With the formation of an 18-member Economic Advisory Council (EAC) comprising eminent economists, Imran Khan’s government will not be short of economic policymaking expertise that was sorely lacking under former finance minister Ishaq Dar’s mismanagement of the economy.
That period also provides an important lesson that businesspersons and their ilk aren’t necessarily the most astute at managing economic affairs despite the claims of competence made on their behalf.
The result of the previous regime’s dash for debt-fuelled GDP growth is a huge fiscal deficit of about seven percent of GDP. This is a massive foreign debt burden requiring anywhere from $9 to $12 billion of repayments within the next 12 months (with currency reserves barely enough to cover two months of imports), and a current account deficit of about six percent of GDP, forcing the current government’s hand by requiring it to take unpopular steps such as the recent announcement of major hikes in electricity and gas tariffs.
In other words, we should expect painful revenue-generating and cost-reduction measures for the foreseeable future if the economy is to be turned around. This should also send a signal to domestic and international investors and creditors that the government is determined to take corrective actions to set the economy on a path of sustainable and socially inclusive growth. While the formation of the EAC is a positive step, there are some issues regarding its composition.
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First, it comprises 18 members, which makes it an unwieldy body. In comparison, the US Council of Economic Advisers has three panel members, thereby forming a cohesive policy-planning team assisting the US president. Perhaps the prime minister has decided to form groups, each comprising three or four members specialising in different areas that will prepare and present their recommendations and findings in these fields. Whether these reports will be routed through an overall coordinator (the finance minister?) who will brief the prime minister and the cabinet isn’t clear.
Second, the EAC doesn’t have a single woman among its members. Surely there must be competent female economists and corporate leaders in a country of 200 million. Gender diversity is important to bring a range of viewpoints to the discussion.
Third, one of the major problems facing the country is a runaway population growth. Yet, the EAC doesn’t have any expert in demography among its ranks. This is a glaring omission and the problem cannot be avoided by skirting around the matter altogether ostrich-like. Unbridled population growth is an existential threat to the country since it is joined at the hip to the problems of water scarcity and climate change.
Fourth, having economics professors from leading foreign universities on the panel was really an overkill and perhaps done as a public-relations measure to impress international financial institutions since the nominated Pakistan-based economists are renowned experts in their field and have enough theoretical and practical knowhow that comes from living and working professionally in Pakistan.
Instead of tapping the Ivy League, it would have been preferable to appoint experts from the more underdeveloped regions within the country. Thus, capable economists who hail from and viscerally understand the development issues besetting regions such as Balochistan, Khyber Pakhtunkhwa, and rural Sindh would have given a voice to areas of Pakistan that have been clamouring for attention from the federal government and placed the vaunted CPEC project at the heart of the future development strategy.
One of the PTI’s main goals is to reduce income and wealth inequality in the country. Widening the income tax net and making the system more effective is one obvious way. However, there is also the insidious influence of large monopolies in the private sector that have a major share of the markets they dominate that often exploit consumers through price-gouging while fuelling cost-push inflation.
Therefore, the Competition Commission of Pakistan (CCP) should be given wide-ranging powers to enforce its findings and recommendations, including the levying of hefty fines linked to offending companies’ sales revenues.Changes in the law, if necessary, should be put into effect to allow for swift judicial rulings on the CCP’s recommendations.
One possible solution to restrain private-sector monopolies and oligopolies from increasing their prices at will is along the lines of the policy that the UK government has adopted for price-capping by privatised utility companies (electricity, gas, etc). This is the RPI-X formula in which ‘RPI’ refers to the change in the previous year’s retail price index (a measure of consumer inflation) and ‘X’ is the expected productivity improvement during the period the price-adjustment formula is valid for. This kind of price regime provides an incentive for dominant firms to improve their efficiency since it results in greater profits for them while keeping a check on arbitrary price hikes.
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In the rural economy, the sugar industry is a source of great political and economic influence, and of social and political inequality. The ownership of multiple sugar mills by individuals or their family members gives them significant political influence in their respective catchment areas. The export subsidies that the mill owners receive are akin to monopoly rents and are examples of ‘regulatory capture’ by mill owners.
Therefore, a taskforce to examine the workings of sugar mills – with a view to effectively regulating the sugar monopolies and curtailing the excessive economic and political power exercised by the ‘sugar barons’ – will surely be welcomed by thousands of cane-growers around the country and provide some relief to taxpayers.
As the government is also serious about eliminating corruption and punishing malefactors, it should extend the whistleblower law to encompass the private sector. Anybody who knows of any corrupt business practices, such as payments made to public officials by private businesses to win public-sector contracts or other such illegal activities, and steps forward to provide credible information should be promised anonymity and given a suitable monetary reward. (Argentina and Brazil have recently implemented anti-graft laws that encourage private parties to admit to their role in bribing public officials in exchange for lenient treatment by the authorities. So far, the new laws have proved to be highly successful.)
The government’s equivocation about its next steps shouldn’t be taken to imply that it doesn’t know what is needed to restore the economy’s health. Minister for Finance Asad Umar has made it clear in various statements and interviews that he is aware of the scope and magnitude of the required economic reforms. What’s likely giving the government pause is to estimate how much austerity is going to be politically acceptable to the people.
The dialing down of the recently-announced price hikes of gas and electricity suggests how sensitive the PTI government is to political blowbacks. Economists are likely to advise it to do whatever is necessary. But then they don’t have to face the political consequences. Hence the government’s abundance of caution.
Unfortunately, there is no luxury of an extended ‘honeymoon period’ available to the new government. An exchange between two characters in one of the books the American novelist Ernest Hemingway wrote is suggestive of the dilemma.
The first character asks: “How did you go bankrupt?” The second replies: “Two ways. Gradually, then suddenly”. Examples abound of countries and companies imploding unexpectedly, testifying to the validity of Hemingway’s warning about sticking to bad habits.
The writer is a group director at the Jang Group. Email: firstname.lastname@example.org
(This news/article originally appeared in The News on September 14th, 2018)