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Righting economic policies?

13 October, 2011

By Dr Kamal Monnoo


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"When the going gets tough, the tough get going", or more suitably in our case, "when the elections get near, the politicians get going!" Bad economics, but how one wishes it was always election time in Pakistan, because if the economic policy signals over the last four weeks are anything to go by, the government suddenly seems to have woken up from its deep slumber and surprisingly making all the right moves.

In September, we saw a more confident Finance Ministry wanting to resort arrangements with the IMF; a Planning Commission more focused on Pakistan's future by announcing a multi-faceted growth policy; now, in October, the Prime Minister suddenly announcing an end to the electricity loadshedding; the Textile Ministry pre-announcing its own outlook on the cotton crop in an effort to ease panic and restore calm to the market; and the State Bank on Saturday reducing the interest rate by 150 basis points - all unbelievable, but extremely welcome!

Even more important, from an economic governance perspective, the above developments signal a healthy management transformation in the very functioning of the key economic policy-making arms of this government.

One: For the first time in its tenure, there appears to be unanimity of views and on selected strategy. Most economists and businessmen feel that not only have we now reached the inelastic threshold of inflation control through monetary tools, but also, to quite an extent, the present inflation is being driven by the supply side issues. In their opinion, time has come to push 'real' economic activity by arresting the escalating cost of doing business in Pakistan, creating jobs and reducing unemployment.

Two: These new initiatives point towards a governmental mindset that is finally turning towards becoming 'proactive' - meaning an endeavour by the government to make things happen, rather than waiting for them to happen. A realisation setting in that given our high population growth rate and the already existing high percentage of employable youth in the population mix, the salvation lies in maintaining a sustained high growth rate because prudent austerity measures alone will just not be enough.

Three: The new found coordination within the ministries and their work in tandem. This has been the weakness of this government all along, but now the terms' rethink with the IMF, the emphasis on growth, the urgency to overcome the power crisis in order to boost manufacturing and the reduction in the interest rate, all point to the growing perception that for once the economic managers are on the same page, have their act together, are consulting each other and working jointly towards common objectives. 'Perception' in the economic world often tends to play a more critical role than the reality itself, since a positive perception in turn generates 'confidence', which as we know invariably occupies the most central position in an investor's decision to put his money in an economy or to hold back!

So, the chain being: Perception to confidence to investment to growth to job creation. Speaking of investor's confidence, John Maynard Keynes and then Robert Shiller of Yale, refer to this phenomenon as "animal spirits" of investors, which is described as a spontaneous urge to action, rather than inaction. Recessions occur when optimism turns to pessimism and businesses are reluctant to place bets on a prosperous future. Recovery occurs when the investors' confidence returns. The relationship between investment and the overall economy is what an engineer would call a positive feedback loop. Greater business investment would increase hiring, both by those who produce the investment goods and those who buy them. Greater employment would mean more workers taking home pay checks, which in turn would increase the overall demand for goods and services.

On the inflation front, while surely it seems to be on its way down (being primarily driven by external factors, rather than internal), however, care needs to be taken that complacency does not creep in. Food price index is still close to 18 percent or more and this despite the falling food commodity prices in the international market. This means, that the job is not over and the State needs to do more by way of management, distribution, storage, breaking of cartels, controlling black-marketing and stocking or hoarding to ensure easing of 'supply flows' in the coming months.

Also, inflation may be down, but certainly not out. Taming inflation is always one of the top economic priorities of any political government because of the fear that high prices can fuel social unrest. Any evidence that price increases are slowing down can surely provide some leeway to economic managers, but no sense of final victory. I have seen our government functionaries argue on several platforms that Pakistan's inflation is not really concerning over the long run because it is mostly about food prices, all weather and supply shocks - bad harvests, international shortages, speculation and the likes. But the fact that even the non-food inflation in Pakistan over the last five years stands as being its highest in its history, indicates that there are significant structural deficiencies which need to be properly addressed. The government has aggressively worked to tame inflation over the past 12 months and this watch they must continue; albeit by maintaining a balance with growth. It must keep faith that the support for growth will ultimately come from: i). Investment that translates into employment generation, more and more Pakistanis drawing real wages, rising personal wealth and a higher tax to GDP ratio threshold; and ii). Affordable social welfare schemes, infrastructure development and agriculture investment projects.

Finally, now that the government seems to be on the right track one only hopes and prays that these are not just one-time or merely damage control measures, but sustained efforts to put the economy back on track. The weakness with Pakistani politicians has been that they have mostly relied on convenient shortcut approaches. For some strange reason downturns and recessions have been viewed as short-run issues, which borders on simplicity-cum-naivety, to say the least. While a decline in investment spending may in some cases be argued as an economy's current difficulty, capital investments, however, are always made with an eye toward the future. What this implies is that our economic managers must always remember that given the multi-dimensional economic challenges being faced by Pakistan, the best fix for even our short-run problems lies in focusing on policies that will foster long-run growth and stability. But for the last four weeks their performance merits a pat on the back - well done!

 Courtesy: The Nation

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