Ours is a mismanaged country but one with potential to amply fulfill the needs of its citizenry. In so far as our economy goes, there is nothing that is wrong with it structurally.
Prima facie Pakistan’s current economic difficulties emerge out of high import bill and corresponding lack of investment. The huge rise in the oil price internationally over the last few years along with an international crisis of agriculture production has affected this country just like it has affected all countries around the world.  For us, it also has to do with the unique geo-political role that we are forced to play without an effective negotiator on the top.
The recession in the West has given us breathing space. The oil price is now back down into the US$60 to a barrel range on the international market. This is – as with all capitalist systems- an automatic correction of what was an unusually high increase in the costs of fueling the global economic system.
As it stands right now, Pakistan’s policy makers shall find a greater cushion than they expected. If some of the price decline is passed on to the consumers in Pakistan, it will slow down the inflation rate considerably. The 30% to 50% food inflation rate over the last few weeks will go down to 12% to 16% in the coming months. Even if it isn’t passed on, the correction vis a vis import bill is going to be substantial. The policy makers thus have a menu of options available.
An important factor would be increase the tax base to include agricultural income. Similarly, selective weekend taxes for petroleum products, as much as several hundred percent, will help bring both the burgeoning fuel demand and reduce pollution. Similarly for power, instead of load shedding during the work week, it would be better to increase the tariff by significant amount on Sundays. At the very least our policy makers should heavily tax imported products and luxury items for which there are local alternatives.
Pakistan’s economic growth will slow down from between 6 to 7 percent to between 4 to 5 percent. To achieve a growth rate between 4 to 5 percent in times of a global recession is no mean achievement and it reaffirms the point made earlier. Similarly, the State Bank’s decision to increase money supply by cutting in interest rates and cash reserve requirement indicates that the policy makers tend to agree that Pakistan’s current crisis is not demand pull (since the economy is slowing down) but is cost push due to external factors. The immediate and possibly temporary reaction to State Bank’s decision was the appreciation of the Pakistani rupee which has generally been seen as welcome. Pakistani rupee will stabilize as the situation globally favors the developing world.
Ultimately the real solution for our economic woes, to use the hackneyed phrase, lies in increased foreign direct investment.  Since 2001, Pakistan had received only up to US$ 64 billion inflows, which is – no matter what people say- a pittance compared to our potential. As an English-speaking nation of 165 million industrious and talented people, Pakistan presents an excellent opportunity for any foreign investor but for three major drawbacks.
One, we assume and project the same assumption on to foreign investors that that investments in Pakistan and India are mutually exclusive and since we view everything in comparison to our giant neighbor, we tend to underestimate ourselves increasingly so in the last decade and a half. Second, and more conclusively it is terrorism that has dulled Pakistan’s foreign investment in every sector including sport and tourism. In 2004-2005, Pakistan was an exciting tourist destination with Basant festivals, Polo matches and Cricket. Today foreign sports teams are very rightfully apprehensive of visiting the country and almost every Western embassy has a travel advisory out. The Marriot bombing has all but completely brought not just international but domestic commercial activity to a halt. And finally, it is the infrastructure. For all of the last government’s purported achievements in the economic sphere, their inability to create power solutions for an annual demand for electricity growing at 7-10 percent.
How does one do it though is a tricky one. The first two are political issues. India’s existence as a bigger nation in our neighborhood need not be a threat to us. Indeed if Pakistan were to play its unique role as a neighbor of one emerging global economy like India, while courting Asia’s foremost power house China and manage to keep its ties with the US as its Major Non-Nato Ally at the same time, it is highly probable that under a democratic regime, Pakistan can manage to create a trillion dollar economy in two decades or less.
But this means a solutions or management of all existing disputes but most importantly the water crisis. The most crucial issue however will be what role Pakistan plays in the Iran-US. Instead of waiting for the time where US gives Pakistan an option similar to the one it was given in 2001, Pakistan should play a pro-active role in bringing Iran and the US together by playing exactly the kind of role it played in the 1972 between China and the US. It would not be out of place to attempt once again to revive the long dead Regional Cooperation Development organization or the RCD between Turkey, Iran and Pakistan which would guarantee greater regional stability and economic options for Pakistan. Winning the war on terror is going to be essential but the war itself ought to be fought on several fronts one of which has to be economic.
The fall out of the war on terror has been economic and our allies should compensate us for our losses. But perhaps the most important thing any of our allies can help us with is in the power sector. Ideally the US should have boosted us by providing us the same kind of civil nuclear deal that it has offered India but much of that is impossible at present because of the history of nuclear proliferation and now that Dr. A Q Khan has rescinded on his earlier confession. We still might get a nuclear deal from China. This is not all though.
Pakistan must make dams and make them quick. If Kalabagh is out of the question, then alternatives must be looked at and a quick decision taken on. Similarly the Iran-Pakistan pipeline is also essential and if India joins in, this pipeline might just be a pipeline of peace and prosperity in the region. All in all, if this democratic government was to play its cards right, it could raise up to another US$ 30-40 Billion in direct investment over the next 3 to 5 years and that would be more than enough to sustain and develop it.
The late US President Richard Nixon, one of the 20th century’s greatest statesmen, wrote in 1991 that Pakistan as a democracy, an important “modernist” Muslim state and a US ally was one of the most important countries in Asia, close relations with which were imperative for US’ own interests in Asia and the greater Islamic world. Unfortunately the policy makers in the US in the 1990s did not listen to him. Now more than ever it is clear that our allies need us more than we need them – it is this essential premise on which we should deal with the world with our head held high.
Indeed if nations were judged by how hard they were hit and still managed to move on, Pakistan has given a good account of itself going from one crisis to another in quick succession. But nation states, as with individuals, are judged not by how many crises it takes to bring them down but how far they travel on the road to progress and towards their stated aims and objectives. Without getting into ideological pretensions, the consensus that all major players in Pakistan’s politics have is that Pakistan ought to be: an economically viable state run by constitutional democratic means which was the original aspiration of the people of this country.
Our rulers have bungled up opportunities and have let the people down far too many times in the past. It is time for the current democratically elected government to take a long hard look at the situation and refrain from mock tough rhetoric that does no one any good.
Pakistan must seize the moment and take this as an opportunity to catch up.
@ Watan Aziz
Producing goods for the people that are sub-standard is just one big concern – the other biggie is that producing anything is NOT enough unless the folks have the means to buy these goods! (miles to go just to survive!)
We should reduce our dependence on financing our trades, etc on foreign loans. They do nothing but have the drug-addictive-effect and cause instability and other problems – not to speak of the balance of payment crisis and open for blackmail if NOT loss of sovereignty. (miles to go before real independence).
We cannot look just at one category or two – in planning and monitoring the economy, the categories used are aggregates – “consumption”, “investment”, “export”, “balance-of-payment”, etc. Stabilization strategies work only when accompanied by longterm policy initiatives and social protection measures. (miles to go before awaken from clumsy slumbers!)
Thanks for being awake and keeping me awake!
@Jusathot
~~In order for us to achieve greater self-reliance, we must have a comprehensive strategy to reduce imports, especially of luxuries.~~
I took a quick peek at the latest budget. We are still importing and subsidizing items we did 20, 30 years ago. It seems it is a search and replace of values; the items are the same.
As a matter of fact, the entire budget looks just about the same, except for nouns, values, dates with “milk” added to add flavor.
~~This would also open up more domestic entrepreneurship, which utilizes local materials, so that the economy produces more of the goods, which are locally used.~~
Would you agree that the local manufacturers should ramp up to ISO standards? Pakistan Standards and Quality Control Authority has mere 78 items on its list. There appears no movement to demand or expect ISO standards. What is the purpose of developing a local industry if the people are cheated out on quality of manufacture? Is it a triple robbery for the citizen? First, the inflation will rob you while you sleep. Next the employer (and or GOP) will rob you for your wages. And finally, the local producer will clean you out on the way home for sub-standard products.
Should there not be a drop dead date for products that should either meet the ISO or specifically PSQA standards (in event of local needs)? What is free competition without standards; there is nothing to compare, compete against? Why would the domestic production become competitive? Why would the international manufacturer care about your needs? You can be taken for fools by your own people.
~~In this way, resources can be channeled from the export sector and demand for import cut down. Greater development of the domestic sector and you would see revenues increases. ~~
I find your statement fascinating. Are you suggesting that there exists a substantial and direct relationship between the imports and exports and that while there is a value added component; there is false sense of production and mere rent rolls exists (hired workers) with no direct benefit to the local (domestic) economy in terms of actual revenues?
I thank you again for sharing your thoughts.
PS. Pardon me for double post. I forgot that html will eat up text in angled brackets.
@Jusathot
>>In order for us to achieve greater self-reliance, we must have a comprehensive strategy to reduce imports, especially of luxuries. <>This would also open up more domestic entrepreneurship, which utilizes local materials, so that the economy produces more of the goods, which are locally used. <>In this way, resources can be channeled from the export sector and demand for import cut down. Greater development of the domestic sector and you would see revenues increases. <<
I find your statement fascinating. Are you suggesting that there exists a substantial and direct relationship between the imports and exports and that while there is a value added component; there is false sense of production and mere rent rolls exists (hired workers) with no direct benefit to the local (domestic) economy in terms of actual revenues?
I thank you again for sharing your thoughts.
@ Watan Aziz
It is a fact that Pakistanis are hardworking, talented and resourceful. You will find a great percentage of Pakistani expats and those with dual nationality successful at entrepreneurship and most other professions. So we already have abundance of talented human capital – whose full potentials are NOT fully utilized in our country. For the largely honest and hardworking silent majority, working under our corrupt and unjust SYSTEM is like trying to win a 100-meters race with a mill-stone around their neck!
In order for us to achieve greater self-reliance, we must have a comprehensive strategy to reduce imports, especially of luxuries. This would also open up more domestic entrepreneurship, which utilizes local materials, so that the economy produces more of the goods, which are locally used. In this way, resources can be channeled from the export sector and demand for import cut down. Greater development of the domestic sector and you would see revenues increases. We should also pay greater attention for self-sufficiency in our agriculture sector.
Inaddition, we should learn to save and invest rather than get into the consumerism trap. We should develop our own indigenous technology and be competitive in the value-added export markets. We must build and improve our physical infrastructures. We should provide quality education and vocational training for sustaining growth in the high value-added sectors.
The vicious cycle of putting off the debt crisis (i.e. debt relief and new loans under IMF conditions which includes measures usually borne by ordinary folks) should be opposed and rejected. Such methods only reward the perpetrators of this debt crime without alleviating the suffering of the working people. (we should learn to get out of the “begging-bowl” business). This is a vicious circle. And one explanation of why our economic problems remain unsolved or actually worsen is that most of our national resources are siphoned off by our corrupt ruling elites. Therefore, we must first overhaul our SYSTEM for better planning, management and just government.
Change can only come about if those of us who are conscious of the problems are ready to go forward in serious hardwork. The delusion of ‘one model for all’ must be destroyed. Finally, and above all we must unite – and remain true to our calling! just a thought ……it would be great to hear your thoughts on this as well.
@Jusathot
You mentioned structural (economic) constraints; what are the structural opportunities?
What economic or administrative actions could set in motion the expansion of revenue base, both vertically and horizontally; given the current constraints? Simply put, what will make the revenues jump?
I appreciate your patience in filling in these blanks for the benefit of all of us.
Thanks again.
@Watan Aziz: Going by your postings on this blog, you seem to relate to the actual condition of life on the ground unlike many economists and “snake oil salesman” a.k.a.“court-scholars”. Economists use words/tools like “Drivers of Change”, etc, to simply identify the “support” (anti status quo folks) and “blockages” (status quo crowd – ruling elites) in the effective use of funding to foster growth and to redress poverty. But your contacts in the villages and rural areas will tell you the same thing without any fancy articulations: injustice - cruel injustice, pure and simple, my dear compatriot!
@Jusathot
“Drivers of Change Study”, can you expand on this thought?
thanks
In Pakistan the institutional structure of the economy provides rents for the elite by restricting competition through the exclusion of the majority of the people from the process of quality education, training, investment and governance. It is this narrow base of investment and restricted competition that underlies endemic inefficiency and lack of innovation and export competitiveness, and hence recurrent balance of payments crises.
My research for the UNDP, ‘National Human Development Report 2003’, provides evidence to suggest that the poor have unequal access compared to the rich to markets for land, labour and capital. The institutional *structures * of power at the local level engender asymmetric markets for inputs and outputs which deprive the poor of almost one-third of their income. Furthermore my research for the ‘Drivers of Change Study (2008)’ shows that Pakistan’s institutional structure constrains both sustained growth as well as poverty reduction.
It is Pakistan’s institutional framework and the associated incentive systems which have shaped the structure of its economy. By *structure * I mean the design format of the economy which determines the essential features of its growth process. I had argued in 2006 (Daily Times, May 1 and 8) that Pakistan’s high GDP growth observable at the time was not sustainable and was likely to hit a balance of payments constraint which could force a slow down. Unfortunately this indeed has come to pass. … This time Pakistan is fighting a war for survival. There is no room for mistakes on the economic front.
By Dr Akmal Hussain
Dawn Op-ed Nov 9, 2008
http://www.dawn.com/2008/text/op.htm