The dole trap

The cost of each of the 3 “free lunches” when they ended quickly appeared in the shape of massive crises.

Ours is a firmly entrenched dole-driven economy thanks largely to three extended periods of massive inflows of foreign concessional and grant type of assistance. And predictably, at the end of each of these three rounds, the country suffered from massive crises of low growth, high inflation, low investment and high unemployment because we had failed to use the huge fiscal space provided by these ‘free lunches’ to tend to our comparative economic advantages and, at the same time, to undertake appropriate policies aimed at development with equity.

The first round: Pakistan’s economy grew at an annual average rate of over six per cent during 1955-65, reflecting largely the Korean War-related domestic economic boom, the Seato and Cento-related almost free supply of defence equipment, the generous US dole of wheat under PL480 and inflow of massive World Bank funds during the construction of the Tarbela Dam.

The second round: Between 1980 and 1988, the country once again grew at an annual average rate of over six per cent, thanks this time to the first Afghan War-related inflows. By the time this round ended, the country had received over $100 billion, all unencumbered, according to a rough estimate. But midway through 1988, one could see nothing on the ground to show where this huge amount had gone. The then caretaker finance minister, the late Dr Mehbubul Haq, had to rush to the IMF for a bailout package. The huge fiscal space that was generated during this period was again wasted on consumerism and if any planning for the future was made, it was all skewed. For example, when the bamboo-curtained socialist China was opening up its port city, Shenzhen, to the world, we were locking up our Karachi export processing zone. The main source of income continued to be ever higher import tariff rates and foreign dole. Foreign assistance had become such a permanent and important feature of our economy that once, when publicly confronted with the reality of increasing dependence on aid, Dr Haq claimed that the more the amount of dole, the higher it reflected on the level of confidence of the donors in our economic policies! And our then economic sage, the late Ghulam Ishaq Khan, was so unconcerned about the ongoing smuggling which was adversely affecting our manufacturing sector that once he publicly but indirectly approved of it, saying that there was nothing to be disturbed about because these goods were coming in without adversely impacting on Pakistan’s official foreign exchange reserves! The power sector was criminally neglected during this period and by 1986, for the first time in its life, Pakistan was firmly in the grip of massive power outages.

The third round: During 1999-2008, Pakistan once again grew at an annual average rate of over six per cent as the incoming largesse, related to our services rendered in the war against terrorism following the 9/11 tragic episode, had flooded our coffers. And the man who took over the country without asking anybody wasted three precious years in trying to build national consensus on the Kalabagh Dam, relegating all other important power (including the Bhasha Dam) and irrigation projects to lowest priorities. And so, darkness descended once again on the country at the end of the third “free lunch”.

The cost of each of the three “free lunches” when they ended quickly appeared in the shape of soaring population growth, massive drop in literacy rates, a huge slump in tax-to-GDP ratio and a widening gap between the haves and the have-nots. During the first round, the then government had ill-advisedly gone on a spree of import substitution under the protection of high tariffs. In the subsequent rounds, the governments of the day, it appeared, had mistaken the temporary boom and the donor-interest driven transient dole to be a permanent national economic feature and, therefore, paid no attention to the all-important task of planning for the future. Not only education, health and the demands of equity were criminally ignored but no thought was given even to resource generation.

Could we get out of this trap by shunning dole for good and adopting the Keynesian way out rather than going back to the IMF? A tall order, indeed.

Published in The Express Tribune, May 1^st, 2013.