This is the first of a two-part series focusing on the symbiotic relationship between politics and economics, with existing literature focusing more on domestic policies premised on globalization representative of a unipolar US-led world rather than taking account of the evolving multipolar world.
The second part will detail the focus of our cabinet members on domestic factors as the root cause of the economy’s fragility while ignoring external factors with a considerably greater impact on our domestic economic policies.
There is a symbiotic liaison between economics and politics with markedly differing gradations of affiliation depending on the ruling elite’s target/preferred group - their constituents/stakeholders in a democracy/hybrid system, the institutional elite in autocracies, the religious groups in a theocracy or the party apparatchik in communism - all operating within a psychologically determined range of welfare data - poverty, inflation and unemployment - deemed acceptable.
There is, however, a dearth of empirical studies on this relationship. Thirteen years ago an International Monetary Fund Working Paper 11/12 (January 2011) titled How Does Political Instability Affect Economic Growth? by Ari Aisen and Francisco Jose Veiga concluded that “political instability significantly reduces economic growth, both statistically and economically…..Using a dataset covering up to 169 countries in the period between 1960 and 2004, estimates from system-GMM (generalized method of moments) regressions show that political instability is particularly harmful through its adverse effects on total factor productivity growth and, in a lesser scale, by discouraging physical and human capital accumulation…..Our results suggest that governments in politically fragmented countries with high degrees of political instability need to address its root causes and try to mitigate its effects on the design and implementation of economic policies. Only then, countries could have durable economic policies that may engender higher economic growth.”
There is no updated empirical study on the Fund website, an entity not known for undertaking any cogent political analysis of any member country, however it has begun to upload podcasts by non-staffers. A Harvard professor of Government in an IMF podcast dated March 2024 titled A place for Politics argued that “Political economy is the integration of political and economic factors in our analysis of modern society.
Inasmuch as just about everyone would agree that politics and economics are intricately and irretrievably interwoven—politics affects the economy and the economy affects politics—this approach seems natural. It has proved itself powerful in understanding governments and societies; it can also be a powerful tool for those interested in changing governments and societies.“ The reference could well be to either change the form of government - from democracy to say a dictatorship - or simply de-seat one administration and replace it with another.
Be that as it may, the focus of the earlier study and the podcast is on domestic politics which is no longer the sole determinant on two major counts. First, there is evidence of a very slow but inexorable changing international world order where globalization, the hallmark of a unipolar system, is being replaced by a multipolar world.
This claim is strengthened by the fact that while the United States GDP remains the highest in the world, at 23 trillion dollars, it is likely to be surpassed by China’s current 17 trillion dollars GDP, given that the latter’s growth rate has been consistently higher than that of the US (4.9 percent in 2024 against the US rate of 2.7 percent). Militarily though, China is strong yet Russia’s recent show of military strength in its war with Ukraine is increasingly being seen as rivalling the US.
Sanctioned countries, Russia, Iran, North Korea, and China, have enhanced their cooperation with each other and within the Brazil, Russia, India, China and South Africa (BRICS) forum which recently expanded membership to include Iran, the United Arab Emirates, Indonesia, Egypt, and Ethiopia.
Discussions on a system that could provide an alternative to SWIFT (led by the US) as well as the feasibility of a new common currency (to counter the weaponization of the dollar through an increasing use of sanctions) are underway.
And second, the West continues to head donor agencies and has a major voice in approving all disbursements to member countries (with the exception of the recently established Asian Infrastructure Investment Bank which has limited resources compared to the others), which makes developing countries heavily reliant on assistance from the multilaterals hostage to the US-led West’s economic and political pressures.
In Pakistan’s case the situation is much more complex as our long-term alliance with China, Saudi Arabia and the United Arab Emirates (UAE) is no longer purely bilateral in terms of loans/grants as all three clearly notified the country that until and unless we are on a rigidly monitored IMF programme there will be no roll-overs (currently around 12 billion dollars are rolled over each year by these three countries – which incidentally is also a condition of the ongoing IMF loan) or loans.
To further complicate matters Pakistan is currently on its twenty-fourth IMF programme and disturbingly the designs of all these programmes have largely failed to take account of: (i) the capacity of the administration to implement politically challenging reforms (assurances from powerful stakeholders are no doubt sought) and, of equal if not more relevance, the shortening of the timeline to implement them; and (ii) unlike India the Fund staff have rarely been challenged by our finance ministers/governors of the state bank as their experience is largely gained outside the country, the basis of their appointments, which has compromised their capacity to separate the wheat from the chaff – wheat defined as economic policies supported by the West, including donor agencies, while the chaff is the intimate knowledge of conditions unique to Pakistan.
An example is the fact that in Pakistan we have no perfect conditions prevailing in even those markets that have a large number of producers and consumers due to the proliferation of by now politically powerful organizations (examples abound and include the textile association, the cement manufacturers association, the tobacco lobby representing vested interests) and the aarthis, the middleman between the farmers and the market.
The IMF programme refers to vested interests in the 10 October 2024 documents uploaded on the IMF website and there is reference to “political economy considerations”, a focus on achieving full cost recovery of utilities through passing on the buck to the consumers. However, the disentanglement of the country due to flawed policies of the past coupled with the changing world order requires a more expansively inclusive strategy than is in evidence today.
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