SOME positive news about the economy is finally visible on the horizon. If official numbers are to be believed, Pakistan will end the current fiscal year with a GDP growth of almost four per cent. Economic policymakers deserve a pat on the back for bringing about a modicum of economic growth despite the severe global economic downturn in the wake of the Covid-19 pandemic. Still, the pandemic has transformed economic thinking all over the world in fundamental ways. In order to capitalise on these positive economic numbers and to address Pakistan-specific economic challenges, the time has come to develop a new consensus — the Islamabad Consensus, if you will — on economic policy recommendations in Pakistan.
The old consensus on economic policy, or the Washington Consensus, focused on reducing state involvement in economic decision-making, especially for the countries of the global South. The World Bank and the IMF, institutions that enforced this consensus throughout the developing world, saw fiscal policy as the problem, while qualifying monetary policy as the only legitimate policy tool for economic management. Central bank independence was an extension of this thinking as an autonomous central bank was thought to effectively stop a state from injecting a fiscal stimulus. For this reason, starting from the 1990s, there was a general movement towards monetary policy tools and greater central bank autonomy all over the world. The global economic downturn due to the Covid-19 pandemic, however, has shattered the Washington Consensus.
Covid-19 has demolished the old consensus.
As all countries face the biggest global economic downturn since the Great Depression, fiscal policy is back with a bang. Recently, Jerome Powell, chair of the Federal Reserve, spoke about the efficacy of using both monetary and fiscal measures for economic management. Andrew Bailey, governor of the Bank of England, called for a “very close and sensible coordination” between monetary and fiscal policies. Even Kristalina Georgieva, the head of the IMF and the veritable gatekeeper of the Washington Consensus, has called for more fiscal action. Globally, more than $16 trillion have been injected from the fiscal side to shore up economies.
Countries of the Global South are paying special attention. Realising the need for fiscal policy in order to bring about economic growth, Latin American countries are trying to push back against the remnants of the Washington Consensus. In the case of Argentina, Vice-President Cristina Kirchner has asked for deferral of talks with the IMF. Similar voices are being raised in Mexico under President Andréas Obrador as well.
Covid-19 has also been an unmitigated economic disaster for Pakistan, especially as it has exacerbated Pakistan’s core economic problems: anaemic economic growth, lack of job creation and galloping poverty incidence. Pakistani policymakers must come together in order to jettison the Washington Consensus and develop a new consensus that seeks to address Pakistan’s core economic problems through fiscal policy. In so doing, Pakistani policymakers will have to come up with new ways of employing fiscal tools in order to stimulate economic growth, create jobs and alleviate poverty.
An innovative intervention through which the main economic problems can be addressed involves substantially increasing the outlay on social welfare initiatives from about Rs416 billion in the present fiscal year to something like Rs800bn in the upcoming budget. Poor people have a higher marginal propensity to consume, meaning that they spend a much higher fraction of their additional income on consumption, thereby reinjecting the additional money into the economy. Moreover, through the multiplier effect, the final impact of these expenditures is going to be far greater as initial expenditures cycle through the economy. This will not only stimulate economic growth but will also create more jobs as the economy picks up, while reducing poverty incidence as money goes directly in the poor people’s pockets.
Covid-19 has demolished the old consensus on economic policy. Nations are now increasingly resisting IMF’s tough conditions and employing fiscal policy everywhere. There is a dire need to develop a new consensus on economic policy that seeks to address Pakistan’s core economic problems like anaemic economic growth, lack of job creation and persistent poverty through fiscal policy. One innovative way in which economic policymakers in Pakistan can address these core economic issues is through substantially increasing the fiscal outlay on social welfare initiatives in the upcoming budget. Let there be consensus!
The writer completed his doctorate on a Fulbright scholarship. He teaches economics and public policy at Habib University, Karachi.
Published in Dawn, May 30th, 2021