Economy: govt’s misplaced exuberance

ARTICLE:Stock markets only are a weak indicator of the overall performance of any economy, especially in terms of the real sector indicators, including, employment, income inequality, and poverty. One wonders then as to why the government should boast about the buoyancy in the stock market, which covers a narrow spectrum of economic interests.

In fact, over the years, under the weakening of regulatory frameworks, including that of the capital markets in the wake of the ascent of the neoliberal economic regime, speculative investment and risky financial instruments, generally speaking and in the specific case of Pakistan, have taken a lot of savings away from the real sector of economy, which are the basis of the tangible economy, and a significant number of jobs, and one that is an important part of reaching sustainable economy, and equitable fruits of growth.

In his recent article ‘Stocks are soaring. So is misery’ in New York Times economics Nobel-laureate, Paul Krugman, highlights the inadequacies of stock market in dealing with the hardcore issues facing the economy including unemployment, and rising welfare needs in the wake of the pandemic. In the particular case of Pakistan, in addition, the country needs a massive subsidy programme for supporting the households and businesses to boost much-eroded payment capacities to meet the high costs of electricity.

Although Krugman argues with regard to the US economy, his argument is even more starkly applicable in the case of a developing country like Pakistan: “On Tuesday, the S&P 500 stock index hit a record high. The next day, Apple became the first US company in history to be valued at more than $2 trillion. … But the economy probably doesn’t feel so great to the millions of workers who still haven’t gotten their jobs back and who have just seen their unemployment benefits slashed... the number of parents reporting that they were having trouble giving their children enough to eat was rising rapidly.”

Moreover, in addition to stock market performance, PM Imran Khan recently took great pride in the performance of his economic team in another matter as well, by pointing out that the current account stands moved from a situation of deficit to that of surplus. Here, too, the basis of such exuberance is indeed unwarranted on the part of the government, when clearly the reduction in current account has not happened due to any meaningful growth in exports, but rather at the back of a) debt moratorium/relief, b) decreased oil-related import costs specifically, and c) overall reduction in imports due to the pandemic-related aggregate demand compression.

Moreover, another contributing factor towards narrowing of the deficit and its march into the surplus is a sugar-high of remittances during the pandemic; it appears to have happened because of greater needs generated by depreciating incomes back home given a more developing-country context than the Gulf and European countries – the main sources of remittance origination – and at the back of greater FATF compliance of Pakistan. Unfortunately, however, this is also being cheered as a success story of the economic team! What other attraction there could be as such for greater amounts of remittance, in this great time of pandemic-related uncertainty for investment, and when housing schemes – the flagship programme of the government for attracting investment – are still lurking at the stages of infancy?

If anything, such basis of current account surplus should be a source of concern for the government, given the transitory nature of change in some important import items, and lack of any meaningful improvement in important factors for increase in inflows, like exports or foreign direct investment; where foreign direct investment, in particular, is likely to remain subdued for at least up till the end of 2021 – coinciding with the time a vaccine is expected to be made and rolled out for administration – according to most projections by think-tanks/multilateral agencies.

The government should not clutch on to straws of economic performance, as if to gather any possible available grains of popularity. Without any significant institutional reform in the domain of economy and governance, nothing much else will bring needed relief to the masses. Instead, the government should focus on producing much better news in the shape of greater public health breakthroughs, significant improvement in education, especially in terms of meeting the needs of remote learning, and agricultural- and industrial growth, especially in the areas of SMEs; the major sources of job creation in the country.

The government will have to come out of the shadows of the back-seat, which neoliberal forces have so successfully relegated it to for so long. The pandemic demands no less. The people need an active role of government, even to become the ‘entrepreneurial state’ in many sectors of the economy, as renowned economic intellectual Mariana Mazzucato puts it.

In her recent article ‘Why the Covid-19 recovery needs a proactive public sector’, she recommends: “...the pandemic shines a light on how the proactive role of the state has been shifted from its purpose. Since the 1980s, governments have been steered to take a back seat on the economy, intervening only for the purpose of fixing market failures—and always worrying that government failure might be even worse. ... An entrepreneurial state will be required to help guide the investments needed towards a long-term, sustainable post-coronavirus recovery. ... Covid-19 encourages us to take a refreshed look at the interplay between public and private and provides an opportunity for re-structuring these complex relationships. This means the public sector not only acts reactively to the crises at hand but proactively, co-creating and co-shaping markets.”

At the same time, what the current crisis also demands – given huge aggregate demand- and supply contractions – from the government in Pakistan, and in most countries for that matter, is to not fall into the trap of austerity. Here, although news headings these days are raising alarm bells over significant rise in debt levels during the tenure of this government, this writer is of the opinion that while it is important to remain cautious in terms of default risks, yet the best way for governance to raise taxes, increase foreign exchange earnings, and boost economic growth, is to adopt stimulus measures, which could mean starting big infrastructure projects, and even increased social protection spending, as this will give a quick boost to much-needed consumption and investment expenditures. It would make sense to increase borrowings from both domestic and external sources because interest rates are on the lower side. Moreover, hedging instruments should also be locked-in now, while borrowing, than perhaps later to cash in on lower interest rates for the maximum possible time. The IMF (International Monetary Fund) should be brought on board in this regard, and given this time of huge crisis, it is hoped they remain a lot more flexible.

Copyright Business Recorder, 2020