Since the 18th Century, one country after another has experienced what Harvard economist Rostow called a “take off into sustained growth”. Rostow stated that, every once in a while, something happens to a previously stagnant country – after decades, sometimes even centuries, of dormancy – that they begin a steep climb towards prosperity, joining the modern world.
Today, Pakistan is the ‘Sick man of South Asia’, turning to the IMF (International Monetary Fund) for the 23rd time and a state of despondency prevailing across all social and economic classes. However, times of crises also provide ground for growth, and as such, it is incumbent upon us to reflect on how we got to this point, and what steps are needed to course correct towards prosperity.
Fortunately, countries such as Mexico, Thailand, and Germany have all experienced far worse crises and emerged economically strong and sound; it falls to us to study these economies and how they dealt with their individual crises, and determine what lessons can be learnt and applied to Pakistan.
Economics is often a game of amateur psychology. Similar to how bank runs take place, a crisis of confidence in an economy often becomes a self- fulfilling prophecy presaging actual economic downturn.
Having spent the past few years here developing a venture capital eco-system and investing in start-ups, I have found that what plagues Pakistan is not some outside conspiracy or even a lack of fundamental opportunities, but rather a lack of confidence, openness, and inclusivity. Such challenges cannot be resolved through force or coercion, but rather through bringing together reform-minded individuals to rebuild and shore up again the country’s prospects.
As things currently stand, there is strong inertia amongst policymakers, and a resistance to do things differently. Islamabad is disconnected from the private sector, with input primarily taken from aged businessmen with vested interests.
Today, Pakistan faces indebtedness, an escalating fiscal deficit, capital controls combined with a wide gap between social, political, and religious values. Rather than address these root issues, the government has chosen to print more money, putting the financial sector at risk.
The lack of openness applies to both the economy and the culture. Pakistan’s share of world exports is 0.13% (vs. India’s at 4.5%) with trade as a percentage of GDP at 32% (India is 50%). Over the years, Pakistan has become insular and disconnected from the world, opting to shore up import tariffs and barriers.
These tariffs create an anti-export bias, making selling domestically more profitable than exploring world markets and supporting inefficient industries that wouldn’t have survived otherwise. The share of import tariffs as a percentage of total tax collection is 50% compared to only 10% in India. The way forward is trade liberalisation to become part of the global supply chain. No country has progressed without opening itself up for trade.
At the same time, this navel-gazing culture– through measures such as the Single National Curriculum which seek to further ideologically condition people, rather than make them globally minded – result in a lack of cultural affinity with the outside world.
To sell globally, one has to build trust and relationships, and know how to network with, and sell your story to the world. As the maxim goes, “Culture eats strategy for breakfast.” We are raising our kids to be conformists to rules, rather than questioning, inquisitive, problem solvers. We need more disruptors, not parrots.
The world draws confidence in a country when they see a credible pathway towards the right policy reform measures being undertaken. The older generation in Pakistan indulged in a decadent lifestyle, printing money to sustain this extravaganza, with a lack of willingness and realisation that this lifestyle came at the cost of the youth who will have to pay back these debts.
The focus on ideological and political battles amongst angry old men, at the cost of pragmatic decision making, has put our future at stake. And we continue to repeat the same mistakes committed by others.
Taking a look at Mexico’s tequila crisis, two key lessons are immediately evident: 1) if you devalue, make it big enough so that speculators don’t expect more to come; 2) immediately after such a devaluation, the government must give every signal that things are in control, understand the importance of investor rights, and show that they are responsible.
A piecemeal devaluation results in a shift towards non-PKR assets. With interest payments exceeding total government revenues last month, a debt restructuring may be inevitable along with an ambitious reform program. In 1923, Germany launched a new currency backed by hard assets, cut the size of its workforce by 25% and reduced remaining salaries by 30%.
Pakistan is currently in the midst of an inflationary depression with an uncoordinated fiscal and monetary policy. Only deep fiscal reforms that help re-build confidence can help stem the escalating crisis not one-time foreign inflows. These include:
A wide privatisation programme of state-owned and military businesses. The government’s job is the policy framework and facilitation, not business.
An ambitious civil services and pensions reform, with a move towards a fully-funded defined contribution scheme and deep downsizing of the bloated government and military workforce.
A war on the cash economy/non-filers and a push towards digitisation.
The key reason nations fail is because of a lack of inclusive growth. Pakistan has denied opportunity to the vast majority of its population to gain a globally competitive education and skill set and has selected from a limited pool of schools/universities.
The youth of Pakistan are progressive, globally minded, and want opportunities to progress. Much the same way as the young Saudi heir drove a cultural transformation before an economic transformation could occur, Pakistan requires a wholesale cultural shift towards opening up socially, culturally, and – subsequently – economically.
With these few simple steps, I see a bright future ahead, as the mantle passes on to those who are more in tune with the world.
Copyright Business Recorder, 2023