A snapshot

August 19, 2019


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

HAVING adopted the free market theory unconditionally, mostly because it was thrust upon us by multilateral lenders, not-withstanding that free market is a myth if not a fantasy, we ended up importing the shinier and cheaper goods at the peril of domestic manufacturing. Unfortunately, since on the other hand we were only exporting raw produce, we clocked up a trade deficit, which had to be financed by external debt.

And this continued for a decade; while we blissfully, and blindly, enjoyed the luxury of branded goods, we continued to export raw produce only. What we should have realised back then was that our domestic manu-

facture simply could never, and cannot in the foreseeable future, compete with multinational corporations, which enjoy immense economies of scale and have deep pockets to wage a price war. Worse, after having completely marginalised the domestic manufacture and having monopolised our markets, the foreign producers jacked up their prices.

The net result was an even steeper trade deficit and a burgeoning external debt. The more sinister fallout was export of jobs, and that too of the skilled kind; a natural outcome of imports. Consequently, due to declining employment opportunities at home, we ended up exporting workers — mostly for menial labour; and while remittances therefrom did ease the trade deficit burden, it was simply not enough.

In time, we will be left with nothing to sell, except our souls.

Arguably, if employment opportunities existed at home, given a choice, nobody would prefer to work in adverse circumstances, perhaps verging on the inhuman, away from home. Necessity is always the mother of all decisions.

Eventually, the inevitable happened; the music stopped. Foreign creditors started knocking at our doors for their pound of flesh; eyeing a loot sale of our state-owned enterprises. What we did not realise back then, and refuse to acknowledge even today, is that left on their own, domestic companies, whether in the private or public sector, simply cannot compete with the more efficient and extremely resourceful large global corporations. A pertinent point is that even if we sell the SOEs, we will still have a mountain of external debt to pay back; so what will we sell thereafter?

Admittedly, we could perhaps sell Thar coal deposits, or Gwadar or Reko Diq copper and gold reserves, which may even alleviate our external debt problem; but is it not better to mend our ways? If we keep spending on imported goods, in time we will be back to square one with nothing left to sell, except our souls. Like it or not, when you borrow excessively, your creditors can dictate to you.

And dictate they did. Even ignoring the ability of the ultimate parents of our multilateral lenders to influence our foreign policy, the economic dictates alone have a severe backlash. Substantively, the only way to pay for trade deficits, past and present, is through exports; but for some strange reason we are told to continue importing freely!

Continuing trade deficit means more external debt which means higher annual debt servicing; the rupee had to take a fall eventually.

A cheaper rupee did make imports expensive and there is a visible decline in the trade deficit, but there is a problem. Since we are now only left with basic manufacturing, we still need to import a lot, which means that while the trade deficit may decline, it is not going anywhere; further, a weaker rupee means everything is now more expensive.

And for some conspiratorial reason, our lenders also forced us to tighten the monetary policy and increase taxes; the opposite of quantitative easing that was practised when the West faced a financial crisis during the great recession of 2008. With a weakening rupee, higher taxes and increasing cost of local debt, domestic entrepreneurs should not be expected to rise to the occasion, especially when they still will not be able to compete with imports. And FDI is a Trojan horse; if not as bad as imports, perhaps worse.

Like lenders of debt, lenders of equity also have a singular motive, profit. Contrary to our best interests, FDI’s objective always is to take back their money with profit quickly, which they want the government to guarantee. Admittedly, we might get taxes, and perhaps a bit of employment is generated, but in the balance, the export of foreign currency via profits beats everything else.

Tight monetary policy, free floating rupee, higher taxation and reduction in fiscal deficit may or may not stabilise the economy, but what this regime undoubtedly cannot accomplish is much-needed industrialisation.

Perhaps the only way is planning and protectionism; an unconventional path shunned today by economic theory. But in history, that is the only path that has worked, and it would be best if we reconciled with this reality at the earliest, if we ever want to set up the proverbial can opener factory!

The writer is a chartered accountant based in Islamabad.


Published in Dawn, August 19th, 2019