THIS article is not directly related to the IMF programme just agreed to by the Government of Pakistan, yet given its importance and the extent of its coverage in the media one cannot avoid talking about it.

Having read some rather excellent articles in these pages by well-trained economists from different political and ideological positions, and having read far more articles by uninformed, unqualified writers who should not be writing about things of which they know next to nothing, I am struck by a particular explanation or reason given by many as to why Pakistan should accept the IMF package.

The economic reasons why Pakistan needs an IMF programme are by now common knowledge. Many economists have argued that the domestic economic crisis with its unsustainable levels of inflation, balance of payments shortfall, diminishing foreign reserves and high fiscal deficits requires ‘help’ from the IMF to address these matters which will, apparently, result in a reversal of these trends.

I hold a contrary position to this line of argument. Based on my understanding both of the IMF programmes and of the various agreements signed by Pakistani governments in the past, my belief is that an IMF package does far more damage than any benefit it pretends to bring. I have not seen any convincing data or evidence from anywhere in the world which would make me reconsider this opinion. However, what the IMF does or does not do is not the focus of this article.

Perhaps the one phrase which has struck me more than any other in the very large number of articles written on the IMF in the Pakistani press, has been this idea that by agreeing to an IMF programme we — it often becomes difficult to understand who this ‘we’ is, whether it is the country, the government or the people — will come under some form of ‘discipline’ of the Fund and will be able to do things which ‘we’ normally are unable to.

For instance, one writer wrote recently that the discipline of the IMF will allow us to eliminate corruption, become economically viable, cut defence expenditure, raise agricultural taxes and so forth. The argument made by some writers is that ‘we’ are unable to enforce certain critical decisions on our own and it is only the IMF-enforced discipline which allows us to do so.

I am not interested in arguing about whether IMF discipline, also known as ‘conditionality’, is good for us or not — which it actually is not and countries get punished for adhering to this discipline — but want to discuss this notion of being forced to take decisions which we are afraid to and which we would voluntarily not take unless this stick was being threateningly wielded at us.

It is the government of a country which signs an agreement with the IMF and agrees to undertake reforms in return for financial support. If a government on its own is unwilling to take what it calls unpopular decisions and has to swallow the IMF’s bitter medicine only if the IMF’s discipline is imposed, all possibilities regarding what are called home-grown solutions to the economic crisis become redundant. If a home-grown programme cannot be implemented, it is useless. Because of the carrot-and-stick approach, an IMF-imposed (and usually designed) programme is said to be more acceptable. Governments can and do hide behind such a programme arguing that they are forced to undertake certain difficult decisions because of IMF conditionality.

It is this need for another’s stick, or danda, to undertake reforms which make notions of sovereignty and especially democracy questionable. If certain difficult decisions need to be taken which are necessary, why cannot governments create a consensus among political actors and take them? Why is there a need to hide behind the cloak of the IMF or for that matter the Bush administration, the Pakistani military or any other authoritarianism? In fact, I believe, by not creating political consensus and by depending on someone else’s stick, we tend to undermine the process of democratisation and ownership of our very own issues.

In fact, by relying on the IMF-imposed discipline, countries are let off the hook and avoid taking far-reaching and essential reforms. In the case of Pakistan, it is clear that there is a serious economic crisis affecting the country on many fronts. Most people are aware of the facts and there are numerous plans and suggestions to deal with the economic issues.

Unfortunately, going to the IMF acts as an escape valve, passing all agency and responsibility from the government of the day which has been elected to solve these problems to an unelected, unaccountable supra body. The IMF has a far smaller stake in Pakistan and its economy than a democratically elected government ought to have. And hence a democratically elected government needs to take more responsibility for interventions that affect the economy.

By going to the IMF a government gives up its agency to another entity and agrees to rules and a discipline which follow a different logic and set of guidelines and norms. At a time when there is a broad consensus on the nature of the economic crisis in Pakistan between many sets of actors, political and academic, a far more inclusive agreement between different sets of vested interests may have produced better results for the economy. In all probability, by incorporating different sets of domestic voices, it could have also moved the country towards strengthening and widening its nascent democracy as well.

AS a discipline traditional economics is good for normal times. But as the economist John Maynard Keynes discovered when times are not normal something more than conventional economics needs to be deployed.

Textbooks tell you that when prices begin to rise the correct policy response is to curb demand by raising interest rates. When the increase in demand has been created by severe fiscal imbalances, the right thing to do is to raise taxes and curb government expenditure.

Demand management is also needed when the external account is completely out of balance, when the earnings from exports are way short of the money that needs to be spent on imports. Once again, interest rates and reducing fiscal deficits are the tools that are normally used.

Conventional economics guides the staff of the IMF when it develops programmes for countries that are in great distress and come knocking on its door for help. Pakistan did that a few weeks ago and the Fund responded generously. It offered Pakistan $7.6bn to be disbursed over a period of 23 months. This was five times the quota (share of capital) Pakistan has in the Fund.

The usual standby programmes put together by the Fund provide disbursements equal to three times the quota. For Hungary, Iceland, and Ukraine — three troubled countries that approached the Fund before Pakistan came calling — the institution provided much larger amounts. In developing its approach to Pakistan, the Fund departed in two additional ways. It emphasised that it will focus on the poor while developing its policy approach to Pakistan and it sent out an appeal to other donors to join it in coming to Islamabad’s support.

This change of heart was no doubt the consequence of the widespread belief in the developing world that they needed a larger voice in governing the multilateral institutions than was allowed by the Bretton Woods system developed 64 years ago. These departures from standard practice notwithstanding, the Fund is likely to confine itself to conventional economics in developing the details of its programme for Pakistan.

This is where Islamabad needs to assert itself much more aggressively and not be a passive player as the Fund staff restructure its finance and re-tune its monetary policy. The issue on which Pakistan’s policymakers will need to develop their position concerns the extent of fiscal retrenchment and monetary tightening they will be prepared to accept.

Pakistan will be asked to decrease government spending and raise interest rates when most of rest of the world is using the same tools of public policymaking to stimulate their economies. This is being done not only in the developed parts of the world where there is likely to be a contraction in 2009 — the economies of America, western Europe and Japan are estimated to see their economies contract by 0.1 per cent in 2009 — but also in emerging markets that will still see expansion next year.

The World Bank estimates that the emerging world will see its combined output increase by 4.5 per cent in 2009. In other words, 100 per cent of the expected increase in global output will come from emerging economies.

In spite of this, several large developing countries are planning to stimulate their economies by increasing government expenditure on development and lowering the rates of interest. China has been the most aggressive country in this respect. A few days before the G20 met in Washington, it announced the launch of a massive programme of construction that will cost about $600bn. Improvement and expansion of the already large system of railways will be the central part of this effort.

India is also thinking of expansionary policies. The coalition government led by the Congress party faces elections next year and is hoping to keep the economy growing at 7.5 per cent in 2009. Palaniappan Chidambaram, the long-serving finance minister, would like to see the GDP increase at the rate of nine per cent. He proposes to expand government expenditure on infrastructure and hopes that the Reserve Bank of India, the country’s central bank, will lower interest rates. Brazil, another large emerging economy, is also going to use fiscal and monetary policy to protect relatively high rates of GDP growth.

The Fund will push Pakistan in the opposite direction. It is worried by the rate of inflation that is at historical highs and by the large balance of payments deficit which, by lowering the value of the rupee, is contributing to price increases. These policies will significantly reduce the rate of GDP growth.

The Economist has estimated that in 2009 Pakistan’s GDP growth would decline by more than three percentage points, from six per cent in 2008 to only 2.9 per cent. This estimate did not factor in the contractionary policies that would result from a conventional IMF programme. With the programme, the rate of expansion may slow down even further, to 2.5 per cent

Pakistan’s current economic situation is so dire that it cannot contemplate an expansionary programme, the kind of economic stimulus that has become the central feature of so many economies around the globe. What it can do is to significantly restructure government finance by reducing non-development expenditures while increasing outlays on development.

The focus on development should be on those sectors that generate employment and incomes for the poorer segments of the population. There is much waste in the way the government spends; while this cannot be totally eliminated, it can be drastically reduced. The country also needs to review the amount of money it spends on defence.

The proportion of GDP spent on public administration and defence increased enormously in the latter part of the period of President Pervez Musharraf; it went up from an average of four per cent of GDP in 2000-2005 to 10 per cent in 2005-2008. The government should reduce it once again to four per cent over a period of two to three years.

This will help to stimulate the economy by diverting resources away from the expenditures that have practically no economic returns to those that can add to both growth and poverty alleviation. Such a move will need determination and the exercise of political will but will produce handsome economic as well as political rewards.