Pakistan’s economy — in need of an ideology

The writer is Executive Director of the Institute for Development Initiatives, Islamabad. [email protected]

It is argued that Pakistan’s economy was on the right track till 2007 and is now paralysed, like a healthy person dying of a sudden heart attack. It is argued that public policy changes were pushing the economy towards a welfare enhancing equilibrium whereas the current government has converted Pakistan into a beggar state. Such claims need to be reassessed.

Alternative views argue that the economy was performing well in dimensions not relevant for a less-developed economy. In fact, it did not fulfil the requirements of a real turnaround in the economy. This view doubts the longer term growth impacts of increase in portfolio investment and highly concentrated foreign direct investments in a few sectors, such as oil and gas and telecom. Rather, it emphasises the importance of the role of the state in governing markets and regulating investments in the direction of the development needs of society.

Another view argues that, for an economy to take a steady growth path, it needs to look into ‘imbalances’ which go beyond traditional macro-economic imbalances, emphasising that equalities such as income and assets must be taken into account for the robust development of the buying capacity of as many people as possible. It must be noted that imbalances in income and wealth are serious issues for longer term economic growth and development — the global financial crisis has shown this to the world.

Looking at the economic performance of Pakistan over the years, it seems the distribution side of the economy became weaker with a worsening tax-to-GDP ratio which caused imbalances, including a fiscal deficit, over the years. However, while the economy started faltering during 2007, the tax base was not expanded. Instead, simmering problems, such as regulatory capture by special interests, were handed over to the new regime, though the managers remained the same — neoliberals. The argument was simple: to increase the pie, downward distribution of welfare gains of economy must be put on hold. But for how long? No one knew.

Alternative perspectives also argue that the economy has never been triggered to catch GDP growth from increasing innovation in products and processes. At best, it has tried to utilise more land, capital, and labour as sources of increase in production of goods and services. The result is that the economy never became an enviable enterprise in international trade and industrial competitiveness, while integration in the global economy did not expand its range of products.

To fix the economy, as the alternative perspective says, we need to reorganise our economy which goes beyond Washington Consensus type policy prescriptions. We need to build the capacity of the state to function — it needs reforms in entitlements as well as possession of assets and skills of the bottom 40 per cent. In fact, Pakistan needs to create a new economic ideology and restructure its public finance.

Published in The Express Tribune, November 29^th, 2010.