Getting out of the economic boom-bust cycle

Since independence, Pakistan has largely remained a consumption-oriented economy, and together with this, growth mostly has come from light industrial base. This is because government has sub-optimally played its part – under the overall neoliberal or neoclassical policy mindset – in regulating markets, and in improving economic institutional quality to significantly decrease transaction costs.

As a consequence, practice of market fundamentalism resulted in price signals that created a consumption-oriented society rather than one that had enough savings – along with putting pressure on imports in the absence of import-substituting industry of any note – at the back of better price discovery, and much higher economic institutional quality that put in place an optimal incentive structure that significantly reduced transaction costs, and incentivized those savings to be invested into long-gestation, heavy industry.

On the contrary, practice of neoliberal economics kept the role of government limited in regulating prices, and in evolving more effective economic institutional quality on one hand and, on the other hand, pushing for greater trade, and capital flows liberalization competed out local industry in the face of highly competitive foreign companies. Also, lack of both overall good-level economic institutional quality, and meaningful regulation did not allow creating an environment that while safeguarded the domestic industry, created enough competition among enterprises locally to see improvement in their capacities.

Instead of following the policy of ‘price shock therapy’ the country should follow the ‘dual-track’ pricing mechanism as was done by China during the 1980s, and beyond, to avoid frequent episodes of boom-bust growth cycles

Hence, the heavy industry could not create attraction for both investment, and better skilled labour supply – since both of them went to light industry for quick profit, and fast-increasing wage gains, as a result of high-momentum price-wage spiral – and therefore, both the positive outcome from them in terms of creating needed import-substitution industry, along with producing high quality domestic production, and create exports in an enhanced way, could not be created.

Therefore, Pakistan treaded the path of becoming a highly consumption-oriented society – and not just because people were buying a lot more commodities, but because prices relative to average incomes remained not only high but for a number of years real wages have been falling – and one that looked for quick profits, which came from light-industry, but which meant large exposure of the country from exogenous shocks due to significant reliance on imports for both domestic consumption, and local industrial production; not to mention similar pricing, and institutional reasons have also not allowed reaching better agricultural outcomes, both in terms of ensuring local food security, and creating an optimally priced, and significant quality supplier of raw materials for local industry and, in addition, reaching significant export quantity.

Moreover, investments into light industry mainly while provided quick profits, they created a price and wage spiral, that enhanced inflationary pressures on one hand, and lack of investments for heavy industry on the other hand which, in turn, played a significant role in not allowing reaching sustainable economic growth. Hence, Pakistan, like China in the 1980s, is stuck in a ‘structural disequilibrium’ at the back of low elasticity of both supply, and demand in the heavy industry which, in turn, has neither allowed needed import-substitution, nor enhancement of better- quality, and priced domestic production, along with reaching more competitive exports. This has overall meant that the country continues to remain stuck in a boom-bust cycle.

To make matters worse in this regard, under the overall policy umbrella of Neoliberalism – that the country has mostly practiced in or outside of an International Monetary Fund (IMF) programme – over-board practice of austerity policies have also not allowed enhancing the supply, and demand elasticities of the heavy industry, which is the main source of macroeconomic instability, and low economic growth. Instead, over-board practice of austerity policies over-suppressed aggregate demand, rather than undoing bottlenecks to enhance aggregate supply both in terms of greater domestic production, larger import substitution industry, and more competitive and high value-adding export quality.

So, the issue of twin deficit – deficit in both the current account, and fiscal account – which is a pre-cursor to keeping the country into a boom-bust cycle—was not tackled in a sustainable way by improving aggregate supply situation, but by unnecessarily suppressing aggregate demand that caused undue growth sacrifice for gaining otherwise limited macroeconomic stability, and reaching some low-growth equilibrium.

This is clearly an outcome of wrongly following ‘price shock therapy’ or liberalizing prices in one ‘big bang’ way or, in other words, following neoliberal policy, and within it, practicing over-board austerity policy, which in addition to not resolving the issue of twin deficit, have also not allowed sustainably reducing debt burden on one hand, and played its part in enhancing inequality and poverty in the country.

Worse, it has favoured fascist tendencies that have allowed oligarchic perpetuation at the back of weakening of political voice due to lesser educational, and economic empowerment of demos on account of over-board practice of austerity policies, and for not allowing properly regulating prices.

Hence, instead of following the policy of ‘price shock therapy’ the country should follow the ‘dual-track’ pricing mechanism as was done by China during the 1980s, and beyond, to avoid frequent episodes of boom-bust growth cycles. Moreover, the country while sees changes in inflation rate, but it is stuck in a ‘price level fever’, and sees no meaningful level of sustained economic growth.

In addition to the misgivings of following neoliberal policies, as indicated above, there is also another important consequence of following these policies, especially as the existential threat of climate change crisis is fast-unfolding, and because Pakistan is among the most climate-vulnerable countries, and which is a country that has remained unable to build climate change-related economic resilience, and get on a trajectory of improving it thereafter.

The same unfortunate learning curve was experienced by Yugoslavia, and Hungary – as is being witnessed by Pakistan – as pointed out in the 2021 Routledge published book ‘How China escaped shock therapy: the market reform debate’ by noted economist, Isabella M. Weber as follows: ‘This simple combination of price liberalization and profit incentives proved insufficient, however, as a reform approach for the more capital- and technology intensive, large-scale heavy and extracting industries. …The supply elasticity for critical inputs such as energy and raw materials was very low, while at the same time the demand of the industries processing these inputs was also relatively inelastic. …With the demanders and suppliers unable to adjust to price signals, both Hungary and Yugoslavia experienced that liberalizing the prices for these critical goods did not adjust their industrial structure. They entered an “inflationary spiral in which commodity prices and wages [took] turns going upward”…’

China, on the contrary, although had come very close to adopting the ‘price shock therapy’ approach, learnt from such examples, along with making a deep analysis of its domestic economic conditions, and found the suitability of adopting a ‘big bang’ sort of price liberalizing policy counter-productive for its economy. Instead, it followed a ‘dual-track’ pricing mechanism where it left all those commodities that were non-critical for the overall economy, and in particular for enhancing heavy industry, and were in excess supply, to market for price determination while, on the other hand, commodities which were critical, and were also in scarce quantity, their prices were regulated by the government.

Hence, unlike Pakistan, Russia, and a number of other countries that have been following ‘price shock therapy’ under the overall neoliberal assault, both in or outside of the IMF programme(s), China adopted a ‘dual-track’ pricing mechanism, and the economy overall saw a high level of economic growth, and progress in just a short period of a few decades.

The same book pointed out in this regard, ‘By the late summer of 1986, what had started under the label “coordinated, comprehensive package reform” was watered down to an adjustment of only the important and symbolic price of steel, combined with a partial tax and financial reform. In the fall, the last remnants for the shock treatment were condemned… In 1986, China narrowly escaped a big bang. Confronted with diverse, authoritative warnings about the unforeseeable risks of imposing the shock of price reform and the uncertainty about its benefits, Zhao Ziyang [served as third ‘Premier of the State Council of the People’s Republic of China’ during 1980-87] ultimately gave up on package reform. This plan had appeared like a comprehensive solution in theory, but it proved infeasible in practice. Zhao came around to arguing that the basic challenge of economic reform was enlivening enterprises. …The first, most shocking element of shock therapy, overnight price liberalization, was aborted. Instead, the reform approach of marketization from the margins prevailed… A full-scale contract responsibility system enhancing the dual-track price system, along the lines proposed in the 1985 System Reform Institute survey, was now implemented…’

Copyright Business Recorder, 2025