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Thursday, May 25, 2023

Economic Slowdown in Pakistan: A Result of Austerity & Reduced Spending?

Perhaps, the government took a wrong policy turn at the very start of its tenure by focusing on areas that do not count for much, in the process ignoring the ones that actually matter or needed a fix!

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Could the current economic slowdown in Pakistan be a result of unnaturally hyped up austerity slogans of PTI when it assumed power? The notion is worth exploring, because suddenly Pakistan from being described as an overheated economy in 2018, today finds itself in a negative growth trap; one that it is finding increasingly difficult to escape from. austerity and spending  

Balance the fiscal budget

A decade ago the world was living in the aftermath of the worst economic crisis since the 1930s. International Financial markets may have stabilized, but the real economy in the developed world was still in terrible shape, with around 40 million European and North American workers unemployed. Fortunately though, economists have learned a lot from the experience of the Great Depression.

In particular they knew that fiscal austerity slashing government spending in an attempt to balance the budget – is really a bad idea in a depressed economy. Unfortunately, policymakers on both sides of the Atlantic spent the first half of 2010s doing exactly what both theory and history told them not to do. And this wrong turn on policy cast a long shadow, economically and politically.

Read More: NHA saved Rs750 million through austerity drive, Murad Saeed

Deficit obsession of 2010-2015

In particular the deficit obsession of 2010-15 helped set the stage for the current crisis in unleashing yet again the once tamed protectionist syndrome. Iconic inclusive institutions of the world like the WTO, IPCC, UNEP, WHO and others are facing existential threats like never before, in the process giving a re-rise to right wing politics and undermining the very spirit of democracy cum an equitable world order.

Pakistan should have known better before putting on abrupt brakes to its domestic consumption in an overall global environment that was already in recession by the mid to late 2010s.

Why is austerity in a depressed economy a bad idea?

An economy is not like a household, whose income and spending are separate things. In the economy as a whole, my spending is your income and your spending is my income. What happens if everyone tries to cut spending or everyone just feels compelled to curb spending due to government ‘s excessive taxation policies, albeit all at the same time.

Such has been the case of two years of PTI where in the aftermath of unprecedented tax cum tariff increases coupled with arbitrary cum coercive revenue collection drives (unleashed by this government), abrupt interest rate hikes and unprecedented currency devaluation fuelling inflation, both the common man and the economic outlook have suffered – Lawmakers aside, virtually everyone’s income has fallen.

Read More: PTI Government rejects opposition’s proposed amendments to NAB Law

Austerity and Spending: So where to now?

The solution lies in that either the government retracts on its erroneous tax levies and spurs private investment and spending to give a boost to economic activity or it starts spending itself, since currently everyone else in the economy no longer has the disposable income to do so. And dangerously if the government also stops spending itself – similar to the present day scenario and as has been the case over the last two years – the result is not too difficult to determine: Growth plummets causing widespread unemployment and poverty.

Well, some would argue that it is not this simple, as their policy discourse would insist on cutting deficit immediately or we would instead get into a debt trap that would simply render the economy unsustainable, thereby pushing the country on the verge of bankruptcy.

No surprises, as Debt fears have always been used as a scare factor to cut spending on social programs, and also as an excuse for hobbling the ambitions of center-left thinking, something that was quite obvious in the approach of the first finance minister that PTI put forward. By the time he left office, a lot of damage had already done and the ship had set sails in the wrong direction! austerity and spending 

The emphasis instead should have been to ensure transparent and effective spend of capital on sustainable projects through private public partnerships. The guilt of PML-N was not that they undertook public spending, but that they did so using an ineffective and questionable management process, which resulted in wastefulness, corruption, nepotism and sadly in a weak structure (constrained by almost its sole dependence on political leadership) hampering the underlying element of self-sustainability of the public spend.

Read More: Is PTI government ‘the most corrupt regime’ in Pakistan’s history?

Pakistan’s economic history: Government spending and austerity 

For anyone closely following Pakistan’s economic history, he or she can easily determine that growth has somehow always correlated to Keynesian propositions even if at times the notion has been politically weaponized. Meaning, that even at times when private investment has been weak despite governmental incentives, government spending compensated for the same.

However, on other hand every time austerity has ruled the roost, the side effects have almost always targeted people’s freedom to govern or democracy per se. In Eastern Europe, white nationalist parties came to power after center-left governments alienated the working class by letting themselves to be talked or bullied into austerity policies. In Britain, support for right-wing extremists is strongest in regions hit hardest by fiscal austerity. And here in Pakistan also every time investment and growth took a hit, democracy stumbled! Finally, a lesson for any government pushing austerity just for the sake of sloganeering is that in essence this mania damages its own credibility.

If ordinary people on the streets and average investors no longer believe that the government knows what it is doing or it does indeed have a plan to spend on their prosperity or that it does genuinely care for them, the unrest and uncertainty mounts, causing further and ever evolving upheavals in the markets: e.g. Sugar scams, wheat scams, fuel crisis, conflict of interest, mafias, energy anomalies, etc. all come into play.

In short the way out of this mess is not by indulging in sham austerity or coercive tariff increases or in counter productive taxation drives by unleashing (mostly corrupt) state machinery on businesses and people, but by resorting to efficient cum innovative management solutions that aid free market mechanism, incentivize spending and channel spending through an apex controlling structure that ensures self-sustainability through transparency and accountability.

Perhaps, the government took a wrong policy turn at the very start of its tenure by focusing on areas that do not count for much, in the process ignoring the ones that actually matter or needed a fix!

Dr Kamal Monnoo is a political analyst. He is honorary consul general of the Czech Republic in Punjab, Pakistan, and a member Board of Governors of Islamabad Policy Research Institute. He is the author of two books ‘A Study of WTO’, and ‘Economic Management in Pakistan.’ He can be reached at: kamal.monnoo@gmail.com. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.