Economic ills - thinking beyond fundamentals

Unless investors are facilitated, dealing with twin deficit will not help the economy

KUALA LUMPUR: Imagine that you are given 30 minutes with a former finance minister of a major economy, who has played a crucial role in recent years and enjoys a high degree of respect amongst the peers.

You will be tempted to get a recipe for treating Pakistan’s economic ailments. A catch is that the former minister, a trained economist, had no direct knowledge about Pakistan’s economy or politics. However, the country where he served had faced a similar crisis, so there is a degree of similarity.

I narrate here key points of my discussion with him, who will remain unnamed as per his request. This is akin to going to a doctor, who gets information about the fundamentals, but then points to internal problems, which are indicated by these symptoms.

I described the ‘patient’ in question as follows: it is suffering from a persistent twin deficit, in both current and fiscal accounts. In other words, it does not have enough money to meet its domestic and international obligations. Exports are stagnant. Tax payments have dropped. Energy prices have been on the rise and people are very unhappy. New investments are not forthcoming.

However, infrastructure has seen fresh and significant investments in recent years. The government has been deliberating on an IMF package for several months whereas some friendly countries have also offered some help. How to treat the patient and where to begin from?

Without hesitation, and with confidence, which only comes from years of successful practice, the “doctor of the economy” offered some thoughts.

First, all macroeconomic problems are essentially micro-economic problems. “The twin deficit won’t worry me as it is only a symbol of a problem - mere symptom”. The underlying causes of all macroeconomic crises lie in the business environment and institutional environment of a country.

If investors and business community are not facilitated in doing business, addressing only current account or fiscal account by any measures will not help the economy. This needs an able and efficient administration which should work with the businesses.

Second, countries in such situations have usually wasted resources in doing wrong investments, especially in mega infrastructure, while deeper problems in the business environment lie unaddressed. These investments, and resulting infrastructure, create a feel-good factor, however, they create debt and become obstacle in the way of sustained economic growth.

Therefore, it is important to take stock of investment direction and re-prioritise efforts according to the priorities.

Third, what I found astonishing was that it was not the job of the finance minister to take an economy out of such crisis, it is the job of the prime minister! The finance minister does not have the necessary powers in a system to fight the problems holistically and without the prime minister’s direct involvement in these matters, nothing can be fixed.

Fourth, I asked for his estimate of the length of treatment, and the answer, without hesitation, was two years, before signs of recovery appear and the economy can follow the path of growth. Before it, the journey is very painful, for all near and dear ones of the patient.

Fifth, the fiscal policy of a country must move towards a balanced budget, something which our doctor of the economy is credited with during his tenure. It means that before the country could target at reducing the current account deficit, it must strive to reduce the fiscal deficit.

And since the increase in tax collection is less likely, the only way to reduce the deficit is to cut down on wasteful expenditures.

My conversation with the doctor, who served his country for several years, is now concluded. Do we have a research-backed plan to address the micro-economic, or in other words, structural ailments of Pakistan? We did not hear anything about the government’s plan to cut down waste beyond the prime minister’s house kitchen! We did not hear any plan to privatise some loss-making enterprises and instead we heard about a new government holding company which would acquire most or all state-owned enterprises.

These five points by the “doctor of the economy” are neither presented as a revelation not a new economic mantra. Many economists have always recommended these measures, though it is possible that these views are seen in isolation and perhaps not in totality, rendering them actually useless.

Hence, having a well-thought-out plan of action with all economic actors on board is extremely critical. I hope that while the new finance minister takes charge of the complex situation, some of his time will be spent on thinking beyond the symptoms, or the fundamentals.

The writer is the founder of PRIME Institute, an independent think tank based in Islamabad and is currently based in Kuala Lumpur, where he heads the Institute for Democracy and Economic Affairs (IDEAS)

Published in The Express Tribune, May 6^th, 2019.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.