'Stabilization First'?

Pakistan's economy is passing through the most difficult and challenging phase of its economic history. The landscape of its economy has changed dramatically since 2007-08. Seven years of managing the economy with weak and frivolous economic team have not only damaged the economy but also weakened the key economic institutions. The current state of the economy has also emerged as a serious threat to national security.
The major economic challenges facing the country today include slowing economic growth, decelerating investment and saving rates, rising unemployment and poverty, deteriorating fiscal situation and rising public debt at a threatening pace, reckless borrowing by the government from commercial banks leaving little credit for private sector, faltering domestic resource mobilisation effort, declining exports and foreign direct investment, and building foreign exchange reserves through expensive borrowing.
The deteriorating economic conditions have severely damaged the country's social fabrics. The country is witnessing growing social unrest, deteriorating human capital creating skill and knowledge gap and thus adversely affecting the overall governance, crumbling physical infrastructure (a case in hand is Karachi whose infrastructure has been damaged to the core), rising scale of corruption and mis-governance, weakening of state institutions and most importantly dwindling writ of the state.
The present government, prior to taking charge of the state of affairs after the May 2013 election, claimed to have a competent team of ministers fully aware of the challenges. In so doing, they raised expectations of the people who had already suffered severely from the mis-governance of the previous regime (2008-13). After completing two years at the helm of affairs, sadly enough, it appears that it is the same old damaged car; only the driver of the car has changed. It has thus far relied on spin doctoring, media management and a large-scale manipulation of key economic statistics.
Pakistan's economic conditions by end June/July 2013 reached a level where it needed an IMF bailout programme. The programme, though was a necessity for Pakistan as it had reached an almost default position, was a 1980s vintage of "Stabilisation First" programme. The key elements of 'Stabilisation First' programme were reducing fiscal deficit, controlling public debt, keeping inflation low, building foreign exchange reserves and maintaining a flexible exchange rate. Tight fiscal and tight monetary policies were the instruments of 'Stabilisation First' programme.
Pakistan continued to pursue, by and large, the 'stabilisation first' or 'austerity' programme since 2008 in one way or the other. Such a prolonged period of 'austerity program' has severely constrained the country's growth potential and has caused serious socio-economic problems in the country. Pakistan's economy is growing in the range of 3.0-3.7 percent for the last seven years (2008-15), as a result of the continued pursuance of 'austerity programme'.
Since this level of growth is considered "too little" for a country like Pakistan, it is safe to suggest that it cannot grow "more" anytime soon. It appears that a growth rate in the neighbourhood of 3.0-4.0 percent has become a "new normal" for Pakistan. If this is the case, then the governments who ruled or are ruling the country since 2008 have made the people of Pakistan permanently poor. The economy may not be seen growing back to 7-8 percent level anytime soon. Instead, it appears, that it may remain stuck in a 'new normal' range for years to come unless a concerted effort is made to take the economy back to 7-8 percent growth path for which, a change in policy stance is absolutely critical.
The slower growth syndrome of last seven years has taken the country to a deficient demand mode as reflected by various indicators (eg the WPI-based inflation is in negative zone for the last nine months in a row suggesting that the country may have entered the deflationary mode, the growth in sales tax collection at domestic level whose tax base is domestic demand has remained flat in the year 2014-15, and private sector is borrowing far too little from commercial banks to expand their businesses).
The deficient demand has caused deficient supply. Why should investors or producers produce more in an environment of a depressed domestic demand? The growth of Large-Scale Manufacturing (LSM) has remained stagnant for quite some time despite the efforts of the Pakistan Bureau of Statistics to produce idiosyncratic statistics. Since the country's production is stagnant, its exports are facing supply side structural bottlenecks and are on the decline (exports are four year low in 2014-15). The long slump has hurt the economy's productive capacity and hence has lowered the long-run growth path.
Slower economic growth is failing to create enough jobs. People in general and youth in particular, are finding it difficult to get jobs. People remaining unemployed for a longer duration are becoming unemployable with all its social and economic consequences. Youth (15-19 years) unemployment rate has increased from 8.7 percent in 2007-08 to 11.7 percent in 2013-14 (the latest number available from government sources). Unemployment rate for the age bracket of 20-24 years (prime age) has also increased from 6.8 percent to 9.9 percent during the same period. Rising unemployment among the youth and prime age workforce are a matter of serious concern for political stability and social harmony in the country.
Even more worrying development is that youth and prime age persons remaining unemployed for a longer period have become unemployable. They have stopped searching for jobs. This phenomenon is known as "discouraged worker phenomenon" where the labour force participation rate falls. The government statistics suggest that the labour force participation rate for male youth (15-19 years) has declined from 53.9 percent in 2007-08 to 49.7 percent in 2013-14 - decline of 4.2 percentage points. In other words, half-a-million male youths have stopped looking for a job or they are out of the job market. Similarly, the labour force participation rate for male prime age (20-24 years) has also declined from 85.1 percent in 2007-08 to 81.7 percent in 2013-14 - a decline of 3.4 percentage points. In other words, slightly over 0.5 million male prime age workforce have gone out of job market or are not seeking job any more.
This is a dangerous development as the country is witnessing educated youth or prime age people turning into ruthless killers (remember! Safoora Goth incident), taking revenge from society. Young people are willing to burn everything which comes in their way. This is nothing but the social costs of 'austerity program', which the nation is paying.
The economy cannot recover on its own and if it doesn't recover soon, it might take far longer time with many measures to recover. Pakistan needs to change its fiscal policy stance; it needs more investment in physical infrastructure and human capital and less tut-tutting about fiscal deficit. The time has come to move out from 'Stabilisation First' policy and strike a balance between growth and stability. A prolonged period of 'austerity' has caused human sufferings in Greece. Do we want to become another Greece? Act before it is too late.
(The writer is Principal and Dean at NUST School of Social Sciences & Humanities, Islamabad)