Shabbir Ahmad
POOR economic decisions have led to countries falling, people dying from hunger and led to revolutions that changed the course of world history. Niall Ferguson, the famous historian, has given several examples in his book, “The Ascent of Money” explaining the course of economic collapses. One of such examples is of Spain, which was on course of becoming a major world power in the 16th Century until they start importing gold and silver at a rapid pace from Peru and other Latin American territories. Metals were extremely valuable to Spain but relatively unimportant to the natives. The import provided a huge, unexpected supply of silver and gold to Spain, causing massive price inflation. Inflation and high taxes hurt Spanish industry, and much of the country’s wealth was subsequently spent on wars. Spain went bankrupt in 1596, eventually leading to the country losing its position in America to the English and French.
In the mid-19th Century, the Confederate Army felt that it needed diplomatic recognition. In order to achieve this status, the Army decided to cut off all cotton imports to Europe. Cotton was essential to Europe and it was America’s leading export, and the decision ultimately led to a substantially lower amount of revenues and inflation which. destroyed the value of the Confederate Dollar. The main focus of the Confederate States was political, but the lack of alternate sources of revenue with exports nearly nonexistent became a huge burden to its finances. Similarly, after World War I, Russia got nearly bankrupt. As a result, they started printing enormous amount of money to pay for war deficit. This decision backfired, resulting in a high level of unemployment and below par wages which led to strikes and riots. People even left their own jobs to hunt for food, hurting industries even more. Russia’s national debt was as high as $3 trillion in today’s USD. The financial issues in Russia led to militias fighting and eventually beating the nation’s army and creating the USSR in 1922.
Pakistan’s economy is going through one of the worst times of its history. A significant increase in current expenditure and a major decline in tax collection have led to a historically high budget deficit of 8.9 percent of GDP in the last financial year. According to official statistics, the deficit amounts Pakistani rupee Rs 3.445 trillion, highest since 1979-80. Foreign private investment fell to less than half in comparison to previous financial year. The Government has been struggling to avert a balance of payments crisis and to prevent its debt from spiralling out of control. This state of affairs can also be attributed to some poor economic decisions. Be it taking too much time to go to the International Monetary Fund (IMF) for a financial-assistance package, allowing free fall of currency, pressurising the existing taxpayers and opting for public borrowing instead of attempting to raise tax revenue. However, blaming the poor decisions of the current government for the current economic chaos would be unfair. The previous governments made several such decisions as well, especially about excessive borrowing from foreign and domestic sources and keeping a stagnant export level. Pakistan’s high fiscal deficit is the talk of the town these days. IMF is also concerned about it and is likely to send a team this month to assess the situation. Pakistan has been experiencing a high fiscal deficit for the last years – its annual fiscal deficit hovers around six per cent of GDP since 1990s. Reasons for high fiscal deficit include: a narrow tax base, inelastic tax system, complex tax laws, heavy reliance on foreign trade taxes and large tax exemptions to agriculture and other industries. The consequences of such a high fiscal deficit are in terms of accelerating burden of internal and external borrowing. Persistent deficit in balance of payments also results in fiscal deficit. Pakistan finances budgetary gap through external and internal borrowing. Debt servicing has positive and significant relationship with fiscal deficit indicating that any increase in debt servicing will put pressure on government treasure.
Poor economic decisions can make a lasting impact if these are not reversed in due course. History tells us that the conditions have not reached a certain threshold, impact of bad decisions can be reversed through good decisions. In case of Pakistan’s economy, the poor economic conditions can be put on track through good or some “difficult” decisions. The word difficult suits better here, since it’s always difficult for a democratic government to make unpopular decisions. The Government needs to remove structural barriers to economic growth. Structural reforms are required in tax legislation, widening tax base, trade policy, privatization of State-owned enterprises and human resource development. Efforts should be made to control negative trade balance which is possible by increasing exports through improving the quality of products and by exploring new international avenues. To curtail imports, import substitute industry must be installed by providing enabling environment to both domestic and foreign investors. The improvement in trade balance may ultimately improve fiscal deficit.
According to the World Bank, Pakistan ranks 136 out of 190 in terms of ease of doing business. The Government needs to provide clarity on the devaluation of the currency that is sustainable. They need to remove barriers to foreign and domestic investment and nurture a business-friendly environment. They also need to provide incentives to businesses especially small businesses and facilitate them during initial phases. The country must build up its economic and political institutions, develop human and physical capital and employ sound economic stabilization policies that rein in fiscal deficits and curb inflation. Industrialization of the economy may also help in growing the economy to a higher level. The success of East Asian economies has shown us that export-led growth model is a viable path to rapid economic development. Developed economies do not take decisions in fragmentation, rather they handle their economic problems in a holistic frame. We also need to do the same. Pakistan’s economy can be brought on track by taking into account its social, cultural and political issues.
—The writer is freelance columnist.
