EMERGING economies like Pakistan are facing an economic catastrophe due to Covid-19. The World Bank recently noted that analysts do not know how deep or persistent this recession will be. Some days ago, the IMF said that economic growth for Pakistan in 2020-21 is going to be even lower than the government’s estimate of one per cent, dashing all hopes of a V-shaped, or strong, economic recovery. This plummeting economy, according to the Pakistan Institute of Development Economics will result in 4.23 million Pakistanis losing their jobs; 67m would be pushed into poverty!
Chairing a meeting of economics and finance experts, the prime minister correctly urged the need for out-of-the-box or creative thinking to arrest the deteriorating economic situation. Surprisingly, the experts came up with run-of-the-mill policies centred on stimulating the economy through the construction and housing sector. The problem with such thinking is that, instead of stimulating the economy, a singular focus on construction and housing may actually end up hurting it.
Last year, Atif Mian, the Pakistani-American economist, warned against using a credit-fuelled housing programme since a big “…increase in mortgage-credit and housing demand will fuel demand for imports, without an increase in exports”.
Proponents of the construction and housing sector argue that Mian was correct at the time because last year Pakistan was nursing a huge current account deficit — about five per cent of GDP. But, the economic situation, they aver, has recently taken a turn for the better with the current account entering surplus territory and thus large increases in housing demand will not weaken Pakistan’s external position.
A radical idea is that cash, like medicine, should expire.
But, even a cursory look at trade data from the State Bank shows that the improvement in Pakistan’s external position has come at the expense of economic growth as exports are at a 13-year low. Creating a huge demand for imports at a time when exports are down only means that the current account will again become unsustainable in no time. Are there any creative policies?
To find an answer, Pakistani policymakers may want to look at the work of Silvio Gesell, whose admirers included John Maynard Keynes. Gesell, like Keynes, understood the significance of injecting money in order to escape from recessions, especially in capitalist economies. A witness to the severe economic recession of 1891 in Argentina, Gesell saw firsthand how uncertainty forced people to stop spending and hold on to their cash reserves. This cash withdrawal from the economy resulted in what was later termed a negative ‘multiplier effect’ by Keynes. Once people stop spending and hoard cash, firms unable to sell their wares fire workers who, in turn, end up losing their job and money to buy goods, thereby negatively impacting the sales of additional firms. In short, the negative impact of withdrawing cash cascades far and wide bringing capitalist economies to a near standstill, or to an economic growth rate of 1pc.
Gesell came up with a radical idea that cash, like medicine, should expire. Specifically, cash savings would need to be stamped for a fee after some time, otherwise the cash would become useless. What this meant was that now savings in cash would incur a negative interest rate creating an incentive for people to spend it sooner to avoid the stamping fee. For years, cash with an expiry date remained a theoretical idea, but during the Great Depression many cities in Europe and the US ran successful experiments with stamped money. In 1933, Irving Fisher, the famous economist, even lobbied US Congress in favour of stamped money so that relief could be provided to distressed Americans.
Gesell's work has recently gained attention with papers being published by the IMF, no less. Given the urgent need to stimulate this economy and the lack of policy options, policymakers could experiment with multiple creative policies. The government could legislate that for the next year, one-fifth of all salaries would be paid in a parallel currency — Pakistan riyal, if you will — that would expire if not renewed every quarter. The parallel currency would not be convertible into any other currency or be usable online. Rather, the parallel currency would only be able to purchase goods made in Pakistan, thereby providing a fillip to the local economy. Once the economy starts to gain momentum, the riyals would be gradually taken out with the government accepting them as payment for taxes or train tickets.
Given the unprecedented economic shock unfolding due to Covid-19, out-of-the-box solutions are required before the alarm bells becomes deafening. Singular focus on run-of-the-mill policies is not the answer. Policymakers need to come up with creative policies.
The writer teaches economics and public policy at Habib University.
Published in Dawn, July 19th, 2020