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The cost of political uncertainty

The failed attempt on the life of former prime minister Imran Khan has raised temperatures throughout the country with obvious repercussions on the state of the union (federation versus at least two federating units) as well as on the economic health of the country that are far beyond the flawed economic policy decision making by the economic team leaders – flawed as it continues to strengthen the elite capture of our scarce resources at the cost of the poor an example being the 19.99 rupee per unit made available to the five export sectors while the middle-class pays 40 rupees per unit.

Pakistan Tehreek-e-Insaf has indicated that the long march will continue. And notwithstanding the party’s democratic right to a long march in the larger context it is relevant to note that a long march, dharna, strike action be it for attaining a political/religious/economic objective, have become the norm in Pakistan with severe negative repercussions on the economy.

Regional/religious political parties, on occasion with no representation in parliament, while others with less than 10 to 15 seats in parliament, have been able to stop all economic activity within their sphere of influence and/or effectively isolate the capital from the rest of the country. Some have displayed a level of violence that crippled the effectiveness of law enforcement agencies while the government of the day capitulated largely due to concerns about the number of their supporters from within the country’s law enforcement agencies.

Economic pressure groups have on numerous occasions also effectively mounted considerable resistance in the capital, particularly with reference to taxation measures, that undercut their profits. And who have used and continue to use their formidable influence within the corridors of power to access subsidies in hundreds of billions of rupees (including utility rate subsidies, export subsidies, tax exemptions and cheap credit defined as a rate of interest that is well below the rate of inflation) – factors that have given rise to the phrase ‘elite capture’ in our economic literature.

International Monetary Fund (IMF) Working Paper titled How Does Political Instability Affect Economic Growth, by Ari Aisen and Francisco Jose Veiga notes that “the widespread phenomenon of political (and policy) instability in several countries across time and its negative effects on their economic performance has arisen the interest of several economists. As such, the profession produced an ample literature documenting the negative effects of political instability on a wide range of macroeconomic variables including, among others, GDP growth, private investment, and inflation. Alesina et al. (1996) use data on 113 countries from 1950 to 1982 to show that GDP growth is significantly lower in countries and time periods with a high propensity of government collapse. In a more recent paper, Jong-a-Pin (2009) also finds that higher degrees of political instability lead to lower economic growth. As regards to private investment, Alesina and Perotti (1996) show that socio-political instability generates an uncertain politico-economic environment, raising risks and reducing investment. Political instability also leads to higher inflation as shown in Aisen and Veiga (2006).” The Working Paper endorses these findings empirically adding that cabinet changes are also highly statistically significant as well as the violence index.

Pakistan Institute of Development Economics (PIDE) cited the economic loss to the following countries associated with a strike/march: (i) cost of production of manufacturing sector rises by 1.17 percent due to disruption caused by strikes in Bangladesh; (ii) in Nepal the average cost of strikes was 1.4 percent of GDP; (iii) in France strikes caused a drop of 0.17 percent of GDP with more than a two-third loss borne by the private sector; (iv) in Spain strikes cost 0.1 percent of GDP; and (v) a study showed that on average strikes caused an average decline in stock prices between 0.4 and one percent. PIDE therefore concluded in 2019 that strikes in Pakistan cost around 2 percent of GDP per year – a direct loss three times greater than total expenditure on social protection and highlighted the consequences on the poor, especially those operating in the large parallel informal economy which comes to a standstill during strikes.

For 2022-23 the projected GDP by World Bank for Pakistan is 2 percent and given PIDE’s assessment the long march may well cost the country around 0.5 to 1 percent of GDP which needless to add the country can ill afford. Be that as it may, when the PTI was in power the opposition parties also engaged in a long march and frequent jalsas that did impact on the daily wagers and those operating in the parallel informal sector, albeit the numbers were much smaller.

Today the state of the Pakistan economy is dire irrespective of claims to the contrary by the economic team leaders. And the long march by the Pakistan Tehreek-e-Insaf is being viewed in the context of its political cost to all the stakeholders even though more than 400 million rupees of the taxpayers’ money has already been approved to deal with the march as and when it arrived in the twin cities.

What is however significant in this context is that the impact of these long marches on the economy may be considerably less than the impact of an organized strike action by influential economic groups. Ishaq Dar soon after his appointment on 28 September proudly announced capping per unit electricity tariff at 19.99 rupee to the five export sectors that would cost the taxpayers around 140 billion rupees more than the 20 billion rupees budgeted (including arrears of previous months as well as for the rest of the current year). The pros of this decision, we were informed would include higher exports (though the link between incentives and higher exports has not been empirically ascertained yet), higher employment opportunities and a guarantee that these units will not relocate elsewhere in the world.

The cons however are formidable especially in a country where the consumer price index for October was a high of 26.6 percent: (i) as pointed out on 13 October by Azour the IMF head of department that deals with Pakistan these subsidies are regressive and hurt the poor and vulnerable; in his words “subsidy, as in other parts of the world, subsidy that is targeted to support certain items has proved not to be very effective. I would say it has proved to be very regressive. And in our regional economic outlook we are again looking at this issue that is showing that this is not the best way to use the very limited fiscal space that exists. Therefore, we are encouraging Pakistan as well as also other countries to move from an untargeted subsidy that is a waste of resources and to dedicate those resources to those who need it.”; and (ii) based on the existing tax structure where reliance on indirect regressive taxes is pervasive (with withholding taxes accounting for over 70 percent of direct tax collections also imposed in the sales tax mode) the subsidy to the export sectors would imply a mini-budget or higher taxes which if past precedence is anything to go by implies higher regressive taxes whose incidence on the poor is greater than on the rich.

To conclude, while given the current high level of divisiveness in the country political dialogue on using parliament to register one’s discontent is unlikely therefore the onus falls on the government to take informed economic decisions when allocating largesse at the tax payers’ expense.

Anjum Ibrahim, "The cost of political uncertainty," Business recorder. 2022-11-07.
Keywords: Economics , Monetary fund , Economic health , Sales tax , Economic policy , Economic growth , Imran Khan , Pakistan , IMF , GDP , PTI , PIDE

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