Lack of allocative and productive expenditure efficiency has led to under-utilization of revenue and aid, which in turn has significantly contributed to lack of sustained, high economic growth, which has not only meant lower domestic production, but also exports. This in turn has resulted in accentuating of the twin deficit from time to time, and has negatively impacted debt repayment capacity.

Moreover, lack of investment – both domestic and foreign, and both from public and private sector – has not allowed supply-side unclogging on one hand, and practice of over-board monetary and fiscal austerity policies to deal with inflation has resulted in stagflationary consequences.

Hence, growth has not only been not high for any sustained basis over the medium-to-long term for the last many decades, it is also not inclusive.

Since the late 1980s, in or outside of the International Monetary Fund (IMF) programme, Pakistan has practiced shock therapy policies, which has meant that under market fundamentalism, the role of government and regulation has continued to reduce to mainly ‘fixer’ of market failures, and facilitator of the private sector. This has resulted in sub-optimal recovery of prices, may that be in terms of goods and services, or the price of capital in terms of interest rate, or the price of labour in terms of wages or incomes.

Hence, quick, landslide, domestic price and financial liberalisation policies under loose regulation as part of the overall shock-therapy or overall neoliberal policy mindset resulted in over-profiteering, while inflationary pressures were mainly managed under this approach through monetary austerity or aggregate demand squeeze policies, only providing temporary relief, if at all, while inflation received fresh impetus from cost-push inflationary channel mainly at the back of lack of domestic supply due to stagnating economic growth under high policy rate, build-up in imported inflationary channel due to falling exports, and ‘hot money’ nature of portfolio investment.

Pakistan has not been alone in suffering from shock therapy policies, where a number of countries have seen a negative fallout in this regard on not only economy, but also lack of economic stability over the years also negatively impacting political stability, especially in weakening of political voice due to economic under-investment in the demos leading to little build-up in their economic and educational capacity to push their representatives to push for economic reforms, which otherwise dent the elite capture status quo, like taxing moneyed interests.

Renowned economist Isabella M. Weber in her noted 2021 book ‘How China escaped shock therapy: the market reform debate’ pointed out, for instance, that China during the last two decades of the previous century actively pursued ‘dual-track’ pricing system, and to a lot of success in not only keeping in check over-profiteering and inflation, but also controlling prices for important economic sectors in terms of domestic production, and exports.

With regard to ‘shock therapy’ she pointed out: ‘Shock therapy was at the heart of “Washington consensus doctrine of transition”… propagated by the Bretton Woods institutions in developing countries, Eastern and Central Europe, and Russia… On the surface, it was a comprehensive package of policies to be implemented in a single stroke to shock the planned economies into markets at once… The package consisted of (1) liberalization of all prices in one big bang, (2) privatization, (3) trade liberalization, and (4) stabilization in the form of tight monetary and fiscal policies.’

Instead, she rightly favoured dual-track price system – given the successful economic experience of China, and unlike Russia, for instance, where the shock therapy policies were practiced on the contrary – and indicated in this regard: ‘The most prominent manifestation of China’s reform approach is the dual-track price system, which is the opposite of shock therapy. Instead of liberalizing all prices in one big bang, the state initially continued to plan the industrial core of the economy and set the prices of essential goods while the prices of surplus output and non-essential goods were successfully liberalized. As a result, prices were gradually determined by the market… The dual-track system is not simply a price policy, but rather a process of market creation and regulation through state participation.’

As mentioned before, market fundamentalism has resulted in over-profiteering in the real sector and financial sector, and austerity policies, in addition to contributing unnecessarily high profits in the financial sector, have positively influenced cost-push-, and imported inflation.

Together, market fundamentalism and austerity policies have hurt employment, growth, exports, and revenues, and have not allowed correct pricing of labour due to lack of regulation, and have also increased inequality and poverty levels with weakening consequences for democracy.

Hence, Pakistan has to move away from shock therapy policies and should apply dual-track pricing system, which would likely positively contribute towards wider and deeper economic, and political consequences, in addition to meeting goals of approaching macroeconomic stability, and sustained and inclusive economic growth.

Moreover, unlike market fundamentalism producing price signals that favour investment, production, and consumption decisions that produced weaker growth consequences in terms of sustainability, inclusivity, and resilience, inequality, and poverty, dual-track system would allow strengthening of not only these consequences, but also democratic roots, and would also likely produce rounds of legislation that weaken elite capture or politico-economic extractive institutional design.

Here, while other methods could be though indeed, a sound method to technically formalize the dual-track pricing system could be following the process of input-output model, as pointed out by Isabella M. Weber, and others in their 2024 published article ‘Inflation in times of overlapping emergencies: systemically significant prices from an input-output perspective’.

The reason as to why an input-output method needs to be adopted to control inflation, in addition to squeezing the aggregate demand side within reasonable limits, and not going over-board as practiced under monetary austerity policy, is because inflation is not just a ‘result of “too much money chasing too few goods”… [or] as a matter of the relation between aggregate demand and capacity utilization’ as indicated in the same paper as taking the ‘aggressive approach’ whereby the paper highlights ‘Today’s institutions of economic stabilization are grounded on this aggressive approach. In the current round of inflation, this has implied that central banks… have no adequate tools at hand to counter commodity price shocks…’

Hence, the paper suggests not adopting this ‘aggressive approach’ to counter inflation, but to approach resolving the problem by digging deeper into the microeconomic foundations of inflation.

The paper points out in this regard: ‘When faced with large sectoral shocks [as has been in the case of developing countries in general, including Pakistan, with large dependence on imports, have weak domestic regulation, and deep financial liberalization – keeping country hostage to highly volatile portfolio investment – and is also exposed to significant climate change related shocks, including the ‘Pandemicene’ phenomenon], it is not sufficient for monetary stabilization to rely on purely macroeconomic means designed to respond to demand-pull inflation. …As shocks are likely to become more systemic in the context of overlapping emergencies, a form of economic disasters preparedness to protect the points of greatest vulnerability becomes relevant for monetary stability even beyond today’s inflation.

We need to be able to respond to shocks to systematically significant prices before they unleash a broader inflationary dynamic. …We use a Leontief price model. This “method of systematically quantifying the mutual interrelationships among the various sectors of a complex economic system”… allows us to study cost-price structures in their relationships. …We simulate how in an input–output setup a price shock in any specific industry cascades as a cost shock through the whole system, leading to changes in the general price level.

This means that we not only take direct effects of a price change on the consumer price index into account, but also the myriad of indirect effects that follow from cost changes in other sectors.’

Pakistan is preparing to go into the 24th programme of the International Monetary Fund (IMF). Therefore, the government, especially the ministry of finance, and State Bank of Pakistan, take the lead in taking a ‘home-grown programme’ that strongly suggests reaching the likely IMF’s extended fund facility (EFF) programme goals of approaching macroeconomic stability, and sustainable economic growth, with important undertones of reaching a resilient, green, and inclusive economy, that to take the route of dual-track pricing system, and not follow the usual shock-therapy, ‘Washington Consensus’-styled, neoliberal policies.

Moreover, the underlying input-output model, and the Leontief price model is applied, under the overall dual-track policy to reach at an implementation strategy in terms of highlighting the important sectors in terms of their contribution for overall inflation, domestic production, and exports.

Also, it is important that the country should create a ‘price commission’ that checks over-profiteering, and suggests standardized physical models of markets in the real and financial, which are then replicated across the country for reaching much higher expenditure and productive efficiencies.

Copyright Business Recorder, 2024