The cost of political uncertainty

Published November 27, 2017
Islamabad: Policemen gather next to a burning police vehicle set on fire by protesters during a clash on Saturday.—AP
Islamabad: Policemen gather next to a burning police vehicle set on fire by protesters during a clash on Saturday.—AP

HOW much are Pakistanis paying for the political uncertainty affecting the country?

Economic literature emphasises that the cost of political uncertainty is painfully high as policy direction becomes unclear, decisions, investments and key appointments are postponed, approvals remain pending, new initiatives are discouraged, and pressure groups have a field day.

In a study conducted from 1960 to 2004 and involving 169 countries, two IMF economists found that “an additional cabinet change (a new premier is named and/or 50 per cent of cabinet posts are occupied by new ministers) reduces the annual real GDP per capita growth rate by 2.39 percentage points.”

Other studies have suggested the same. Investigating the relationship between political uncertainty and GDP growth in 113 countries from 1950-82, a study by four economists from Harvard, Yale, Stanford, and the US Fed states: “In countries and time periods with a high propensity of government collapse, growth is significantly lower than otherwise.”

The result is intuitive and our experience bears it out. Pakistan’s economic growth has had sharp drops after periods of political turmoil. The most dramatic drop came with the creation of Bangladesh when GDP growth fell from 11.35pc in 1970 to 0.47pc in 1971.

Some of the other transitions have also been quite costly. Following the removal of the PML-N government in 1992, growth fell from 7.7pc to 1.75pc in 1993. After the dismissal of the PPP government in 1996, it fell from 4.85pc to 1.01pc in 1997.

And while we are currently experiencing the highest economic growth in a decade, we risk losing the growth momentum to political uncertainty.

Let’s make a conservative estimate. If our 2016 GDP of $283.7 billion grew 5pc instead of the targeted 6pc owing to ongoing political uncertainty, then the cost of political uncertainty in one year alone would be around $2.84bn (Rs300bn).

What this loss of GDP growth means is that there will be fewer economic opportunities, from getting education to finding a job. We will also have to pay more in terms of indirect taxes and inflation.

One may argue that politics is inherently uncertain, therefore, an adverse affect on growth is inevitable. That’s a fair point, but what we are experiencing is not inherent uncertainty, such as that caused by elections, but an avoidable element caused by a clash among the institutions in Pakistan.

One may also argue that isolating the effect of political uncertainty on economic growth is difficult because there are other factors at work and poor economic performance could be the cause rather than the effect.

That’s also a fair point, but it does not negate that political uncertainty is a key factor and its cost ought to be measured. In Pakistan, the uncertainty caused by the clash of institutions is not because of economic performance but in spite of it.

Each time an elected government is removed ahead of its term, we hope that better governance by those coming in would make up for the loss caused by the disruptive transition. The problem is that every time it remains just that: hope.

Time and again, those coming in have not done any better than those going out. Each time we think things would be different but they are not. Reality is that we are better off respecting the term of a government to let its economic decision-makers get a fair chance in making and implementing their policies. That’s the certainty we need.

In spite of its significance, the cost of political uncertainty is left out of some of the key reports on our economy. Take the example of the 92-page ‘Pakistan Development Update’ by the World Bank. It is labelled ‘Managing risks for sustained growth’ but it takes great care to avoid any reference to the political uncertainty created by the clash of institutions affecting the sustainability of our growth.

The 5.5pc growth forecast for the current fiscal year by the World Bank necessarily assumes a decisive political government, which we may no longer have.

Perhaps we are apathetic towards the cost of political uncertainty because we cannot touch and feel it like some other costs, such as the recent hike in the price of tomatoes that created uproar in the media. If the cost of political uncertainty could be quantified and sent to each Pakistani like the bill of his mobile phone, there would surely be much wider support for political stability.

Every other day we see some number being thrown around in the media on our per-capita national debt. There are issues regarding the accuracy and meaning of this number. But it serves a useful purpose: it communicates that we have a serious problem touching all of us and it must be addressed.

We need to do the same here. We need to put a price tag on this latest wave of avoidable political uncertainty caused by the clash of our institutions to make Pakistanis aware of its staggering cost.

The writer is a former executive director at the Securities and Exchange Commission Pakistan

Published in Dawn, The Business and Finance Weekly, November 27th, 2017



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