ON the whole, political parties have revealed little in their manifestos of what economic philosophy will govern their policies once in power — will it be the path of liberalisation, deregulation and privatisation that will be pursued, or will it be a “big government” approach that will see the public-sector stamp an even larger footprint on the economy?
Generally, the manifestos are a patchwork of intent and wishes without a coherent framework underpinning the largely unspecified policies. A road map of the institutional and structural reforms required to achieve the stated objectives and goals is also, by and large, missing. While the manifestos are not expected to be detailed policy documents, at least in one area they have left a gaping hole — in not articulating the very real trade-offs and choices that their suggested policies would entail.
One critical area where these trade-offs have inter-generational consequences is in the pursuit of economic growth. To put it simply, the fundamental choice here is whether the policies on economic growth will be debt-fuelled, or will have a stronger and more sustainable foundation built on structural and institutional reform.
While sparking growth via the first approach — a liquidity-driven, debt-accumulating binge — can be relatively easier and, equally appealingly for a political party, can show results quicker depending on the initial conditions, its effects are invariably short-lived and distortionary. It also shifts the burden of adjustment to future generations, and, in the case of higher inflation, to the most vulnerable in society. On both these counts, this approach can be deemed to be unfair.
The second approach, which has broadly come to be referred to as “macro-economic stabilisation” — or loosely as “fiscal austerity” — distributes the burden of adjustment, some would argue, more fairly across society (if done right) and across generations, by undertaking a measure of up-front adjustment.
At its core is an emphasis on fiscal consolidation — reducing the budget deficit by measures to improve revenue collection supplemented by better expenditure management. This approach seeks to first stabilise the public debt, and then to lower it progressively to more manageable levels.
The advantage of this strategy is two-fold. First, this approach generally lowers inflation after an initial period of adjustment in administered prices, if required. Second, as government borrowing declines, more space is created for banks to lend to the private sector. Importantly, it is not just the availability of credit to private businesses which improves, but the price of credit as well — both of which can be important channels for growth.
Despite its prolonged use of IMF resources since the 1970s, and its pretence of reform, Pakistan has followed, by and large, a debt-laden or liquidity-driven approach to stimulating growth — with underwhelming results even in the medium term. On the other hand, periods of macroeconomic stability and even limited moves on reform have been followed by a robust growth and investment response.
Two key episodes of economic reform in Pakistan’s recent history — the “big bang” de-regulation and privatisation orchestrated by Sartaj Aziz as finance minister in the early 1990s , and the liberalisation of the financial and telecoms sectors in the mid-2000s — were followed by an upsurge of investment in the economy. Even in the wake of the severe 2008 crisis, the pursuit of stabilisation policy under Shaukat Tarin successfully restored confidence to investors and markets (with the release of a wad of cash by the IMF admittedly a powerful influence as well).
The fact is that given the state of Pakistan’s public finances, the level of its debt, and the weak institutional links and broken “transmission channels” between policies and outcomes, the country does not have the luxury to follow outright expansionary Keynesian policy.
However, contrary to popular misconception, the fact is that macroeconomic stabilisation can be pursued in ways that are not only growth-neutral, but are actually growth-enhancing. Below is a partial framework of policies that can be pursued under the aegis of a plan of macroeconomic stabilisation that will, I believe, lead to not only a rapid return to higher economic growth, but do so in a durable and sustainable manner.
1) Reduce undirected consumption subsidies and partially replace with investment subsidies. Almost the entire subsidy allocation in the budget — barring a miniscule amount — is geared towards supporting consumption. If the overall subsidy burden is reduced, and a part of it reoriented towards new capital investment or new hiring by businesses, or the absorption of new technology, it will be more growth-enhancing than the current regime.
2) Reduce overall government expenditure — but channel more resources to high-priority areas such as overcoming the energy crisis and the water challenge, and enhancing yields in agriculture by spending more on research and extension services.
3) Widen the tax base, and reduce the marginal tax rate.
4) Make provinces more accountable — for revenue mobilisation as well as service delivery. An ‘adjustor’ should be applied to the provinces’ NFC Award transfers for shortfalls in either area. While this measure will not directly lead to economic growth in the short run, it will improve the resource envelope in a substantial manner, and lead to a lower level of fiscal consolidation in future.
I have returned to the theme of fiscal consolidation repeatedly since last year for good reason. It is highly misunderstood, for starters. Equally important, with almost all political parties that could form the next government demonstrating an unrestrained populist impulse in their previous stints in power, it is more than likely that we could see a continuation of Pakistan’s historical pattern of “over-financing and under-adjustment”. Were this to happen, it would be unfortunate and counterproductive as well as outright dangerous.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.