COULD we have a situation where economic conditions are difficult for the majority of people but the macro situation is stable and affords the government some measure of satisfaction? And could such a situation persist for substantial periods of time?
It seems that the answer to both these questions is in the affirmative. Currently, inflation is around 14-15 per cent; prices of essentials (energy, food items) rapidly rising; interest rate high; taxes jacked up substantially and slated to go even higher; growth rate very low; unemployment high; job creation non-existent; poverty increasing, as income inequality continues to be high; exports languishing, imports suppressed through higher taxation; large-scale manufacturing showing negative growth; and agriculture not doing well. The majority of the people in the country are suffering.
At the same time, government officials almost daily express satisfaction with the way the economy is stabilising. They point out that the primary deficit is below target; trade deficit has narrowed; exchange rate is holding steady; tax revenue continues to increase; and that the government budgetary situation is improving. They claim that even international agencies acknowledge and appreciate the progress Pakistan has been making.
So, it seems, satisfaction with indicators at the macro level can coexist with micro-level misery. Can the situation persist for long? Clearly, this is not an equilibrium phenomenon. If it persists, something will have to give.
So, it seems, satisfaction with macro-level indicators can coexist with micro-level misery.
Given the low growth and significant unemployment, there does not seem to be any demand-pull inflationary pressure in the economy. As the energy price increases and exchange rate change work through the price system, inflationary pressure should ease up a bit. This might allow the SBP to lower interest rates eventually. Lower interest rate will, differentially, allow some growth activity to come through.
The current situation cannot be in equilibrium as it is also giving rise to societal unrest. The government is already feeling the pressure. Almost daily, the prime minister and other key ministers are making statements on the need to control prices and provide ‘relief’ to the people. This concern is the result of public pressure.
Every few weeks, the government is also announcing new initiatives — under Ehsaas, Kamyab Jawan and other programmes — to provide direct relief to the needy. Again, these are responses to public concerns. Most of these programmes are not large or deep enough to address general issues resulting from slower growth, higher inflation and lack of employment opportunities, but they provide some relief to those who are targeted and provide a way for the government to address critics, for some time at least.
Since the government does not have a lot of new resources to play with, some of the relief programmes are just reallocations from other, sometimes equally important and necessary, programmes. The government announced 50,000 scholarships per year for university students. At the same time, it cut the Higher Education Commission’s budget by around 10-15pc. The 50,000 lucky students benefit, but a lot of universities are under severe financial constraint and are having difficulty remaining solvent. Do ‘the people’ benefit from this reallocation?
Even in the case of the recent Rs10 billion ‘relief package’ on food items to be supplied through the Utility Stores Corporation, the money is reportedly coming from Ehsaas programmes. If this is the case, does this really mean anything for the people in net terms?
Some reallocation does help. If subsidies to the rich are cut and the money diverted to the poor, it helps. But in these cases, it is not clear that this is happening. So, the net gains become quite questionable. The main advantage of these reallocations for the government seems to be more rhetorical than substantive. Rhetoric might be important in these times of high inflation and slow growth, but it will not solve the underlying issues, though it might buy the government some time until the economy responds to the reforms being implemented under the IMF programme.
The key concern, for the government and the people, remains growth. Where will growth come from? If exports do not pick up in a major way and large-scale manufacturing remains stagnant or shows sluggish growth, no amount of stability, price controls or Ehsaas programmes are going to be enough. But how is this growth going to happen? It will definitely not happen if interest rates remain high, the state keeps piling on new taxes and energy prices keep going up. The tension to ‘stabilise’ and keep the government out of the red might actually mitigate efforts to get the economy to grow. The government has to address this somehow.
Some experts have been arguing that growth will come from reducing the size of the government, deregulating and letting the private sector take the lead in initiating, organising and managing economic activity. This approach calls for reductions in taxation and allowing cities to become engines of growth for the economy. Others argue that we need the government to have a much more active and interventionist industrial policy that supports certain sectors and supports export orientation. This approach potentially calls for a larger government and definitely for a smarter one. The real problem is that, on paper, we have tried all sorts of approaches, but nothing has worked well to provide us sustained and sustainable growth. This might have to do with issues of the state’s competence, efficiency and effectiveness. Where do we go from here?
Satisfaction with macro aggregates while the majority of the population (especially low- and middle-income groups) suffer can persist for some time, especially when it is aided by suitable rhetoric and pronouncements. But, eventually, something will need to give. The dynamics of the economy itself as well as public pressure will trigger responses. But what will that response be? This seems to be the main issue. It is still not clear if the government has a ‘transition to growth’ plan in place. It does not seem to be the case. This, more than anything else, should have the public worried.
The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums.
Published in Dawn, February 21st, 2020