Sometimes theres talk of devaluation. Other times theres talk of raising rates. One would thank God for someone like Hafeez Shaikh in this sinking ship of utter fools, but is anyone listening to him? Equally to the point, is he listening to us?
Currency is devalued to raise exports, but only if exports increase by more than a factor of one? Devaluation makes sense only if imports come down provided a countrys imports are price elastic. Our main imports are totally price inelastic, so our import bill will go up and export earnings come down, thus widening the trade gap further. Inflation will skyrocket more and tear through the atmosphere into that beautiful void called space.
Theory says that inflation can be controlled by interest rate manipulation. Raise it and demand will fall, thus decreasing inflation. But that only applies in a consumer-driven economy based on cheap credit. In a country like ours, where we hardly borrow to buy anything (how few bank accounts do we have for Gods sake?) and only purchase with our earnings, high interest rates will not bring inflation down. In fact, it will make it go up because the cost of manufacturing will go up, as will the cost of imports. Our inflation is mainly imported and driven almost exclusively by the international price of oil.
Credit driven consumerism eventually comes a cropper as even in developed countries a spike in oil prices can raise inflation, squeezing real incomes and cause defaults, making banks bite dust. You only have to look at the track records of the plethora geniuses from financial houses that ran the US Federal Reserve and Treasury into the ground to believe me. Because bankers and financial gurus are still at the helm of the FED and the Treasury is exactly why the fundamental structural flaws in the US financial system are not being addressed. They only keep throwing worse money after bad, desperately trying to keep an edifice standing with spit and paste knowing (or perhaps not) that sooner rather than later it is going to collapse through a process called liquefaction, when the ground underneath a building becomes soft and collapses into itself like a star that becomes a black hole, taking everything on and around it to oblivion.
A country considers devaluation when its balance-of-payments goes awry i.e. its import bill exceeds its export earnings and its trade balance goes into deficit. If they have no surplus they usually bridge the gap through short-term borrowing at relatively high interest rates, usually from the IMF, or when desperation sets in, from commercial banks at usurious interest rates. (When Shahid Javed Burki took charge of finance in the government of the late caretaker Prime Minister Meraj Khalid, he inherited desperation. So he was forced to borrow from commercial banks at rates between 5 and 7 percent. It nearly killed us). But such borrowing is done only when governments are convinced that the deficit is only a temporary glitch and will go into surplus soon and they will be able to return the money in the short term. They dont let it become a disastrous long-term loan.
The other option to close the trade gap is devaluation. But this is a double-edged sword, not understood by those who are victims of the theorys tyranny. In real life, 2 plus 2 is equal to many things apart from four, for real mathematics are not zero based zero was brilliantly invented for ease of calculation but infinity based and in infinity there can be any number of outcomes. It is like raising interest rates to control inflation: it wont work if a countrys inflation is driven not by consumption but by a factor outside its control, like world petroleum prices, as ours is. Then high interest rates only contribute to killing existing investment, discouraging future investment and raising prices further as the cost of money goes up.
So too with devaluation: it works only if a countrys imports and exports are both price inelastic. If they are not, as ours are not, it will only make matters worse, for the trade gap will go up as the quantum of exports stay about the same while the money earned from them actually reduces while the import quantum also remains about the same but the rupee bill for it shoots up by more than the factor of devaluation. The balance of payments gap actually gets bigger.
Our main exports are cotton and rice, both primary raw materials with a given global demand every year, and that too against acute competition, not only in prices but also in quality. Which means that lowering their prices in dollar terms wont necessarily increase their demand by an amount in money terms that justifies devaluation. Similarly, our main imports are petroleum, tea and edible oil. Again, no matter how expensive they get, the demand for them is not going to decrease appreciably, not even in the very short term. After all, the army isnt going to stop its tanks, the air force its planes and the navy its ships. Ministers wont start traveling in donkey carts, though by rights they deserve to (they can keep their flags). Public transport cant stop and neither can private. Worst of all, a huge amount of our electricity is generated by furnace oil guzzling power plants. All that will happen is that the prices of petrol and diesel will go up at the pump as will the price of kerosene and the price of electricity will go up too. This will fuel already out of control inflation further. People are finding it difficult to survive given the current prices. Suicides are being committed, minor children are being sold and young girls from decent families are being forced into prostitution out of desperation. Then what?
Then what? As a revolutionary who rejects this obscene system totally, this is great, if you see the big picture. At least this decrepit edifice we have built on a constitution whose legitimacy is questionable, a document dedicated to protecting the iniquitous anti-people status quo, will be burnt to a cinder and hopefully, just hopefully, another edifice will arise in its place. It cant be worse, not for the vast-hungry multitudes, the wretched of the earth.
Chaos, already upon us, will soon turn to anarchy. There will be blood on the streets. The tinderbox is ready, dry and full. All it needs is a spark. The spark could come from anywhere, any incident. Then sit back and watch the gory spectacle. Remember the French Revolution? Actually, it was anarchy. Remember there was somebody called Robespierre? I suggest if you had read about it in a comic or even in a history book years ago, go back and revisit it. If you cannot stand boring academic writing, read A Tale of Two Cities by Charles Dickens. Im sure youve heard of that one even if most of our rulers and parliamentarians have not. The novel recreates some of the atmosphere of France in 1789, the bloodletting, the guillotining, the rapine and massacres, the burning and looting. They had it coming. They got it.
The writer is a political analyst. He can be contacted at [email protected]
