A new economic model in the offing?

The economic model that we have been using all these 71 years has failed to deliver. In early decades this model was based on the so-called ‘trickle-down’ theory propounded by the Harvard Advisory Group and since mid-1970s on the one propounded by Milton Friedman’s Chicago School. Interestingly the Chicago School also promoted almost the same ‘trickle down’ theory with three trade-mark demands: privatisation, government deregulation and deep cuts to social spending. This has taken us in the economic no-man’s land.

Pakistan’s economy needs to grow at an annual average rate of at least 10 per cent of the GDP over the next 10 to 15 years to be able to lift the teeming millions from below the poverty line and generate enough jobs to absorb its ever-expanding youth bulge in gainful employment and provide to the majority of its population affordable educational facilities, health cover, public transport, telecommunication facilities and housing. But in order to grow at this rate, the economy would need investment to the tune of at least 35-40 per cent of the GDP at an annual average for the next 10 to 15 years.

However, our current rate of savings has been stagnating at around 12-14 per cent of the GDP for the last several years. The gap of almost about 25-30 per cent between the required rate of investment and the existing rate of saving could be filled with borrowed/aid resources and FDI. Borrowing is not bad as long as the borrowed resources are invested in economically and socially-profitable avenues.

But there are three main reasons why we should eliminate foreign aid from the new economic model:1) Most foreign aid is not intended to reduce poverty. 2) Foreign aid makes governments less accountable to their citizens. 3) Foreign aid is essentially undemocratic. In aid-dependent countries, foreigners often have a weighty say in policy matters.

Meanwhile, most of the revenues we collect domestically are through indirect taxes which are regressive in practice and a big chunk of direct taxation is collected through what is known as withholding taxes which again amounts to no more than a minuscule residual of huge settlements made through black cash in most of the major transactions.

The sooner we discard this model of economy the better it would be for Pakistan. In its place, we could develop a new model based on our strategic geographical location.

Its location makes Pakistan an ideal country to adopt the warehouse/transshipment economic model.

So, in order to make the most of the opportunity offered by the China-Pakistan Economic Corridor (CPEC) we need to let India trade with Afghanistan via land route, facilitating Delhi to go beyond to Central Asia and also reach western China while China could access western India through this corridor which would also hopefully open up a trade window to the landlocked India-Occupied Kashmir. Russia can also join in for mutual benefit.

Pakistan stands to rack up billions only in toll tax itself when these corridors become fully functional. The warehousing and value-addition activities en route the corridors from exporting to importing destinations and back would earn Pakistan more than enough to graduate into upper middle-income group of countries in a matter of a decade.

While we are trying to change our economic model, we also need to bring about some crucial internal reforms as well.

Take for instance our water and energy problems. At least 35-50 per cent of irrigation water gets lost, leaked and pilfered from our excellent man-made irrigation canal system. But instead of making these canals and their linked channels leak-proof and theft-proof, we waste all our national efforts on unachievable harebrained solutions like debating dams or blaming the upper riparian country of pilfering our portion of river waters without irrefutable technical proof that would stand the scrutiny of international arbitrators.

Similarly, all these years we have been trying to solve our energy crisis by putting the cart before the horse. There is no authentic documented estimate of losses of power produced from costly imported fuel on its way to the end users, which according to various studies, is somewhere between 30-45 per cent of the total generation. But for decades now, instead of trying to save these technical as well as non-technical losses, we have been spending our energies and financial resources on power generation and subsidising the escalating bills of end users.

While we are at it, we also need to improve our delivery system. Over the years this system of ours has failed because those that man this system – the civil servants – were never up to it.

Being one of the major instruments of governance, the civil service contributes crucially to the difference between good and bad governance. The other equally important instruments of governance include the police, the judiciary and the security institutions.

To the misfortune of Pakistan, within a few years of independence, all these instruments of governance, for want of strict accountability and a lack of a sense of responsibility, were rendered patently inefficient thus bringing down several notches the overall standard of governance in the country.

Making plans in Islamabad with incoherent and shallow inputs from an inefficient and unaccountable set of instruments of governance had rendered most of our development plans too out of tune in the context of the felt-needs at the delivery end.

And an inefficient civil servant implementing such a plan would surely end up creating more socio-economic and political problems at the grass roots giving rise, in the process, to the kind of political and socio-economic chaos that the country has been witnessing at least since the early 1980s. So, with good plans we also need efficient and responsible instruments of governance. It is the absence of such instruments that is continuously pushing the country down to the bottom of the pole.

The CPEC project has the potential to bring about a sea change in Pakistan’s economic model it has been working since about its inception. The disruption that this sea change is expected to cause to our existing economic pattern would certainly be too unsettling.

As a result, many of our currently profitable economic activities are likely to be rendered uneconomic with new profitable ones emerging in their place. This process is likely to turn many of our today’s ‘winners’ into ‘losers’ while throwing up an entirely new crop of winners in their place.

As normally happens in such situations which more often than not look akin to a sort of an economic revolution, the potential losers try their best to resist the change failing which they do their best to delay it as much as possible causing in the process considerable losses to the national economy.

As anticipated, the project has already sparked fears that domestic industries would be crippled as China is feared to dump its goods in Pakistan. Already complaints in this regard have begun to be voiced. One being: China has already eaten half of our economy.

Our businessmen too are not very happy with the incentives being offered to the Chinese investors.

One way of coping with the on-coming CPEC-related changes especially in the country’s industrial base and its commercial direction is to resist the changes. However, that would only add to the cost of the change. The sensible way to meet the challenge is to roll with the changes and try to make the best of what looks like inevitable in any case.

The CPEC project offers us a god-sent opportunity to repudiate the economic model that we have been working all these 71 years which has brought us nothing other than an ever-escalating mountain of debt, and an ever-galloping illiterate and unskilled population without even rudimentary health cover.

The only way we can repay our debt is through our export earnings which continue to stagnate. This is happening because the list of our export items has not changed an iota since at least the 1990s. Our value-addition effort as well has remained too insignificant.

But of course, a realistic exchange rate would make it more profitable for those that export their finished and semi- finished goods to Pakistan to manufacture these items in Pakistan itself and taking advantage of its commercially strategic location and export these goods from Pakistan to its west, east, northwest, north and south destinations.

We should also be mindful of the new international order emerging defined overwhelmingly by geo-economics rather than geopolitics. In this new order, the old multilateral institutions created under American auspices, or what is known as the Washington Consensus, no longer seem as effective or capable of addressing global problems as they were just a decade ago.

Nation-states are coming to realise that war is no longer a viable option for remaining in control. Seeing this, competitive nations are shifting their resources towards science, education, production and trade. Wars by commercial means are becoming the principal focus of inter-state competition.