Way out of the stagnation trap

The austerity formula has proved to be a stagnation trap for countries that went to the Fund seeking an emergency loan

Pakistan’s economy needs to grow at an annual average rate of at least seven to eight per cent over the next 10 to 15 years to be able to generate enough to fund affordable educational facilities, affordable health cover, affordable public transport, affordable telecommunication facilities, affordable housing and affordable bank loans to all its citizens.

But in order to grow at this rate, the economy would need investment to the tune of at least 25 per cent of the GDP at an annual average for the next 10 to 15 years. However, our current rate of savings has been stagnating at around 14 per cent of the GDP over the last several years. This leaves a gap of almost about 11 per cent between the required rate of investment and the existing rate of savings.

Since we have consistently failed to mobilise enough resources from within the national economy to bridge this gap, we have resorted to borrowings, which while never enough, have now accumulated into a mountain under whose weight a default would appear imminent at times.

Besides, the tap of concessional loans appears to be closing down rapidly because our traditional lenders now feel that it would be unfair to their own taxpayers to keep pumping their hard-earned resources into a country, which has shown no willingness to tax the incomes of its own citizens or which has invested the borrowed resources in profitable avenues. So, every time a default looks imminent, we rush to the lender of the last resort for emergency assistance.

Since the IMF operations are controlled by its largest shareholders — the US and Europe — more often than not, the Fund’s policies get influenced by the global policies of these large shareholders, and especially that of the US.

Most probably, the US and its allies do not want a nuclear country to collapse nor perhaps do they want to see it get out of their clutches. So perhaps, they have asked the Fund to keep the country afloat with bailouts and not to help it out of its continued stagnation. Therefore, the Fund obliges, no matter how many times we fail to fulfil its conditions.

This explains why successive Fund bureaucracies continue to be seemingly doped rather willingly by successive governments in Islamabad. Indeed, despite the poor record of implementing IMF ‘reforms’ by Islamabad, the Fund has continued to come to our rescue every time we went to Washington seeking an immediate bailout.

The Fund, ostensibly in order to ensure that it would get back its loan, imposes a lot of austerity conditions on the borrower assuring it at the same time that in the long run its economy would start growing at an accelerated rate.

“In the long run we are all dead,” so said John Maynard Keynes. But since the Second World War, the fundamentalists of the so-called Washington Consensus have been coming up with their own self-serving definitions of the term ‘long run’ so as to sell ‘austerity’ to countries like Pakistan as the panacea for all their economic ills. But the austerity formula has proved, in the long run, to be a stagnation trap for countries that went to the Fund seeking an emergency loan.

Macroeconomic stability is a highly desirable goal but by the time a country succeeds in achieving this goal, it invariably ends up with resource constraints becoming even more chronic, the unemployment rate shooting through the ceiling and inflation spiralling out of control.

Therefore, instead of seeking ways to return to the Fund after the current programme expires next year in September, we should be doing some creative thinking on this matter. For example, we could approach the new infrastructure bank that China has floated and/or offer India and Afghanistan transit trade facility on an attractive rental in return for a political or economic quid pro quo from New Delhi. And what would that be? Our strategists should have by now ‘war-gamed’ the idea to find out how far the Indians would go to buy it. We should start the negotiation seeking more than what they could afford and settle for what they can really live with.

Published in The Express Tribune, January 2^nd, 2016.

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