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The impact of political instability on the economic growth

The difficult and unpopular policy choices made by the current government sent shockwave after shockwave into the economy which coupled with a strong dollar, and extreme volatility in the commodity prices virtually paralyzed Pakistan’s economic wheel.

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Political stability and economic growth are like hands in a glove. In the delicate scheme of things, their association is such that in absence of the first, the latter ceases to exist. An unstable political environment casts a bleak shadow on the country, its institutions and the macroeconomic framework of the country. This in turn erodes the development partners’ and investors’ confidence and the diminishing interest slows down economic development. Any hints of policy uncertainty can extract a hefty tax on private investments, and even the best thought and perfectly implemented reforms may prove damaging if they are accompanied by doubts as to their permanence.

This year has been a year of many transitions for Pakistan. The no-confidence motion against the former premier of the country in April witnessed the country descending into a political nightmare no developing nation should wish upon itself.

Read more: Pakistan economy in long term ICU – Editorial

Understanding the matter better

Its largest province in terms of GDP contribution suffered months-long political comedy as the question of its next chief hung in the air. The instability in the cabinet led to uncertainty about the country’s future economic policy, which in turn adversely affected the investments and, consequently, physical capital accumulation mix. Violence, strikes and civil unrest evoked by the country’s largest democratic parties did not just disrupt everyday life, it hampered the normal operations of markets, reducing the country’s installed productive capacity leading to overall lower productivity growth.

The difficult and unpopular policy choices made by the current government sent shockwave after shockwave into the economy which coupled with a strong dollar, and extreme volatility in the commodity prices virtually paralyzed Pakistan’s economic wheel, and the aftershocks of decades of ill governance ushered in due to short term policy foresight of past governments are being felt by the entire country now.

Unsustainable external debt burdens, additional borrowing to cushion the impact of the pandemic and ever-increasing debt servicing costs put Pakistan at the crossroads of a debt crisis or seeking international support for debt relief, as all sectors of its economy suffered. One such example is of once celebrated, the poster child of Pakistan’s promising growing middle class and its economic prowess-the telecom sector which in recent days has declared digital bankruptcy. Its key foreign players are considering exiting the market as the operations no longer remain profitable in wake of rising fuel prices and the regulator’s firm stance against rising tariffs.

As the ruling elite scrambles to change NAB laws instead of focusing on what’s critical for the country’s socio-economic future, foreign direct investments in the country have stalled while its global outlook soured. In June rating agency Moody’s changed Pakistan’s outlook to negative, the political infighting further fueling the country’s economic turmoil.

Read more: Did Pakistan economy really progress under PM Khan?

Frequent changes in the country’s top office in the last decade have birthed an inefficient system- a system sinking under the deadweights of frequent fiscal and monetary policy changes that erode private investor’s confidence in Pakistan’s economy, sagas of corruption and unaccountability and of defunct public institutions that continue to drain its resources, headed by a team that many times succumb to popular public opinions instead of doing what is actually required to steer the country out of its persistent economic troubles. A repeating tale of incompetence, corruption, indecisive ruling elite and its power struggles that almost brought the country to the brink of bankruptcy.

Still, the country’s ruling elite and policymakers continue to hedge Pakistan’s economic survival on the benevolence of Pakistan’s lenders and remittances sent by the brains that left the country due to its lack of opportunities, whereas the focus should instead be on a much needed, far delayed reset on economic policies.

For a long-term sustainable economic recovery, the ruling elite needs to reorient its attention. Power struggles to be replaced with inclusive efforts to resuscitate the sinking economy. Reforms geared towards refreshing the confidence of the international business community in the policies of Pakistan and reviving private investments in the country via structural changes and microeconomic features can be one step in the right direction.

Creating investment policies that create a balance between industrial and infrastructure investments and promote the development of strategic industries such as new technologies, digital infrastructure, healthcare systems and green energy can help Pakistan navigate its economic grief. Fostering a full business ecosystem that encourages private investments supported by active dispute settlement mechanisms, a favorable regulatory environment, policy advocacy efforts and investor retention practices can address financial distress in various sectors and kick start the economic recovery.

The way forward

Programs geared towards maintaining critical support for recovery and job creation by prioritizing private green investments through competitive geo-centric and industry-targeted incentives can become the bricks that build a more resilient economy and free up public resources for servicing the people of Pakistan instead of its external debts.

To steer Pakistan out of its current turmoil, policymakers and the ruling elite can also take a leaf from the notebooks of “miracle economies” of East Asia, that were able to break free from the chains of under-development and slow socio-economic growth by undertaking industrialization drives categorized by protecting domestic industry and investments and cherry picking winning sectors with future potential to create a competitive advantage in the global markets.

Read more: Food security in danger: Pakistan Economy Watch

Unless the deep-rooted structural and policy impediments prevalent in the current economic mix of Pakistan are addressed, and strategies are adopted to make the economy more resilient under a stable dependable political environment,  it shall continue to look up to the generosity of its friends, and donors for its economic survival.

 

The author is a Political Economist, currently working with the Punjab Board of Investment and Trade. The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.

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