Need for a more balanced policy emphasis by Pakistan and Argentina

Pakistan and Argentina have somewhat similar macroeconomic, and growth consequences, whereby although the extent of inflation rate was much more in the case of Argentina, yet both countries practiced significantly acute level of austerity policies.

Hence, taming inflation primarily through adopting aggregate demand-squeeze policies by increasing policy rate a lot, instead of rightly pursuing a more balanced policy approach in terms of aggregate- demand and supply-side policies, led to a lot of growth sacrifice.

A December 10, Financial Times (FT) article ‘Argentina: has Javier Milei proved his critics wrong?’ pointed out the practice of aggressive austerity policies by Argentina, and highlighted while it successfully tamed inflation, but at a high growth cost, with negative impact on social spending and likely enhancing consequence for income inequality, and poverty.

The article argued in this regard: ‘Having taken over an economy on the brink of hyperinflation, Milei slashed the monthly inflation rate from 26 per cent last December to 2.7 per cent in October. …But Argentina’s situation is still critical. While the economy appears to be emerging from a recession that began last year, it is expected to finish this year 3 per cent smaller than in 2023, according to JPMorgan. …With industries and wages depressed,

Argentines have yet to recover from a steep drop in living standards that began roughly a decade ago, and accelerated in the early months of Milei’s presidency. The share of the population living in poverty climbed 11 percentage points in the first half of 2024 to 53 per cent, according to the national statistics agency.’

This is the same dilemma facing Pakistan, whereby, like Argentina, the country has been able to bring down inflation from close to 30 percent a year ago to around 5 percent, yet economic growth continues to remain stuck in the medium-term range of around 3 percent, just about a little better than the population growth rate of around 2 percent. This dilemma sadly has continued to remain a ‘Gordian Knot’ in both the countries because there is lack of aggregate supply-side reform both in terms of governance and incentive structures, and that too in a non-neoliberal way.

This is because neoliberal policy does not allow proper intervention by public sector to not only properly correct market failures, but also to efficiently create markets that allow both better price discovery, and reaching public-private sector contracts that safeguard the interests of the demos.

Hence, both the countries are likely to repeat the cycles of fall in inflation and fall in growth, and rise in growth and rise in inflation since lack of economic resilience, and price discovery, on one hand, and high level of information asymmetry and overall transaction costs due to lacking institutional reforms, on the other, result in over-sacrifice of growth for reducing inflation, which increases as soon as economic stimulus is provided as lack of productive capacity, low domestic resource mobilization, serious market imperfections, and lack of provision of climate finance – in an overall scenario of weak multilateral spirit, which also increases debt burden – over-heat the economy.

Moreover, the same article points out that significant austerity policies drastically reduce social spending. Hence, this leads to not only economic hardship, but also lack of investment into the demos reduces political voice, and with it reduces the influence of public opinion over public policy, which is otherwise very important for the passage of important legislation in parliament that is against the interests of elites, but is important for public welfare.

The article highlighted in this regard: ‘Milei has prioritised tackling Argentina’s inflation rate above all else. His main strategy has been “taking a chainsaw to the state”, as his catchphrase goes, cutting spending from 44 per cent to 32 per cent of GDP.

The largest savings came from cuts to pensions, public works, public sector salaries, energy and transport subsidies, and social programmes.’ Linking with the point in the previous paragraph, the level of hardship being faced is quite high, given such deep cuts in spending in such areas as ‘…pensions, public works, public sector salaries, energy and transport subsidies.’

Pakistan is currently in a neoliberal, austerity-emphasised International Monetary Fund (IMF) programme, while Argentina is reportedly also looking for IMF assistance, as the same FT published article pointed out ‘…Milei is hoping to borrow up to USD 10 billion on top of the USD 44 billion Argentina already owes’.

Here, it needs to be pointed that both countries need to negotiate with IMF a programme that allows seeing a greater role of aggregate supply in determination of inflation, and in turn, the programme has a more balanced programme with more reined-in practice of austerity policies, and non-neoliberal institutional reform, especially on the aggregate supply side.

In the case of Pakistan, which is already in an IMF programme, such change of policy focus should come from renegotiating certain aspects of the same Extended Fund Facility (EFF) IMF programme.

Such programme revision is important also because a number of programme targets, especially on the fiscal side are already not being met even at an early stage of the programme, given a much lower growth projection being reached, than previously assumed, for which reason a much less austerity-based programme conditionalities need to be agreed at both in terms of monetary- and fiscal policy.

Copyright Business Recorder, 2024