Fixing the economy

After a landmark election, and a comprehensive win for PML-N, there is yet another opportunity to `fix` Pakistan`s economy. How the challenges are perceived by the leadership of the PML-N and its advisors will determine, of course, the new government`s policy response to the serious issues at hand.

This article is an `open letter` of sorts to this group of senior leaders and advisors, urging them to view Pakistan`s economic problems from a perspective that is perhaps different and perhaps more longer term (beyond the election-cycle) than the plans they have made so far for running the economy between now and 2018. The key points are as follows: The house is `on fire` The condition of Pakistan`s economy,as opposed to that of many Pakistanis we interact with, is far worse than what even many economists realise. The comforting narrative of `resilience` and `a hardy country` is meeting up with theugly reality of unchecked population growth, fraying institutions, capital flight, brain drain and declining water tables.

The problem with the `we are a resilient nation` narrative is that it is rooted in a historical, static analysis. It also breeds a sense of complacency we can do without.

An examination of the economy`s vital signs in a more dynamic manner reveals a much more worrying picture. (As I said off-the-cuff at the launch of the Institute of Public Policy`s annual report in Lahore two weeks ago, the `plane is falling from the sky, while the firstand business-class passengers are happily sipping their drinks and munching peanuts!`.) Politicians and Pakistan`s other entrenched special interest groups probably subscribe wholeheartedly to the resilient country` argument because it demands no action it implicitly says `the current state of affairs is an aberration, and will largely self-correct`. That is simply not true.

A look beyond annual macro-economic indicators, such as the growth rate orthe fiscal deficit for a particular year, and focusing instead on the longer-term trend, reveals a worrying picture of the underlying state of the economy and its decaying foundations.

The indicators of the long-term health of the economy tell us that Pakistan is experiencing: the longest economic slowdown in its history; the lowest investment rates by the private sector in over 50 years; a decline to a trickle in the flow of foreign direct investment into the country; a shrinking formal economy and an expanding informal sector; a near-collapse of the energy sector; and the near-complete destruction of its public sector by whole-scale looting by the previous government.

The bottom-line: a significant part of the economy is facing a severe, and, in the case of the manufacturing sector, possibly an existential, challenge. (No serious, credible economist will bring up the stock market performance as one possible counterpoint in this debate,because of its largely fallacious signal on the health of the real economy).

Growth alone is not sufficient If the onerous challenges are to be addressed, restoring growth to the economy will be important. However, too many policymakers around the world, and not just in Pakistan, think that generating economic growth will, on its own, resolve all problems. As I have consistently argued, along with eminent economists such as Dr Akmal Hussain and others but with a slightly differing perspective in our views how economic growth is generated is equally important.

The importance of the origins and structure of economic growth is basically two-fold: the two factors determine how sustainable, and how povertyreducing and income equality-enhancing, the growth will prove to be.

Take the case of Greece. Before its dramatic economic collapse, Greece was recording a reasonable rate of GDP growth each year. One year before the start of the global economic crisis in 2007, and the start of the eurozone`swoes, Greece`s GDP growth was 5.5pc.

The five-year average rate of economic growth was a reasonably healthy 4.3pc. So what happened? Why did the Greek economy with reasonable rates of growth collapse so dramatically? As I have pointed out repeatedly, most recently in Pathways to growth (May 3, Dawn), a debt-fuelled approach to growth will almost always end in tragedy.

In a cruel, but somewhat delicious, irony, Greece is even equipped with a European Union-financed modern underground transit system in Athens that has been the envy of many other European cities.

Moral of the story: Debt-financed bullet trains or any number of yellow taxis, green tractors, silver laptops, or any colour-coded placebo will not fix our problems. They will all lead to only one colour for the budget: deep red. We have to get real -and serious about the sources of our problems. These areinstitutional and structural in nature, and will require a response that is commensurate.

The most important reform will be in the area of taxes. Stemming the PPP-left rot in the public sector will alonerequire a massive amount of fiscal resources over and above the billions of dollars needed for Pakistan`s looming energy and water infrastructure requirements in the next few years. The other reforms I have alluded to previously, and will be covered in a subsequent piece.

The bottom-line is that with its current electoral mandate, a PML-N government can quite easily afford to take some difficult decisions in its first six months in power. The effects will last around two to three years, with the economic as well as political dividends starting to come thereafter.

If it moves with understanding, speed, commitment and clarity of purpose, the PML-N government can achieve what no government has managed so far in Pakistan`s history: a neat alignment of economic reform dividends with the next election cycle.

 The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.