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What ails Pak economy?

Theories, theories everywhere

The outlook on the state of affairs on Pakistans economy is at best confusing. While the
government keeps on citing achievements in controlling fiscal deficit, currency stability, rising
revenue collection, increased reserves and lower inflation, the ground reality with the average
person on the street may well be quite different. Economists, like medics, sometimes confront a
patient with an obvious problem but no obvious diagnosis! This is perhaps precisely the situation
we face right now. Lets start with the problem. There is no simple way to gauge an economys
health. But if one had to choose just one statistic, it would be gross domestic product (GDP).
Real GDP measures the total income produced within an economy, adjusted for the overall level
of prices. Now here is the sad fact for Pakistan: Over the last decade the growth rate of real GDP
has averaged just 3.5 percent compared with the regional average of nearly 5.5 percent. And the
two main implications of this low growth rate being: First, given the high percentage of
employable youth in our population mix, we need a minimum growth rate of 7% to create
enough jobs for incoming annual entrants to the job market; meaning our unemployment is
rising, and second, at a rate of around 3%, incomes double every 35 years, meaning at a rate of
3.5%, it will take us 30 years to double our income per person, the base as we know is already
very low. It is very tempting to blame military interventions or external factors like global
recession, etc. for the paltry decade long performance, but the fact remains that regardless of
whosoever assumed power during this period, the economic governance remained inept. Still, the
explanation for the poor long-run performance is not this simple. There was global recession
even back in 1982 but in contrast Pak economy was posting a robust growth rate, courtesy
foreign inflows, relatively less corruption in Islamabad, and regional competitiveness that was
clearly superior to our larger neighbors like India and China both upped their game in the early
90s. Sadly, today Pakistan does not even appear in the very frame depicting regional economic
leaders (China, India, Bangladesh & Sri Lanka), and despite some favorable external factors, is
suffering from serious concerns like mounting debt, declining exports, rising poverty and a
stubbornly low growth rate. So what is really wrong with the economy? No one knows for sure,
but numerous theories are being bandied about and here are five of them:

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Wrong Statistics: Talk to our economic managers and they say that there isnt a problem. When
quality improvements and new products and services are pervasive and so different from what
came before, the national income accountants who construct GDP might underestimate how
much life is getting better. Think of how smart phones now replace camera, GPS or music
system or how new eating-out habits alter the realities of home kitchens or how motorcycles
reshape individual transport. According to them the problem is not in the economy but in the out-
of-context quoted statistics. There is, however, reason to doubt that this is the whole story. Polls
indicate that most Pakistanis think the country is on the wrong track and say that economy is
their top concern. Their dis-satisfaction comes not from studying the national income statistics
but from their day-to-day experiences, which are not living up to their aspirations.

Vicious Trap: The slowdown or recession in an economy invariably carries its own hangover
and if this phenomenon is compounded by a global recession which we are witnessing now
since 2008 it makes recovery from a downturn all the more difficult. Anxiety lingers, causing
businesses to be reluctant to borrow to finance risky investments and banks reluctant to finance
them. The good news is that hangovers eventually dissipate, but patience is required.

Secular Stagnation: A term coined by Lawrence H. Summers, pointing to long-term decline in

inflation-adjusted interest rates, a trend, which in itself is evidence of reduced demand for capital
to fund investment projects. The main reasons he cites for such stagnation are: ignoring home
based manufacturing and not enough investment in brick-and-mortar investments. The result, he
says, is secular stagnation a persistent inability of the economy to generate sufficient demand
to maintain full employment. His solutions? Protect and facilitate home manufacturing industries
and more government spending on infrastructure, provided of course the government takes
advantage of the lower interest rates to make right investments in public capital admittedly a
big if. In our case, we seem to be faltering on both counts: home industry is crumbling &
injudicious government spending.

Slower Innovation: According to the renowned economist, Robert Gordon, sustainable growth
is primarily driven by innovation both in products and operational efficiencies, and by thriving
entrepreneurship. From Pakistans perspective where none of the above is being seen to take
root, this theory is the most pessimistic, because if he is right, we may have little choice but to
get used to slower growth.

Policy Missteps: The very approach and mindset of economic policymakers in tackling a
stagnating economy can hold the key to a countrys future economic prospects. For example,
when Obama took office in 2009, the economy was in the midst of the Great Recession. His
advisers relied on standard Keynesian theory by proposing a large increase in government
spending to energise the economy. Through the stimulus package, as the economy recovered, the
US administration supported tax increases to shrink the budget deficit. In hindsight now many

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economists are, doubting the government policy relating to the unrealistic hiking of tax rates,
which in time became counterproductive. Oliver Blanchard and Roberto Perotti recently released
a study that points to the negative effects of high increases in taxes and government-spending on
private investment; in-turn undermining the very objectives of the Keynesian theory. Likewise, a
similar recent study released by Alberto Alesina and Silvia Ardagna, opines that fiscal stimuli
based on tax-cuts are more likely to increase growth than based on states spending increases.
Out here our government policies appear to be making mockery of all these findings: capital is
being mopped up by the government through excessive domestic borrowing in-turn crowding out
the private sector; coercive tax drives and punishing tax rates are being orchestrated without
paying any attention to tax reforms; and the government continues on a lavish spending spree on
projects that can neither be justified on the scale of financial sustainability nor on the measure of
public priority. So if this continues then why even expect high growth in the coming months?

Anyway, the above are all different possibilities or diagnoses on what truly ails the Pak
economy. Unfortunately, I have no idea which one in particular is right. The answer perhaps may
well involve a bit of each!

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