Stabilisation and growth without much reforms – I

In the latest interaction with the public, Prime Minister Imran Khan highlighted that the country’s economy had been performing well because firstly its growth rate has shown healthy performance, and that unlike the past the quality of this growth is also good since it has not been achieved by running deep current account deficits, or through accumulating external debt. Although this is true, this is a very narrow basis to explain why growth may have happened, and why the quality of growth is not at all where it should be in terms of addressing concerns of equity, and sustainability.

The government up till now has mostly been concerned about managing national accounts, and through the ‘shock therapy’ of neoliberal economic recipe. This resulted in over-adjustment of aggregate demand, resulting in a sharp dip in economic activity, and with it a fall in imports. Moreover, exports have not shown any significant growth during the same period and of time to provide any sort of sustainability to the trade account, and with it in terms of uplifting foreign exchange reserves from this channel of buildup.

So a sharp fall in capital formation on the back of unwarranted pace of macroeconomic adjustment, which has resulted in a decline in imports, is not a sustainable source on which current account surplus should stand because it came at a huge economic growth sacrifice. Also, it is not that rise in remittances could bring sustainability to current account surplus because firstly, it is dependent on the performance of economies of other countries, and secondly it is not that remittances are largely being invested for any long-term-benefiting domestic productive endeavours. This is mainly because government has not initiated a meaningful institutional reform strategy, and one which is away from the neoliberal, Washington-consensus, for example what China adopted – a country which PM wishes to learn from in terms of how they sustainably grew over many years and lifted so many poor out of poverty. The same lack of reforms indicates a lack of any significant buildup in foreign direct investment (FDI) over the years, and hence that source of sustainability-providing channel to current account and economic growth also stands missing.

Moreover, as adjustment thrust was lowered since the arrival of the pandemic, the economy has just started to revert to its traditional level of economic activity, and one which is still very much based on imports, which started to rise in the recent months, and if not for strong remittance inflows, the current account would have already turned into deficit. Even agricultural sector growth was once again due to other factors like good weather, some subsidy provision that governments traditionally provide on procurement or a number of input prices, as is generally the case, and so nothing much out of the usual has happened there as well, which could provide a basis for thinking that the growth has achieved some sort of fairness, equity, and sustainability traits.

Quite the contrary, the farmer still is very much alone in terms of any institutional support from government, or any reformed markets to save against the middle-man’s exploitation or receiving rationalized prices of produce in markets directly as well; where in the case of latter, collusive practices, high transaction costs, and information asymmetries are similarly present in agricultural markets as in any other real or financial markets overall.

Here, the government should also understand that both sustained macroeconomic stabilisation and sustainable growth require strong institutional underpinnings of economy, which ensure that the economic environment brings price rationality – in both the goods and services markets – equity, foreign direct investment, import substitution, broad-based and value-adding exports sector, and broad-based, and a progressive tax regime.

Pakistan is a prolonged user of IMF resources, and following the neoliberal policy prescription of IMF programmes for bringing sustained macroeconomic stability did not happen on any sustained basis; even though very few programmes were completed, but even so many programme conditionalities for stabilisation were implemented over frequently adopted programmes.

This was also highlighted for instance by this writer in his 2016 published book ‘The economic impact of International Monetary Fund programmes: institutional quality, macroeconomic stabilization and economic growth’ by quoting the findings of a 2002 research article titled ‘Effectiveness of IMF-supported stabilisation programmes in developing countries’ by Ayse Y. Evrensel whereby ‘previous programme countries entered a new one at the back of an even worse macroeconomic situation (as compared to the situation when they were not in the programme in the first place), because of the existence of moral hazard in terms of easily available financing. Also, he indicated that significant improvement achieved in terms of current account and foreign exchange reserves, could not be sustained after the programme ended.’

What is important, therefore, is to adopt a non-neoliberal institutional reform agenda to reach equitable and sustainable economic growth, and one that is based on macroeconomic stabilization achieved through meaningful institutional reform. Without this, any macroeconomic stability achieved, like the one being celebrated currently, stands on thin ice since the underlying institutional, organisational, and market reforms are not there to allow sustained macroeconomic stabilisation.

China undertook such meaningful reforms that were not based on the neoliberal, Washington-consensus, one which Pakistan has overall continued to follow over the years, both under the International Monetary Fund (IMF) programmes, and also otherwise under the influence of the Chicago-boys-styled policymakers, although there is ample evidence against it for many years now. In a recently published book ‘How China escaped shock therapy: the market reform debate’, Isabella M. Weber pointed out in this regard: ‘China’s deviation from the neoliberal state lies not in the size of the Chinese state but in the nature of its economic governance. …In contrast, the Chinese state uses the market as a tool in the pursuit of its larger development goals.’

(To be continued)

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2021