Aggravated slowdown

September 26, 2019


The writer is a member of staff.
The writer is a member of staff.

NEWS of at least one large-scale plant shutdown this week created quite a stir. Some said the matter is being exaggerated, while others used it as a means to batter the government and its track record in managing the economy. Some found opportunity in it to beat up on the auto assemblers, the sector where news of the plant shutdown emerged from, arguing that this sector has been immune from competition for too long and had lost the ability to adapt and survive in the face of adversity.

Read: Large-scale manufacturing shrinks for eighth month in row

Let’s put this debate aside for a moment and consider a slightly wider perspective. Data released this week also showed that large-scale manufacturing — of which autos is one part — continued to face a broad-based slowdown through the month of July. Industries like petroleum products, pharmaceuticals, and iron and steel faced the largest brunt of this slowdown along with autos. Meanwhile, textiles, which carry heavy weight in the large-scale manufacturing index, found a small uptick and fertiliser and electronics, with smaller weightage, found a larger uptick.

It would be a mistake to build an analysis on the broader trends in the economy based on these data points alone, but in the right perspective, they tell us a story. Manufacturing activity has been riding a roller coaster for two years now, hitting a high in late 2017 and first quarter 2018 to crash through the summer, until seeing a short-lived revival in December 2018 that barely lasted till March 2019.

This rise every winter appears to be seasonal since the pattern extends back to 2015 at least, if not further back. It might be connected with rising fuel despatches in the winter with the cessation of hydel power generation coupled with rising fertiliser offtake with the onset of the wheat-planting season. But the manufacturing sector appears to show this seasonality of rising manufacturing activity from November to March every year.

What exactly is the big legacy this government is now working on? Putting opposition politicians in jail?

So putting aside the seasonal rise and fall, the index is today sitting at a low point comparable to where it was at back in 2015. That was immediately preceding the growth boom that ensued under the PML-N government once it successfully arranged foreign inflows (even if borrowed or ‘gifted’) that stabilised the external account and the exchange rate. The resultant GDP growth lifted revenues, and the elevated spending through the PSDP drove a broad-based spurt in growth.

Of course, eventually this growth spurt ate out the foundations of its own success by leading to rising imports, dwindling reserves, and a skyrocketing deficit as government spending outpaced the revenues that came from the resultant growth. It was a classic growth spurt of the sort we have seen many of in the past, fuelled by what the State Bank at the time referred to as “one-off foreign inflows” and high government spending, and anchored by an artificially maintained exchange rate.

So this government inherited the bloated deficits and nearly depleted treasury that were the inevitable consequence of this growth spurt. So far so good. This part of the story has been amply told, more or less in real time as it happened, on these very pages, in this very column.

Question is: now what? A manufacturing slowdown matters because this sector creates employment, and it forms the bedrock of our productive economy. If the government wants to shrug off this slowdown and say ‘each to his own’ at a time when many firms are in fact fighting for their survival, then fair enough, but it would be foolish to think of this as some sort of an ‘economic vision’ for the future.

Supporters of the government frequently ask: what alternatives were there? They say the adjustment was inevitable and not undertaking it was the more damaging course. This is correct and most serious analysts have agreed that the adjustment being undertaken — high interest rates, exchange rate depreciation and fiscal deficit containment — was necessary.

What was not necessary was aggravating the whole situation with an aggressive and empty-headed ‘accountability drive’, incessant indecision, poorly coordinated policymaking, delays in availing readily available growth vents such as the next phase of CPEC, and so on. In broad brushstrokes the argument can be made that an adjustment was necessary, but the environment within which that adjustment takes place, the quality of the decision-making and agenda setting that it is informed and guided by, the teamwork that it takes to navigate its pitfalls successfully, all require skill. Chief among these skills is the political skill to build consensus.

Perhaps its most spectacular failure through all this will be this government’s inability to build consensus behind anything. The PPP built a consensus around the 18th Amendment and the NFC award and its vision for restructuring the federation by empowering the provinces. The PML-N- built a consensus around CPEC, after facing strong criticism for having ignored the western route. What exactly is the big legacy this government is now working on? Putting opposition politicians in jail? That’s been done before, usually by military dictators who wanted to extract concessions for themselves from these politicians.

So coming back to the plant closures, yes there is a bigger picture at play. The auto sector in many countries is slowing down, manufacturing more widely is in the grip of a contraction, and yes past protections have rendered them less able to face competitive pressures and adverse economic times. But the slowdown exists. It is real, not a rhetorical tool being used by the opposition. Every country that is faced with such a slowdown is taking steps to mitigate its impact. In Pakistan, the government needs to stabilise more than just the economy in order to be able to do the same. It needs to stabilise the political waters upon which the ship of state is afloat at the moment. Without that, it will be unable to fashion any response to the aggravated slowdown. And simply asking what alternatives are there is no vision.

The writer is a member of staff.

Twitter: @khurramhusain

Published in Dawn, September 26th, 2019