Ignore the public, save the economy

Why appeasing the people and doing the right thing are usually not the same.

KARACHI: With the streets of Cairo, Tunis and Sana’a having become battlegrounds and depicting scenes of open revolt against their own governments’ corruption and mismanagement, the question is being asked whether the Pakistani government would be next. Yet the truth is that, on the economic front, the government of Pakistan, far from being a repressive regime, is simply doing what the people want.

The fact remains that there will most likely not be the same kind of insurrection in Pakistan that is currently taking place in the Arab world for a simple reason: we only need a no-confidence vote in Parliament to send our prime minister packing. And, despite unacceptably high levels of corruption, the government’s economic policy is genuinely a reflection of popular will. In fact, that is the problem with it.

On the electricity crisis, fuel prices, privatisation and even the soaring inflation, the government is doing exactly what the overwhelming majority of Pakistanis want it to do. In each case, it can be demonstrated that the popular move is precisely the wrong thing to do and that the recommendations of the despised foreigners – the Americans and the IMF – are in fact the right policy prescription.

Electricity prices and the power crisis

Perhaps one of the starkest reminders of the divergence between popular demands and prudent policy lies in Pakistan’s energy crisis. Despite the myriad reasons as to why the country does not have an adequate supply of electricity, the current series of rolling blackouts throughout the country is caused by one reason alone: unaffordable government subsidies.

Although this point has been made before – ad nauseum – it bears repeating: the energy crisis started in 2008 when the Musharraf administration, in a bid to win re-election, refused to pass on the full effects of the astronomical increase in oil prices to the Pakistani consumer. As a result, the government ended up promising subsidies to each sub-segment of the energy sector.

When it could not pay those subsidies, each company in the energy chain ended up with significant liabilities on its balance sheet, which meant that they were unable to pay their bills, forcing them to cut back on production. That reduction in production led to the sharp increase in power outages throughout the country.

But imagine, for a moment, what would have happened if the government had allowed the prices to go up according to their international rates? The rise was as much as 90 per cent in the space of only a few months. How many editorials would have been written denouncing the government for the price hike? How many protestors would have blamed the government for their misery? It is probable that none but a handful of academics and energy industry professionals would have supported the rise.

Here is what would have happened though: electricity and fuel prices would have risen sharply, and then come back down (though perhaps not with the same speed). Domestic and industrial consumers would have undoubtedly suffered, but no more than their counterparts across the world. Crucially, the system would keep producing power at close to optimal capacity, or at least at far higher levels of capacity than it is producing now, causing far fewer power outages.

Even now, the government appears to not have learnt its lesson. The IMF continues to insist that the government get rid of all subsidies on electricity – for the eminently logical reason that the government does not have the money for them – and the finance ministry’s response is to beg America to force the IMF to make an exception. A more embarrassing course of action is hardly imaginable.

Rather than honestly telling the citizens what it can afford to do and what it cannot, the government chooses to pull out the perennial begging bowl.

Fuel prices, privatisation and inflation

One of the most recent “victories for the people” was the reversal of the government’s decision to reduce the subsidy on petroleum products, which would have caused fuel prices to rise. There is no question that higher fuel prices have a negative impact on the economy. But consider the alternative.

The government must borrow upwards of Rs60 billion a year to maintain the current subsidy. This is money the government does not have, because we, the honourable citizens of this republic feel that tax-paying is an optional activity, barring a very small minority, the salaried-class who pay income tax by default. And so it simply prints the money. By printing more money without a corresponding increase in the number of goods and services that can be purchased with it, the government reduces the value of the rupee, a phenomenon commonly called inflation.

This also plays out in the surprisingly emotive issue of privatisation of state-owned enterprises. The pilots’ association is dead against the privatisation of PIA and other labour unions are loathe to allow Railways or any other publicly-owned company to go into private hands, mainly because they correctly fear a loss of jobs. Yet these companies are incurring losses precisely because they employ too many people.

Indeed, the losses on state-owned enterprises cost the government Rs250 billion a year. Even selling them off for absolute zero, in other words, would be a profitable transaction for the government. Incidentally, the government gets the money for bailing out these white elephants by printing it too. So keeping PIA, Steel Mills, Railways and all other such entities in government hands also causes inflation.

The IMF, of course, recommends getting rid of them as soon as possible. But overcoming political pressure to jettison even the worst of the loss-making enterprises seems to be beyond the capacity of the current administration.

Conclusion: we deserve our misery

Inflation and the energy crisis are easily two of the biggest economic concerns of most Pakistanis. And yet, as demonstrated above, all of the measures that would be required to overcome them are deeply unpopular with the public.

In other words, it is not that the government does not listen to the voice of the people but rather that it listens too much that is causing much of the country’s economic problems. The solution, of course, is not dictatorship (Musharraf did the same thing) but rather a politically courageous leadership willing to explain the hard choices we face.

The writer can be contacted at [e-mail]

Published in The Express Tribune, January 31^st,  2011.