The economic crisis, again

Published October 28, 2011

IN the last two weeks, there have been numerous articles on the economy, in this newspaper as well as in others, which have warned, once again, that Pakistan is on the verge of an economic crisis and collapse.

The economy is said to be in a ‘free fall’ and all professional economists are said to share this view. Others have written that there is an ‘impending economic crisis’, with the economy failing, causing ‘untold misery and losses’. Yet others warn of a ‘protracted recession’ with a likelihood of ‘panic capital outflows’. And there are many, many more, who have been ratcheting up the cacophony that Pakistan’s economy is on the precipice of a cliff and just a nudge would tip it over into a deep abyss.

That Pakistan’s economy has been performing at a level which is far below its assumed potential, or that its neighbours and other countries in the region are doing better, is a fact which has been acknowledged by serious economists for some years now. Even Bangladesh and Sri Lanka have better economic growth rates compared to Pakistan, and more importantly, unlike Pakistan’s roller-coaster economy, countries in the region are locking in to steady states of economic growth.

Pakistan’s economic growth pattern depicts highs of a few years, followed by troughs the next few. For economists who want to understand Pakistan’s economy, an explanation of why these trends persist — and why other countries don’t follow these trends — is an important area of inquiry.

There is also recognition amongst those Pakistani economists who are not employed by the government, nor are apologists for it, that the economy has not been managed well under the incumbent PPP government. Much of the criticism that has appeared in the press over the last few years is warranted.

The absence of an economic plan or vision, or any long- or medium-term policy which has been thought through, is the highlight of the economic team in Islamabad. The fact that the team has changed so many times in less than four years is also an indication of the confusion amongst political leaders and the lack of priority given to the economic problems faced by Pakistanis. The failure of this government and its economic team to address economic issues has been much documented in the media and there is little disagreement over this claim.

The question of whether Pakistan’s economy is in crisis or in a free fall, has hit rock bottom or is near an abyss, is a completely different matter. While the broader accusations do implicate the incumbent government’s role in creating the crisis, to argue that Pakistan’s economy is where it is on account of this government is to ignore many other factors, and much of the criticism of this government alone is a bit disingenuous.

The overuse of the term ‘crisis’, and its other manifestations, not only detracts from real debate about the economy but, importantly, denudes the meaning of the term and de-legitimises it. How and when we use key concepts matters critically.

Pakistan’s economy is not in a crisis, nor on the verge of one. It has serious problems, but a crisis is a much deeper affliction. Greece’s economy is in a crisis, Britain’s or America’s is not. The latter two are struggling with high and growing unemployment, low growth, high debt — just like Pakistan, but of course at a different level and of a much different nature — but this is not a crisis.

Pakistan’s economy faced a huge crisis in 1998 following the nuclear tests for many reasons but particularly due to the freezing of foreign currency accounts. But for most of its existence, Pakistan has been caught in a trap of poor performance, as over the last few years. A crisis, by any imagination, would look far worse than the present economic indicators reveal.

Those who have been hammering the ‘collapse and crisis’ mantra are not wrong in citing many of the statistics they do. The fiscal deficit is high and growing, inflation seems to be stuck at around 14 per cent, investment is low, poverty has grown over the last five years (though less than expected), and so on. Clearly, these indicators reveal an economy which is performing poorly.

However, these economists — and many non-economists who know nothing about how the economy works but yet hold forth — have ignored numerous factors which have prevented a crisis situation from emerging.

Two speculative reasons requiring a much more rigorous analysis can only point towards answering these questions. While ideas about the informal sector or the black or underground economy abound, there has been little research done on how Pakistan’s wide social and economic networks allow families and individuals to live in worlds which are often not on the economists’ map. Similarly, what has also not been analysed in recent years is how remittances have allowed numerous families to weather the storms created by the economists’ statistics of doom and gloom.

Many economists, even those who have been around for many decades, fail to understand how Pakistan’s economy really works, and why it continuously avoids any real crisis. They use a few select facts from the data to make their point, but this reveals only their own lack of understanding and ignorance about the actually existing economy.

While the oft-repeated cries of ‘collapse and crises’ now sound terribly boring, what would make for a more interesting and relevant analysis is why and how Pakistan manages to avoid an economic crisis. The truth is, really, we don’t know enough.

The writer is a political economist.



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