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Perplexing economy

November 24, 2011

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PAKISTAN'S economy continues to defy conventional logic. The general consensus and narrative continues to be that the economy has collapsed, we are in crisis mode, on the edge, and so forth. This is articulated by many trained economists and many of those untrained to say anything about the economy.

Yet, Pakistan's economy continues to present a picture not necessarily of collapse or crisis. This does not mean that the economy is doing well but, rather, that we know less of what drives the economy than we assume. As long as these gaps in our knowledge exist, all pronouncements will come up short.

Two recent sets of figures emphasise this point and give more substance to the argument that we, as economists, are missing much and that economists should confess that they don't really know as much as they claim they do. Last year's growth rate was a mere 2.4 per cent. By all logic this would imply that the condition of most Pakistanis improved little or stayed the same over the last financial year.

Reading Pakistan's newspapers and op-ed pieces since the start of the financial year in July, one gets the sense that things have gotten far worse, not better. Yet, at the same time, in the first four months of this fiscal year, from July to end October, automobile sales increased by as much as 24 per cent.

Of course there are valid reasons for this increase. One reason is supposed to be postponed purchases by many potential buyers in June this year, who preferred to wait for July and later in the new fiscal year, since lower taxes and import duties effectively lowered prices. The government gave incentives to local auto manufacturers who had a bad year in the previous fiscal year, which also meant that the increase has come on the back of a low base year. This trend makes sense, but by all accounts cannot explain such a large jump in sales. Something else must be at play.

A second, even more, surprising statistic is the anticipated cotton production figure for 2011-12, of a minimum of 13 million bales, and a possible unprecedented 15 million bales bumper crop, the highest ever in Pakistan's history.

The conventional wisdom has remained that the floods which struck Sindh a few weeks ago would have completely destroyed Pakistan's cotton crop, affecting the textile sector. However, while cotton production has fallen in Sindh, the increase in Punjab has made up the shortfall. It seems that Pakistan's demand for cotton will be met through domestic resources and imports would not be required.

The estimates about the destruction caused to the economy by the floods, very much like last year, may have been exaggerated, the human damage and that to people's livelihood in Sindh, notwithstanding. Within a few weeks, economists have had to revise their projections completely.

There are other sets of improving numbers and indicators which allow the finance minister to say with some confidence that Pakistan's economy will grow by 4.2 per cent this fiscal year, a figure which has not been achieved since 2006-07 and which will be the highest for the incumbent PPP government. Of course, one ought to dismiss these claims by the government which by any reading of the economy seem to be overly optimistic estimates. Nevertheless, these numbers do suggest that things might not be as bad as they seem. Even though the 4.2 per cent growth will not be achieved, one suspects that this fiscal year will be better than the last, where growth was only 2.4 per cent, although some unknowns might lower the eventual rate.

There are two opposing political trends which have started playing themselves out having an impact on the economy. The first is the start of a long election cycle, which should mean more borrowing, more spending and more liquidity in the economy. Some money might even be brought from abroad by potential candidates.

Election cycles in most countries, where the incumbent government thinks it can be re-elected, give rise to extra or even excessive spending. This is more marked where coalition governments exist, and in Pakistan one should expect the best manifestation of these phenomena. Some economists believe that this is exactly the sort of impetus which the economy needs for growth to be raised.

This trend is matched by the environment of political instability and uncertainty in the form of one tsunami following another. While the entire tenure of the incumbent government has been burdened by dealing with instability from the very beginning, the present political scenario offers far more unsettling possibilities.

Political instability has major consequences on productivity and growth, as 2007-08 showed under Musharraf when the economy slowed to its lowest levels of growth after five years. However, the main difference between now and then is, of course, that this time around, with nothing to show for the last three years, lower growth will just be continuity in the norm. Ironically, the advantage of persistent political uncertainty might just lend itself to absorbing another, albeit, heightened round of instability, limiting excessive damage.

It is easy to argue that Pakistan's economy has done well using selective economic indicators, something at which the Musharraf-Shaukat Aziz economic team were masters. However, such indicators are misleading and unsustainable because they do not examine or explain the particular, perplexing economy of Pakistan. Some good research highlighting what makes Pakistan's economy run in the first place is a minimum starting point to revive Pakistan's economy. There is great need for some unconventional wisdom.

The writer is a political economist.