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Economic growth amid political instability

Political instability is a serious impediment to economic progress. Not only does it shorten policymakers’ horizons leading to suboptimal short term macroeconomic policies, but it is also the cause of frequent policy U-turns and leads to non-completion of ongoing projects. This scenario paired with mounting debt and a continued reliance on foreign loans leaves Pakistan with a weak economy and a lack of direction.

Socio-political instability results in a high-risk, low-investment environment. Vietnam provides us with an example eerily similar to Pakistan’s case, as during the early 1980s, the country was heavily reliant on foreign and domestic loans due to a lack of foreign direct investment and inefficient state-owned enterprises, paired with high debt accumulation, poor international relations and balance of payment deficit. Much like the state of affairs in Pakistan, which has escalated recently, Vietnam suffered from an unstable political environment. Countless reforms were attempted but Vietnamese insist that these were unsuccessful until existing political dynamics and elite capture within the country were effectively addressed, after which the country made an impressive economic recovery with a particular focus on investing in human and social capital.

The political environment in Pakistan has been unstable over the long-term, leading to an uncertain business environment, reduced investments and slow pace of economic development. However, the effects of escalating instability over the past few weeks have been immediately evident. Exporters have started facing losses as a result of the government’s move of impounding containers to counter protests.

In an effort to offset the balance of payments deficit, the government instituted a ban on intermediate inputs and textile imports but unintentionally endangered the livelihoods of millions of people. Traders have emphasized that foreign cloth caters to most of the local requirements as it is cheaper than locally made cloth. The people will be forced to use expensive locally made cloth which will increase their budget, while the price of school uniforms will also increase.

The country is struggling to find its footing amidst mounting foreign debt and policy inconsistency born out of frequent changes, emphasised by the IMF as “the number of times in a year in which a new premier is named and/or 50 percent of the cabinet posts are occupied by new ministers” in the paper How Does Political Instability Affect Economic Growth?

With its high income disparity and limited resources, Pakistan relies largely on foreign debt for its functioning and development, and while also suffering a major trade deficit. This, along with recurrent rupee devaluation and increased consumer price inflation, has further deteriorated the economic outlook.

Pakistan’s largest industry share continues to be occupied by textiles, and the sector provides an opportunity for unprecedented GDP growth. With consistent policy and appropriate measures to give Pakistan’s export sectors the necessary facilitation they require, it is possible to change the negative projections into positives. This is an opportunity to set a precedent for the coming years, and to streamline the way trade is managed in the country.

Modern Monetary Theory (MMT) research shows that a high government deficit, a trade surplus via imports and/or exports, and to some extent, foreign remittances, have been the most pertinent factors in boosting a country’s growth rate and GDP. Pakistan has a high fiscal multiplier, so even nominal investment in the country provides substantial returns in the form of employment and exports etc. The fiscal multiplier explains the expected total increase in GDP resulting from additional spending or a reduction in tax. Thus, a higher fiscal multiplier exponentially impacts the overall domestic output (GDP). Slight increases in government deficit are major drivers of growth.

According to the World Bank, 1% growth in garment production is associated with 0.3% to 0.4% increase in employment for both men and women. Investment in human capital is the most essential component of the revised policies and programs to facilitate Pakistan’s economic growth in the coming years.

Foreign remittances boost short-term growth but carry the underlying implication of brain drain and loss of high-skilled labor to other countries. The returns for Pakistan that would have been realized by retaining this skilled labor go untapped, although cash inflows from their foreign jobs do provide a certain degree of support locally. Thus the MMT strategy provides useful indicators for where the focus must lie in moving forward with Pakistan’s export-led sectors, but a narrowed down approach with identification of individual areas for development is necessary.

This brings us to the textile policy, set for implementation in 2022 with a view towards realizing the potential of value addition in each segment of the textile value chain, utilizing the potential of home-grown cotton augmented by Manmade Fibre/Filament to boost value added exports, and the efforts required to become a major player in global textiles. Great emphasis has been placed upon investment in human capital, as if history and competition are to be good indicators, there is a need to build a strong and motivated workforce before other goals can be actualized.

The policy posits that improving worker skills and literacy will allow for increased productivity of workers, wage increases, and a reduced level of waste. This will enable, among other things, the production of higher-quality products, garments and non-garments. It will require a comprehensive vision for skill development, reskilling the current labor force through greater access to informal training and skill-building, and improving the quality of foundational education.

With a holistic approach to spearheading economic growth and institutionalizing certain international standards, Pakistan can achieve sustained long-term economic growth that makes use of opportunities that were previously neglected. The realization that increased trade and government deficits have played a key role in economic growth all along has broader implications for the way in which future policies ought to be formulated. Furthermore, acknowledging the human factor at every stage of the process, in terms of worker welfare, skill development, investment in youth and retention of top graduates is bound to ensure great returns and an improved standard of living in Pakistan. Lastly and most importantly, stability and consistent policy implementation are crucial for economic growth and for the export sector to thrive and contribute dollar earnings to stabilize the Balance of Payments for a sustainable economic outlook.

Shahid Sattar and Eman Ahmed, "Economic growth amid political instability," Business recorder. 2022-06-02.
Keywords: Economics , Political stability , Economic growth , International relations , Income Tax , Global textile , World Bank , Economy , Pakistan , GDP , IMF , MMT

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