AN odd feature of Pakistan’s recent economic history is that its two best GDP growth rates of six per cent in 2018 and 2022 were followed by severe economic crises. This wasn’t coincidental. In fact, high growth was the causes of both crises. So while PTI flaunts its on-paper 6pc growth, economists and ordinary people lament high inflation and the risks of default it left behind.
States like South Korea and China got sustainable growth spread over decades by upping investment and its productivity (ie increasing the outputs from inputs over time) via painful reforms. Unfortunately, no regime in Pakistan could implement such reforms to increase investment or productivity. Thus, our investment/GDP ratio is 15pc after peaking at 18pc in 1980-90s, while the average even in South Asia is double at around 30pc and higher in many East Asian states. Our productivity has been falling over the decades and is much lower than in dynamic East Asian states.
Unable to increase investment and productivity, our regimes have fabricated growth via short-term US aid or unsustainable monetary, fiscal and current account stimuli that soon led to an economic crisis in the shape of high twin deficits and inflation and falling foreign reserves. Between the 1950s and 2008, our best growth eras of only a few years each came via high but short-term US aid under Ayub, Zia and Musharraf. Despite it, sustainable increases in investment and productivity, and economic upgrading remained elusive and each era often saw high fiscal or external deficits and inflation and falling reserves that led us to an IMF loan.
This boom-bust pattern has quickened since 2000. With US aid cut sharply, successive regimes have used monetary, fiscal and exchange rate/current account stimuli to jack up growth in the short run that soon bust. Thus, the last four regimes (Musharraf, PPP, PML-N and PTI) all left behind an economic crisis that led us to the IMF. Calculating their severity based on the levels of fiscal and current account deficits, GDP growth, inflation and interest rates and levels of relative reserves near the end of each regime it seems the 2008 crisis Musharraf left for the PPP was the most severe, followed by the one PTI left for PML-N in 2022. The one PML-N left for PTI was the least severe. Thus, the two dubiously elected regimes (as per EU election reports) left behind the most severe crises.
PTI left behind a worse economic crisis than PPP and PML-N
PTI left behind a more severe economic crisis than PPP and PML-N as its economic prowess over its term was poorer than even the weak economic outcomes of the PPP and PML-N. One sees many comparisons on social media showing PTI doing best economically based on comparing absolute levels of cherry-picked economic indicators and claims of attaining all-time high levels on them. But such comparisons are wrong as economies usually attain new all-time highs on almost all rupee-value indicators almost every year. Thus, all new regimes attain higher absolute levels than all past ones on most indicators. The correct way is to look at growth rates and ratios of all key economic indicators for the same length of time for each party using State Bank and finance ministry data.
In comparing PPP, PML-N and PTI on 20 key GDP, fiscal and external macro-economic indicators (across three to four years’ given data availability for each indicator), PML-N does best on 13 indicators (GDP, per-capita real income, manufacturing, inflation, FDI, public external debt, foreign reserves and domestic debt growth rates; and savings/GDP, total revenues/GDP, direct tax, imports/foreign reserves and fiscal deficit/GDP ratios).
PTI does best on none and PPP does best on seven indicators (exports, remittances, trade deficit, imports, tax growth and current account deficit growth rates and investment/GDP ratio) despite facing the hardest external problems. These included inheriting the most severe of the four economic crises, electricity crisis, and high terrorism; and facing Benazir’s death, the 2008 global crisis, 2010 super floods, high oil prices, Arab Spring-related global turmoil and Pindi tensions throughout.
For PML-N, they included inheriting the electricity crisis and terrorism and facing the 2014 long dharna and Pindi tensions throughout. For PTI, they included Covid-19 and the Ukraine crisis at the end. While the PTI’s outcomes are the worst, the other two parties also failed to achieve sustainable growth.
Although it’s early to judge the current regime, the early signs are bad. The team lacks dynamic capacity in investment, commerce and industry, which shows up via lack of strong ideas for enhancing exports and manufacturing on a sustainable basis both in the new budget and otherwise. Thus, the severe pain the nation will go through in coming months may still not give sustainable growth.
Published in Dawn, June 14th, 2022