NOW that the title has everybody’s attention, this article is not about that 10 per cent. But if you are still reading, since your curiosity is now suitably piqued, perhaps you may gain from this particular 10pc rule and may also end up appreciating the writer’s endeavour to go against the tide and repeatedly bring to the fore topics which the proponents of free markets don’t want discussed at any forum.
Personally, it is extremely perplexing how free trade is good for Pakistan when all that particular policy has resulted in, at least for the past decade, is clocking up unmanageable trade deficits, and is expected to continue doing that for the foreseeable future, if something is not done about it. And I restrict myself to the past 10 years only because in this information age any happenings beyond even five years are history which you can yearn for, but perhaps not even learn from any more.
Pakistan is fortunate to have a free trade agreement with China which has allowed us to extensively consume amazing Chinese goods worth billions of dollars, and China has been so nice and kind enough to lend us billions of dollars of foreign debt to allow us to finance the billions of dollars of trade deficit with China arising from our unbridled consumption.
Not only that, China continues to give us billions of dollars of more debt, so that we can continue enjoying Chinese goods as a nation without any fear or worry since it is our best friend and won’t ask us to pay back the debt ever.
The old but gold rule, saving for a rainy day, gets chucked out the window.
The above sentence adequately articulates what we have been led to believe as a nation. But it is high time that someone punctures at least one particular balloon. China will definitely want and will ask for its money back, in cash or in kind; and let’s not even get into a conspiratorial debate on what it can demand in kind. Economics has one fundamental rule that perhaps is true; there are no free lunches. More to the point we are already servicing their debt out of our meagre budgetary resources which is the reason that not only do we have a trade deficit resulting in an unmanageable current account deficit, we also have a fiscal deficit.
While it’s easy to criticise successive governments for their failure in managing the twin deficits, believe me, it is well-nigh impossible for any government to manage the economy if the entire nation is hell bent upon spending and consuming, and not saving. If at all the government can be blamed for anything, it is the failure to send appropriate price signals for controlling consumption and/ or promoting a culture and habit of saving within the masses. Imagine that it is far cheaper to waste time talking on the phone in Pakistan, compared with most of the developed nations across the globe. Considering that we import most of our fuel, every time international oil prices come down, we want a discount so that we don’t even have to walk to the market for roti.
Perhaps it is difficult for any democratically elected government to give its voters a slap on the wrist every time they spend foolishly; that being the case, the future is definitely bleak.
Inflation, and that too hyper inflation, a consequence of twin deficits, will pretty soon not be a choice; it will be a fait accompli and all the economists in the world will not have any words of wisdom, whom none understand anyway, to undo the inevitable.
When a populace is obsessed with consumption, consumer choice rather than living within means becomes the popular dogma. The old but gold rule, saving for a rainy day, gets chucked out the window and is replaced by taking credit to consume more, simply to compete with neighbours and peers; mankind’s self-destructive habit.
The obvious consequence of a nation borrowing to spend rather than saving for a better future is a trade deficit; the unseen consequence is importing savings of other nations and exporting own employment.
We are using the savings of the Chinese people to pay them for making stuff for us. Worse, without our own savings, we don’t have the equity to invest in our own country’s productive capacity, meaning thereby that borrowing to consume imported goods becomes an irreversible spiral downwards to doom.
The solution, considering that the government seems hapless to do anything, is the 10pc rule. If all of us commit to save 10pc of our earnings, and make efforts to inculcate this habit of saving in the next generation, this will not only ensure personal financial viability, it will also reduce the trade deficit and provide Pakistan the resources for capital investment.
The writer is a chartered accountant based in Islamabad.
Published in Dawn, February 27th, 2019
