Negative Externalities of Pandemic and Climate Change
By Masood H Kizilbash
Islamabad, Pakistan
The economy of Pakistan has suffered a setback from the combined effect of covid-19 and climate change. The former affected the economy from February 2019 and the later as a consequence of blatant violation of Paris Agreement by the developed world.
The economy of Pakistan was in a sinking state some three years ago. It importunately required short-term measures to save it from virtual sinking. The first was to go ahead with seeking foreign assistance from friendly countries, namely Saudi Arabia, United Arab Emirates and China to keep the economy floating. The second was the package announced on 24 th March, 2020. The package had two distinct objectives. The first objective was to provide immediate relief to daily wage-earners and self-employed labor through cash disbursements. The second objective aimed at three sectors which fell in the category of Stiglitz’s Green Economy, namely, agriculture, small and medium size industries and health.
The initial response was further widened in April and May to include cuts in duties and taxes on food items, ban on export of some food items and personal protection equipment meant for hospitals, payment of export rebate and duty drawback and refund of GST to exporters/export industries and removal of restriction on movement of goods through trucks across the country, deferment of payment of utility bills, etc.
A cautious approach was adopted for adjustment of discount rate for fear of inflation. It was gradually adjusted from 13.25% in early March to 7% in June, 2020. However, the needs for finances of SMEs and business enterprises were catered in the monetary policy framework. These included financing of wages and salaries expenses for three months between April and June, relaxation in collateral requirements, further reduction in end-user rate, opening of special for employees to receive wages, borrowing from banks other than maintaining payrolls, a reduction in bank’s exposure limits etc.
The home-grown policies were keeping the economy afloat till Pakistan revived its $ 6 billion Extended Fund Facility Arrangement, signed on 3 rd July, 2019. This step replaced home-grown policy framework with tough conditions that the Arrangement stipulated. In an editorial dated 26 th March, 2021, Dawn highlighted its ill-effects on the economy of pursuing a contraction fiscal policy “which requires it to drastically cut its job-creating development spending, reduce its subsidy bill, as well as reform (i.e. raise) sales tax and income tax from the next fiscal year for mobilizing revenues” to achieve a lasting improvement in public finances and place debt on downward path”. Obviously, the brunt would largely be borne by the low-middle-income segments that have already been shaken by the hefty increase in electricity prices, food inflation, job losses and pay cuts. Businesses will also feel the impact. The withdrawal of certain corporate tax exemptions worth Rs 140 billion has already caused unease in the corporate sector as it will hurt growth prospects and diversification plans of the companies.”
It is no wonder that the newly appointed Finance Minister Shaukat Tarin has come out with a statement to renegotiate some of the provisions of the arrangement in view of rising trend of corona virus.
The two negative externalities in corona virus and climate change have not only adversely affected growth in Pakistan but across the globe during the last two years. According to estimates of International Monetary Fund the world economy recorded a negative growth of -3.5% in 2020 and lowered the projection of growth of 5.6% to 4.2% in April, 2021 as the pandemic intensified in the second and third wave. The estimates of the Organization for Economic Cooperation and Development (OECD) and World Bank also fell in line with IMF projections with some differences. The regional and state-wise projections for the two years depicted the same trend with variations within the band.
As compared to other countries of the world, the World Bank data shows that the impact of the pandemic was less acute at -1.5% in 2020 as against India -9.6%, Thailand -6.5%, Iran -3.7% and Indonesia -2.2%. As for the year 2021, the projection of growth for Pakistan was 0.5% (since revised by the government to 3.94%), India 5.4%, Thailand 4%, Iran 1.5% and Indonesia 4.4%. The results were achieved despite an adverse impact of climate change in Pakistan. According to a recent joint study titled “Climate Risk Country Profile” by the Asian Development Bank and World Bank, Pakistan is facing an annual economic loss of $ 3.8 billion. This cost is being borne by Pakistan due to a flagrant violation of Paris Agreement by the developed states. particularly USA.
In the backdrop of two negative externalities, the performance of Pakistan appears to be commendable. How could it be achieved? The answer lies in the theory of Joseph Stiglitz that investment in green economy will help recover from the Covid-19 crisis. By green transition he implies that “well directed public spending, particularly investments in the green transition, can be timely, labor-intensive (helping to resolve the problem of soaring unemployment) and highly stimulative -delivering far more bang for the buck than, say, tax cuts. There is no economic reason why countries, including the US, cannot adopt large, sustained recovery programs that will affirm - or move them closer to - the societies they claim to be.”
Joseph Stiglitz has propounded the theory on two postulations. The first is that “v-shaped recovery is probably a fantasy. And that because Covid-19 looks likely to remain with us for the long term, we have time to ensure that our spending reflects our priorities. The second is that “we also know from economic theory and history that markets alone are ill-suited to manage such a transition, especially considering how sudden it has been. There is no easy way to convert airline employees into Zoom technicians. And even if we could, the sectors that are now expanding are much less labor-intensive than the ones they are supplanting.”
Thomas Malthus in his book titled “An Essay on the Principles of Population” in 1798 AD had articulated that unchecked increase in population attracted natural catastrophes, such as, floods, draughts, earthquakes, etc. which he called positive checks to balance food supply with population. This could only be averted if humans took negative checks on population growth. With world population growing from one billion to more than seven billion during the interim period, it is now argued that climate change and Covid-19 crises are off-shoots of the Malthusian theory, working to wreck existing economic structure.
The negative check by humans lies in transformation of economies to Green Economies. Pakistan started early to adopt it and must ensure implementing it without yielding to pressures from within and without.
(The writer is a retired government servant and author of several monographs and books. His latest book is: Human Conflict with Nature-Alarm Bell for the Demise of our Modern Civilization. e-mail: Masood_kizilbash@hotmail.com )
