The orphan economy

There are at least six different parties and groups giving their own views about the state of the economy and the required direction of policies, and their viewpoints differ drastically from each other. These parties and groups can broadly be divided into: (a) independent professional economists; (b) the present economic management team of the government; (c) the leadership in charge of the government; (d) the political parties currently in the opposition; (e) businessmen, industrialists and landlords, and (f) the international community, particularly the US and the IMF.

Except the group of independent economists who have no personal stakes and no vested interests, all other groups look at the economy from their own vantage points, draw conclusions that suit their interests and propose policies that will help them realise their respective goals. In the ultimate analysis, the state of the economy is, and should be, of major concern to ordinary citizens whose economic well-being and miseries are directly tied to it.

The independent professional economists are almost unanimous in their views on the state of the economy. They are concerned about the low rate of economic growth due to the low rate of investment in both public and private sectors, and an even lower rate of domestic savings, and the associated high unemployment, widening income disparity and rising poverty. They also are unanimous in their views that the rate of inflation is very high and that the main causes of it are fiscal mismanagement of the government and an ineffective monetary policy of the State Bank of Pakistan (SBP).

Fiscal mismanagement is manifested in large budget deficits and quasi-fiscal deficits reflecting poor tax collection and wasteful expenditure, resulting in large scale government borrowing from the domestic banking system and foreign sources. It has led to accumulation of huge public debt and vulnerability of the balance of payments with an imminent threat of external debt default. Equally importantly, a subservient SBP and its expansionary monetary policy have created excess demand in the economy which finds its way into rising domestic inflation and depreciating exchange rate.

These economists recommend major structural economic reforms to change the direction of the economy, including reform of the taxation system, reduction in the budget deficit, sharp curtailment of the government’s internal and external borrowing, de facto autonomy of the SBP to pursue a prudent monetary policy based on professional considerations, and implementation of an export-led economic growth strategy aimed at broad sharing of the fruits of development by all segments of the population and provinces of the country. But there are no takers of this advice because its acceptance and implementation require a strong and sincere political leadership that is willing to follow good governance practices and confront powerful vested-interest groups, and is genuinely interested in promoting the welfare of the poor majority.

On the other extreme is the economic management team of the government which seems to be incapable of understanding the complex economic situation or, as a minimum, has no political clout to propose and implement economic reforms that are vitally needed to turn around the economy. They have found refuge in figure fudging, thereby creating the false impression that the economy is not as bad as depicted by independent economists.

The economic team has fudged national income accounts to show a higher rate of economic growth, doctored the price statistics to show a lower rate of inflation, and manipulated fiscal data to come up with a budget deficit narrower than it actually is. It has engaged in begging and borrowing from abroad to meet foreign-exchange requirements and slow down the depletion of the foreign exchange reserves of the SBP and emergence of the balance of payments crisis.

This kind of statistical trickery and temporary patchwork help the economic team save their jobs and complete their tenure without an economic crisis on their watch. But they will leave a bankrupt economy behind. They have done a great national disservice by delaying policy measures to address deep-rooted structural economic problems.

High-income business people, industrialists and landlords have developed powerful lobbies to promote their own economic interests and stop the government from policy reforms that will affect their economic empires. They have given birth to a large and expanding underground economy whose operations enable them to accumulate what is contemptuously called ‘rental income’, with no accountability, effective state control or regulation of their economic activities.

This group uses pressure tactics to extract subsidies from the government that militate against industrial efficiency and agricultural development and burden the majority to pay its cost. A few families have by now developed a stranglehold on the political and economic powerbase of the country with which it collects implicit and explicit subsidies. The tools include protection and patronage, exchange-rate manipulation, price distortions/subsidies, interest-rate concessions, tax exemptions and wilful loan defaults. The majority has no counter-lobbying power to protect their economic interests.

The top political leadership running the government comes from among the above group and is engaged in the ‘monkey-like income distribution’ business for self-enrichment through corruption and exploitation and has no interest in putting the economy on sound footing. Their priorities are not improvement of economic governance, establishing strong mechanism of accountability, adhering to the rule of law, ensuring peace and security and protecting the economic interest of the majority of the population. Their main preoccupation is to get rich quick at the cost of the poor.

Political parties not currently in power also have the same background, but they propagate facts about bad governance and poor economic management by the present government and expose the vulnerabilities of the economy for public consumption. However, they also have no serious economic policy programme to address those problems if they were to come into power after the forthcoming elections.

The opposition parties have not developed and presented any economic policy reform programme to address these problems. The apprehension is that without a serious analysis of the state of the economy and commitment to the required difficult policies to reform it, they are likely to do no better if they were to come to power.

The last group consists of the countries of the west and the international financial institutions. They understand the vulnerabilities of the economy but are driven by their own vested interests in dealing with the government.

It suits the western world, led by the US, to see the government presiding over a vulnerable economy and thereby becoming dependent on their small financial handouts, which keep it temporarily afloat without the strengthening of the underlying economy. A vulnerable economy and a weak government best serve the strategic security interests of the western countries.

International financial organisations have poured large sums of money in the last 66 years. This money was not used productively and by now these organisations have become the largest creditors of the country. A situation of external debt default by Pakistan would hurt them and international financial stability. Accordingly, they remain engaged with the Pakistani government to make sure that they get paid on time either through recycling of fresh lending or galvanisation of bilateral external assistance under the umbrella of an operational IMF programme.

Accordingly, even when knowing that a government is unwilling or unable to undertake major structural economic reforms for stabilisation and growth of the economy, they stand ready to give bailout packages one after the other in their own self-interest. However, bailout packages not based on structural economic reforms fail to improve the economy.

While all these players are engaged in their respective games, the economy continues to sink and ordinary people continue to suffer. The orphaned economy is bound to collapse one day, adding to people’s suffering. This will happen unless a stable and sincere government, one that practices good economic governance and takes hard economic decisions, emerges to save the sinking ship.

The writer is a former governor of the State Bank of Pakistan.