If a problem is not properly diagnosed, the remedy to the ailment cannot be correctly identified. For example, if runaway inflation is to be tackled effectively, the first thing to do is to determine its real cause. It would be in the fitness of things to look at what certain prominent international and Pakistani economists have to say on the issue.
Inflation is on the supply side and the policymakers should look there for solutions, says Nobel Laureate Economist Joseph E. Stiglitz. He argues that the US economy needs supply-side interventions rather than interest rate hikes by the Federal Reserve which, he adds, would fail to bring inflation under control.
Mr Stiglitz is convinced that interest rate hikes by central banks are not going to solve the problem of inflation as it is not going to create more food. Instead, it is going to make it more difficult because you aren’t going to make investments. He insists that food production should be a priority for the US and globally.
At least try to do everything we can globally to increase supply; supply is going to do more in dealing with the problem that causes depression. We should pursue policies that tax the rich and benefit working people who are the worst affected in any economic downturn.
Prominent economists criticise measures that increase interest rates rather than address real causes of core issues
While some supply side shortages were anticipated in the global economy after Covid-19 lockdowns, Mr Stiglitz points out that they have proved more pervasive and less transitory than had been hoped. A World Bank study predicts that inflation will persist globally for the next three years due to high fuel, food and fertiliser prices.
Though looking at things from a different perspective, another Nobel Laureate Paul Krugman fears “the US Federal Reserve would itself be bullied into hiking rates too much and produce a gratuitous recession.”
And Project Syndicate quotes Professor of History and International Relations at Princeton University Harold James saying how the episodes of price instability can both reflect and accelerate systematic breakdown.
Certain Pakistani economists also hold similar views. A leading country analyst notes that the country is facing two types of inflationary pressures. One, ‘imported inflation’ owing to the rise in prices of global energy and palm oil. Two, ‘cartel pricing’ in the domestic market. He notes the government has no control over ‘imported inflation’ but hasn’t done a thing to break the ‘pricing power’ of domestic cartels,
And Dr Omer Javed argues that inflation as a supply-side phenomenon is a more dominant determinant in developing countries due to their relative lack of financialisation traditionally. Their greater reliance on imports of essential commodities like oil, food, machinery, etc means a greater role of imported/cost-push channel inflation in the wake of the global supply chain crisis.
Annual food inflation in Pakistan in June at 25.92 per cent was much higher than recorded for the same month in China (2.9pc), India (7.75pc) and Bangladesh (8.3 pc). The number one concern of the common citizen is food inflation and food insecurity.
On July 18, Moody’s Investors Service said the ‘elevated inflation and a higher cost of living are adding to social and political risks’ in Pakistan.
The modernisation, mechanisation and commercialisation of agriculture and rural industrialisation are moving at a snail’s pace, resulting in low farm productivity and food insecurity. To quote a Chinese diplomat, the overall level of mechanisation in ploughing, sowing and harvesting in his country has exceeded 72pc and wheat production has exceeded 97pc, indicating mechanisation in almost the entire wheat production process. And rural industries have been experiencing a boom.
Pakistan’s correspondent for the New York Times Salman Masood says the vote for PTI in Punjab by-elections was a “repudiation of the establishment and a reaction to the high fuel prices, inflation and grinding power outages”.
The situation has led to an intensive national debate on the proposed solar policy the government intends to announce on August 1. President Council of Social Sciences, Dr Pervez Tahir says banning new fossil fuel plants will demonstrate government commitment to the solar policy.
Moving away from fossil fuels is critical to laying down the infrastructural foundations of food security and planetary protection, says Tabinda Ashraf Shahid, editor of Scientific Investigations and Global Network of Scientists.
Simultaneously, Mr Tahir wrote, that a research and development unit along the lines of the Kahuta (nuclear) project should be set up for the low-cost and competitive manufacture of the entire range of solar equipment locally. This is essential as technological changes in this field are extremely rapid. He suggests that the work done at Lahore’s engineering university may guide this process. And this learning by doing should be supplemented by imitation through joint ventures with firms from China and other countries
Energy expert Syed Akhtar Ali hopes that the proposed solar policy would encourage both consumer-level and producer/supplier-level infrastructure. There is already a provision of 6,000MW in the Indicative Generation Capacity Expansion Plan 2021-30, which may be expanded. With special focus, Mr Ali estimates that 1,000MW can be added in the next 12 months; some capacity may come even earlier. He says solar costs less than Rs8-10 per kWh, adding that the average cost of supply will go down and the marginal cost will be further reduced.
Pakistan’s solar capacity is reportedly a mere 1.04pc of the total national capacity at 0.4GW compared with that of India’s solar capacity of 50GW which is 116 times more than Pakistan’s.
Published in Dawn, The Business and Finance Weekly, July 25th, 2022