Dawn News

Eying the crisis-driven transformation

WHEN decision-makers fail to take corrective measures in time and resist a paradigm policy shift required by fast changing ground realities, they invite a crisis.

And when they fail to effectively address the crisis so created, they make structural changes more painful, leaving the crisis itself to trigger the needed key changes. This is primarily what is happening in Pakistan.

Often decision-makers tend to ‘engineer’ a crisis to manage ‘creative destruction’. In the midst of multiple crises, the engineered one proves to be ultimately counterproductive. And more often than not the policymakers try to manage the emerging crisis through artificial means. This explains the escalating debt crisis in Pakistan and the ‘rich’ countries.

On long-term and strategic basis, the state and the economy are undergoing a transformational change, more fundamental than the inadequate ‘reforms’ generally talked about by economic agents to resolve the crisis. And what is no less important the changes are taking place through an evolutionary process indicating that the situation is mature for change.

Some of the major emerging trends in the economy as a result of the crisis are identifiable. The drying up of foreign capital and financial inflows is opening the path of economic self-reliance; even the much undesirable and growing fiscal federal deficits are being funded mainly by heavy domestic borrowings.

While it may take eurozone a decade to come out of the debt crisis, and coupled with its worldwide fallout, there is not much hope for liberal external financial assistance or foreign investment for the long-term. The problem of fiscal deficit can no longer be managed artificially through injection of foreign capital, now dwindling, as happened during the last military-led regime. The IMF support, if and when it comes, would provide only a temporary relief, as has happened in the past.

That leaves policymakers with only one option: to seek economic stability through higher economic growth by stimulating the domestic market. Much of this will be done during the course of this election year by huge spending by the federal and provincial governments and the candidates for the national and provincial assemblies. Public spending on development activities would create opportunities for a wide range of businesses.

However, it may be conceded that domestic market is somewhat stimulated by rising workers remittances and regional trade.

Foreign trade is far more diversified and less dependent on few goods and markets. Amid severe strains on the economy, foreign dependence is declining.

With the sovereign economic decision-making taking the driving seat, more space is being created for the economy to expand.

A growth rate of 3.7 per cent this year has been achieved with sharp drop in inflow of foreign money, demonstrating the resilience of the national economy.

Over the past six decades of independence, despite ups and down, the country has acquired enough economic muscle to be able to stand on its feet but for the flawed fiscal and monetary policies. The State Bank discourages economic growth by keeping its policy rate high. Commercial banks prefer to finance federal fiscal deficits rather than fund the real economy and help it grow.

The banks’ key function— intermediation—has become dysfunctional. The volatile floating interest rates are providing an impetus to inter-corporate financing. The banks are being cut to size by their own policies.

Originally, the banks came into being in the industrial era to help finance large investments which could not be funded by friends and relatives of project sponsors. Now the businesses are awash with cash, trying to find productive outlets. Industry, agriculture and financial sectors are moving towards a new equilibrium.

While banks are losing their sway over the economy, big corporations seem to be getting out of fashion. Over time, the number of listed public companies has fallen and is declining, and the number of a whole range of other types of smaller companies is increasing. Similarly, with rampant tax evasion and ‘ exemptions,’ the informal sector is demonstrating strong resilience. And the formal and informal sectors are joined like teeth and lips, in an era of networking and sharing value in business chains.

Apparently, the dispersal of capital is faster than its accumulation as also demonstrated by stockpiling of debts by the financial sector, defaulting companies and governments while there are many who are accumulating cash instead of productive capital.

In the state sector, it was assumed during Musharaf’s tenure that with an empowered federal minister of finance the government would be able to manage more prudently consolidated fiscal deficit. Citibanker Shaukat Aziz became finance minister and then prime minister whose performance could only be judged in the background of huge external financial and financial inflows that made the budget deficits look somewhat smaller.

When the excess liquidity in the international market dried up, the government’s financial problems surfaced in a variety of ways. Now the finance ministry has lost much of its lustre, more so by the financial, legislative and administrative autonomy given to the provinces under the 18th amendment and 7th NFC Award. And no less important is the emergence of more active Planning Commission with the motto of ‘Grow Pakistan.’

The provincial budgets can no longer be effectively influenced by the once all powerful federal finance ministry under Mr Shaukat Aziz. The provincial development budgets 2012-13 are Rs100 billion more than the figure approved by the National Economic Council. Devolution has made provinces more autonomous and federalism has weakened ‘unity of command’. And the current political tensions are making the ‘ centre’ dysfunctional.

No doubt when one looks at the day-to-day performance of politicians, one may feel disappointed. But they are continuously hampered in their work by those who have not given up their archaic ambitions for power though restrained by loss of foreign patrons, and emergence of multiple centres of power and crises that cannot be managed without national unity and constitutional democracy .

More important, the cultural change sweeping across the country and the world is setting the pace for a more equitable social order with both traditional politics and economics in the eye of the storm.

Comments (0) Closed