The writer is a chartered accountant based in Islamabad.
The writer is a chartered accountant based in Islamabad.

NO, Ricardo was not Mountbatten’s chief of staff and he was not opposed to the two-nation theory, the basis of creation of Pakistan, and the reason I am sure is because he died in 1823. In any case, if even after 70 years anybody still has a problem with the two-nation theory, they are more than welcome to, restraining my penchant for colourful language under such circumstances pursuant to columnist ethics, go take a hike. Pakistan Zindabad.

David Ricardo was a political economist whose Theory of Comparative Advantage is perhaps the singularity, subsequent to Adam Smith glorifying free trade, because of which the International Monetary Fund has been shoving the Washington Consensus down the throats of developing nations. But it is time that nations like Pakistan begin to see the daylight; free trade, opening capital accounts and protecting copyrights work, if you are the guys producing and selling, not the other way around.

According to Ricardo, when two nations trade, it suits both if the less efficient producer buys from the more efficient producer; consumers in the importing country get cheap goods, and the exporting country gets the other country’s money.

Free trade is not the way to ‘developed nation’ status.

For Pakistan, this seemingly simplistic doctrine is fatal. Firstly, developed and comparatively more developed nations will most definitely be more efficient in producing everything that we manufacture or produce; that perhaps is the reason why we cannot enter foreign markets without being granted some kind of a favoured status, and why our exports continue to crumble and collapse.

Secondly, where will we get the money to pay for all these imports when all we export are cheaper raw commodities, like rice, cotton, mangoes and maybe bananas? And we cannot print dollars, don’t have endless bullion reserves and nobody wants our rupee.

To digress, a pertinent question to ask right about now is: when did we lose sight of our elder’s values and ditch financial prudence just to buy cheaper luxuries; if you can only afford a Suzuki Mehran, you don’t go out and rent a Mercedes. Economic policies that are good for the individual are equally good for the nation as a whole. And for those who did not get the analogy, its PIA and Emirates.

Ricardo did take the efficiency issue beyond absolute advantage that an efficient nation has when producing something, to what most of us hear repeatedly in defence of free trade but never understand, the comparative advantage. Ricardo’s two nations with which he tries to prove that if everyone plays by the rules comparative advantage will make everyone better off are England and Portugal trading in cloth and, ahem, wine. Indeed the theory, which we need not get into the details of, makes sense if there were only two nations in the world and only two items to trade and we were back in the 19th century when the world did no compute in nanoseconds and change unimaginably in less than two-year cycles. And in our case India is not the second nation!

Comparative advantage, in layman terms, was later succinctly explained by economist Ian Fletcher: football players are capable of mowing their lawns efficiently, but they hire lawn mowers — in spite of the fact that the latter are less efficient at the job — so that the football players can better use that time to train or relax or have fun.

What comparative advantage boils down to then is that in the world there are football players and lawn mowers, and both of them should continue doing what they are good at forever. To extrapolate this example, at the global levels there are developed nations and developing nations, imperial powers and colonies, industrial powerhouses and banana republics, and they should be what they are forever.

Undeniably, history has instances where lawn mowers did become football players but that was only because they figured out the secret ingredient and threw away the free trade rule book. Over history these nations include America, Japan, South Korea and China; invariably, any lawn mower who became a football player, a developed nation, did so not by playing by the free trade rules. Except, all countries, once they achieve ‘developed nation’ status, start preaching free trade since it is in their interest to do so now; they need markets for their produce.

And what is the secret ingredient? To borrow from the movie Kung Fu Panda, the secret ingredient is you; in the given context, protecting our own industry. Free trade, buying goods from others we can ill afford, is not the path that can ever lead to a ‘developed nation’ status. Jumping to the conclusions, it will immensely benefit Pakistan to impose an across-the-board minimum 30 per cent tariff on all goods and services.

The writer is a chartered accountant based in Islamabad.

syed.bakhtiyarkazmi@gmail.com

Published in Dawn, September 17th, 2017

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