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By Shahid Javed Burki IN the several TV programmes to which I was invited during my current visit to Pakistan, I was repeatedly asked the same set of questions. What was behind the depressing and seemingly worsening economic situation in Pakistan?
Who was to blame for the plunging value of the rupee and for the precipitous fall in the stock market? Why did the government not anticipate the severe shortage of electricity that is taking such a heavy toll on the economy?
Was the model of economic development followed by the government that was in office for more than eight years, from Oct 1999 to Feb 2008, responsible for the sorry state of the economy? Or, conversely, was the tardy response to the deteriorating situation by those who now govern the cause for the problems that have suddenly surfaced?
Some policymakers who are currently in charge of the economy have sidestepped these questions saying that they don’t wish to play the ‘blame game’. While this is a worthy response this game has to be played in order to craft the right policy response to deal with the emerging situation. History cannot be ignored when fundamental changes have to be made in the way the economy is to be managed.
In managing an economy in stress, policymakers must go beyond just treating the symptoms; they have to deal with the causes of the disease. That means an objective reading of history. If that is the case, where do I come out in this debate?
My answer is a simple one and in keeping with what I have written many times before. The blame for the current difficulties faced by the economy rests clearly with the previous administration and those who occupied senior positions in it.
There has been a delay in response by the new managers but economic fundamentals don’t change overnight. The large fiscal, trade and current account deficits that now characterise the state of the economy did not suddenly appear. They are the product of neglect of some of the weaknesses that have been apparent in the economy for years. These could have been addressed by the government that took so much pride in its management of the economy. But they were not its concern.
In looking for the causes of the current unhappy economic situation, three areas of concern should be identified. First, we must review the policies that were put in place over the past few years, particularly since 2002-03 when the pursuit of growth became the overriding concern of the policymakers. This review should lead to the identification of the approaches that need to be changed as well as those that should remain.
Second, we must understand the changes that are occurring in Pakistan’s external economic situation. An appreciation of the way the external environment is changing should lead to policy responses aimed at both benefiting from them as well as protecting the more vulnerable parts of the population from their impact.
Third, we should take stock of the way that speculators are operating in various parts of the economy and devise ways of protecting the economy from their operations.
The first area — where did the previous set of policymakers go wrong — would require a long treatise. However, some of the major mistakes that were made can be quickly identified. These included excessive dependence on foreign capital flows, encouraging the flow of these and also domestic resources into capital-intensive sectors, ignoring the impact of these policies on income distribution, paying little attention to developing the export sector of the economy, ignoring the development of some of the real sectors that have considerable growth- and poverty-alleviation potential, and ignoring some of the consequences of rapid growth on electric power and gas supply.
This is not the entire list but the point of mentioning these mistakes is to emphasise that they will have to be dealt with by the new policymakers. This will require considerable reflection and strategising which should occupy a great deal of Islamabad’s attention once the current crisis has been handled.
The second area — the significant changes in commodity prices including the continuing increase in the price of oil — requires immediate response from the government. However, in preparing this response, the government should work on two basic principles. One, the economy should not be insulated from the global economic system. The price signals the system is sending out should not be ignored.
Two, the poor, who will be adversely affected by the transmission of these price changes, must be protected. This will require the careful design of programmes to assist the poor to deal with price changes without suffering any loss in real income which they cannot afford. Help to the poor should not take the form of subsidies but consist of cash transfers and employment generation through specially designed public works programmes.
Also, this is the first time in a long while that the terms of trade have turned in favour of the sector of agriculture. This new set of price signals should be passed on to agricultural producers to get the right kind of supply responses.
The third area — controlling speculative behaviour — needs careful thinking. Economists in recent years have begun to focus their attention on human behaviour to understand human responses to various kinds of economic signals. They now appreciate that many economic interactions take the form of speculation rather than careful and rational cost-benefit analysis. It is the job of the state to deal with speculation when it hurts society. The best way to do this is not to ban it but to make it very expensive for the speculators to speculate.
What is needed are well-designed institutions working on the basis of well-thought-out systems of rules and regulations to prevent speculative behaviour from doing damage to the citizenry. When prices begin to rise, traders will be tempted to hold back sales in anticipation of future increases. This leads to what is generally referred to as ‘hoarding’. The state’s response to this should not be to force the trading community to release their stocks. This will interfere adversely with the development of markets. It should be to make it expensive to hold stocks through the use of instruments such as tax policy.
In sum, we are at the point where the design of government policy needs careful thought rather than a series of knee-jerk reactions. I hope the new set of policymakers is up to this task.
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