FINANCIAL markets and commentators are abuzz with excitement after the recent discovery of the economics equivalent for Pakistan of the Higgs particle: an inflation data point below 10 per cent. Headline consumer price inflation (CPI) has slowed to its lowest level in 31 months on a year-on-year basis (i.e. July 2012 versus July 2011), coming in at 9.6 per cent.
This single data point has been enough for most market participants to declare victory over inflation and to demand that policymakers turn their artillery toward the other part of our ‘stagflation’ woes: sluggish growth.
In their justified desperation to see a spark of growth in a moribund economy, the markets, many commentators, policymakers in Islamabad and perhaps even the SBP are making a cardinal — but not uncommon — mistake: they are fashioning an anti-cyclical response to what is fundamentally a structural phenomenon.
Because of structural factors — such as fiscal weaknesses, energy shortages, a large footprint of a public sector that is not dynamic, a poorly educated and unskilled labour force, illiquid land markets and widespread institutional failings — Pakistan’s economy has failed miserably in the growth Olympics, much like its once-vaunted hockey team.
Without broad, deep, well-thought-out, credible and painful reform, the economy will continue on its current trajectory of long-run secular decline (no pun intended). Even with an interest rate of zero per cent, it will struggle to elicit a private investment response and to generate a reasonable growth rate that could be sustained beyond four years. Why four years?
Because that is the maximum length of time Pakistan’s growth episodes have lasted since the 1970s.
Since 1980, Pakistan’s economic growth has averaged around five per cent. It has exceeded an annual growth rate of six per cent in only 12 of the intervening 32 years. By comparison, China has averaged 10 per cent during this period, exceeding nine per cent 24 times. Latecomer Vietnam has averaged 6.6 per cent since 1980, recording over six per cent growth for 20 years.
India has averaged over six per cent growth in this period and has exceeded the par score in 19 years since 1980.
Ever since the start of what I call the modern growth Olympics — safely dated to the late 1980s by my reckoning, when the rapid expansion of the Chinese economy was well under way and the newly industrialised economies of East Asia had begun to take off, with India and Vietnam to follow suit — policymakers in many countries have been obsessed with achieving spectacular rates of growth. Pakistan’s policymakers have been no exception, with one caveat: their growth-centric policies date back many decades.
The fixation of Pakistan’s power elites on generating headline growth — and conferring a tone of almost moral righteousness to this outcome — has had unfortunate, and perhaps unintended, consequences. It has distracted from the real objective of growth: the betterment of the lives of a state’s citizens. Since Independence, it seems, growth has been made an end in itself, not the means to an end.
This appears to have led, in many cases beside Pakistan, to what has been dubbed the halo effect, where policymakers have celebrated the achievement of high rates of growth as proof of the success of their policies without inventorying the distributional and social end results of the policies pursued. For example, should policymakers set a single-point agenda of achieving an eight per cent annual growth rate, or should they reframe the national goals to be universal quality education or affordable, world-class health care for the entire population? To be sure, the two goals do not have to be mutually exclusive, but in Pakistan’s case they have been so.
Two countries that appear to have stayed out of this growth frenzy and set their national priorities differently rarely get mentioned in the public-policy discourse in Pakistan. And yet one look at their social indicators exposes the bankruptcy of Pakistan’s growth fixation. These two countries are Iran and Cuba.
Both have literacy rates well above Pakistan (Cuba: 100 per cent, Iran: 85 per cent) with virtually universal net enrolment and health indicators (such as child and maternal mortality or doctors per 1,000 population) that should be embarrassing for any policymaker in Pakistan.
Returning to the tactical issue of the interest rate, with the latest inflation data point dipping to a 30-month low, the SBP may be tempted to lower its policy discount rate further at its review of monetary policy scheduled for later today. If so, that would be a mistake for the following reasons:
We’ve been here before. In December 2011, CPI inflation had dipped to 9.7 per cent before reversing course sharply and peaking at 12.3 per cent in May.
The slide in July does not appear to be broad in nature and is driven by the large reduction in gas tariffs effective July 1.
Stripping out energy and food prices, core inflation has declined nominally (0.02 per cent) after increasing steadily for the previous 11 months.
The widely held anticipation of balance-of-payments difficulties later in 2012-13 (including by the governor of the SBP) should be reason enough to breed caution.
Finally, and perhaps most importantly, growth is no longer a cyclical issue. It is, and has been for years, a structural issue.
Without fixing the structural fault lines in the economy, Pakistan cannot hope to grow its economy sustainably.
Trying to fix a structural issue with a conventional anti-cyclical policy tool such as interest rates will just not work. Ask Japan.
The writer is a former economic adviser to government and currently heads a macroeconomic consultancy based in Islamabad.