Pakistan’s economic policies

Updated 29 Jul 2020

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The writer is an economist, and a research fellow at the Pakistan Institute of Development Economics.
The writer is an economist, and a research fellow at the Pakistan Institute of Development Economics.

THE economic might of a nation is dependent upon the success or failure of economic management, ultimately determining where it stands in the global community. What determines this success or failure? There is no straightforward answer, but one can begin to unravel this Gordian knot by analysing economic management in our own country.

Let’s take economic management (so far) under the PTI. Even before the pandemic, its performance was nothing to talk about. Two policies, the chicken breeding programme and Sarmaya-i-Pakistan, give us ample insight into why we are such a basket case when it comes to the economy. The former, launched with much fanfare, envisions poverty reduction through breeding and rearing desi chickens at home, while the latter was Asad Umar’s brainchild for turning around lossmaking public entities.

Also read: Is the PTI budget sustainable for an economy like Pakistan's?

The main issue with these initiatives was (and still is) that they were never rooted in Pakistan’s ground realities. The chicken programme was inspired by Bill Gates — who has been on a crusade to further this initiative — but it won’t work, at least not in Pakistan. One does not need to be an Einstein to figure this out. In Pakistan, rural poverty has consistently been higher than urban poverty. Yet, even in rural areas, it’s hard to find homes where desi chickens are reared and bred. If chicken breeding were such a potent anti-poverty tool, nobody in the rural areas would have given it up.

The main issue with these initiatives is that they were never rooted in ground realities.

The practice has almost vanished because the opportunity cost of rearing chickens at home is higher than having cash at hand through some other endeavour that can buy a broiler chicken from the market. Yet, undeterred by this common observation, the government went ahead with the scheme. At present, it’s rare to hear anything about it, which in all probability will cause the taxpayers a few billion rupees before it’s finally wrapped up.

A similar fate befell the ‘Sarmaya’ concept, initiated with much fervour. The issue, again, was that it was a ‘bought’ concept, without any consideration of ground realities. Unlike Malaysia, lobbies and interests in Pakistan’s public sector are just too powerful to allow for any reforms. By now, as the initiative fizzles out, this much must have been realised after wasting time (time is globally recognised as a resource, except by our policymakers, who view it as leisure).

Trying to run the country on borrowed or externally foisted ideas (the perennial ‘white man’s burden’) is one reason why economic policies in Pakistan remain unproductive and ineffective. Let’s now turn to yet another, simpler way of gauging why most economic policies in Pakistan remain fruitless.

The most well-known diagram in economics is the Marshallian cross, which shows an upward sloping supply and downward sloping demand curve intersecting at a certain point (equilibrium). Put simply, it conveys the message that both demand and supply are equally important considerations. For this discussion, it suffices to point out that our economic managers have been entirely fixated upon the supply side.

What better way to illustrate this point than the power sector, and especially in the context of the Indicative Generation Capacity Expansion Plan (IGCEP) 2047, which envisages increasing electricity production manifold. At present, our electricity production capacity is significantly higher than what the demand is. The end result is billions of rupees in ‘capacity charges’ that are extracted out of consumers. Notice that this is besides the circular debt (basically a shortage of cash due to inefficiencies), now around Rs1.8 trillion (also to be paid by consumers).

A lot of this has to do with policymakers’ exclusive emphasis upon supply-side policies, a theme that continues with IGCEP 2047. It’s all about big-ticket items like dams and production plants, but completely missing from this picture is the demand side. To understand its importance, one may turn to what’s dubbed as the ‘California energy miracle’.

In short, since at least the 1970s, California managed to cater to power consumption demand without taking recourse to mega dams or highly expensive IPPs. They are not paying any capacity charges, and there isn’t any circular debt. This success, in substantial part, is explained by their emphasis on electricity efficiency standards (part of demand side management). Strict enforcement of these standards meant that, over time, the same power infrastructure is enough to cater to the demands of residents. Moreover, it has been designed in a manner that the state can piggyback on it for any new initiatives (like electric vehicles) without adding substantial power-producing infrastructure. In stark contrast, efficiency standards have been noticeably omitted in Pakistan’s power management, and electricity appliances are some of the most inefficient in the world. Put another way, if we had been serious about the demand side, we probably would not have needed expensive IPPs and mega dams.

This infatuation with the supply side explains why we have so many white elephants in the public sector like motorways, metros, BRTs and railways. It also explains the poor state of critical aspects, like Pakistan’s human capital, since government policies are entirely focused on supply side (more schools, colleges and universities) without any consideration of quality. Consider that we have around 200 universities, but none of them produces human capital that can compete at the global level.

In conclusion, Pakistan’s economic policies tend to be ineffective because they are divorced from ground realities and considered exclusively in terms of supply. Additionally, policymakers are always on the lookout for imported ideas — which is not bad per se, but becomes problematic when domestic fundamentals are ignored. Being all ears to major donors and ignoring domestic research does not help either.

Good, effective policies will come by when both demand and supply fundamentals are thoroughly considered, and the supporting material (good human capital, effective coordination, etc) are present. In this context, Pakistan has a long way to go.

The writer is an economist, and a research fellow at the Pakistan Institute of Development Economics.

Twitter: @ShahidMohmand79

Published in Dawn, July 29th, 2020