Good on intentions…

Part of being a concerned citizen is to be well informed and, as I belong to the 18-35 age demographic that is going to cast its vote for the first time, I thought to enlighten myself as to the parties that are participating in the upcoming national elections and their respective positions on the topic of most importance to me ie “The Economy”. As part of this research I spent an entire weekend reading the recently released (to much fanfare may I add) PML-N manifesto; and may I say – what a wasted weekend.

At the end of the document I had more questions with regards to what the party’s actual policies and implementation mechanisms were, than when I had started reading the document. As expected the document is heavy on rhetoric, banalities and clichés while light on substantive material, roadmaps or solutions. The reason for this article is not to criticise for the sake of criticism, or to make one party look better than the other; rather it is to put forward my questions and observations in the public domain, in the hope that someone concerned with writing the above mentioned document might answer them.

First and foremost I have a problem with the tone of the preamble supposedly written by Mr Nawaz Sharif (not that I was expecting a Jeffersonian “We the People…”) and particularly with the following sentence “My party’s manifesto for the coming elections…..” Mr Sharif may I remind you here that this is not “your party”, you just happen to have stumbled upon the leadership of the Pakistan Muslim League through a good dose of chance, intrigue and rather shady internal elections. This sentence is indicative of a retrogressive thinking that looks at things through the narrow telescope of self actualisation (and not the good type), where everything is viewed as a means to an end in the service of ones own progression to the next level, without thought to the larger good.

Now that the above broadside is out of my system, let us get back to analysing the merits of PML-N’s economic policies as set out in its manifesto. On pg-9 it is said that they will increase the investment to GDP ratio from the present 12% to 20% (the last time it was at that level was in 2005-2006). My first question is: How? Is this expected increase going to be attributed to (i) a phenomenal improvement in confidence of local as well as foreign investors at the election of a PML-N government, (ii) a robust growth in private sector credit that is only likely once the government-caused “crowding out effect” is taken care of, which would necessitate painful spending cuts or (iii) by rising public investment, if they are going down the Keynesian route. If that then how are they going to manage our present fiscal problems? Or is it a combination of all three? Whatever their solutions are for increasing the investment to GDP ratio they are surely not mentioned in enough detail in the manifesto. Just a little further down from there the manifesto talks about converting 50% of remittances into investment. Now, and again I am not an expert at this, but if a detailed analysis of usage of remittances is done you will find out that most of the amount that comes in is used for daily sustenance of the receiving families and I don’t think that they would forgo their “roti, kapra our makkan” to invest in some half-thought out investment scheme, especially when the outcome is unknown. I think that although popular sloganing is a given in politics our people will not have such short-term memories and the bad taste of the ill planned “Karz Utaroo, Mulk Sanwaro” scheme will not easily be forgotten.

The question that also arises is: is it the public sector or the private sector that is going to be contributing to investment in the country? If past records are any indication, about three-fourths of total investment is usually made by the private sector while public sector corporations and the General Government provide the remaining one-fourth. Thus it is obvious that investment in Pakistan is led by the private sector. The next question that needs to be addressed then is: wherefrom is the private sector going to obtain these resources for such large investment to push up the investment to GDP ratio? Is it getting the bulk of financing from the financial sector? If so, how, since the government is the largest borrower from the financial sector.

The manifesto also talks about increasing the tax-to-GDP ratio from the present 9% to 15%. Again, the begging question is: how? Are they going to do this without increasing taxes? Because they have clearly stated that they will look to decrease taxes in the long-run. The concept of Laffer Curves is well known, which states that one potential result of the Laffer curve is that increasing tax rates beyond a certain point will be counterproductive for raising further tax revenue. I sincerely appreciate the no-new-taxes approach but it sounds more like a George Bush Snr. “Read my lips, NO new taxes” moment because without the much abhorred VAT or agricultural tax how they are going to increase and broaden the tax base?

The manifesto talks about decreasing inflation but here again it has a “did the egg come first or the chicken” moment because for all the economics I know, and I know quite a bit, I still cannot figure out how lowering taxes will decrease inflation. Or for that matter of fact, how decreasing interest rates will decrease inflation. Because if that were true then we would be in economic utopia as of this moment ie interest rates are near a decade low, yet inflationary pressures are building up in the economy, not abating. A little Econ 101: decreases in interest rates, if anything, discourage saving and encourage consumption, and in an economy like ours where there is sub-optimal utilisation and severe bottlenecks this will only make inflation rise. That said the movement of interest rates is a function of inflation and not the other way round. Monetary policy effectiveness is definitely not judged by the level of interest rates rather its effectiveness is a combination of factors, because if this was the case we would assume that we have the most effective monetary policy at the moment with the low rates, but everyone knows that we could not be more farther from the truth.

Moving on through the manifesto one gets the feeling that it is simply a list of what the PML-N thinks is wrong with the economy of the country and lists what the PML-N thinks the fixes are, there is no attention to detail, no roadmaps on how these fixes are going to work, no implementation strategies, all in all it’s just a lot of hot air, though some of which can be rather interesting to read. For example the manifesto draws on pg-16 a direct correlation between the VIP culture and circular debt, while also simultaneously lumping circular debt and fiscal discipline in one category. If anyone reading this can connect the dots and explain the linkages, please feel free to write to me. In the same vein there are the populist pronouncements that the PML-N government will stop the import of “Luxury Items.” Now if that includes the prime minister ‘slum-ing’ it in a Suzuki Alto, I am perfectly fine with the limiting of my discretionary spending options, but if this involves every minister zooming around in a Prado while the closest I can get to a nice car is a poster, I have serious reservations with it.

While reading, the one charge that I can levy very confidently is that the PML-N’s thinking is very (what we call in management parlance) “top heavy”. Their approach seems to lean towards setting up, or initiating new projects rather than reforming, upgrading or improving existing institutions. An example is that they propose to set up a “Bureau of Infrastructure Development.” My question is why would PML-N want to set up such a fund when we already have the Infrastructure Project Development Fund (IPDF) – Why not make the existing fund more effective rather than opening a new one? There is also a reference to the establishment of various technology upgradation funds on pg-12 when again, there are already a plethora of such funds, why not improve them? Also, glaringly lacking is the enunciation of an SME policy: how are they going to make it easier for small businesses? How are they going to make SME banking more effective? How are they going to improve the tax efficiencies for the SME sector?

There are some good points in the manifesto such as free trade with India (lets see how that holds out to the internal lobbies within the party ie steel barons, sugar barons, textile barons). There is also mention of fiscal responsibility on behalf of the provinces. However, if Punjab’s own performance is anything to go by, well then there will be a lot left to desire.

To sum it up; the PML-N’s economic policy as enshrined in their manifesto was sorely lacking and left a lot to be desired, leaving me with more questions than answers. The manifesto might be good on Intention but fails to define/indicate the capacity needed and the channels of delivery for overall implementation. If they are going to count on my vote, they will need more than just well-written rhetoric to convince me – or even the target demographics that I belong to.