Economy: bad bits

Bad because the shortest path to being categorised as villainous is to disagree with the group think; in Pakistan today that would be CPEC. Perhaps the history of the world may have been very different if every time a leader wanted to do a trapeze act, someone had yanked the rope. Frankly the being on the same page rule is overrated, disagreement may be messy, but ensures careful decision making. Essentially the Devil's advocate should be a formal position in the kitchen cabinet.
To digress a bit, writing this column a week in advance at times gives rise to interesting peculiarities; couple of weeks ago while writing "More Bits", the benefits of plugging leakages in tax collection, through industry wise global reconciliation, satellite images and tracking activity at ports was highlighted. The just announced mini-budget believes that Rs 92 billion can be collected through technology; and while the budget is silent about the details behind the initiative, Kudos for a step in the right direction.
However, I don't write to praise "Caesar", and I have no wish to bury him; I simply want to disagree with Caesar to make him think again, even if he is right. Listening to those disagreeing for the sake of disagreeing, even with truisms, is only for the wise ruler. Alternatively if Caesar wants praise and flattery, for that he has the kitchen staff.
The mini budget can be viewed as an attempt to demonstrate a willingness to bring down the fiscal deficit; and there is only one reason to want to do that. However, some of us have always found it curious and astounding that multilateral institutions forged under the Bretton Woods system, whilst dealing with developing nations in crises, only focus on the fiscal deficit and GDP and completely ignore the more critical economic indicator, trade deficit. Notwithstanding that Pakistan has never met any budget in history, and perhaps budgets are never meant to be met, however even believing for a second that controlling the fiscal deficit without bringing down the trade deficit will address the economic challenges will be extremely foolhardy.
If the trade deficit continues to increase, or even stays constant at the current levels, Pakistan will have to keep on borrowing more, which will keep raising debt servicing expenditure, already by far the biggest line item in the budget, consequently leading to a higher fiscal deficit. Without controlling the trade deficit, the economic war cannot be won. And you don't need an economist to tell you that, you need common sense.
Continuing in this vein, lets tickle economists to death; why not just forget about GDP for a bit. Our GDP has been growing for decades but we still seem to be in an eternal economic crisis. Once again common sense will tell you that in any case GDP cannot grow ad infinitum. A decline in external debt and trade deficit might be a more realistic target than wanting the GDP to grow forever; especially since nobody really understands what GDP is in the first instance and in Pakistan's case nobody knows for sure what our GDP is.
Finally to end economist bashing with flair; how can FDI be any solution when the return thereon is near or above 20% IRR in dollar terms? Most of us perhaps cannot even understand the impact on the domestic economy and the kind of subsidy the Government will need to dish out if it is indeed correct that power generation projects under CPEC carry that kind of return. No way can we afford electricity at that cost. And increasing oil refining simply means we are consuming more of something we can ill afford too!
As far as attracting global capital is concerned, Dani Rodrik has a point; minus protection of property rights, sound contract enforcement, eradication of corruption, enhanced transparency and financial information, sound corporate governance, monetary and fiscal stability, debt sustainability, market-determined exchange rates, high-quality financial regulations and prudential supervision, Pakistan is not a very attractive investment opportunity.
This obviously means that in the current state of affairs, anyone, even our best friends, who invests in Pakistan is looking at a payback period of under 5 years, which cannot be beneficial for Pakistan under any stretch of imagination. And those at the top perhaps understand this, since transparency is a casualty even with a different finance team. If we can't see, hear or talk about CPEC today, are we really gaining from it. Is Pakistan a corridor or a people?
Perhaps the solution for increasing capital investment is not FDI but the Korean way; force domestic business groups to undertake specific industrial undertakings rather than everyone competing in a handful of sectors. Get more mileage out of the dollars we have; and protect them like crazy. Do we really need all our savings dumped into more and more airlines, cement plants, property developments?
By the way note that even Mr. Rodrik views protection of property rights as the first prerequisite for attracting capital; on the other hand we just can't figure out the solution to that particular problem. Even when we go after encroachments they are the ones which perhaps benefit the common man's economy rather than the land grabs by the powerful. On a personal note small market encroachments give life to the market place, an orderly market is rather boring.
In conclusion, as of now the bits can be summarised as follows:
* Unless someone has a better idea, tariff hikes, with minimum tariff at 30%, to bring down the trade deficit.
* Immediate steps towards protecting property rights, with a focus on addressing land disputes on war footing, within a maximum of three years.
* Nudging, even forcing, domestic entrepreneurs to invest in specified industrial sectors under a protectionist regime coupled with state capitalism to support larger and critical projects.
* Sector wise reconciliation of tax collection with GDP; finally a use for GDP even if it is only a guesstimate!
* Focus on ease of doing business to bring down the ranking under 75 in two years.
And next week, hopefully, we focus on tax collection.
(The writer is Chartered Accountant based in Islamabad)email: [email protected]