It seems that that the country’s system is being run collectively by the three main organs of the state where decisions are taken in sync and responsibility of the outcomes are also hopefully assumed jointly. Now, this is a good omen for the country, which not only needed harmony but a joint commitment to some difficult looming challenges (example, FATF) in order to progress – Dividends are already beginning to show on the foreign policy front given the success of the Prime Minister’s recent US visit. The trouble though is that the primary function of these organs is to dispense governance in a manner that improves the life of the common man and this is where they may perhaps be measuring short. Unless the economic governance quickly falls into place the rest may be meaningless. The intentions may surely be noble, but when it comes to the economy, unfortunately mere intentions will not do. The exercise needs to be accompanied by delivery, which requires competence, related experience, and a focus on the ‘real’ objectives and of course practical management. So far, it has been a story of imported bookish theories with realities far removed from Pakistan, an overzealous and mostly unnecessary nature of revenue drives run by managers with little hands-on experience of practical business & industry in the country, and an irresponsible hype creation that has created an air of uncertainty in the markets, whereas, the need was to instead calm them.
Ostensibly, economic mismanagement carries long-term repercussions, because economic cycles can invariably take a long time to correct themselves: The present managers will be well served by studying some very respected work in this regard by the eminent Russian economist, Nikolai Kondratiev, who advises on how disturbed economic cycles in a non-conducive environment can sometimes take as long as 50 years to re-correct themselves. Incidentally, he also emphasizes why nations cannot sustainably develop unless they ensure cheap capital to the investor. In fact, the underlying argument to his work is that how a government is responsible for arranging cheap capital in its economy and what it must do to see to it that cost of capital to its investors is always globally competitive. A cursory look at the successful economies and not only have they all ensured this for their investors, but in fact today are operating at negative interest rates – Still the in the US the Federal Reserve further cut the interest rate last week despite fears of inflation owing to the on-going trade war between the US and China! Closer to home, Turkey recently reduced its discount rate by nearly 400 basis points in one go; India is expected to further lower its discount rate from the present 6%; and China just announced another cut of 100 basis points, with expectations for more in the coming months. For Pakistan to support 13.25% in an economic structure where discount rates have little correlation to real inflation just does not make much sense.
The origins of efficiencies often associated with the private sector management can be traced back to various forms of right-to-ownership. The more secure stockholders feel about their rights to the assets they own and about their rights to fairly deploy them in a competitive environment the more likely they are to expand portfolios or reinvest. Unfortunately, the shock of nationalization in the 70s shook the very foundations of right to asset ownership in Pakistan and our economy never truly recovered from that debacle. A damage further exacerbated by successive governments who coined their economic policies on political grounds, leaving Pakistan’s economic management per se in hands of those who had little or no understanding of how to create a just corporate culture in an evolving economy. As merit got lost in the lust to retain power at any cost and mediocrity became the order of the day, the required policymaking to keep us in the hunt for global competitiveness and achieving sustainable economic progress went missing. Further, somewhere across the journey, governance got inter-twined with personal gains and agendas and suddenly a national culture of get-rich-quick took root. Thrown out were the lofty principles of good corporate governance and in came vices of corruption and rent seeking. Today, this virus stands embedded in the very structure of some of the leading cum key industrial sectors of the country which thrive on a trail of dodgy ownerships, a history of rent-seeking and stubborn cartelization. To correct this is essential, but not by committing the original sin of the 70s. This government needs to understand this in order to repeat the saga of another era of ‘lost decades’. The key is to first concentrate on fundamentally creating wealth and once wealth is tangibly created then only to go on to find ways to retain it and to also redistribute it equitably. Once again, the successful economies have shown cognizance to this reality and we can see dividends being reaped by them for undertaking the right reforms in this regard: US undertook their fifth generation tax reforms after 2010 involving mainly tax cuts and drastic simplification of tax codes; The European Union followed suit by simplifying its tax and revenue systems (post 2014) to attract more private capital to stay at home, which also in many ways forms the corner stone of the present EU look inwards policy; and last but not least, China undertook some key tax reforms in the last five years that now help Chinese companies to connect globally with a more free two-way capital movement – The idea behind this being that investors are always lured through facilitative reforms and by creating order cum calm and not through stoking uncertainty.
Finally, one would like to draw attention to their 2014 works on an economy’s management, released by the two economists, Thomas Piketty and Jeff Madrick. Both, in their respective works advocate that in order for developing countries to succeed they need to create new innovative winners. The basis of their arguments emanates from the lessons of post 2008 financial crisis, mainly in shape of a realization that markets are not necessarily perfect; not all forms of Foreign financing (even domestic for that matter, if wrongly prioritized) are beneficial; and last but not least, whereas seeking enhanced trade with economies more developed than itself may be better at most times for an economy but an excessive faith in bilateral trade with more developed economies may at times be quite ‘misplaced’ – Trust, the last bit, we have learned the hard way when trading excessively with China.
They go one to explain how and what essentially forms the basis of the Pew Research Centre Survey on the US, released the same year in 2014, where more than 60 percent Americans opined that sacrificing home manufacturing in the US to blindly support free trade/imports was a mistake. More importantly, they strongly recommend that just as the developing nations need to be careful about their trade policy they also at the same time need to re-think the ‘new-normal’ of economic recipes that until recently have relentlessly been pushed down their throat by the western economic orthodoxy: low tariffs, free capital flows, elimination of industrial subsidies, deregulation of labor markets, balanced budgets, low inflation and high interest rates. Incidentally, all these incorporating the very basis of routine advice invariably being handed down by the likes of the International Monetary Fund (IMF) and the World Bank, to most developing countries in return for their help. Though ironically, during the industrial revolution, today’s rich countries – Britain, France and the United States – pursued the very opposite policies: high tariffs, governmental support to investment in industry, cheap finance and easy regulations per se to investors, and fixed values of currencies for extended tenures!
(This news/article originally appeared in The Nation on August 7th, 2019)