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Time for ‘radical’ and fast-paced economic reforms–I

Just as the intellectuals have proposed ‘radical’ reforms in the area of governance and decentralization, there is a set of ‘radical’ structural economic reforms that need to be involuntarily imposed on the nation instead of a series of stabilization short-term episodes under the guise of much hated IMF (International Monetary Fund) ‘structural’ reforms. Irrespective of which government comes to power in Pakistan, the radical reforms will never be owned by the population at large as the utility of current income is more than that of future income and in fact increases with inflation. Moreover, every political party is bluffing the masses as if they have a magic wand to overnight clear the economic mess of last 30-50 years. Even if we now convince the creditors that we are serious in implementing ‘structural’ reforms, the past evidence is sufficient to prove that these attempts were nothing more than to stabilize the economy in hard times in order to put us back on track to our old ways of freebies, infrastructural show pieces, support subsidies and maintain elite capture through distributing and auctioning ‘pound of flesh’ to mafias. In the last 30-35 years, the economy has avoided the pain of deep rooted reforms to change the structure of the economy and must now be prepared and willing to face ‘radical’ and painful reforms, whether home grown or thrust in our throat by the creditors, to regain a semblance of political and economic sovereignty. There are signs of donors fatigue and for how long they can continue to support our politicians’ hunger for votes and USD remains to be experienced. As an example (not an exact one) German banks were tired of liberal lending to Greece because it was beginning to affect their financial balance sheets, without increasing Greece’s capacity to repay and the then Chancellor Angela Merkel had to step in and force Greece with tough fiscal reforms (WB and IMF were not in the driving seat) and restructuring of the labour market, leading to 5 years of continuous negative growth rate and high unemployment. The counterfactual to ‘radical’ economic reforms is to continuously live in a fantasy world that this country of 220 million people with nuclear capabilities and regularly in possession of trump cards from heaven/hell is too important for the world not to be removed from the ventilator. As they say in economics there is no free lunch. So far GoP and IMF have remained in ‘stabilization’ mode in the last few programmes and are nowhere near the ‘structural’ mode. Time is not far when implementing hard hitting at least one structural reform will become a ‘prior action’, for the release of every tranche of 1-2 billion USD.

While the GoP finances are in a mess, nation as a whole is striving to maintain its permanent consumption levels by using khanchas, speculation (casino economy), remittances, IT supported Gig economy, free trade (smuggling, hoarding and cash transactions) and social/political networks. These tendencies will grow with higher inflation, more currency depreciation and higher external debt and its servicing. Debt restructuring and rescheduling are just band-aids to postpone the inevitable in the form of radical and time-bound reforms. With bouts of steep (more than 10 percent per year) depreciation of currency, and negative real interest rates, high inflation may become a norm as in Turkiye. In comparison to radical governance and political reforms, the radical economic reforms are far more difficult to implement as there are innumerable gainers and losers, while former reforms can be implemented with 1000 legislators and a 2/3rd majority.

The first radical reform is to completely overhaul the structure of the manufacturing sector, small and large and structure it towards labour intensity (an abundant resource), intensive use of domestic resources and reduce import intensity. A bottoms-up approach to begin with is to convert all the car assembly plants into automobile parts manufacturing plants with the cooperation of foreign and local investors. At the most only 800 and below cc cars be assembled and sold only to registered income tax payers. The 5-10 year localization schedule is not worth the paper it is written on (largely in cahoots with engineering board/Ministry of Commerce) and will never be realized given the absence of economies of scale. Anticipating that shortage of USD will persist in the next few years, it is better to shift to a new production mode and export quality parts rather than a stop and go mode in assembly. If India could survive with locally made Maruti in the first 30 years of its existence, why can’t we survive for the next 5 years? Baggage rules for import of cars by overseas Pakistanis be scrapped.

The second radical reform is our approach to investment. The whole gamut of laws and rules to allow foreign and local investment has to be re-written to incorporate tough clauses on monitoring, evaluation, enforcement and penalties, until such time that our debt ratio falls to 60 percent of GDP and/or foreign reserves rise to USD 40 billion. The nation’s lust for USD and votes (thru employment and import based growth) has seeped into luring foreign and local investment at any cost (mostly hidden). Most of foreign and local investors see Pakistan as an expanding non-competitive market of 220 million (highest population growth and urbanization in South Asia) supported by remittances and rising undocumented incomes. Except for investments in energy, IT and basic raw materials projects, investment in manufacturing consumption items specifically luxury/durable items should be discouraged. Multiple criteria be used to allow investment in above commodities such as i) 60 percent or more of inputs (excluding labour) are domestically produced and/or manufactured and/or ii) 50 percent of the total production is exported within 2 years of full production and/or iii) set of implementable penalties in case of non-compliance. Unfortunately, non-compliance of these commitments are held hostage to threats of withdrawal of investment and eventually compromises are struck and become a source of kickbacks and under the table deals right up to politicians and even foreign/local investors as in the case of car assembly plants. Admittedly, the above two ‘radical’ approaches present a trade-off between transitional unemployment and the need to re-structure industrial sector in favor of local resources and production. It also calls for a selective tariff policy in favor of basic raw material.

In the absence of reliable and updated input/output and manufacturing value-added data, construction sector as ‘mother’ of 22 industries is a myth. It is now the mother of all non-energy non-food imports ranging from iron ore, steel bars to bathroom fittings. Almost 90 percent of down-stream industries involved in supplying construction related finished goods (specifically residential) are nothing more than packaging industries as they rely on containers of Chinese unbranded goods sold under local brand names. This mafia in the manufacturing sector is as powerful as other mafias in the country and is unwilling to reveal input/output data or allow government officials in packaging premises. Consequently, a 5-year lag in rebasing our national accounts and input/output table is still in the making for the last 10 years.

Dr Sajjad Akhtar, "Time for ‘radical’ and fast-paced economic reforms–I," Business recorder. 2023-01-26.
Keywords: Economics , Economic reforms , Domestic resources , Population control , Financial growth , Local investors , Income Tax

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