The halo effect

Published June 4, 2021
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.

THE National Accounts Committee has provided a provisional estimate for overall growth in the economy for the outgoing fiscal year. At 3.94 per cent, the estimate has surprised everyone, especially given the difficult context for the economy in 2020-21 with the lingering effects of stabilisation and the full-blown impact of the Covid-19 pandemic.

The growth estimate has sparked a spirited debate in the country, with the ‘econocracy’ — comprising the commentariat, media, Panglossian stock market analysts, and doomsday economists — consumed by this one data point. Not surprisingly, the government has seized upon this growth estimate as validation of its policies, while the political opposition and the government’s detractors are convinced this is the result of data manipulation.

Read: What we are seeing is not economic growth but the rush that comes with the injection of a stimulant

The kerfuffle surrounding this one data point is revealing about how economic ‘success’ (or failure) is defined by the elite members of the ‘econocracy’. Around the world, the political and economic elites have reduced the economic well-being of current and future generations to the attainment of a ‘high’ GDP growth rate. By doing so, they are skirting existential (and difficult) questions about the growth process, distributional aspects of the growth, the sustainability and inclusiveness of it, if the lives of people were changed for the better, and the ecological impact. Perhaps most fundamentally, the question avoided is: how desirable is growth of this nature that benefits so few?

Many years ago, at the height of the ‘India Shining’ political slogan, then-celebrated Indian editor and commentator M.J. Akbar wrote: a “7% growth (rate) for the 7%”, highlighting the skewed nature of the benefits. Warren Buffet has described it differently, as a “tide that has lifted all the yachts”.

The fixation across the divide with the headline growth rate is dangerously misplaced.

At an important level, the fixation with the growth rate is revealing about how narrow-based and self-serving definitions of ‘economic well-being’ have become. A high economic growth rate confers a ‘halo effect’, and all other issues — however existential for a majority of the population — are moved to the shadows.

Having said that, a few short comments about the number itself may be in order to give perspective. First, the reported growth rate may be implausible to some (and unpalatable to many), but it is certainly not an impossibility. The momentum in many economic indicators, especially high frequency ones, was confirming a strong pick-up in economic activity post-second wave of Covid. Whether this would have caused GDP to grow by three per cent, 3.3pc or 3.9pc is moot, however. It should be noted that the order of magnitude between the foregoing different estimates is not very large.

Nonetheless, the growth bounce is predicated substantially on two factors: a base effect, and the bumper output of major crops. While exports have done exceedingly well, the claim that they contributed significantly to headline growth does not wash, given that the export sector is still less than 10pc of GDP.

The record and near-record output in four major crops (wheat, maize, rice and sugarcane) has meant a transfer of hundreds of billions of rupees to the rural economy. While the flip side is higher prices paid by urban consumers (especially in the case of wheat and sugar), there is a ‘funnel effect’ at work, where the transfer occurs from a larger number of consumers to fewer farmers; hence, the positive effect on consumption is more visible.

This boost to rural incomes has driven the sale of cars, motorcycles, tractors, and various other consumer goods in the economy, providing an important prop to the large-scale manufacturing sector. The other significant contribution to growth has come from construction and its allied industries. The robustness of the wholesale and retail sector is counter-intuitive and is based more on an imputed flow of ‘marketable surpluses’ from the commodity-producing sector (if I remember correctly the imputed value used by the Pakistan Bureau of Statistics is as high as 33pc).

Overall, how much of the growth was policy-induced? Given that some of the sectors showed strong momentum on the back of policy measures — such as the construction package, support to the export sector, and the State Bank’s substantial injection of liquidity combined with a slashing of interest rates — the government can rightly claim credit for a significant portion of the growth. Its efforts are even more commendable given the challenging context. This is amply demonstrated by the over 7pc contraction recorded by India’s economy in the same period.

On the flip side, factors beyond the control of the government (such as favourable conditions in the crop sector, and a bounce from the base effect) played a crucial role as well. The other important question the government should be asking is ‘how sustainable’ is the growth bounce? Already, there are significant headwinds to growth in the year ahead emanating from IMF conditionality. The finance minister will also need to be careful with his spending plans. Unless calibrated well, any fiscal stimulus runs the clear and present danger of overheating the economy and causing a build-up of difficult-to-manage pressure on the external account.

All in all, we have been down this path on several occasions in the past, unfortunately, with loud triumphalism of the mission-accomplished type from government spokespersons, and gushing accolades from stock market analysts and other cheerleaders. Each time, the country has failed to maintain its growth acceleration for more than three to four years. There is a cautionary tale in our recent history.

In the longer run, only much-needed reforms will make growth sustainable. The silver lining? The government is focusing on the right reform areas such as agriculture, exports and the power sector. In addition, the finance minister has talked about ‘inclusive’ as well as ‘sustainable’ growth. If the government manages to walk the talk, it will be a structural break from the past.

Learning from the past, the government needs to demonstrate a measure of humility, coupled with a realisation of the long road ahead. It needs to put its head down and focus on seeing through the reforms it has started, and take a hard look at areas it has missed.

The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, June 4th, 2021

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