There is a major global slowdown and US/Europe are struggling to cope with it too (though this has not affected China and India as much), we are fighting major insurgencies, we had floods, there is severe energy shortage, government is posting large deficits, and inflation is out of control. All of these are cited as causes for the ills of the economy. In addition analysts also point to longstanding governance issues, high cost of doing business, excessive regulation (some complain of lack of regulation), lack of proper institutions, and corruption as more entrenched reasons for the poor current performance.
But while I hear all of these arguments and have also written on some of these aspects myself, I am not convinced. I still feel very uneasy saying I understand what is ailing the Pakistani economy. I have no sense of the importance of these factors, I have not seen any good research that delineates the importance of each of the above, tells us exactly how each of them impacts the economy and by how much, and if there are other factors that might also be worth looking at.
We should not underestimate the need for having a better understanding. The remedies we prescribe, for the economy to move on to a high growth providing rising incomes and jobs to most Pakistanis, depend on our understanding of the ailments. The analogy with medicine is not inappropriate here. If we do not know what ails the body how can we prescribe medicines and/or prevention techniques? This explains why the current prescriptions, being suggested by experts, within government and outside, do not sound convincing. But let us return to prescriptions later.
Let me explain some of the reasons for the unease. The war on terror and insurgency has been going on for more than a decade and we have had some years of high growth along the way. What has changed now? The floods were devastating and unprecedented, but the slowdown happened before the floods and even if we allow for a one-time shock, it does not seem that our problems are related to that. In fact demand from reconstruction should add to aggregate demand. Energy shortages are also having an effect no doubt. But we have had periods of shortages before and they were not as debilitating. The overall institutional problems of corruption, nepotism, inefficient regulation, and cost of doing business that are often referred to have also been there all along. If they were capable of constraining growth significantly, how could we have sustained periods of pretty decent growth in the past? Or have they become more binding now?
Or is it simply that all of these factors have partial effects but put together they have become very limiting. And the current situation is quite bad. Growth prospects for the next few years look poor as inflation has been extremely hard to bring down and with large fiscal deficits expected for next year as well, it is unlikely that we will be able to bring inflation down. Poverty, unemployment, and inequality are increasing and we have no remedies for them.
It is possible that we have various levels at which we can find explanations for the current problems. At one level the problem is of stabilisation. The government is running large deficits, and borrows heavily internally and externally. But internal borrowing is either financed by crowding out the private sector or by creating inflation. External borrowing brings with it the burden of debt servicing. We cannot cut government expenditures by too much as well. In fact we need to expand public sector expenditure significantly to cater to our needs in providing the population with education, health, infrastructure and other facilities. So how do we keep this equation in kilter?
If things go out of balance at any point in time, as they did in early 2008 when the new government had taken over, it makes sense to think of a stabilisation mode that would bring things back into balance. The stabilisation mode would
a) trim back on expenditures, and
b) increase international borrowing for a short period to get the government budget in reasonable bounds to allow for exchange rate, inflation, and interest rates to stabilise.
But then stabilisation only gives time to the government and the economy to get started on the path to growth. We cannot hold a stabilisation pattern for long as it needs external borrowing and also keeps needed expenditures unfunded.
This is where we need second level explanation. Once we have stabilisation and the growth does not come, stabilisation will unravel. This seems to be happening. The stabilisation happened, to an extent, in 2009-10, but the growth did not come. Now we are thinking of going back to the IMF for more funds to keep stabilisation. But how can this help? How will we pay back the rising debt burden that we are accumulating? Even the IMF has raised some concern about our rising debt burden. What is our growth plan that will give comfort to us and to our lenders that we will a) not need more loans moving forward or will not take the loans to an unsustainable level, and b) be able to pay the loans we have already accumulated or will take.
This is where the deeper level of analysis needs to come in. What will get the economy going? Growth is stalled but we need it badly not only to maintain macroeconomic viability but, more substantively, to deal with poverty. Though most analysts are still regurgitating the homilies from the now frequently questioned and more or less defunct Washington Consensus, clearly something deeper is needed.
This is where the weakness of institutions, cost of doing business, nepotism and corruption become relevant as explanatory variables. But we need more. We need to understand how our political economy works. How are lack of education and skills playing out, how are the entrenched social, political and economic inequalities in the system adding to our woes, how are class structures interacting and how do these stratifications/divisions of the society function or malfunction.
Our economy is in deep trouble. But the more troubling part seems to be that though we have many hypotheses as to why, we do not really understand the reasons. We really need some high quality and deep research here that will delineate the importance/role of various reasons so that we can design specific policies to address specific issues. Otherwise we are likely to continue to flounder which we can ill-afford.
The writer is an Associate Professor of Economics at LUMS (currently on leave) and a Senior Advisor at Open Society Foundation (OSF). He can be reached at fbari@sorosny.org