the government’s mill that it has presided over the restoration of growth against heavy odds.

Against all odds, Pakistan’s economy is growing. Overall growth has risen to four percent this year, beating all projections. But while upper-level management and company owners say they’re seeing their fortunes turn around, the salaried class and daily wagers are struggling to make ends meet. What lies behind the disparity?

Below the headline number of GDP growth, the picture gets starker still. Conversations with a large number of owners of capital and CEOs confirm that economic activity is indeed picking up at a brisk pace. “Generally the environment is very positive,” says Muhammad Ali Tabba, one of the largest owners of capital in the country, whose business empire includes stakes in cement, textiles, automobiles and power generation, among others.

“We started seeing this uptick since August or September last year,” he tells Eos, adding that, by the end of the fiscal year in June, growth is likely to be even higher than the four percent that the government has projected.

The first person to see this growth trend coming was Dr Mushtaq Khan, who served as an economic adviser to the State Bank Governor before setting up his own private economic consultancy called Doctored Papers. In a presentation circulated to his clients in December 2020, he wrote that “[g]iven the role construction plays in supporting other sectors of the economy, we have upgraded our growth estimate to 3-4pc in FY21, which is much higher than the IMF’s 1pc growth projection.”

Speaking to Eos, Khan says that the Fund, and other international financial institutions such as the World Bank, underestimate Pakistan’s potential in their projections. “The projections of global agencies and their narrative on Pakistan kept them conservative,” he says. “But talking to participants in the formal economy, the picture was actually better.”

Everybody who owns or operates a big business agrees with this perception today.

Savail Hussain, who owns Sayyed Engineers, a massive ‘fast-moving consumer goods’ (FMCG) company, that employs more than 2,000 workers and specializes in the manufacture of stationery items such as pens, tells Eos that his own company has been hit by school closures, but this year has still been better than the last. “Our profitability is looking up this year,” he says, adding that his dealers in urban and rural areas are reporting brisk sales of other products besides his own.

A CEO from a large paint manufacturer, who could not speak for attribution since that would require lengthy permissions, says all measures of a firm’s health are looking up. “Sales, top line, bottom line, all are improving,” he says.

His industry is closely tied with the construction sector, the main focal point of the government’s efforts to revive the economy. “Compared to last year, our volume and value growth is double,” he says, but adds that last year is a bad comparator due to the Covid-related lockdowns that hurt businesses across the board.

“Nevertheless, real growth, even compared to the previous year, is improving,” he says. As a consequence, the companies in the paints sector have upped their spending to spur sales, by raising their marketing budget to nearly 92 million rupees across the sector, in the months running from July to April. Last year this figure was nil, he says.

The data shows that real wages for skilled and unskilled workers have fallen sharply through the year 2020 and are refusing to pick up, even as inflation eats away their meagre purchasing power, month after month. And this is happening in a sector of the economy that is the epicenter of the government’s growth story and critically responsible for pushing the overall economic growth rate so far above all projections.

Across the board, participants in the economy, at least those at top-level positions such as CEOs and owners of large industries, are reporting brisk sales, rising profitability and the return of confidence after two years of moribund growth, aggravated by the Covid-related uncertainty.

They all report rising pressures on their profitability as well, making it necessary for them to pass on price increases to their customers, mainly on the back of rising raw material prices in global markets, as well as rising freight and logistics costs due to the disruption in shipping — which they argue persists into the present, since the Covid shutdowns left global maritime traffic stranded in place.

The data shows a similar story of skyrocketing profits being booked in recent months by all listed companies. Companies in consumer products, such as pharmaceuticals, appliance manufacturers and food, saw their profits double between January and March this year, compared to the same period last year. Auto assemblers saw their profits nearly triple, while the cement sector posted record high profits. And the story goes on and on with them all.

Where is the growth going?

If company owners and CEOs are feeling this growth and seeing its results on their cash flows, why are their employees and daily wage earning workers not feeling the same way?

Finance advisor Shaukat Tarin acknowledges this perception, but says the benefits will come to them all in due course.

“It’s true that this growth has not touched the lives of the majority of people as of yet,” he tells Eos. “Large-scale manufacturing [LSM] is not as job intensive as small-scale manufacturing, so the real job creation is yet to come. Once the small- and medium-sized enterprises start to grow as well, once the supply chains for LSM start to pick up, and once housing construction gets going, that is when the real impacts will begin to be felt by the common man.

“At the moment the construction of housing stock has not yet begun. That will come in six months to a year. The common man will feel the impact of this growth a little later, once it deepens and spreads to other job-intensive sectors.”

But others might wonder why profits should rise sharply, while wages and salaries continue to lag. One answer lies in a closer examination of how employee compensation structures operate in the market, whether for white collar salaried employees or wage labor.

Employee compensations

People familiar with corporate sector payrolls in Pakistan tell Eos that large employers in the formal sector have issued salary increments to their employees in the range of eight to 12 percent in the first four months of 2021. This is sensitive data and none of them was willing to speak on the record about it.

The data relates only to blue-chip corporations, however, and not to family-owned businesses (except for a few large ones), or to small and medium enterprises, or those businesses operating in the informal sector, or state-owned enterprises. There are some outliers in the data, those companies whose increments are below this range, but the majority are clumped within it.

“Last year these increments were in the range of 11 to 15 percent,” one of them tells Eos, despite it being a bad year. Salary increments are usually pegged to the Consumer Price Index (CPI), and most corporations tend to give five to seven percent above the CPI, according to these people. “This time it is two to four percent only,” one of them says.

In addition to this, these corporate employers also gave “special incentive” allowances, ranging between 30,000 rupees to 100,000 rupees on a one-off basis once the lockdowns began, to help lower-level staff, especially, to set up work-from-home systems for themselves, early in the Covid months. Some lower-level staff were also given 1,000 rupees per month for a period of six to nine months, to help tide over difficulties, but those funds largely ended by December 2020.

This data does not include many businesses that may be large but are not considered blue-chip employers. Employees of media houses, for example, continue to work under sharp salary cuts and listen to management lectures about how bad business is, despite many corporates reporting rising marketing budgets.

It also will not include school teachers or employees in small and medium enterprises, or other owner-operated businesses that may enjoy scale but do not follow scientific practices when making decisions on employee compensation. In such companies, the amount of noise the employees can generate with their respective bosses can often end up playing a larger role in determining the direction their compensation takes.

“Different companies have different mechanisms for deciding compensation and increments,” says Ehsan Malik, CEO of the Pakistan Business Council. “Some use a scientific approach, designed to attract and retain talent relative to the market, while others might look only at cost of living increases and make performance-related decisions in a more arbitrary manner.” He agrees that the range of increments given by blue-chip corporates this year is between eight to 12 percent.

One reason for why there should be such divergence in how compensation decisions are made, is because these decisions can be designed to serve different purposes. Some companies simply see salary increments as a way to compensate employees for increases in the cost of living. Others see them primarily as a tool to attract or retain talent, and yet others as a means to reward performance. There can be some overlap between these objectives but, fundamentally, they are distinct from each other.

The increments given this year by blue-chip corporates are barely enough to keep one’s head above water in a time when CPI inflation is marching on at an average of almost nine percent in the months running from July 2020 to May 2021. Moreover, using the CPI to calculate salary increments can be tricky business. For example, there is a different CPI for urban and rural areas. In the period from July to May, for example, urban CPI was eight percent and rural was 10.7 percent, so management can decide that, since their employees work in cities, they will use urban CPI to peg their increments.

Another complication comes due to the mismatch between the calendars the government uses versus those used by corporates. The government reports inflation data on a monthly basis running from July to June, in line with its own fiscal calendar, while many corporates operate on the basis of the calendar year, running from January to December — leaving it up to them to calculate their own period average.

One can also land up with different CPI depending on which benchmark year to use, since the government reports two different inflation indices, one based on the year 2008 as the benchmark, and the other using 2016.

“It should be management’s responsibility to explain to employees how the CPI is being used,” says Mushtaq Khan. “It should not be complicated and it should be transparent. Questions like what benchmark year or month to use, or what subset of the inflation data to use, should not become complicated matters.”

Companies in consumer products, such as pharmaceuticals, appliance manufacturers and food, saw their profits double between January and March this year, compared to the same period last year.

For many corporates that are global companies, salary increments are decided in their global headquarters and the criteria may not be related to the cost of living, but performance-related as well as what salary levels are necessary to attract and retain talent. CEOs of such companies say that their head offices often use companies such as Mercer, which provide salary surveys from around the world, as well as from within Pakistan. They either use their competitors’ benchmarks or some other comparable industry, from where they either wish to draw talent or fear losing talent to, in deciding their increments.

These increments are then applied to all local operations, irrespective of the cost of living. As a result, movements in employee compensation can often be out of touch with local conditions, whether company performance or inflation. One of the CEOs of such a corporate says his company gave increments ranging from five to seven percent this year — below the average for corporate employers around the country — despite rising sales and profitability, because increments are decided centrally by their headquarters.

Many white collar jobs have compensation mechanisms other than salary, however. Sales staff get commissions and management get bonuses, depending on company performance. These CEOs say that the bulk of the compensation received by an employee is in fixed form, that is their salary, which can account for 60 to 80 percent of their total compensation, depending on the company.

Managements of these companies say that salary increments are always pegged on last year’s data, whether it is company or employee performance or inflation. All companies make their salary decisions between the months of January and July, depending on whether they operate on the fiscal or calendar year. Their decisions are based on developments that happened until December of the preceding year, or until the end of June.

In this case, they argue, the rise in profitability only started in the months since August or September, so increments announced in January reflected developments in 2020, that included the pandemic months, as well as a few of those after the opening up. Those who are waiting till the end of June to announce their decision, such as Tabba and Hussain, say they will make their decision based on the CPI by June, or simply give the figure of 10 percent as the benchmark for the forthcoming increments in their respective companies.

The problem comes in when matters have developed rapidly since the increment decision was made. This is what has happened since January, since inflation has marched onwards at a rapid clip, and a sharp power tariff hike was administered in February.

Even before receiving their increments, therefore, employees of the blue-chip companies mentioned above would have found that their own cost of living has marched on, leaving them puzzled as to why their personal circumstances have not changed much even as the government touts its growth numbers.

Wagers’ woes

The situation is far more dire for workers who live on wages instead of salaries. Take the example of construction workers. This is one sector that the government presents as an emblem of its success, where the growth has been the most pronounced; where profits of allied industries, such as paints and cement, have risen most sharply; and where the greatest amount of activity is clearly visible.

The sector received an inflow in excess of 186 billion rupees till December, via an amnesty scheme that the government announced last year to fuel demand, and banks have been given strict targets to increase their lending to this sector, particularly for housing. From the government to independent analysts, such as Mushtaq Khan, all agree that this sector is today the motor force of the growth taking place in the economy.

But construction sector wages have risen by paltry amounts of less than five percent in the same period. The reality faced by construction sector workers is very different from the one faced by salaried employees of large companies. They are mostly daily wage earners, command very little skill premium and, therefore, have little bargaining power before their employers, and are not organized the way workers in factories often are.

As such they have no collective bargaining unit to represent their interests or concerns, the way unionized workers do. They are largely dependent on the government’s own minimum wage, as well as the ones announced by respective provincial governments, for their compensation.

Wage growth for this segment, however, responds more rapidly to changing circumstances than it does for salaried people. Only unionized labor, who are represented by a collective bargaining unit, need to wait till close of their employer’s year to negotiate wage raises. Contract workers in a company will also have their compensation fixed for the duration of their contract, and are often pegged to the minimum wage, followed by whatever skill premium they can command.

But daily wagers, and other workers whose employment status is renewed daily, can find their compensation move much faster to changing circumstances in the workforce. If demand for labor rises rapidly, for example, the compensation demand by them can also increase along the way, and need not necessarily wait till the arrival of a predetermined point to be negotiated anew.

The minimum wage announced by the government plays a determining role in setting the floor for wage earners. And in the last budget, the federal government announced no increases in the minimum wage, meaning those who live on daily wages have been left to negotiate their compensation on their own with their employers.

Meanwhile, their consumption patterns are different, with food accounting for a large share — almost half by some measurements — of what they spend their money on. As such, they are more vulnerable to food inflation than those who live on salaries.

The best indicator that captures the state of their compensation is the Sensitive Price Indicator (SPI), which has a high weightage for food items and contains those items that are primarily consumed by daily wage earners. The SPI has averaged around 10 percent for the months from July to December, before shooting up sharply to touch almost 20 percent by May 2021.

In the same time, their wages have increased by around five percent or, often, less. This means that many items of essential use have spiraled out of their reach. Economists call this negative real wage growth and one simple way to visualize it is to subtract inflation from wage growth. In this case, the number reached is negative 15 percent almost, although this can vary by a percentage point or two from month to month.

For skilled workers, the situation is not much better. Consider occupations like plumber, electrician, mason and painter, for example. These are not daily wage earners and their income will command a skill premium over their unskilled peers. But they are also workers who will usually find much work when construction activity picks up. Yet, here too, in recent months, their wage growth — as reported by the government — is close to only five percent, with the exception of electricians who continue to see wage growth of around 16 percent. On the other hand, these workers face inflation closer to 16 percent, meaning strong negative wage growth.

What’s more, in the year 2019, their wage growth was being reported in the double digits, usually between 15 and 20 percent. At that level, wages were either growing faster or, at least, keeping pace with inflation as measured by the SPI.

Negative wage growth, over a prolonged period, impoverishes a population. There are an estimated 56 million people who make up Pakistan’s wage-earning workforce, so the reality these numbers are describing is massive; far larger than the size of the population impacted by salary increments.

Some estimates suggest close to 10 million people could be pushed below the poverty line if this trend does not reverse. If you often hear people from the wage-earning segment of the population, which accounts for the vast majority of the country’s workforce, complain bitterly about inflation, this is the reality from where that voice is coming to you.

Follow the money

Given this picture, people are entitled to wonder where the benefits of all this growth in profitability and output are really going. The gentler answer will say these benefits will, eventually, ‘trickle down’ to the people, whether salaried or wage earners, once firms have fixed their balance sheets and cash flows following two years of a devastating economic adjustment as well as the impact of Covid.

For those willing to be patient, this answer will suffice. But those at the lower ends of the pyramid, whose earnings are being eaten away by inflation, are less likely to be patient.

An important thing to note is the decisive role that massive government inducements have played in bringing about this growth. The State Bank, in its latest monetary policy statement, first noted the “strength of the broad-based economic rebound underway since the start of the fiscal year”, and then went on to highlight the “targeted fiscal measures and aggressive monetary stimulus” that have played a critical role in making this happen.

These measures include government spending as well as slashing interest rates to almost half of what they used to be, along with a number of refinance facilities offered to businesses to encourage investment.

The latest National Human Development Report noted that “Pakistan’s people do not benefit equally from public expenditure.” When the authors of the report tabulated the benefits of total public expenditure — including via pro-poor programs such as Ehsaas — they found that the overall share of benefits from this government expenditure for the poorest one-fifth of the population was 14.2 percent, while for the richest one-fifth of the population it was 37.2 percent. “This means that Pakistan’s richest quintile benefits most from public expenditure” the report says.

This would be consistent with the experiences of salaried and wage-earning people in the country through this year of growth, that has been so critically brought about through massive government expenditure. Public money has played a key role in bringing about this growth. But the working public will be the last to feel its benefits.

(The writer is a business and economy journalist. - Dawn)