Theories, theories everywhere
The outlook on the state of affairs on Pakistan’s economy is at best confusing. While the government keeps on citing achievements in controlling fiscal deficit, currency stability, rising revenue collection, increased reserves and lower inflation, the ground reality with the average person on the street may well be quite different. Economists, like medics, sometimes confront a patient with an obvious problem but no obvious diagnosis! This is perhaps precisely the situation we face right now. Let’s start with the problem. There is no simple way to gauge an economy’s health. But if one had to choose just one statistic, it would be gross domestic product (GDP). Real GDP measures the total income produced within an economy, adjusted for the overall level of prices. Now here is the sad fact for Pakistan: Over the last decade the growth rate of real GDP has averaged just 3.5 percent compared with the regional average of nearly 5.5 percent. And the two main implications of this low growth rate being: First, given the high percentage of employable youth in our population mix, we need a minimum growth rate of 7% to create enough jobs for incoming annual entrants to the job market; meaning our unemployment is rising, and second, at a rate of around 3%, incomes double every 35 years, meaning at a rate of 3.5%, it will take us 30 years to double our income per person, the base as we know is already very low. It is very tempting to blame military interventions or external factors like global recession, etc. for the paltry decade long performance, but the fact remains that regardless of whosoever assumed power during this period, the economic governance remained inept. Still, the explanation for the poor long-run performance is not this simple. There was global recession even back in 1982 but in contrast Pak economy was posting a robust growth rate, courtesy foreign inflows, relatively less corruption in Islamabad, and regional competitiveness that was clearly superior to our larger neighbors like India and China – both upped their game in the early 90s. Sadly, today Pakistan does not even appear in the very frame depicting regional economic leaders (China, India, Bangladesh & Sri Lanka), and despite some favorable external factors, is suffering from serious concerns like mounting debt, declining exports, rising poverty and a stubbornly low growth rate. So what is really wrong with the economy? No one knows for sure, but numerous theories are being bandied about and here are five of them:
Wrong Statistics: Talk to our economic managers and they say that there isn’t a problem. When quality improvements and new products and services are pervasive and so different from what came before, the national income accountants who construct GDP might underestimate how much life is getting better. Think of how smart phones now replace camera, GPS or music system or how new eating-out habits alter the realities of home kitchens or how motorcycles reshape individual transport. According to them the problem is not in the economy but in the out-of-context quoted statistics. There is, however, reason to doubt that this is the whole story. Polls indicate that most Pakistanis think the country is on the wrong track and say that economy is their top concern. Their dis-satisfaction comes not from studying the national income statistics but from their day-to-day experiences, which are not living up to their aspirations.
Vicious Trap: The slowdown or recession in an economy invariably carries its own hangover and if this phenomenon is compounded by a global recession – which we are witnessing now since 2008 – it makes recovery from a downturn all the more difficult. Anxiety lingers, causing businesses to be reluctant to borrow to finance risky investments and banks reluctant to finance them. The good news is that hangovers eventually dissipate, but patience is required.
Secular Stagnation: A term coined by Lawrence H. Summers, pointing to long-term decline in inflation-adjusted interest rates, a trend, which in itself is evidence of reduced demand for capital to fund investment projects. The main reasons he cites for such stagnation are: ignoring home based manufacturing and not enough investment in brick-and-mortar investments. The result, he says, is secular stagnation – a persistent inability of the economy to generate sufficient demand to maintain full employment. His solutions? Protect and facilitate home manufacturing industries and more government spending on infrastructure, provided of course the government takes advantage of the lower interest rates to make right investments in public capital – admittedly a big if. In our case, we seem to be faltering on both counts: home industry is crumbling & injudicious government spending.
Slower Innovation: According to the renowned economist, Robert Gordon, sustainable growth is primarily driven by innovation both in products and operational efficiencies, and by thriving entrepreneurship. From Pakistan’s perspective where none of the above is being seen to take root, this theory is the most pessimistic, because if he is right, we may have little choice but to get used to slower growth.
Policy Missteps: The very approach and mindset of economic policymakers in tackling a stagnating economy can hold the key to a country’s future economic prospects. For example, when Obama took office in 2009, the economy was in the midst of the Great Recession. His advisers relied on standard Keynesian theory by proposing a large increase in government spending to energise the economy. Through the stimulus package, as the economy recovered, the US administration supported tax increases to shrink the budget deficit. In hindsight now many economists are, doubting the government policy relating to the unrealistic hiking of tax rates, which in time became counterproductive. Oliver Blanchard and Roberto Perotti recently released a study that points to the negative effects of high increases in taxes and government-spending on private investment; in-turn undermining the very objectives of the Keynesian theory. Likewise, a similar recent study released by Alberto Alesina and Silvia Ardagna, opines that fiscal stimuli based on tax-cuts are more likely to increase growth than based on state’s spending increases. Out here our government policies appear to be making mockery of all these findings: capital is being mopped up by the government through excessive domestic borrowing in-turn crowding out the private sector; coercive tax drives and punishing tax rates are being orchestrated without paying any attention to tax reforms; and the government continues on a lavish spending spree on projects that can neither be justified on the scale of financial sustainability nor on the measure of public priority. So if this continues then why even expect high growth in the coming months?
Anyway, the above are all different possibilities or diagnoses on what truly ails the Pak economy. Unfortunately, I have no idea which one in particular is right. The answer perhaps may well involve a bit of each!