STATES must ensure high economic growth and constant upgrading into higher-value sectors to generate sufficient jobs and increase national incomes. They must arrange physical, technical, financial and human capital to support growth, and avoid fiscal and external deficits that harm it. Standard macroeconomic recipes usually end here. But liberal political economy recipes say growth must also be shared fairly across regions, classes and ethnicities and shouldn’t produce conflict or ecological stress.
Pakistan has failed on both recipes. Several writers have pinpointed the boom-bust nature of our economy, with six to eight years of rapid growth and then a bust. In contrast, Asian Tigers have sustained high growth for decades. Useful macroeconomic analysis and recipes have been provided. But a political economy lens can better reflect the root causes of such cycles and predict whether the macroeconomic recipes will succeed.
Our major booms were all ignited by transient political alliances the US struck with our dictators. The alliances produced booms for six to eight years only sans major economic upgrading or equitable progress. They also ignited extremism and violence. The booms ended due to shifting US interests, the violence during the boom and our rivalry with India.
The first major boom started under Ayub, aided by a political alliance with the US which gave much economic aid. While both industry and agriculture did well, the boom didn’t match South Korea’s 1960s’ boom. We could only set up light industry while it moved into intermediate and then heavy industry later given its internal capacities and higher levels of US aid. But our boom slowed once the US imposed sanctions after the 1965 war. The top-down political and elitist economic models also caused ethnic and class tensions leading to Ayub’s fall.
Our booms were ignited by alliances with the US.
Growth resumed under Zia, based on a new US alliance, but only until ’89 when the US reimposed sanctions over our nuclear rivalry with India. While the growth from this alliance lasted only a few years, the violence it ignited continues to harm us even now. The same pattern occurred under Musharraf: a few years of growth that did not upgrade the economy but a re-ignition of long-term violence that has killed thousands and cost billions. The violence was partly caused by the use of non-state actors in the rivalry with India. Fiscal and external deficits have also often undercut growth. Both deficits reflect the low-end nature of our economy. Producers produce low-end goods which don’t fetch enough export revenues to cover increasing imports. The state doesn’t collect sufficient taxes to cover its increasing expenses.
Dictators are usually praised for their economic management. But their plans were unsustainably reliant on transient US aid. This route to booms has likely ended. The two will unlikely ever ally again given the low trust levels. Even otherwise, we must search for drivers of growth not reliant on transient US geopolitics. Ironically, the two economic strategies that were not reliant on the US were both crafted by elected regimes. Bhutto aimed to establish a socialist economy. But faulty strategy caused failure.
The current CPEC-led strategy too is reliant not on the transient political aims of a distant power but the long-term economic aims of a nearby one. This may produce a longer run of high growth. But will it upgrade the economy the way US aid to Asian Tigers did? The US was an advanced economy that could afford fiscal and trade deficits to help Tigers industrialise. China is a middle-income state reliant on trade surpluses. Pakistan has a trade deficit and is suffering de-industrialisation under its free trade pact with China. So the results of our economic links with China are still opposite to those from the US-Tigers ones. Our current twin deficit problems reflect these trends though they aren’t so serious as to justify a technocratic set-up.
Whether CPEC reverses these trends is unclear. Plans to establish industrial zones for Chinese investment have picked up. But given that it is a middle-income state, plants that relocate to Pakistan may be low-end ones that don’t help much in economic upgrading, solving deficits or ensuring equitable progress. China is also corrupt and greater links with it may strengthen our own corruption levels. But despite these gaps, the CPEC-led strategy is better than anything our dictators crafted.
In short, one major cause of our boom-bust cycles (reliance on the US) has ended while the Musharraf-era violence has abated. But other causes, like rivalry with India and the low-end nature of our economy that produces the twin deficits, remain intact. Thus, our boom-bust cycles may abate but will likely not end fully soon.
The writer is a Senior Fellow with UC Berkeley and heads INSPIRING Pakistan, a progressive policy unit.
Published in Dawn, October 24th, 2017