Self-defeating economic thought process

  • The country needs to go beyond the Washington Consensus


Exports have risen negligibly during the tenure of the PTI government. Given that the country inherited a huge current account deficit, and a large external debt servicing requirement, disappointingly, raising exports could still not become one of the government’s main areas of focus. The delay in announcing any meaningful steps to boost exports points to the PTI’s lack of preparedness from before the elections, and its carelessness afterwards.

In addition, it persisted with ‘non-technical’ persons serving in two very important economic positions– SBP Governor and FBR Chairman– only to remove them after months of no useful performance by either. The people paid the price of this delay in action by the now removed Finance Minister. The former persisted without much justification with tight monetary policy, while the latter could neither reach tax collection targets nor evolve tax policy; which also meant that fiscal deficit could not be reined in even when government made no large increases in development spending.

Needlessly maintained policy rate, lack of intervention in foreign exchange markets to appropriately manage float exchange rate, rising global oil prices, and passing this price with indirect taxes/levies to the final consumer knowing its big impact on overall inflation, no break-through institutional policies on the aggregate supply side in sectors such as agriculture, industry, and education/skills training, has resulted in producing a stagflationary spiral. And all that aggregate demand curtailment took place even before an IMF programme, which unfortunately the incompetent and insensitive economic team could not keep at bay. The IMF lacks any understanding or maybe by design wants not to see quick economic recovery, since it has persisted in coming hard on curtailing aggregate demand, even when the data shows lack of correlation between inflation and policy rate, and when the importance of fiscal and governance policies is not internalised in the economic thinking of the IMF programme.

The economic history of Pakistan, especially in its relationship with the IMF, amply indicates that without sound economic institutions, no economic policy will produce much economic improvement– especially when the policy is neoliberal in nature– and any improvement reached would wither soon.

The PM will need to find a mental space where he sees through this facade of an economic policy

Jeffery Sachs of the Columbia University recently pointed out that no trick of monetary policy will allow sustained economic recovery or tackle successfully issues of rising inequality and poverty levels globally. That, he argues, requires improving structural and institutional basis of the economy, which would emerge from improved budgetary/fiscal policies, regulatory policies, among others. Yet both the IMF and the government have over-relied unnecessarily on monetary policy. Why is policy being kept devoid of learning from research that is challenging conventional wisdom for a long time now, is beyond reason.

The Pakistan economy is for long under the clutches of neoliberal/Washington-Consensus thought process; supplied through both the various economic programmes of IMF and national economic gurus, most of whom received their training as economists in this tradition at elite western universities. The PM needs to break this mould. He needs to bring in people who carry the alternate view to this tried and failed economic orthodoxy; those who value economic heterodoxy of the likes of the Nordic social democratic leanings.

After all, the PM believes in laying the economy, democracy and polity on the lines of the State of Madina, which could best be understood and borrowed from the Islamic tradition, and its close representation in modern practice in the shape of Scandinavian social democratic policies. So why rely on the minds of those intellectuals and policy makers who have not stopped breathing the neoliberal thought process into economic policy of the country, which has more often than not kept it caught in the clutches of stagflation, rising inequality and poverty.

The example of Latin America should make it clearer. From being a backyard of US influence where the practice of neoliberal policy mostly caused non-sustained economic recovery, with consequences of rising inequality and poverty– the example of Chile where the ‘Chicago boys’ caused havoc through policy is quite popular and hard to miss– could only be corrected once many of the countries there brought a balance between a) aggregate demand and supply policies, b) role of public and private sectors, c) fiscal and monetary policies, and all of this to ensure that economic institutional quality improved both in the process of implementing these policies and also through these economic policies themselves. The reverse of neoliberal policies in Latin America, broadly speaking, meant that they could grow more sustainably and reach better equity consequences, and in the same vein achieved this to keep away from IMF programmes.

When will we learn from both the Scandinavian countries and from the Latin American experience? The present government gave hope that it will come up with its indigenous economic policy away from the neoliberal thought process. The PM even pointed out the ills of this policy in one of his speeches. But it seems the economic gurus and the IMF sweet talk seems to have also convoluted his once-clear ideas. Bringing the advisor finance, the SBP governor, and before that inserting into many a policy committees these national economic gurus, clearly indicates the rising influence of neoliberal thought process over the PM’s original economic thinking.

It would have been better to borrow less cheaper loans from the financial markets generally, but at least it would have given Pakistan a chance to formulate a policy response that is indigenous and non-neoliberal, by not going to the IMF. Already owing a lot in external debt repayments in the next five years, which reportedly stand at around $37 billion, a little more would not have hurt as much as going to the IMF and losing much chance of coming up with a balanced policy response to both fix macroeconomic imbalances and not hurt growth and equity consequences at the same time. Yet, now all remains a distant dream as Pakistan embarks on another IMF programme.

This severely dents the hopes of the suffering many of this country. This self-defeating economic policy will not help create the much-needed ‘naya’ Pakistan. This means those farmers that never received much institutional support in their affairs, will once again only look to the open skies for help. The dingy schools will most likely still not obtain the much-needed development spending on infrastructure, nor the teachers that can teach children there. The banks will not be regulated enough and the policy rate not brought down quickly to enable many people get the elusive finance they need for improving their lives.

What kind of an economic policy are we following before and in the IMF programme, which has no link with the PTI’s own manifesto? True the economic mess the government inherited was huge, yet the response of policy is mostly absent from the many ministries and departments. The PM will need to find a mental space where he sees through this facade of an economic policy. His mentor Mahathir Mohammad could make such a mental breakthrough back at the time of financial crisis of the late 1990s. He took the road less taken, and refused to go along with neoliberal thinking in general and that of the IMF.