AS Pakistan grapples with its current inflation problem and the alarming consequences it poses to the economy, one cannot help but question the direction we are heading. Within the national textile sectors, for instance, export-based small and medium-sized enterprises (SMEs) that constitute the bulk of employers in the country are facing a disadvantage due to dispropor-tionately higher electricity charges that they have to pay. Compared to large units, some of which are not even export-based, they are subjected to a tariff that is almost three times higher because the larger units are enjoying captive power subsidy.
The resultant crisis is bound to make things even tougher, and, as indicated by a recent International Monetary Fund (IMF) report, persistent inflation is here to stay. In this context, revisiting the works of esteemed economist and money theorist Dr Irving Fisher seems like a good idea.
Known for his seminal 1911 publication, The Purchasing Power of Money, Dr Fisher presented the concept of ‘money illusion’, emphasising that individuals often perceive their wealth and income solely in nominal value terms, overlooking the crucial aspect of adjusting for inflation to understand the real purchasing power of what they have.
An illustrative example of a similar illusion can be seen in the recent import data of Germany, which is Europe’s largest economy. While import values surged by 35 per cent in May, a closer examination reveals that the volumes had actually plummeted to levels last seen in 2015, exposing the apparent illusion of growth.
The full impact of inflation on Pakistani society and the illusion it creates is yet to be accurately quantified. However, a scholarly work by Robert E. Hall, published by the US National Bureau of Economic Research Project Report, sheds light on the behavioural effects of inflation, which erodes the savings of people, turning many into reckless spenders and debtors.
The causes of the inflationary crisis in Pakistan have been a subject of extensive debate, but its effects are undeniably felt in daily lives. Double-digit inflation covertly transfers income and wealth from creditors to debtors, misleads businessmen in their investment decisions, and fuels a boom-and-bust cycle that hits economic activity.
The menace of ‘’shrinkflation’ has taken a toll on the quantity and quality of the food available to consumers, with businesses resorting to clever packaging tricks to maintain the illusion of unchanged prices while providing less product.
Considering the historical patterns of persistent inflation, as documented by Prof Russell Napier in a Library of Mistakes publication, Pakistan may be heading towards a structural change if the current trajectory continues. Past instances of inflation-related turmoil have seen significant regime changes around the world.
Inflation in a mathematical sense really moves history as people react to such insecurity and lack of trust. Chairman Mao Zedong came after the Great Chinese Inflation of the 1930s and 1940s, Napoleon Bonaparte came in after the National Assembly blew up the French currency (assignats) in 1789. Adolf Hitler, Benito Mussolini and Francisco Franco came in after the inflation of 1930s in Europe. Most of Latin American regime changes happened during periods of inflation. That being so, even a simple Bayesian probability calculation would suggest that Pakistan is heading towards a structural change.
Famous writer Ernest Hemingway once wrote, “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin.” It is crucial for Pakistan’s decision-makers to draw lessons from financial history and adopt data-driven policies, as the lives of 230 million people are at stake.
Adil Hanif
London
Published in Dawn, August 9th, 2023
