SAGGING ECONOMY AND THE POLICY SHIFT
MIDSTREAM CHANGE OF HORSES
SHAMSUL GHANI (email@example.com)
Nov 10 - 16, 2008
Our economic mangers must toe the line of their employer political-party by oft- repeating the refrain which usually happens to be the denouncement of dethroned government's economic policies. At the outset, the yesteryears' economic policies earned an outright rejection in strong worded terms. Subsequently, the global appreciation, Pakistan's expending economy got for its last eight years' achievements, put the detractors on back foot and they became selective in their criticism by qualifying the growth as consumption-led. Since the majority of our insufficiently educated population gets easily befuddled by the media propaganda, the recipe of distraction works easily. To add some intellectual credibility, the refrain is embellished with an alternate to the adversary policies. Production-led growth is the alternate solution to the 'economic woes' of consumption-led growth. What surprises most is the fact that Mr. Shaukat Tareen belonging to the same group of economic mangers to which Mr. Shaukat Aziz did, has chosen to come up with such statements that he himself knows are not correct.
Economic & Social Survey of Asia & the Pacific (March-2008) describes Pakistan's economy in the following words:
"Supported by all sectors, Pakistan's growth is expected to remain strong at 6.5% in 2008. In just a few years, sound macroeconomic policies have transformed Pakistan's consumption-led growth impetus to one in which investment-led growth can assume a more important role. But recent political violence and uncertainty about the future could slow the economy."
So, it was the political destabilization rather than the selection of a wrong economic model that led to the economic and financial disaster we presently face. The Survey goes on to add:
"Pakistan's government has maintained an expansionary fiscal stance, seeking to promote more investment for growth and more pro-poor spending. In recent years, development expenditure has become a higher proportion of overall expenditure."
"The main challenge for countries in South Asia is to sustain their growth momentum in the face of high oil prices. Should the prices remain very high, this could undermine economic growth while putting pressure on budgets, inflation rates and balance of payments in countries throughout the sub-region?"
It is now well clear that the economic shocks produced by high oil and commodity prices were of a short term nature and our economy had inherent strength to absorb these shocks. The need was to stand firm in the face of price hike onslaught. The oil price hike waves having subsided, our economy had a good chance to get back to its feet and resume its onward journey. This would have boosted domestic and foreign investors' confidence in our economic buoyancy. Even after meeting our current account deficit liability for FY08, our foreign reserves would still have stood around $10 billion. Our rupee too would have easily absorbed a minor downward correction to stand around Rs.65 for a dollar. No IMF, no international bagging. But we should admire the temerity of our political and media managers who hated to stop short of a complete economic destruction. Having achieved that target, they are now looking for scapegoats. And who else could be the better scapegoats than their predecessors.
Developing economies lacking in economic resources and hand-tied by international finance and trade constraints are left with a dynamic economic option, consumption-led growth. This model aims at expanding the economy for which the poor economies have an inherent capacity. A strong banking system, growing population, a predominantly young generation ready to work and consume, a strategic location and a strong natural resource base are the necessary ingredients of a consumption-led growth model. Supported by prudent monetary and fiscal policy frameworks, this model is known to have worked wonders. Our economy has great expansionary possibilities which must be put to practical use. We should not be afraid of controlled fiscal deficits as these provide us a chance to expand economy through domestic debt expansion which in turn leads to increased government and consumer spending thereby setting the economic wheel in motion.
Rich and resourceful economies embark on production-led growth. Advance technology, abundant cheap skilled and semi-skilled labor (either local or migrated), cash-oversupplied economy, growing domestic and international demands all combine together to keep the industrial wheel rolling and roaring. The international markets are flooded with their competitively priced goods and their economy keeps on growing. China has been using this model with the name 'commodity-heavy model'. Its overheated economy is now in need of a cool-down, and the Chinese economic managers are planning to shift to the "commodity-lite" model. Our economy is best suited to the consumption-led model in which the fuel to industrial growth is provided by consumer spending. Increased consumption creates demands for good.
A robust banking system under a low discount-rate regime provides ample credit to the business and industry. More goods take to the market. The banking system again steps in and provides easy credit to the consumers to enable them to buy goods. With the passage of time, canvas gets expanded. Growing demand for consumer goods results in demand for industrial goods and this is the point when capital formation starts to build up. There was nothing wrong with the model, it was the unprofessional and unpatriotic behavior of our business managers and industrialists who diverted the copious flow of easy bank credit to the speculative sectors instead of using it for capital formation. Now, in the given circumstances when credit is too expensive and hard to come by, anyone talking of production-led growth model is simply toeing the part line. We are already in with the consumption-led growth model; changing the horses in mid-stream will take us nowhere.
MAKING LAST DITCH EFFORT TO AVOID IMF ASSISTANCE
With the issue of external liquidity still unresolved, our economic efforts seem busy making last ditch effort to avoid IMF assistance. Since we have a squeezed timeline, we can not afford to dilly dally. We have to be decisive as there is much at stake. The banking sector, the capital market, the business, the industry all are in limbo. None of our friends seems to have agreed to an outright cash bailout. Their half commitments are based on roundabout techniques to see us through the crisis. There seems to be a trust deficit all around and rightly so, as we have an inglorious history of financial scams. We have yet another history of being smart to one another within the national boundaries. Once pitted against global adversaries, we are always found lacking in wit and alacrity. By now, we should have understood that we have landed into a financial trap, courtesy our own wrongdoings.
We are going to get nothing on our own terms. Even Saudi Arabia is not going to allow us a single barrel of crude oil on deferred payment terms, until and unless a yes vote is passed by the US. China, though having no such constraint, is not going to single out itself by offering us a cash bailout in utter disregard of US simply because we have never proved ourselves worthy of the much trumpeted friendly ties.
While our Urdu press, being not-so-worried (or ignorant) about the economic and financial issues, remains locked in mundane political and mud slinging issues, a stray Urdu article reveals stashing away of $130 billion by the industrialists, bureaucrats and retired generals in their overseas accounts ñ I take exclusion of politicians from the list as an honest oversight! The said article endeavors to make a fervent appeal to the sense of patriotism of the owners of the hidden wealth.
Incidentally a similar article by a well known Indian journalist appeared in the English section of our press. The writer states:
"I do not know how much money is hidden by Pakistanis, Bangladeshis, Nepalis or the Sri Lankans. But the estimate for Indians is around $1,500bn".
"In a 2006 report on black money in Swiss banks, the Swiss Banking Association has put the deposits of five top countries as: India the highest with $1,456bn, Russia $470bn, the UK $390bn, Ukraine $100bn and China $96bn."
I personally do not believe that the hardened black money accumulators can be deterred from the pursuit of getting rich at the expense of nation through emotional appeals or else I would have borrowed the following words of the Indian writer:
"if the corrupt feel even an iota of patriotism, they should not hesitate to bring back the much-required finance to bolster our sagging economies.
Finally, coming out of the emotional mode, the Indian writer suggests that his government may offer legality to the stashed wealth against a 33 per cent cut. In our case, a twenty per cent cut will take us out of the woods. While the international bank secrecy code purchases immunity for the wrongdoers, yet there should be some disclosure flexibility in special circumstances. For example, a country on the verge of default should have the right to know the detail of accounts pregnant with the money looted from that particular economy. After putting the culprits on ECL, the money should then be easy to repatriate. Viewing the matter more broadly and putting it on South Asian canvas, the Indian writer concludes:
"This money belongs to the people of South Asia and it should be available to them when they need it. We should also develop confidence to borrow from one another instead of looking towards the West."
IN WAITING FOR DIVINE SUPPORT
We claim to be a friend of China, yet we have learned nothing from it. History provided us chances to justify our claim but we dutifully faltered on all such occasions. In 1971, when China advised us to iron out a political solution to the then East Pakistan crisis; we simply fell short of saying "mind your own business" as we said to the Russians in the same context. Z.A Bhutto was more close to the Chinese than anyone else. In 1972, when he asked China for a grant of $5oo million, a diplomatic "no" was the reply. It was later explained by the then Chinese premier who said that China held in high esteem Pakistan's self respect and wanted to help it through economic and trade channels or even through soft loans but definitely not through grants (should be read as dole-outs). This was the best advice, a true friend could have offered. The later events are testimony to our fateful disregard of the priceless advice.
Chinese are no angels but the overseas hidden wealth of Chinese is only $96 billion which when compared with their huge forex reserves of around $1,900 billion, shrinks to a negligible half per cent. In our case, the hidden overseas wealth is 1625 per cent of our forex reserves. If we can't learn anything good from our real friends and continue to travel on the road to self-destruction, we are bound to become a liability in their books. In case we again fail to extract any easy money from Chinese, it will just be the case of past revisited. While any commitment from China remains a guess work, the news of peace meal pledges for $4 to 4.5 billion by different international agencies is in the air. A World Bank program for $1.4 billion for the current financial year, a $3 billion IDA assistance over the next three years , fresh negotiations with ADB for another one billion dollars and Islamic Development Bank's enhanced trade facility - form $500 million to one billion dollars - is all that is contained in the pledge basket. The lending agencies, as usual, have asked for some stiff economic measures that include reducing of next year's fiscal deficit to 4.3 per cent, increasing of tax to GDP ratio from 10 to 15 per cent over a period of three years and cutting on government's State Bank borrowings.
The much awaited Abu Dhabi meeting of Friends of Pakistan can hardly be expected to provide us immediate succour, nevertheless some moral support or any roundabout arrangements should certainly be in the offing. We have become so dependent on the Divine Support that it has almost found a place in our economic policy design. And why not? Are not the enhanced inflow of foreign remittances and the plummeting oil prices silver linings in the dark clouds? Every thing shall be fine at the end of the day. So should we expect, at least in the present dire situation!