Dear simpleton, at the outset, there are two handbooks on how the global economy works, one is for the ruled, oops, poor developing nations and the other is for the rich developed nations; and both are poles apart. The latter, is hardly a few pages and basically lays down rules and pointers on how to invest surplus capital in the poor developing nations, by any means possible, and squeeze every ounce of profit available therein, to feed the need for continued capital accumulation. The consequent pain and waste is to be simply ignored and categorised as collateral damage.
Since Pakistan is a developing nation, and has been for all of its independent life, the focus herein is on the former handbook, the one that deals with the economy of the poor nations. Rather than starting from the beginning, it would be more appropriate to turn to pages which deal with the era subsequent to 1970, when the Gold standard was given up for good and financial deregulation in the west gave birth to the global financial powerhouses, the modem moneylenders.
Acquiring a beachhead is the first strategic step in any interaction, and finance is no different. The handbook lays out a variety of means to induce a developing nation (hereinafter referred to as the Target Nation) to initially borrow and become entwined in the global economy. If perchance, the Target Nation has a common border with another hostile nation, life is simple, for both of them will be engaged in an endless arms race and will be desperate to import the latest weaponry, from guess who? Both nations will need to borrow internationally to pay for expensive ever changing technologically advanced weaponry. But don't fret if that does not work, rising oil prices at one time or the other will force any and every developing nation to borrow to balance its current account at one time or the other. Take a guess on how Pakistan got snared in the whirlpool of international finance.
Note that the above are not the only steps to get developing nations to borrow; for instance opening up foreign markets will sufficiently excite a developing nation to enhance its foreign national debt in order to import machinery to produce value added exports. Once debt has been contracted, all that needs to be done is to wait patiently for disaster to strike. It could be a war, a natural calamity like floods or earthquake, fall in international commodity prices or simply bad management. Irrespective of the cause, the Target Nation is suddenly facing bankruptcy and under the Handbook, the only option is to turn to IMF.
Ten out of ten, IMF's conditions for lending money to the Target Nation to meet its current debt obligation, and hence avoid bankruptcy, will include a structural adjustment program. The interesting part here is that IMF ensures that the original lenders don't lose a penny. In general, banks take a haircut when they err in assessing the ability of a borrower to meet debt obligations, not in this case. The IMF makes sure that the money that it makes available first goes towards meeting existing debt obligations of all foreign creditors, inclusive of all accumulated interest.
A small corollary, declaring bankruptcy is not an option for the Target Nation, since a developing nation is not expected to have the firepower or the political clout at the international level to survive economic sanctions or all out bombing.
Getting back to the structural adjustments, the very first such program will generally forcibly open up the Target Nations economy for every Tom, Dick and Harry. Obviously, the narrative will be all about the good things that will accrue once the borders are opened up for free flow of international finance, copyrights laws are enforced, free flow of international trade is encouraged which in any case is the birth right of every consumers and Foreign direct Investment is welcomed with open arms. Irrespective of the fact that hardly any story comes to mind of a developing nation having subjected itself to such adjustments and come out smiling, the Target Nation has no option but to nod acquiescence, and all the while its leadership tries to convince the masses that things are moving in the right direction.
Free flow of capital opens up the markets to speculative and predatory finance; copyrights entail payment of rent to the rich nation; free trade adversely impacts the Target Nations trade balance since local industry cannot under any stretch of imagination compete with multinational giants; and finally FDI is eventually all about outflow of profits. Once again the public narrative, supported by economic theories which simpletons can never understand depict a rosy picture, but after so many IMF programs, the proverbial pot of gold at the end of the rainbow remains elusive.
On to the next page of the handbook; note the program has opened up the borders of the Target Nation, and IMF has provided funds to meet current debt obligations and restructured a few others, but the overall national debt has increased. In order to bring it down to "manageable levels", the Target Nations has to generate funds elsewhere, and according to the handbook, privatisation is the only way to achieve that objective. National assets, such as earth, forest, water and air have to be handed over to foreigners at forced sale values to make up the deficit. Non residents are obviously only interested in assets which can maximise their profits, which in the medium term means additional cash outflows from the Target Nation. And that concludes the chapter until the next disaster.
Unfortunately, now with increasing national foreign debt, due to higher trade deficits and speculative finance, the next disaster can be orchestrated without any fault of the Target Nation. As an example, according to the SBP, international portfolio investment in equity securities stood at USD 5.5 billion at 31 March 2014, under an extreme improbable hypothetical assumption, what happens if all these investors simultaneously want to pack up and leave? Obviously, the only available option will be to call up IMF again.
This time around the program wants more, borrow directly from the international market, reduce the import tariffs further, privatise a few more profitable ventures, adopt austerity through stringent fiscal discipline, increase taxes make everyone pay but at the same time foreign investment should pay lower taxes, increase cost of all utilities and finally do away with all subsidies. Indeed the solutions differ in the two handbooks; when developed nations get into trouble once in a while, the solutions in their handbook is exactly the opposite of the ones set out in the Target Nations handbook.
So where does this all end. Dear Simpletons, the last chapter of the handbook, in respect of the Target Nation, is yet to be written. While indications are that this road just might not lead to the Promised Land; but as Yogi Berra put it, "It ain't over till it's over." There are developing nations who have rewritten the handbook of how the economy works, and succeeded; perhaps it is time that Pakistan sneaked a peek in that handbook.
(The writer is a chartered accountant based in Islamabad)
Comments
Comments are closed.