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Thursday, February 15, 2024

Pakistan’s Self-defeating economic thought process

Dr. Omer Javed |

Exports have risen negligibly during the tenure of the PTI-led government. Given that the country inherited a huge level of current account deficit, and a large external debt servicing requirement, raising exports could still not become one the main areas of focus for the government. That is disappointing to say the least. The delay in announcing any meaningful steps to boost exports points to the lack of preparedness of PTI from before the elections, and their carelessness afterwards.

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

The delay in announcing any meaningful steps to boost exports points to the lack of preparedness of PTI from before the elections, and their carelessness afterwards.

Needlessly kept high policy rate, lack of intervention in foreign exchange markets to appropriately manage float exchange rate, rising oil prices globally since December 2018, and passing this price with indirect taxes/levies to the final consumer knowing the big impact it has 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 in the country.

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, as the country embarks on yet another IMF programme. IMF at the same time lacks any understanding or maybe by design wants to not see quick economic recovery, since it has persisted in their programme with once again 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 internalized in the economic thinking of the IMF programme.

Read more: Naya Pakistan’s mixed economic policy signals?

Pakistan needs improvement in economic institutional quality. To give a comparison, while Malaysia, for example, stood at the 22nd place in the economic freedom index ranking– taken mostly in research as a proxy for measuring economic institutional quality– done by the Heritage Foundation, Pakistan stood at a paltry 131st position. Having said, research has consistently shown during the last three decades or so that without sound institutional base, macroeconomic accounts cannot be sustainably be corrected.

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. My own doctoral research indicates that by improving institutional quality variables in Pakistan over the duration of the active relationship with the IMF since early 1980s, would have provided with sustained positive consequences for both enhancing economic growth and reducing macroeconomic instability.

The people paid the price of this delay in action and the lack of action-taking by the now removed Finance Minister.

Any serious economist, for instance, Jeffery Sachs of the Columbia University, recently pointed out that no trick of the monetary policy will allow sustained economic recovery or tackle successfully issues of rising inequality and poverty levels globally. For that, he argues, requires improving the 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. 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 which received their training as economists in the tradition of this thought process at elite western universities. This mould needs to be broken by the PM.

Read more: Textile sector of Pakistan

He needs to bring in people that carry the alternate view to this tried and failed economic orthodoxy; those who value economic heterodoxy of the likes of social democratic leanings of the Nordic countries. After all, PM believes and rightly so, in laying the economy, democracy and polity on the lines of the State of Madinah, which could best be understood and borrowed from the Islamic tradition, and its close representation in modern practice in the shape of social democratic policies of the Scandinavian countries.

So why rely on the minds of those intellectuals and policymakers local and from the likes of multilateral institutions like IMF who have not stopped breathing the neoliberal thought process into an economic policy of the country, which has more often than not kept the country caught in the clutches of stagflation, rising inequality and poverty.

The former persisted without much justification with tight monetary policy, while the later could neither reach tax collection targets nor evolve tax policy.

The example of Latin America should make it clearer. From being a backyard of US influence where 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. Brining 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.

Read more: IMF Programme: Challenges and Opportunities

It would have been better to lend 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 stood at around US$ 37 billion, a little more would not have hurt this 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’ or new 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 not most likely still not obtain the much-needed development spending over 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 even at least one hand over the elusive finance they need for improving their lives.

Read more: Pakistan Development Bank

What kind of economic policy are we following before and in the IMF programme, which has no link with PTI’s own manifesto even? True the economic mess the current 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 economic policy. His mentor Mahathir Mohammad could make such a mental breakthrough back at the time of financial crisis of late 1990s. He took the road less taken and refused to go along with neoliberal thinking in general and that of the IMF.

Dr. Omer Javed holds Ph.D. in Economics from the University of Barcelona, Spain. A former economist at International Monetary Fund, he is the author of Springer published book (2016), ‘The economic impact of International Monetary Fund programmes: institutional quality, macroeconomic stabilization, and economic growth’. He tweets at @omerjaved7. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.