A NUMBER of commentators have been saying that we are in for a few tough months and then things will start getting better. The expectation of ‘things getting better’, I presume, is based on energy costs coming down and on our getting some inflows from the IMF and other ‘friends’.
If the price of oil decreases in the international market, it will definitely allow some relief within the country as well. But, given where the economy is, the expectation of relief might be overstated.
When oil prices start coming down, the government will begin to impose taxes on oil. It seems this is a commitment to the IMF. If international oil prices do not come down, domestic prices will continue to rise. If they do start reducing, we might still not see domestic prices keep pace due to taxes. So, the expectation that the ‘tough’ times will last only a few months may be an overstatement.
Prices also tend to be sticky downwards. This observation by Keynes has a strong empirical foundation. Prices for electricity and many other goods that have been raised due to recent inflationary pressures are unlikely to fall even if oil prices do. And salaries are slow to adjust. So, the pain for most people won’t be short-term.
There is a deeper reason too. William Easterly, in a 2001 paper, termed Pakistan’s growth and development experience as “growth without development”. His argument was that though Pakistan had decent growth in the 1960-1990s period, its ‘development’ indicators, such as literacy, school completion, infant/ maternal mortality, life expectancy etc lagged behind countries with similar growth experience and income levels. This was a consistent pattern.
The expectation that the ‘tough’ times will last only a few months may be an overstatement.
This argument implies several things. First, it does not seem that our basic policy priorities have changed in any way. Rhetoric aside, education, health and other social sectors continue to be low-priority areas for the government. We still think that growth alone will deliver on all aspects of development. The emphasis on CPEC and similar projects is a good example: we think that Pakistan’s economy can grow, and sustainably, if CPEC comes through. Or another such project.
This leads us to the second implication. Does the country’s growth experience — where external change (war in Afghanistan, ‘war on terror’, etc) boosts growth and leads to a few good years of decent growth before we revert to poor growth, with little change in development indicators — show that it is lack of investment in literacy, education, health and other social/ productive sectors that is not allowing us to stay on the growth path despite numerous nudges?
Read: Desperate times
It is worth thinking this through. So growth comes when money/ resources/ investment flow in, but we are not able to sustain it. Sustaining a decent to high growth path requires agriculture, industry and the services sector to perform. But if we do not have a) educated, skilled and trained human resources, b) the right institutions that encourage investment in productive sectors, and c) the right property rights regime, rule of law, a predictable legal and policy environment, then growth impetus is not sustained.
We have regularly seen such cycles. When growth goes away, we are back to looking for a bailout from the IMF or other international players. Pakistan has had 20-plus IMF programmes. Many governments have, at the start of an IMF programme, announced that their programme would be the last one that Pakistan would go through as their ‘reforms’ would ensure that the country is put on the path of sustainable growth. But — sometimes within two to three years — we go back to the IMF for another bailout.
Read: Up the IMF creek
Clearly, the ‘reforms’ haven’t been deep enough and haven’t been able to reform important areas. How do we then think of the current crisis? And what will ‘relief’ look like? Will it just be some reduction in oil prices while most other prices stay where they are or continue to increase? Our problems are not just about oil prices. The trade and budget deficits, symptoms of a deeper malaise at the structural level, cannot be wished away with changes in oil prices, some IMF inflows or loans from ‘friends’. In realistic terms, this is delusional thinking.
Stefan Dercon, professor of economics at the University of Oxford, also the chief economist for DfID, the UK aid agency, now replaced by the Foreign, Commonwealth and Development Office for a number of years, has, in his recent book Gambling on Development: Why Some Countries Win And Others Lose, argued that while it is difficult to point to specific policies that lead to development and sustainable growth (as they tend to be context-specific in the sense that what works in China may not in India and vice versa), it is possible to argue that those who have been able to show — and sustain for a few decades — impressive levels of development have ‘gambled on development’ and have had an ‘elite bargain’ that has prioritised growth and development over other things. This development bargain has allowed countries to strengthen institutions, invest in the education, skills and health of the people, and restrained elite interest groups from making short-term gains at the cost of the development bargain itself.
To use language from Dercon, we have never had such a ‘bargain’ in Pakistan or we have never been able to sustain one. Many commentators have talked about elite capture in Pakistan. The story continues to be the same. Given that, it is hard to see how the difficult times will be for a few months only. The real question remains: will we, as a nation, be able to forge a pathway that works for all, not just for the elites, and allows optimal investment in the people of the country who then, in the following decades, take to work and ensure the sustainability of the growth and development process? Barring this, promises of relief seem to be political gimmickry.
The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums.
Published in Dawn, July 8th, 2022