IF you wondered why Hafeez Shaikh, the prime minister’s special adviser on finance, rarely makes public appearances to face the press corps, you got your answer on Monday. The remark about tomatoes selling for Rs17 triggered many jokes around the country, but in my mind it brought back a memory of a conversation I had with an eminent, though little known, (retired) economist in Pakistan. I cannot name him because I do not have his permission to publicly cite that portion of the conversation, which took place before the cameras were switched on.
“They create these short spurts of growth,” he said, “with money they don’t have. And after it’s gone, they recover it all through inflation.”
He was not talking about any government in particular, but a trend over the decades that he had had the opportunity to witness up close. The bouts of inflation that follow every growth spurt in the country’s history are in fact engineered precisely to recover the costs of the growth boom that was created for free.
Creating such short-lived, temporary growth booms is the only aim of any government in power, regardless of party. If you succeed in creating one you can say you left a legacy, since every boom leaves behind something that was not there before it. So Nawaz Sharif’s first such boom in the early 1990s gave us a liberalised import regime, as well as the (now infamous) foreign currency deposit scheme. Musharraf’s growth boom gave us the telecom revolution. Nawaz and Dar’s most recent boom gave us massive investments in power and diversification of fuel base for power generation, and so on. It was the misfortune of the PPP governments to rule in times when they could not afford to give the country any such boom.
Creating short-lived growth booms has been the only aim of any government.
Far too much of our economic conversation then revolves around who had the bigger and better boom. And far too much of the conversation on inflation revolves around pointing out that the price hike is ‘cost-push’ and not ‘demand-driven’, and therefore must not be treated with high interest rates, the traditional remedy.
Fact is the old adage that ‘inflation is a tax on the poor’ is more true for our country than perhaps for many states. It is true that ‘cost-push’ factors feed into the inflationary spirals that appear after every period of growth boom, though it is not universally true. The inflation that appeared after Musharraf’s growth boom, for example, was driven largely by monetary factors — too much money had been created to feed what was one of the most artificial booms of our history, and that surplus money had to be sucked back out of the system for the inflation to be brought under control. Today’s inflation might be a slightly different story since it is fuelled in significant measure by what economists might call ‘non-monetary factors’, such as upward adjustments in the price of fuel.
There has been a fair amount of money creation, especially in the first three quarters of the last fiscal year when government borrowing from the State Bank rose sharply. But compared to the Musharraf years, this was short-lived and brought under control quite quickly.
What is common to all these spirals, however, is their impact on the poor. It is the rich who have the most voice in the system and the poor who shoulder the burden of stabilising things. One of the ways that governments around the world fight inflation is to raise interest rates, which raises the cost of borrowing for firms. Since most large firms rely on borrowed money to pay for investment and working capital, higher interest rates slow down the pace of activity in the economy. As business to business transactions slow down, the level of demand in the economy falls across the board. With falling demand come falling prices. At least that’s the broad brush strokes of how it is supposed to work.
Economists call this whole process ‘demand compression’, and in more inspired moments might even speak of a ‘leftward shift of the supply curve’, meaning the same quantity of money should command a smaller slice of goods supplied. This is language designed to render phenomena such as inflation more amenable to policy solutions. But the language has important blind spots, and as a result the policy prescriptions it gives us have adverse impacts that the policymakers cannot see.
Take ‘demand compression’ as an example. For years, we heard the IMF and the World Bank make the argument that subsidies are bad because their benefits are ‘untargeted’, and ‘therefore’ subsidies that are intended to benefit the poor end up benefiting the rich alike. Their argument was to either target subsidies better, or to eliminate them. Today, after decades of making this argument, it is rare to hear someone making the argument in favour of subsidies, except politicians.
But ‘demand compression’ is just as untargeted. It carpets its pain across the economy, making little distinction between rich and poor. The rich are better able to compress their spending, but the poor, who spend more than half of their income on food, have little room for ‘compression’. However, stabilisation demands ‘compression’ equally from both. And nowhere do we hear the orthodoxy talking about the untargeted nature of this stabilisation.
This is one reason why the whole episode involving tomatoes went as viral as it did. The policymaker whose language cannot comprehend, much less describe, the pain that the poor have to feel in the form of inflation, as well as the tools that policymakers use to combat it, was asked for a brief moment to, at the very least, talk about food prices. And he failed so spectacularly that he became a joke. Now think of all the other things that this same policymaker, who has twice been called in to exorcise the economy of its deficits, cannot see. That is the problem.
The writer is a member of staff.
Published in Dawn, November 14th, 2019