In his visit to China, with PM and some other cabinet members, the finance minister, Muhammad Aurangzeb, while addressing a ceremony in China highlighted that Pakistan will be going into an International Monetary Fund (IMF) programme with a home-grown plan.
The finance minister pointed out in this regard: ‘Our direction of travel is very very clear… the home-grown agenda, because that’s what we are talking about. Everything that I have referred to tax-to-GDP, energy equation, SOE reforms, its in the interest of the country that we move in the right direction.
Now, as part of this home-grown agenda, markets, not the government, are going to anchor our economy as we go forward. The private sector is going to lead our country. As far as the government is concerned, we are there to provide policy framework, and even more importantly, policy continuity…’
I am reminded of a similar tone taken by one of the main founders of modern-day neoliberal policy– which anyways is very similar to the neoliberal model adopted by colonial rulers to extract resources from the colonies to their homeland, while in recent decades the shift of extraction has been from a sea of lower-income groups to a tiny pocket of elites – and that is former US president, Ronald Reagan, when in 1981 he remarked in one of his speeches ‘…government is not the solution to our problem; government is the problem.’
Over the decades since then, in the wake of multiple financial crises, diminishing economic resilience, fast-unfolding of climate change crisis, high increase in income inequality, even increase in global absolute poverty, not to mention fall in real wages, move towards lower tax progressivity, volatile capital movements across boundaries working as virtual parliaments globally, affecting political stability globally, and overall lowering of political voice, and greater disenfranchisement due to strengthening of correlation of election campaign finance, and policy influence of elite financiers, among number of other consequences, including justifiably increasing headwinds to globalization, have all been the consequences of neoliberal mindset.
Notwithstanding the home-grown plan, any reform strategy acceptable to IMF standard Washington Consensus based, procyclical, austerity-based, and overall neoliberal programme foundations, does not leave much room for any creative reform policy. Moreover, the ideas shared by the finance minister are anyways not far off than what IMF anyways emphasizes.
So, any number of economic objectives – tax-to-GDP, reforming- energy sector, and state-owned enterprises (SOEs), enhancing exports – have seen serious hurdles when approached from the neoliberal mindset that puts government as only a ‘facilitator’ to private sector, and not ‘co-creator’ of markets for more optimal, and conducive price recovery for economic growth, inclusivity, and even political voice.
Noted economist, Mariana Mazzucato in her famous book ‘The entrepreneurial state: debunking public vs private sector myths’ pointed out for instance ‘According to neoclassical economic theory that is taught in most economics departments, the goal of government policy is simply to correct market failures. …But that view forgets that markets are blind, so to speak. …the State must lead – not by simply fixing market failures but by actively creating and shaping (new) markets, while regulating existing ones. …Creating a symbiotic (more mutualistic) public-private innovation ecosystem thus requires new methods, metrics and indicators to evaluate public investments and their results. …Governments suffer from another, related problem when it comes to contemplating investment: as a result of the dominant view that they should stick to fixing market failures, they are often ill-equipped to do much more than that. …In order to create and shape technologies, sectors and markets, the State must be armed with the intelligence necessary to envision and enact bold policies.’
Therefore, if the intention of the finance minister for highlighting this to Chinese businessmen was to enhance their confidence in the Pakistani economy, it is likely to decrease their confidence, because Chinese macroeconomy and economic growth experience did not subscribe to the shock-therapy style of economic reform that is on the contrary bread-and-butter, neoliberal oriented, and market fundamentalism entrenched IMF reform policy.
Not only did the Chinese policymakers instead subscribe to ‘dual-track’ pricing mechanism – where prices of lesser important economic sectors are allowed greater freedoms of market determination while important sectors for growth, inflation, and as significant costs of doing business were determined through policy discretion – they only went for gradual capital controls. This means, among other things, that their build-up of foreign exchange reserves relied very little on chasing foreign portfolio investment (FPI), or very volatile or ‘hot money’, and instead looked for attracting far more reliable source in the shape of foreign direct investment (FDI) through providing businesses more stable- price, and economic institutional environment.
Pointing towards a non-shock therapy approach, successfully adopted by China, renowned economist Isabella M. Weber pointed out in her famous book ‘How China Escaped Shock Therapy: The Market Reform Debate’: ‘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.’
Hence, basing to some extent, macroeconomic stability, on the idea of attracting FPI through tapping into Chinese capital markets, for instance through floating ‘panda bond’ in the coming months, may not be much of a confidence booster, particularly for Chinese businessmen, given foreign exchange reserve’s build-up on otherwise highly volatile natured FPI, especially in an overall global environment of policy crisis – from existential threats to quite significant geo-political conflict – is already throwing strong headwinds to global economic stability.
There is indeed no short-cut to doing the hard miles of doing reforms to improve the capacity of economic institutions, and improving price recovery through better data usage of demand and supply in markets, and by more potent government regulation against over-profiteering, including adopting effective price controls where market outcomes are overall not optimal for cost-push inflation, and for reaching sustainably high, and significantly inclusive economic growth consequences.
Economic thinking needs to improve overall in the country, may that be in terms of neoclassical/neoliberal/orthodox economics curriculum being primarily taught in educational institutes, or highly emphasized in policy prescription – both in or outside of an IMF programme – which needs to shift meaningfully towards more heterodox, political economy oriented thought process, since it is coming into serious disrepute globally, since the Global Financial Crisis of 2007-08, but especially in the wake of its misgivings in terms of lack of resilience to the deal the economic consequences of Covid pandemic.
Hence, may that be in the shape of lack of availability, and distribution of vaccines during the pandemic, a very diminished public sector capacity over decades of neoliberal mantra of reducing the role of government in economy, the deep fragility of aggregate supply chains that focused more on catering demand globally, and less on building resilience into the system for effectively dealing with shock situations like conflict or pandemic, or the shallow nature of economic response in terms of welfare spending due to individualistic natured neoliberal economic paradigm that virtually allowed policy decisions based on profit-maximization-oriented market price signals.
Under this neoliberal thinking, unlike what was done in China, inflation is seen to be mainly caused by rise in aggregate demand, and therefore, addressed primarily through the instrument of policy rate. Instead, better market governance-, and incentive structures have not been placed for more optimal price recovery.
Also, price controls, like they were placed in China, have not been adopted to check over-profiteering, and for keeping the cost of doing business more stable, and predictable.
So, instead of reducing inflation through both aggregate demand-, and supply-side policies, greater emphasis continues to be placed on the former, which means that growth has been unjustifiably sacrificed, given higher policy rate has resulted in significant cost-push inflation, defeating in turn efforts to reduce inflation in a sustainable way, and keeping it on the lower side.
he argument for keeping policy rate high, even when the above has been evident for many years now, is wrong insecurities of a neoliberal mindset that need not exist on ground if proper supply-side focus is internalized in the policy matrix, and by putting in greater administrative controls on imports.
Hence, the idea that by keeping policy rate on the lower side will lead to a rise in money supply in a way that it will cause demand-pull inflation – that is as Milton Friedman reportedly put it ‘inflation is caused by too much money chasing after too few goods’ – is a wrong explanation, both traditionally because of an important role aggregate supply, and fiscal/governance policies play in determination of inflation, especially in the case of Pakistan with high domestic debt on the balance sheet of government, whereby increase in money supply will most likely mostly go into servicing very high domestic debt.
Similarly, the insecurity that fall in policy rate will enhance imports at a pace, and quantity to build significant pressure on balance of payments, foreign exchange reserves, and in turn, exchange rate, should also not be a worry if deeper administrative controls are placed on imports, and the purchase of dollars in the foreign exchange market.
Rather than dealing with these unfounded insecurities, for the reasons and solutions indicated above, but also given the lack of financialization of the economy – a general trait of developing countries like Pakistan traditionally – whereby spending and investment are done less through bank borrowing, positive impact of lowering policy rate on enhancing fiscal space through reducing debt repayment demands, and increasing growth, employment, and revenue through greater investment, and growth enhancing imports, and in increasing exports. It is about time the policymakers in general in Pakistan and at IMF particular smelled the coffee, and internalized the serious shortcomings of the neoliberal model into home-grown policy.
The focus, therefore, should be to bring IMF around this as much as it is possible, especially as the multilateral institutions turns 80, and has spent a whole latest issue of its ‘Finance & Development’ magazine on improving its thinking.
Copyright Business Recorder, 2024