Economy under stress
Pakistan’s economy does not show any sign of imminent collapse. What it shows is that it is under great stress. What it has also shown is the ability to recover quickly— sometimes with a bounce.
By Shahid Javed Burki
Tuesday, 23 Nov, 2010
IS the Pakistani economy in a deep crisis? The answer is most definitely ‘yes’. Is the country’s economy standing at the edge of a deep abyss into which it could conceivably fall? Once again, yes. Is the economy collapsing, though? The answer is ‘most cer tainly not’.
During my long career in development economics, both as a student of the sub ject and for a much longer time as a prac titioner of the still-evolving discipline, I dealt with many faltering and some col lapsing economies. I can say with some conviction that Pakistan has not yet reached that stage.
There are several signs that point to an economic collapse. The currency loses its value, plummeting to a newer depth every day, if not every hour. I saw that happen in Argentina and Brazil. Inflation may reach the point where it becomes almost meaningless to measure the increase in prices. In some ex treme cases, barter may replace cash transactions. This too I saw happen in the southern cone of Latin America.
The government may run out of foreign reserves and may not have the money to service foreign obligations. Default becomes a possibility; it became a reality in Argentina and Ecuador. Pakistan has been close to this situation a few times but by going to the IMF, it was able to avert default. Commercial banks may default and there may be a run on the banks. This almost happened in Mexico in December 1994.
There are of course close links between politics and economics. A dramatic change in one will most likely affect the other. The writ of the government may not apply and society may begin to display total lawlessness. I saw that happen on many occasions in Haiti during my service with the World Bank in that part of the world. This is the situation of many nations of sub-Saharan Africa that have been torn by internal strife for decades.
The Pakistani economy does not show any of these signs of imminent collapse. What it shows is that it is under a great deal of stress. What it has also shown is remarkable resilience which has made it possible to pull back from near-collapse and move forward, reaching a higher plane of activity. The economy has absorbed many shocks delivered both by man and nature, and by circumstances beyond the control of those in charge of the economy at any given time.
At this time it is dealing with stresses that have been caused by all these different sources. What the Pakistan economy has also shown is the ability to recover quickly — sometimes with quite a bounce. With this as the background what I will do today is discuss three things: the current state of the economy and its immediate prospects, some ideas about the options available to the current group of policymakers and, finally, the form recovery might take once it takes hold of the economy.
Pakistan today is South Asia’s poorestperforming economy. Its projected growth rate for the next couple of years is about a third of that expected in India and about half of that considered to be plausible for Bangladesh. The current financial year — 2010-11 — is likely to be particularly bad for the economy. The great flood of 2010 has caused a loss equivalent to 3 per cent of the GDP. The damage to the economy has been estimated by foreign development agencies at $10bn.
This could lower the rate of growth of the economy by one to 1.5 percentage points a year for several years to come. This means that for the current year there will be a decline in the level of average per capita income and that, in turn, will translate into a significant increase in the number of people living in absolute poverty. The country may add 10 million people to the pool of poverty, bringing it to 40 per cent of the total population. This will be the highest point reached in many decades.
The shocks to the economy during the last couple of years have worsened the fiscal situation to the point where the budgetary deficits being experienced and projected are no longer sustainable. These deficits have not translated into a balance of payments crisis as would normally be expected. This is in part because of the steady flow of external finance, not all of which has come from the IMF and the United States. Capital sent by Pakistanis living and working abroad is an important source for covering the balance of trade deficit. Access to the income and wealth of the Pakistani diasporas is one of the several sources of possible strengths of the Pakistani economy.
Turning now to the options available to policymakers at this time to pull the economy back from possible disaster, I would start with listing three broad categories of reform that need to be put in place. They are improving the quality of governance, restructuring production and giving greater prominence to trade as a driver of growth.
Pakistan’s economy is stuck in a groove from which it is experiencing difficulties in exiting. The high-potential sector of agriculture continues to perform well below its capacity, neglecting to produce the products in which it has comparative advantage. The firms operating in the industrial and commercial sectors remain small, use antiquated production processes and don’t have much capacity to innovate. The government has seriously underinvested in the development of infrastructure and the production of public goods needed by a large and growing economy.
Trade as a driver of growth was an afterthought for Pakistan’s policymakers. The patterns that developed over time, largely the consequence of accidents of history, have remained in place. They are not allowing the country to use the extraordinary opportunities available in the international marketplace. But for reforms to be introduced in these two areas, the state will have to play an important role. The state can only become an effective player if the quality of governance improves, which I will discuss in greater detail in later articles. ¦ The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.