Up front, the federal budget (2004-05) gives the impression of an expansionary budget, with emphasis on human capital too, all of which is simplistically believed to be contrary to the IMF's tough anti-inflationary policy prescriptions.
The IMF's anti-inflationary stance persists for as long as macroeconomic instability is attributed to irresponsible fiscal and monetary policies. The IMF then insists on a reduction in budget deficits even if it is at the expense of growth and jobs.
If budget deficit criteria of the IMF are achieved and intend to be pursued, then the question of whether the IMF will stay or go becomes superfluous in this respect. For, IMF or no IMF, as long as the budget deficit targets of the IMF are internalized as sacrosanct, the IMF has left its traces or "policy deposits," if you will, which render the issue of the IMF's continuation redundant.
As for Pakistan, the budget deficit-to-GDP ratio was brought down from 4.3 per cent in 2001-02 to 3.7 per cent in 2002-03 and to 3.5 per cent in 2003-04. With these targets achieved pretty much in line with the aspirations of the IMF; the Finance Minister, Mr. Shaukat Aziz, mentioned intent of a further reduction in budget deficit-to-GDP ratio to 3 per cent in his budget speech.
While 3 per cent is to be achieved some time in the future, the budget deficit target for 2004-05 is set at about 4 per cent of GDP. A cautious outlook towards this indicator, which is very sensitive for the IMF, demonstrates that the IMF has left, at least, this one "deposit" with our finance managers for a long time to come that is likely to be dominated by the "new growth approach" irrespective of who the financier would be from the developed world.
A second IMF-deposit is about trade liberalization. The top rate of custom duty has been brought down to 25 per cent exactly as per the requirements of the IMF even though the WTO ceilings are a lot higher. Nonetheless, whether the IMF stays or goes, the top rate of custom duty is here to stay.
The question of the IMF's exit is, therefore, immaterial on the score of liberalization. This policy mindset is further reflected in the reduction in custom duties for tractors, agricultural implements, plant and equipment not made domestically.
Even if these are not made domestically, cheaper imports of the above items will provide competition as many of them may provide substitutes for locally produced goods. Custom duties on CBU cars have been brought down even if those sizes are made in the country.
While the car industry cannot be allowed to continue to deny consumer surplus indefinitely, the above duty reductions do point in the direction of the "education" on liberalization imparted to us by the IMF.
So, the IMF may exit this fall but our finance managers are sure to stay the liberalization course whether or not the micro constituents of the economy are well-prepared for it yet.
A third key lesson taught to us by the IMF is about low inflation. The official rates of inflation, therefore, remain low even if the wheat price keeps going up with the supply of wheat and even if the gasoline prices show no sign of let-up and the prices of kitchen items hit the roof.
Even though food price is a major determinant of inflation rate and gasoline prices affect cost of production, the official rate of inflation appears "reined in" by forces that remain invisible.
The surplus liquidity with the financial system allowed a decrease in the rates of interest that the IMF would not be concerned about now that the inflation rate appears disciplined and liquidity surplus.
Some of it was channelized into consumer and housing finance as the external inflows increased after 9/11. While the impact of re-basing of national accounts is yet to be determined independently, the above showed up in "impressive" manufacturing growth rates that even offset the decrease in agricultural growth rate.
Growth, growth, and growth is the hallmark of the "new growth theory" that is being touted although with modifications since the neo classical counterrevolution of the 1980s.
The ideology being promoted since then has undergone a change. The initial doctrine was "government is not the solution but is the problem." So, rely only on free markets with considerably "less government."
As the ill-prepared third world markets would make free with the markets, the importance of "good governance" dawned on the "developed" financiers next. As they, including the IMF, went through their learning curve, they realized the role that third world governments need to play in improving governance in both the public and the private sectors.
The government would then not be "less" but in proportions required for the purpose. So, re-entered the government in not only improving governance but also in social sectors from which the IMF had originally advocated a withdrawal in the interest of macroeconomic stability.
But, as this would lead to social instability that would invite criticism the world over, the IMF even rechristened its stabilization programmes to "poverty reduction and growth facility" (PRGF).
Even the IMF would now profess to be working for the poor even though its earlier missions revolved around stabilization in the international exchange rate mechanism and later correction of the balance of payments disequilibria.
The IMF's new-found advocacy for the poor would, however, be in the paradigm that began taking a new shape in the 1980s with the neo-classical counterrevolution.
Even though the chiefs of the IFIs and developed countries offer extensive lip-service to inclusive growth, the neoclassical prescription is essentially growth with inclusion to the extent that would help growth.
This derives from the neoclassical growth model which explains growth with capital, labour, and a residual which actually means different things in different parts of the world.
Since labour is a key explanatory variable, the concept of "human capital" gained salience. That is, invest in their education and health and then reap returns in the form of their higher productivity and higher growth. Thus came up the emphasis on education and health.
And, since the earlier emphasis on free markets and less governments was not showing the results in the third world, the significance of the role of government in education and health was realized.
When the governments now talk "education and health," they are not going contrary to the current dictum of the IFIs including the IMF. Rather, they are complying with the imported growth recipe when they try to focus upon the social sectors.
This growth recipe is now exported by the IMF too and thus its concern for "poverty reduction and growth" concealed somewhere in their PRGFs. Whether we have an over 6 per cent growth rate with an increasing over 8 per cent unemployment rate are another matter and a less important one for as long as the major power bases in agriculture and business are kept on the right side.
This also converges with the interests of the world's financiers of IFIs, at least, during the war on terror who would like to see an anti-terror government stabilized also through budgetary measures.
However, the increase in unemployment with the rate of growth showsthat the growth is not inclusive. This is primarily because a crucial component of the neoclassical growth model remains neglected. This is the residue comprising country-specific factors.
The residual for the developed world is found to be technology and total factor productivity in economies which approach inclusive growth. The residual when unboxed for the late developers was found to comprise a transformation of all those structural, attitudinal, and institutional factors that hinder distribution of the fruits from growth.
It is this large-scale transformation that alone can provide for equitable sharing of the benefits from growth. Unfortunately, this large-scale transformation is not prescribed by the IMF or the IFIs in a big way.
They do give some recommendations to this effect off and on but these are placed on the shelf as they are not persuasive enough either. It is only a part of the neoclassical growth model they have pushed thus far, as discussed above.
To this extent, the country's finance managers have not only been IMF-compliant but intend to continue to follow the lead even if a formal relationship ends. While success is announced on indicators that matter seriously to the IFIs such as the budget deficit, liberalization, inflation, and now even growth; matters of employment, poverty, health, and education are about only as important as they would be to foreign stakeholders.
It is hoped that the indicator of poverty is not treated similarly as inflation is. For, as the official rate of inflation decreases, people experience no signs of let-up on this score.
Poverty decrease will have to be felt and visible as poverty is an actual state of deprivation and not a function of methodology. Even the IMF has not been able to influence poverty despite its poverty reduction facility even though its growth half of the PRGF was realized, however that may have been.
Ironically enough, it is only to this extent on the score of poverty that freedom from the IMF can be claimed!