Rule of flaw: Rules for thee, but not for me … and my dollar-rich friends

The kindest interpretation one can make of the 'Economic Revival Plan' is that it's a policy misled by a whole-of-government misreading of our ongoing economic collapse.
Published June 27, 2023

Last week, the Government of Pakistan unveiled an ‘Economic Revival Plan’, aimed at reviving the country’s economy by capitalising on its untapped potential in key sectors and investments from friendly countries.

The plan seeks to fast-track foreign investments in five sectors — energy, mining, agriculture, IT and defence production. We are being told that a newly established Special Investment Facilitation Council (SIFC) will act as a ‘single window’ interface so investors are able to circumnavigate what the Prime Minister’s Office itself calls the ‘cumbersome and lengthy business processes’ investors in Pakistan normally have to go through.

This single window interface is tasked with preparing plans for future investments, exploring and marketing investment opportunities to GCC countries ‘in particular’, and fast-tracking implementation by ‘overcoming systemic/bureaucratic hurdles’.

Notably, the chief of army staff has assured the government of the military’s full support in this endeavour. The Pakistan Army has also been given unprecedented representation in the apex and executive Committees of the SIFC, besides near total control of the Implementation Committee.

This then was the government’s “Plan B” — its strategy for plugging the $10.35 billion gaping hole in foreign exchange it needs to fill to fulfil its debt commitments due before December.

The logic is misleadingly simple: we’re short on dollars. We don’t know how to fix the economy as a whole, so let’s ignore the basics and carve out special exemptions on ‘war-footing’ for anyone willing to give us dollars, following the dictum ‘rules for thee but not for me (and my dollar-rich friends)’.

So far, so good. Yet, ironically, this Economic Revival Plan was revealed to a gallery of ‘high-level’ leaders with not an economist in sight. Had they been present, the economists might have asked a few simple questions.

Basic problems, basic questions

First, and most importantly, the new investments our leadership is trying to arrange by trampling over the very structure of the state may stave off the risk of default and buy us some time. And thus they might even be worth attracting through this plan. But all will be for nought if we don’t tackle the fundamental issue of our economy — the inability to increase exports.

For at least half a decade, the celebrated Princeton economist, Atif Mian, has argued that Pakistan’s infatuation with real estate has been detrimental to the economy. His arguments in part inspired last year’s timely World Bank Country Economic Memorandum, which provided a deep dive into the policy distortions that have contributed to Pakistan’s exports reaching historic lows.

And so the hypothetical economists attending the ‘high-level meeting’ might have asked if consensus had finally been reached to commit firmly to market-based exchange rates and reduce incentive structures in rival parts of the economy by increasing real estate taxes and reducing the protection of our import substitution industries?

The answer, of course, was sat in the front row. Accountant-turned Finance Minster Ishaq Dar had famously kept the dollar at Rs100 from 2013 to 2017, and by doing so, not-so-famously presided over the crash of the country’s exports from 13 per cent of GDP to 8pc, thus laying the foundations of the very crisis he is now tasked with resolving. Worryingly, he and other PML-N ministers have dumped the blame for the crisis entirely on political instability, and not once shown remorse or self-awareness about the damage they had wrought through consumption-led growth fuelled by unsustainable loans.

The Minister of State for Petroleum, Musadik Malik, presented a bullish face after the event, declaring ‘Plan B’ to have become ‘Plan A’ now, and claiming that the government expected the SIFC to unlock $20b to $25b in investments from friendly countries in the near future. For context, the size of the inflows Malik expects are equal to all investments into CPEC over the past decade.

Even if this extraordinary prediction comes true, it is only if we start fixing the anti-export bias that it will be worth the cost we will bear for it. That will simply not happen if we fail to learn from mistakes past.

Stifling competition

Second, our imaginary economists might have asked the leadership about the game plan for fixing productivity in the economy more broadly.

This Economic Revival Plan, the Foreign Investment (Promotion and Protection) Act 2022, and the increased participation of the army in commercial activities are all detrimental to a fundamental principle of efficient resource allocation — that no sector or actor in the economy should be unduly privileged over another.

Nobel laureate Douglas North and his co-authors have argued that for a country to develop in a sustained manner, it must transition from closed-access economic systems, meant to allow a privileged elite to extract profits from the shelter of competition restrictions, to an open-access order — where opportunities to produce and grow are earned on a level-playing field rather than wrested through the stroke of the rulers’ pen.

How will we ensure that a savvy Pakistani businessperson is able to compete with these new investors without the advantage of fast-track approvals? How will any competent farmer compete in a market where the Army has sidestepped the constraints civilians face in growing farms — and indeed any business — and harnessed economies of scale?

Duplication of duties

Third, our economist friends may have alerted our leadership that in the desire to facilitate ‘timely decision-making and avoid duplication of effort’, they had in fact designed the SIFC to duplicate effort. Barring the addition of soldiers, the SIFC Apex Committee is comprised of the same people who make up the National Economic Council (NEC); the SIFC Executive Committee more or less mirrors the Executive Council of the NEC (ECNEC), again barring the soldiers; and the SIFC Implementation Committee, which is nearly entirely comprised of military personnel, is being given the task we normally assign to provincial departments or government-owned companies.

Leaving the obvious aside, this presents two problems: the state appears to be wading into a mess of potential litigation when constitutional or statutory bodies’ roles are infringed upon; and that the willingness to ‘fast-track’ outcomes by ‘overcoming systemic/bureaucratic hurdles’ in this manner signals an unwillingness to resolve the policy and bureaucratic gridlock the country suffers from. No economy was ever revived through the neglect of its core problems.

Missing: A serious debt roadmap

Fourth, and most urgently, our absent economists would have asked: where is the government’s debt management game plan over a three-to-five year time horizon?

Such a roadmap has been conspicuous by its absence since the IMF programme we are now reaching the end of started years ago. Any awareness or willingness to deal with the crisis seems to be completely absent in the state’s recent actions, most recently in the presentation of the federal and provincial budgets that were remarkable only in how little attention they paid to the severe economic peril the country finds itself in.

The 16th century Spanish King Phillip II was a notoriously bad debtor, defaulting four times. This was enough for economists, Drelichman and Voth, to label him the ‘Borrower from Hell’. One wonders what they would make of a country flirting with default that simply refuses to lay down a feasible debt management strategy.

Finally, as our economists slowly disappear from our mind, one might wonder why we have not just an anti-export bias, but an anti-expert bias. A day before the plan was presented, Planning Minister Ahsan Iqbal, who is at least nominally to lead the SIFC’s Executive Committee, had made a surreal claim: that the Pakistan economy would touch $1 trillion by 2035. For this to happen, Pakistan would have to grow faster over the next decade than China managed after Deng Xiaoping’s 1977 reforms, or India did after Narasimha Rao’s 1991 moment.

The kindest interpretation one can make of the SIFC and this Economic Revival Plan is that this is a policy misled by a whole-of-government misreading of our ongoing economic collapse.

Countries in crisis go in one of two directions: either they finally find it in themselves to face up to their basic mistakes, or a powerful elite carve more out of the carcass as the rest sink into oblivion. There might still be time to pick the former destiny for ourselves.

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