Sustainability, institutional reform, and stimulus

What causes macroeconomic instability? Main determinants that come to mind are elevated levels of inflation, fiscal deficit (FD), current account deficit (CAD), and debt burden. Moreover, what brings sustainable macroeconomic stability? Naturally, starting with inflation, and notwithstanding sudden and short-lived spikes from temporary and not so deep exogenous shocks, sources of demand-pull, cost push, and imported inflationary channels remain in normal range – for instance in low, single digits – gap between revenue and expenditure or FD as a percentage of gross national income (GNI) is on the lower side, and similarly, difference between exports and imports as a percentage of foreign exchange reserves is once again on the lower side.

The problem is that all of these are on the higher side in general, and it is only after a lot of growth sacrifice is given that macroeconomic instability falls. But such decline in instability is short-lived because the way inflation is reduced is by adopting overboard monetary and fiscal austerity – very significantly increasing policy rate, and pushing for primary surplus – which, in turn, reduces inflation mostly through squeezing aggregate demand. Moreover, fiscal austerity while reduces expenditures – but here the manner of reduction is undesirable because of a significant cut in development expenditures – on the one hand, expenditures in the shape of high interest payments that follow only allow the return of instability, on the other hand.

Similarly, a reduction in current account deficit at the back of overboard demand squeeze means while reduction in imports provides reduction in CAD, and even results in surplus, reduction in exports that soon follows – since most of intermediary goods for exports come from imports – pushes for a U-turn towards increasing CAD. Hence, stabilization policies, or fiscal consolidation policies or, in other words, austerity policies, while only lead to a short-lived macroeconomic stability – as has been quite consistently the case in Pakistan over many decades now, and especially after Neoliberalism influenced austerity policies were almost continuously employed – they induce a low of economic growth sacrifice, and in addition lack of development spending leads to increase in poverty, and income and wealth inequality.

Not only does that capacity to repay debt also weaken as lack of domestic production, exports, and overall GNI reduces capacity to repay debt, whereas during the same time, both external and domestic debt repayment needs have increased, primarily because of higher interest rate, likely more devalued domestic currency due to falling exports and, in turn, foreign exchange reserves. In addition, reduced development expenditure reduces economic empowerment of demos, which weakens their political voice and, in turn, control over public policy, exacerbating overtime feelings of disenfranchisement. Overall, this contributes to not only political instability in the country — an important determinant of economic instability — but also accentuates brain drain as more people get inclined to leave country for greener pastures.

Hence, the recently launched ‘Uraan Pakistan’ plan needs to base its thinking firstly on this chain reaction in the economy, when overboard austerity policies are adopted. This means not only neoliberal mindset influenced policy orientation of giving (wrongly) greater role to austerity policies is reined in, the Plan needs to understand the role of institutional reforms on the supply-side of the economy.

Moreover, these reforms need to be non-neoliberal in orientation, both in terms of more balanced role aggregate- demand and supply side, but also a non-neoliberal or social democratic role of government is seen, both in terms of partnership with the private sector, where instead of just being a ‘facilitator’, the government needs to be an active partner of the private sector; for instance, in formulation of demos-friendly contracts, and the ones that help bring both productive- and allocative efficiencies.

Also, instead of having ‘market fundamentalism’, that is, market knows best, and needs least positive-, and negative incentivization, and weak role of government, markets are not only regulated against ‘fixing’ market failures, but meaningfully deep incentive- and governance structures are employed by government to ‘co-create’ markets where the level of presence of government in market formation depends on the extent of presence of transaction costs such as ‘search and information costs’, and information asymmetries.

Hence, sustainable macroeconomic stability, and economic growth need intervention at the level of firstly introducing non-neoliberal policy formulation framework, and then under this mindset institutional reform, and role of government, including the provision of stimulus is targeted; where both the role of government is not seen in being less or more, but being rationally adjusted to the need of such role in bringing productive, and allocative efficiencies, better price discovery in all the fields of economy, and in improving the quality of political voice, and overall political stability. Moreover, institutional reform is needed on the aggregate supply side in particular for better price discovery on both the aggregate- demand and supply sides, and in reducing income inequality, and poverty.

Pakistan has paid a lot of growth sacrifice to achieve nascent macroeconomic stability, but reaching better growth – and, in turn, greater level of revenues, higher exports, and greater employment rate – requires firstly institutional reforms – which basically means better performing ministries at the federal level, and those departments at the provincial level, which are fully devolved to that level, and better evolved organizations or departments, and much improved markets in turn. Reform of public service – which means doing away with the elitist civil service apartheid kind of regime, and instead introducing one public service regime, and within depending on merit ‘fast’ and ‘general’ streams are introduced for all public services – is indeed among important reforms on the supply side of public services.

Secondly, for enhancing economic resilience – especially in the wake of fast-unfolding climate change crisis, and likely ‘Pandemicene’ phenomenon – and in meaningfully reducing income inequality, and poverty, and overall, for enhancing economic growth, and without the problem of over-heating – for which institutional reforms are another pre-requisite – requires provision of meaningful level of stimulus to the economy.

In addition to increasing domestic resource mobilization effort, there is need for much better prevalence of multilateral spirit, for instance, in terms of greater provision of climate change related special drawing rights (SDRs) by International Monetary Fund (IMF), and in much improved spirit of multilateralism towards much debt forgiveness/provision of moratorium; not to mention reined-in practice of austerity policies helping to increase fiscal space.

Copyright Business Recorder, 2025