The current ideological debate between the "pump primers" and "stabilizers" reminds me of another economic debate during 1997-2000 between the "devaluers" and the 'peggers".

Luckily the economic bonanza after the 9/11 incident and strengthening/ weakening of the rupee/dollar resolved the debate naturally, without producing any clear and permanent winners.

It is interesting that compulsions are so strong to be "politically correct" that many 'stabilizers' of yester years are now advocating 'pump priming' the economy on a fast track basis. Even the IFIs are debating whether to exclude investment in infrastructure in their calculation of deficit financing.

While the stabilizers remain in the driving seat of the economy, they are unwilling because of 'political fallout' to publicly and explicitly state their constraints for an immediate and I repeat 'immediate' quantum increase in the Public Sector Development Program (PSDP) funds.

Simply put, the 'fiscal space' and/or the 'additionality' is not there yet for an immediate quantum increase in PSDP funds. Revenues barely have an elasticity greater than one with respect to nominal GDP, while attempts at additional revenue generation, expenditure reduction and switching are plagued by political unwillingness, i.e., resistance to broad basing the tax regime, trimming the bloated military/civil bureaucracy, including military expenditures, 'overhang' of past structural rigidities in the budget i.e., domestic debt servicing cost and slowness in implementing cost-saving administrative and economic reforms.

Current unsustainable debt and servicing ratios also do not justify immediate recourse to money-financed deficits to support enlarged PSDP even in an environment of low interest rates.

Obtaining more funds from abroad at cheap rates would increase foreign debt and compromise the so-called 'home-grown' policies. Moreover, a study by the writer indicates that the direct poverty reducing impact of increase of development expenditure/GDP ratio is fairly small. A one percent increase in this ratio reduces poverty by 0.2 percent.

Stabilizers are also shy to admit that funds or 'fiscal space' is not the effective binding constraint in doubling PSDP overnight. A more real and substantial issue is the cost-effective use of the additional funds.

This is more so in the case of the favourite 'pump-primers' sectors, i.e., health, education and infrastructure.Just a few years ago inspite of our balance of payments difficulties and fragile macro indicators we had ample funds through the World Bank's Social Action Program to uplift our education and health sector.

Lack of institutions, grass-root politics and mis-governance finally sounded the death-knell of the program and the second phase had to be winded up in sheer frustration. The embarrassment on the part of the government and IFIs was skillfully covered by promising a diversion of funds to the PRGF, the new buzzword in IFIs.

So much so for the 'stabilizers' point of view on overnight doubling of PSDP funds. What are the counter arguments in "Pump-Primers" arsenal to support their stand? Currently many countries (and some of them are in IMF Executive board determining fiscal deficits limits for developing countries like ours) i.e., USA, EU, Japan, China and India are following a counter-cyclical easy fiscal stance, so why not Pakistan? A closer look will reveal that each of these countries have either a) have highly favourable debt /GDP ratios and/or debt servicing ratios b) foreigners willing to fund their deficits or c) non-debt creating capital inflows and export earnings.

USA easy fiscal stance is based on a) and b), EU's bursting of Growth and Stability Pact is based on a), while Japan's stance is based on almost zero debt servicing costs. India and China's expansionary fiscal policy is based on a) and c).

Thus among the 'pump primers' who rightly have a distaste for "one size fits all" approach of IFIs are on slippery ground when they support an overnight jump in PSDP funds in Pakistan by citing the examples of above heavy weights.

A corollary to the feasibility of overnight jump in PSDP funds is the argument that currently interest rates are so low, banks are flushed with liquidity that substantial government borrowing for PSDP will hardly have any impact on interest rates and therefore the classical 'crowding-out' will not be an issue.

On the other hand, prospective high returns to these investments (even if partly financed by borrowing from friendly creditors) will automatically pay-off the future debt servicing costs at the margin.

To repeat the 'stabilizers' argument, theoretically the currently unsustainable debt and debt servicing ratios do not favour such a strategy. Regarding the prospective rates of return argument, if past is any guide these may be exaggerated, difficult to quantify and depend intimately with the quality of investment, cost overruns and funds for the yearly maintenance costs.

A related counter argument is that the current need for upgrading our dilapidated infrastructure or low returns from it reflect the poor quality investments in the past and lack of funds for repair and maintenance. In case of infrastructure, it is pertinent to point out that we are heavily dependent for our 'mega projects' on foreign credits (again welcomed readily because of our budgetary constraints) financing imports from the friendly countries.

Interestingly these very countries when they initiate mega infrastructure projects within their own territories, they are usually built by awarding contracts to companies in USA, Germany, France, Britain, Australia and Japan.

Thus a priori, there must be a noticeable correlation between the apparently initial higher and costly investments, better quality/durability and continuous flow of high prospective returns.

The above discussion however does not imply that all cheap foreign credit financed 'mega projects' are of doubtful quality, but government as contractor of PSDP funds need to take a hard look at the trade-offs between high initial investments costs, easy credits, questions on proven quality and prospective returns. Again these decisions if past is any guide, have fallen partially in the realm of ' geo-political' rather than pure economic sphere.

Recently powerful ammunition has been added to the 'pump primers' arsenal in the shape of proliferation of empirical studies that establish "crowding in" of private investment.

In other words the negative interest rate affect of increased government borrowing is swamped by the positive 'income' effect to bring about a net increase rather than a fall in the private investment as a result of official pump priming of the economy.

This is an argument based on empirical evidence and needs to be dilated upon in some detail. Is it that the 'interest rate affect' to start with is fairly weak in developing countries as opposed to advanced countries and other economic and non-economic affects play a more dominant role in private investment? If the multiplier as opposed to accelerator type transmission is stronger and dominant, than what is the 'origin' and 'composition' of this income effect? And secondly which type and by how much each type of private investments, i.e., manufacturing, agriculture and services receive a boost from this 'crowding in'? While these questions are not answered by empirical studies presently known to the writer, one can offer the following probable scenario which may help to understand the underlying transmission mechanism, origin and impact of income effect, generating the 'crowding in' phenomena.

It is well known that in most countries whether developed or developing, government development funds are funnelled through project contracts. Thus each stage of interaction between the private sector and the government during the birth and life of most projects generates what I call 'Kickback multiplier', 'dirty profits multiplier' and 'pure' accelerator for both parties.

The former two multipliers might take a bit more sophisticated form in the developed countries as compared to ours but their presence cannot be denied even in this age of transparency and accountability.

The first multiplier is at work and mostly accrues to bureaucracy/politicians responsible at the time of awarding the contract and at each stage of payment and inspections, while the second accruing to the private sector is the sum total of rent seeking and/or cost-cutting strategies adopted during the life of the project.

Extent of capacity utilization and expected increase in demand for subsequent output in the manufacturing sector determines the strength of 'pure and direct' accelerator impact on private investment. The share of the investible funds in the project in terms of domestic versus foreign determine the relative strength and share of the three effects in the domestic economy.

In case of pump primers favourite sectors, i.e., infrastructure, education and health, the first two have been stronger in the past relative to the third as the projects mostly had higher domestic content.

These two multipliers and single accelerator are the origin or the first round of the powerful income effect at work in the 'crowding in'. Second round of income effects are generated when the surpluses from these three effects are invested and late in the chain are the efficiency gains of pump priming, i.e., higher rate of return on private capital ultimately encouraging private investment.

Of course a priori whether the combined impact of second and subsequent rounds in the multiplier process is higher or lower than the first round including the 'pure' accelerator effect, remains an empirical question.

So in which sectors are these surpluses invested to generate the second round of income effects? The results from the aggregative nature of the empirical studies create an impression that majority of it are invested in productive activities under the heading 'private investment'. In fact private investment is composed of investment in manufacturing, agriculture, housing, wholesale and retail trade and other smaller sectors.

It is my contention that a major part (not all) of 'kickbacks' and 'dirty profits' are invested in least documented sectors including real estate sector as in the former case the earners of these surpluses are mostly the non-entrepreneurial class and in the latter case the owners would like to evade taxes.

It is interesting that liberal long-term bank credits may have also contributed historically to pushing the private investment rate, especially in the manufacturing sector. Interestingly the effect of this determinant is not isolated in any of the above studies.

The above discussion implicitly reinforces the pump primers argument that income effects are even stronger than what the empirical studies based on documented data reveal.

So an argument could be made that 'end justifies the means' and as long as pump priming kick starts the economy even through these 'shady' multipliers and reduces unemployment and secures the vote for politicians it is a win-win situation. In a fatalistic sense, these multipliers are and will remain part and parcel of any pump priming activity by developed or developing countries and only their magnitude vary.

This brings me to the conclusion of the debate. Pump priming in the immediate run is the preferred strategy if and I stress the word "if" our debt and debt servicing ratios remain 'sustainable' and just not 'stable', inspite of quantum increase of PSDP funds.

While we may have attained a reasonable amount of macroeconomic 'stability' in the last 3 years, it is not synonymous with macroeconomic 'sustainability'. The latter is associated with the capacity of the economy to carry out anti-cyclical monetary/fiscal policies in an inter-temporal sense without endangering the long-run sustainability of major macro and financial indicators.

Currently we are relying heavily on easy monetary policy and in the process implicitly testing whether the financial ratios (traditional as well as new) in a year or two will prove "sustainable'.

Moreover, there is good chance with the present fiscal stance that 'fiscal space' will be available in FY 2007/08, when debt ratios are projected to fall in the 60-70 percent range.

With better governance and stronger institutions at the grass-root level, a more sustainable and efficient counter-cyclical fiscal policy can be conducted at that time if interest rates do not rise dramatically.

The current fiscal stance is also in line with Joseph Stiglitz touting of 'gradualism' as an explanation for the success of China against the 'shock therapy' approach adopted by lagging Russia.