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The bubble that burst

April 02, 2013

GEN Pervez Musharraf has returned to the country. This time, mercifully, his return has not been heralded by a posse of armed soldiers clambering over a gate to pave the way for a power grab.

The retired general plans to run for a seat in parliament and claims he will restore Pakistan to where he left off. Thus an assessment as to what his regime achieved during his eight-year rule is in order.

The general’s principal claim to fame is the economy, which his imported prime minister managed. The high point is claimed as the GDP growth rate, which was raised from a pre-2000 average of below four per cent to a post-9/11 average of six per cent. A stellar performance was the 7.5 per cent growth in 2003-04 and nine per cent in 2004-05.

This feat was achieved on the strength of the finance, manufacturing and services sectors. Manufacturing growth averaged nine per cent during this period and registered a record 14 per cent in 2003-04 and 15.5 per cent in 2004-05. Growth in the services sector was over six per cent compared to below four per cent in the pre-2000 years.

It is, however, pertinent to examine how this deed was accomplished. Before any analysis is presented, it is necessary to note that the GDP growth rate is a weighted average of the various sectors of the economy; the manufacturing sector growth rate is a weighted average of the various industries and the services sector growth rate is a weighted average of the various services sectors. The key to understanding the remarkable performance lies in the services sector and in the banking sector, in particular.

The regime’s economic managers set about creating a macroeconomic environment that heavily favoured the banking sector, 80 per cent of which was sold to foreign interests during the regime’s tenure. The principal benefits to the banks accrued from the opening of the large window of consumer credit; with the result that the financial sector value added growth for 2004-05 and 2005-06 was at an all-time high at a record 31 per cent and 42 per cent, respectively.

Two industries that benefited the most from the liberal expansion of consumer financing were automobiles and electrical goods, with credit-financed sales of automobiles, television sets, etc, skyrocketing. Average value addition growth over 2003-2005 in the automobile and electrical goods industries was 43 per cent and 45 per cent, respectively, compared to 14 per cent for the manufacturing sector as a whole.

Thus, it was the extraordinary credit-financed growth in banking, automobiles and electrical goods sectors that provided the narrow base for overall GDP growth. The rest of the economy, particularly agriculture, stagnated.

However, the credit-finance bubble began to burst by 2007. When the doubling of inflation from four per cent over 2000-04 to nine per cent over 2005-08 forced a rise in interest rates, consumer credit disbursements declined by half, slowing financial sector growth to less than 15 per cent. With reduced consumer credit, production of automobiles and electrical goods dropped and with output of television sets falling by one-third GDP growth was back to below four per cent. What was trumpeted as extraordinary growth was actually a mirage, a hot-air balloon that burst at the first whiff of crisis.

High performance figures were also managed by what was apparently the manipulation of data. Post-1998 population census, the population growth rate was estimated at 2.5 per cent, based on the 1981-1998 inter-census growth. However, the population growth rate was arbitrarily reduced to two per cent in 2004, to 1.9 per cent in 2005 and to 1.8 per cent in 2007.

Given that no census had been carried out after 1998, there was no basis for concluding that the population growth rate had declined. The motive for depressing population growth figures emanated from the desire to show enhanced per capita income, i.e. average national income.

An average is derived by dividing the numerator by the denominator and a lower denominator raises the average. Per capita income is a product of national income divided by population. By lowering population estimates by the stroke of a pen, the Musharraf regime managed to contrive an increase in per capita income for the corresponding years.

Another apparent case of data manipulation is that of tax collection.

Budgetary data for customs duty receipts is provided for 13 categories of goods, ranging from chemicals, iron and steel, and machinery to rubber and plastic products and medical and photographic equipment. Clearly, one would not expect customs duty collection in any one year for different import categories to increase by the same percentage.

Ironically, however, that is exactly what happened. Customs duty collection for 10 out of 13 categories of imports is reported to have grown at a uniform 3.1 per cent during 2002-03, at 9.7 per cent during 2003-04 and at 27 per cent during 2004-05.

One hopes Gen Musharraf does not have a similar kind of contrived economic miracle in mind when he talks of restoring Pakistan’s economy to what it was during his days. Pakistan does not need more rounds of governance by gimmickry.

The writer is an economist.