M Ziauddin
Just about the time the PTI-led coalition government was being sworn in, one of world’s leading econo
mists of Pakistani origin, Atif R. Mian had briefly analysed, in a newspaper column (published August 17, 2018), the crises confronting the incoming government led by Prime Minister Imran Khan and at the same time he also proffered a number of vital suggestions which the author believed, if implemented on time and competently, would lift the country out of its current socio-economic quagmire and set it on the path leading to a genuinely true ‘Naya’ Pakistan.
But before we go into the details of these suggestions it would not be out of place here to record briefly the academic and research achievements of the author so as to appraise the readers about the relevance of the suggestions and their timeliness as well as their worth: Professor, Economics, Public Policy and Finance (Princeton University) and Co-Founder & Board Member, Center for Economic Research in Pakistan (CERP), Atif R. Mian is the John H. Laporte Professor of Economics, Public Policy and Finance at Princeton University, and Director of the Julis-Rabinowitz Center for Public Policy and Finance at the Woodrow Wilson School. Prior to joining Princeton, he taught at the University of California, Berkeley and the University of Chicago Booth School of business. Professor Mian’s work studies the connections between finance and the macroeconomy. His latest book, House of Debt, with Amir Sufi builds upon powerful new data to describe how debt precipitated the Great Recession.
The book explains why debt continues to threaten the global economy, and what needs to be done to fix the financial system. House of Debt is critically acclaimed by The New York Times, Financial Times, The Wall Street Journal, The Economist, and The Atlantic among others.
While analysing the crises confronting Pakistan currently, Atif Mian rightly referred to what has become somewhat of a ritual for Pakistan to be back regularly at the doorsteps of international creditors.
“The PML-N government has left national coffers empty, just like the PPP and the Musharraf-led PML-Q governments before it. Like clockwork, Pakistan goes to the IMF after every election: 2008, 2013 and now 2018,” said the author tracing the short history of performance of the last three successive Pakistan governments. Interestingly, even the current government seemed to have begun exactly the way Atif Mian said was wrong: Typically, the new government has ‘plugged the hole’ through IMF and kicked the can down the road for another five years which is certain to bring it face to face with the next near-death experience in due course of time. For things to be different this time, the author had advised the new government to respond differently, highlighting three elements that, he said, should be part of the government’s strategy to get out of the current doom-loop.
First, strengthen Pakistan’s financial and regulatory authorities. Appoint competent and reputable leadership and design governance rules to minimise political interference. For example, the State Bank of Pakistan should be given legal and functional autonomy. The top leadership should be picked based purely on merit and appointed for a duration that is preferably as long as the political cycle of five years. An independent regulatory authority, perhaps within the State Bank, should be empowered to monitor Pakistan’s exposure to risks such as leverage, liquidity and exchange rate risks in the financial sector. The benefits of having an independent and competent monetary authority are said to be large. Markets reward a country with strong regulatory institutions with lower cost of funding, a stable currency and higher valuation. For example, when India moved towards making its monetary authority more independent and appointed competent individuals like Raghuram Rajan at the top, the Indian market rallied.
On the other hand, when President Erdogan challenged the independence of his own central bank, the Turkish lira plummeted. The lira depreciated further when Erdogan appointed his son-in-law as the finance minister. The author said, the new PTI government would do well if it could set a new tone for independence and competence within Pakistan’s financial institutions. In retrospect, however, it seems the PTI government’s approach to the problem has been only half-hearted.
Second, shift Pakistan’s growth policy from the failed import-led strategies towards policies that focus squarely on raising domestic productivity growth and exports. Pakistan has relied too much on borrowed capital to fund large-scale capital expenditures. It is politically expedient to showcase ‘success’ by having a foreign country develop large capital projects on borrowed money. But at the end of every political cycle, the overhang of excessive borrowing ends up depressing the entire economy. One of the most important lessons for students of economic growth is that a country’s long-term growth is almost exclusively a function of its domestic productivity growth. In plain words, a country cannot buy success from the outside, success has to be developed internally. “The new government needs to focus on factors that expand domestic productivity. For example, invest heavily in education so our labour force becomes more productive. From technology to market design and governance structures, there is now a wealth of information on what works in improving learning outcomes. Appoint competent people in top positions who can utilise this knowledge to run education policy,” Atif Mian advised.
He further advised the new government to invest in science, technology and human capital infrastructure. Pointing to the great shortage of producers of human capital, eg scientists and academics who can produce the next generation of skilled professionals, he said, the government’s first orders of business should be to do everything it can to attract top talent into Pakistan. This, he said, required changing Pakistan’s narrative and promoting a pluralistic society as, according to him, today the much sought-after global talent increasingly demands an open and free society.
On this score, the PTI government seems to have failed miserably as it is still trying to fund its growth with borrowed resources and at the same time completely neglected the matter of human development.
The main reason for Pakistan’s perennial balance-of-payment crises is its anaemic export growth. For example, Pakistan’s exports did not increase in real terms over the last five years. Since 1980, Pakistan’s exports have grown at a rate that is only one-fifth that of India and Bangladesh. The new government also seems to have not focused on expanding domestic productivity for Pakistan’s exports to rise, therefore the country continues to lag behind its closest competitors in the regional and world markets.
Third, modernise the financial system in order to reduce the incidence of tax evasion and money laundering. “Pakistan has one of the lowest tax collection rates that results in a high fiscal deficit. Pakistan also has an active black market in foreign exchange that siphons off ill-gotten wealth abroad. The black market facilitates tax evasion, further widening the fiscal deficit. It also increases the imbalance between the supply and demand for dollars. Both of these factors contribute to balance-of-payment problems in the long run. The new government can reduce tax evasion and money laundering by moving the financial system towards a ‘cashless’ digital payment system that makes it easier to track and audit large financial transactions. The foreign exchange market should also be unified into a single market that integrates with the formal banking system. A combination of reputable leadership at the top and intelligent technology design can significantly reduce the incidence of tax evasion and money laundering,” said the author
However, on this score also, the performance of the PTI government has remained too inadequate. Therefore, Pakistan continues to be stuck in its old ways as the new government continues to plead to outsiders for a bailout.
— The writer is veteran journalist and a former editor based in Islamabad.
