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The great economic challenge

Proud nations, with will of steel, shine the brightest when the clouds are the darkest. The current economic challenge at hand covers the policy landscape with such clouds. We should rise up to the challenge, melt these clouds into rain of economic rejuvenation, and let the sun of green, inclusive, and sustainable development shine through. There are indeed no fears; only strategy, hope, and good plans are made on good understanding, of both the present, and the past.

Let’s start with the past four decades. Why four decades, because it was around that time when the neoliberal policy framework got mainstreamed globally. Back then major universities – globally, while local universities followed the same basically – shifted towards teaching economic programmes that were strongly influenced by Neoliberalism, while the same was strongly reflected through International Monetary Fund (IMF) programmes. Under the neoliberal assault, role of public sector was limited, regulation of markets were weakened, and as a consequence of above real sector policy planning and investment inflows greatly shifted towards, in time, over financialization of the world economy, with loose capital controls increasing speculative, profit-dominated investor decisions.

While the shift increased income and wealth inequality virtually everywhere over this time, which overall saw decrease in real wages, and together with shrinking public domain, replaced by greater role of private sector, which under weak regulation and over-inclination towards following profit signals, meant that on one hand economies became less resilient in the face of shocks like the pandemic and climate change crisis, and on the other reduced the influence of demos on public policy; which over time became more responsive to vested interests, in return for greater political parties’ election campaign funding by same interests.

The same story has followed for Pakistan, with country resuming IMF programmes in 1988, though after a long break since early 1950s recourse to IMF support, and remaining a prolonged user – that is remaining in IMF programme(s) for seven or more years in a decade – of IMF resources in 1990s, 2000s, and 2010s. While the country going through multiple pre-mature leaving of IMF programmes, for which it is also called in policy domains internationally a one-tranche country, even when out of IMF programme followed similar neoliberal policies as in the IMF programmes under the influence of mainly ‘Chicago-boys’ – styled policymakers, meant that economy became less inclusive and resilient while the role of public sector diminished over time and less competent due to the increasing practice of outsourcing over time.

Moreover, weak regulation meant on one hand, that domestic markets became more imperfect, resulting in over-profiteering, which unjustifiably increased both retail prices, and also pushed up costs for domestic producers and exporters. On the other hand, weak regulation also meant loose capital controls, which together with the apparently active policy to attracting foreign portfolio investment, not only increased economic volatility, especially in terms of import costs, and external debt management. At the same time, diminishing role and capacity of public sector, which was seen mostly as a facilitator to private sector, and weak regulation, decreased the performance of state-owned enterprises (SOEs) over time while inclination towards the other preferred mantra of preferring large-scale privatization meant that the ills of golden age of privatization during the early 2000s – over-pricing, contracts favouring private sector profits, while lesser protection of the rights of demos could be ensured, along with decisions taken not for the long-term resilience of economy and service delivery, but one that served profit signals – remain largely ignored from policy debate.

Another important piece of the great economic challenge at hand, and which once again stems from neoliberal policy mindset is that focus has been on structural change within the overall neoliberal economic environment while economic institutional reform in the sense of formulating governance- and incentive structures from the standpoint of non-neoliberal philosophy, for instance, social democratic policy paradigm, which sees greater and more role of government, and regulation of markets, avoiding price shock therapy, and adopting greater strategic price controls, policies of the kind adopted by Scandinavian countries, and China for example.

Moreover, the very understanding of institutions under the IMF preferred neoliberal policy of limiting the role of transaction costs, and in turn, institutions as mainly exogenous to production function, and hence economic policy, has kept economic institutions playing little role in reducing the transaction costs underlying economic exchange (between market participants). This neoliberal economic orthodoxy mainstreaming from the neoclassical economics which, in turn, was propped up since the industrial revolution wrongly narrowed the political economic context of economics. In fact, it was this multidisciplinary approach through which the early day economic thinkers like Adam Smith – also called the father of modern economics – viewed the discipline of economics.

Hence, lack of political economic, multidisciplinary approach resulted in economies becoming very under-prepared for both safeguarding the interests of general public from the moneyed (oligarchic) power of vested interests and other elites with political, bureaucratic, administrative influence over policy where both the oligarchs and other elites colluded to serve their extractive interests. Moreover, the economic discipline that evolved without this multidisciplinary approach, and where profit signal was of a lot of importance – unlink the earlier inclination of economic thinkers like Adam Smith to take together both the positive and normative aspects of economics – found itself seriously wanting in terms of coming up with needed response from shocks ranging from quick withdrawal of foreign portfolio investment (FPI) (wrongly) under the influence of mainly profit signal – for instance, financial crisis in South East Asia in late 1990s, or the global financial crisis, or the pullout of FPI at the back of overall sharp interest rate hikes in the wake of Covid and war in Ukraine-induced aggregate supply shock led high inflation manifestation – to adequately manufacture and deliver Covid vaccine, and also safeguard against over-profiteering.

Here, over-emphasis of seeing inflation as mainly an aggregate demand phenomenon, and using monetary tightening through increasing policy rate mainly, and not addressing the supply-side determinacy of inflation – as not only has been the case significantly in the wake of the pandemic, and accentuated by war in Ukraine but also because of a traditionally significant role of supply-side bottlenecks, and deep market imperfections in influencing inflation in developing countries – it strongly appears has, in fact, stoked inflation through the cost-push, and imported- inflationary channels, and has also significantly added to domestic and external debt burden, especially for developing countries.

Dealing with neoliberal influenced policy, both in and outside of the IMF programme, and the resultant lack of economic institutional, organizational and market governance and incentive structures, and the role and competence of the players at each level –for instance lack of meaningful understanding of the ills of Neoliberalism by policymakers, bureaucrats, and market participants, and preparedness accordingly in the tradition of non-neoliberal, social democratic policies – remains as the main economic challenge facing not only the economy but also the strength of democracy in the overall polity; especially in the wake of existential threats like climate change and related Pandemicene phenomenon, but also rising inequality, poverty, and debt burden on the economic front with damaging consequence for democratic process and outcomes.

It strongly appears that every economic, epidemiological and climate change-related target in addition to more economically and educationally empowered demos – where a more balanced outcome needs to be reached between conformity and creativity in demos – requires strong economic institutions, and efficient organizational and market governance and incentive structures under it. Unregulated markets, monetary – and fiscal austerity policies – different from prioritizing and making expenditures in an efficient way – and limited governments are not the solution. Over-privatization has also had a serious backlash in terms of lack of consumer protection and safeguard of strategic interests – in terms of, for instance, in the case of railways, and steel industry – generally globally, and better outcomes have been reached under social democratic role of public sector, and transitioned over time, for instance, in the case of SOEs, and thereto less consequential ones that is in terms of strategic interests and consumer protection, to mixed-ownership enterprises (MOEs) as seen in the case of China, for instance, where a significant role of public sector is still maintained even after opening a specific SOE for private sector.

Dr. Omer Javed, "The great economic challenge," Business recorder. 2023-06-23.
Keywords: Economics , Economic policy , Monetary fund , Economic rejuvenation , Economic volatility , Public policy , Economy , Pakistan , China , IMF , FPI