EXPORTS are down, the growth of large-scale manufacturing (LSM) has slowed and credit to the private sector has declined during this financial year. We, the armchair economists, are trying to understand why.
Possible reasons? Lack of energy constrains production and hence exports; the overvalued exchange rate has made our potential exports costlier; with the government borrowing most of what the banks have little is left to lend to the private sector; being credit-constrained, mill owners cannot produce and hence export. A final possibility is that slack global demand is hurting exports.
Developing a policy prescription to boost exports calls for identifying precisely what constrains exports. If non-availability of credit is a constraining factor, a depreciating exchange rate will not help. If the energy scenario hurts, making credit available will not work. So economists are busy conjecturing, why exports are falling.
Data to researchers is what surgical instruments are to a surgeon.
But why conjecture? Why do economists not leave their armchairs, visit the textile mill owners and simply ask them why the looms are closed? Or ask the automakers why the assembly lines are not busy? Ask them is it energy, credit or the exchange rate that hurts.
Asking the mill owners is easier said than done. Statisticians say that talking to only a handful of mill owners is not enough — an unbiased finding would need undertaking a well-designed survey. Design a questionnaire, determine the sample size, design the sampling frame, hire and train enumerators, send enumerators to potential respondents, feed responses into computers and statistically analyse responses. This calls for manpower and therefore money.
Who will fund this kind of survey — does energy, credit or an overvalued exchange rate constrain LSM growth? With benefit spread over the entire private sector, a few producers would shy away from putting their money into this. A collective action problem would inhibit the private sector to fund this collectively. With most of the donors’ money in environment and gender, they would not be interested either. In any case, encouraging exports has never been the donors’ domain. Economic theory expects the government to fund this kind of research.
Our government owns research think tanks and universities to undertake such research. Do these think tanks have the capacity and money to conduct research? A typical public think tank is staffed with professionals, whose PhD in the best of foreign universities has been facilitated by the government. So yes, public think tanks and universities have the capacity.
Coming to money, the budget of a typical public think tank would look like this: salaries 90pc, overheads 10pc — but no money to ask entrepreneurs why shops are closed or how business is doing. Imagine if the government established a surgical hospital, staffed it with reputed surgeons but forgot to equip the operation theatre with surgical instruments — data to researchers is what surgical instruments are to a surgeon.
Assuming that a researcher gathers funds to conduct the survey in question, what will s/he do with this data? S/he has to move up the career ladder. This calls for publications. Which impact factor journal (IFJ) would be interested in the finding that the energy scene constrains LSM growth in Pakistan?
Sadly, this research — which has policy value — is not publishable in an IFJ. To move up the career ladder, researchers sitting in armchairs must use sophisticated mathematical models, the Federal Bureau of Statistics’ controversial data and dubious econometrics to find that the use of contaminated water upsets stomachs or that FDI and good governance cause economic growth.
Currently, the incentive structure is skewed towards producing armchair researchers. The career-progression system of researchers and also the evaluation mechanism of their work must undergo fundamental revisions. Academicians, facilitated by the HEC, should develop a new system. They should refrain from jumping out of the frying pan into the fire, as happens in many system innovations.
Would this be enough? No. Suggesting the price of a product that cannot be marketed in the typical fashion is the domain of economics. We depleted Sui gas by pricing it very low and landed ourselves into circular debt by offering a very high price to our power producers, in the late 1980s and early 1990s. Both were policy decisions not backed by economic research. To avoid a repeat, policy-oriented economic research should now suggest the price of LNG and the tariffs for the new power plants being installed.
The question is: would economists know the input prices be able to suggest the output price? Perhaps not. Even if the money is there and researchers have the proper incentives, the political economy will continue to mar policy-oriented research, in most, if not all sectors, and economists will continue to enjoy their armchairs.
The writer heads the School of Public Policy at the Pakistan Institute of Development Economics.
Published in Dawn, May 15th, 2015