Decoding the economic crisis of Pakistan

Economics is a very interesting science for a multitude of reasons. Firstly, it has a cause and effect relationship with individuals and their environment, their decisions and how they impact society. Secondly, there are different perceptions as to how the environment must be structured and these perceptions in their own may have some semblance of wisdom to them as well. The global economic crunch can be attributed to certain perceptions that have been imposed on a larger segment of society making the proletariat believe that ‘all is being done’ to alleviate their problems. While discussing the curious case of Pakistan’s economy, it is imperative to take a brief look at the leading economies of the world and how the global economic recession has affected them.

Global economic recession: US and Europe
Let us take the example of the United States of America, the biggest proponent of capitalism, something that has worked like a charm for them, until quite recently. It worked like a charm, mainly due to the fact that the American economy provided a stimulus to private enterprises, enterprises that evolved into large corporations, multi-national corporations and eventually, transnational companies. The great housing bubble in the last decade led to increased speculation by stakeholders both in America and Europe. This boom in housing led to an increase in household debt and when the bubble burst it had a massive impact on the debt burdened families. Construction activities came to a standstill and so did consumer spending.
This posed the economy with a major dilemma and the effects of this could have been cushioned if other major economic players had stepped in and filled the vacuum by increasing their spending. However, these major players further exacerbated the situation by backing off in crucial times. This was mainly due to the fact that profit maximising corporations do not see the wisdom in investing their money, in the face of weak consumer demand.
What they fail to realise is that, “It is not the employer who pays the wages. Employers only handle the money. It is the customer who pays the wages,” and the employee is in effect the customer. Therefore, weak consumer demand is interlinked with decreasing economic independence of the workforce. If only corporations had the foresight to make this connection. This is exactly where, their policies back fired. The drive of profit maximisation led these companies to divest their interest in other regions across the globe where functioning was more profitable. This meant, that slowly and gradually employment opportunities started fading in the world’s biggest economy. People started going out of work, and as of today unemployment rates stand at 9.2 per cent. If they continue to increase by the same level, till Obama’s re-election he would have the honour of being the first President of the United States since the great depression whose term saw the greatest rise in unemployment levels for over 8 decades.

A double dip recession on the cards
A cheap workforce does not in effect account for a skilled one. A distinction Henry Ford made quite early in his career, one that he did not live to regret. So, we have the example of MNC’s and TNC’s divesting interests from developed to developing countries in an attempt to cut down their costs.
At this point, it necessitated the governments to take necessary steps through market intervention. Yet all they could do, including the Obama stimulus plan, was to ensure that their measures somehow offset the massive cuts in spending they were forced to make. Unfortunately these steps in effect did less than nothing to handle the situation.
So in essence a market economy is susceptible to failures and thus requires various stakeholders to step in and provide that necessary catalyst to the economy to counter the debilitating effects of unemployment and recession.
When the powers to be, including heads of states of EU countries and EU institutions got together, they called for a sharp cut on spending in order to resolve the deficit. This entails that as soon as all of Europe cuts down on its spending in the foreseeable future, private corporations would be in dire straits for at least a period of two years. Therefore in this setting, a double dip recession seems unavoidable.

Economic crisis of Pakistan
So where does Pakistan stand in all of this?
As said earlier private sector requires stimulus through the economy and this can be provided in the form of easy access to finance, pragmatic government policy and low interest rates. Foreign direct investment in developing countries contributes to the development of infrastructure, triggers technology spillovers, assists in the formation of human capital, leads to international trade integration and aids in creating a conducive business environment enhancing enterprise development. All of these factors are collective stimulants to economic growth of a country. In fact economic growth in Pakistan from 2002 to 2008 was a result of increasing foreign development in Pakistan and pragmatic policies of various institutions. Sometimes it is more than necessary to take ground realities into account rather than relying on traditional theory to make policy decisions and this is one aspect where the world at large and effectively Pakistan has suffered greatly. Therefore one finds the right wing policy makers in the US vehemently blocking a move to raise debt ceilings and if this is in fact perpetuated it could wreak havoc in financial markets across the globe.

Policy failure
This lack of foresight is also witnessed in policy makers of Pakistan who seem hell bent on conforming to traditional economic policy: raise interest rates, control inflation. If this policy was in fact effective then, it would have worked to curb inflation in Pakistan that has sky rocketed to 13 per cent according to State Bank figures. If food inflation is taken into account, it has propelled by a massive 45 per cent. In the face of such blatant policy failures what are the policy makers doing? Excessive borrowings from the SBP by the government in such a scenario is diluting interest rates resulting in the crowding out of the private sector. Therefore instead of increasing the supply of money to the private sector, the government is financing unproductive expenditures through excessive borrowing. The report suggests that policy makers have been effective in containing their spending by cutting down on ‘development expenditures’.

Fiscal mismanagement
Instead of focusing on prudent fiscal management that can increase government revenues through tax collection, restructuring and privatising the loss making PSE’s, they continue to rely on domestic and foreign financing to bridge the fiscal deficit. A large part of government borrowings have also gone into financing the growing circular debt, and policy makers have attempted to internalise these quasi fiscal deficit of previous years. This would put an additional burden of 0.6 per cent of GDP over the target government deficit of 5.5 per cent.
Therefore according to the report by SBP, stubborn inflationary pressures is possibly a result of the ‘lagged impact of government borrowings from SBP, frequent upward adjustment in utility and POL prices, increase in commodity prices; and rising house rent index.’ If this is to be analysed it is more than apparent that major inflationary challenges are inherently supply side issues which could have been dealt with even in the face of a continuation of an expansionary fiscal and monetary policy.
A gross miscalculation on the part of policy makers applied breaks to a relatively decent rate of economic growth during 2002 to 2008. Media persons and liberal fundamentalists tend to criticise the previous government for fudging numbers, faking the growth rates or tend to reiterate the cliché ‘it made the rich richer and the poor poorer’. It is a commonly acknowledged fact that economic growth is absolutely vital for improving living standards however it does not promise an egalitarian income distribution. Therefore world economies that have experienced high economic growth rates have at the same time witnessed increasing socio-economic disparities where income distribution between households and regions in fact worsened.

Need for govt intervention
As I mentioned earlier, fiscal mismanagement seems to be one of the major problem for Pakistan and this problem can only be addressed through economic growth. Economic growth tends to attract foreign direct investment, increase employment opportunities and boosts the confidence of various stakeholders. Therefore, ruling out the beneficial effects of economic growth witnessed during the last government is not only naïve but also factually incorrect.
Until recently, Pakistan’s population was growing at a rate of approximately 3 per cent however these figures have fallen to around 2 per cent per annum. Accordingly, our labour force is expected to grow at over 3 per cent annually, and in order to absorb this growth in labour force, GDP needs to grow in excess of 7 per cent annually. More important is for this growth rate to be sustained. Obviously a growth rate of 7-8 per cent annually seems beyond reach, given our current performance of under 3 per cent per annum. In order for Pakistan to prosper, an economic growth rate of at least 5 to 6 per cent a year must be maintained – there is a significant chunk of unused capacity in the manufacturing sector of the country. With population growth rate of 2 per cent a year, the real GDP growth rate would dock in at 3 to 4 per cent. At this rate, Pakistan will be able to double its per capita income within 20 years, absorb the incremental increase in its labour force, reduce poverty and attract foreign investment.
But our aim should be to develop prudent economic policies that can accelerate growth beyond the current potential of 5 per cent, to at least 7 per cent per annum. Reforms to increase productivity, better governance, informed policy-making, the provision and development of an adequate investment space, can all help achieve our growth objectives. Failure of the Government to intervene would only result in one possible scenario – the economic debilitation of the country to a point beyond return. World markets might be able to a certain extent cushion the impact of a foreseeable economic collapse but one cannot share such optimism for Pakistan.

The writer is sub-editor, Profit.