Economic theory and practice would have suggested a tightening of money supply, not its easing. This was not expected by a dozen or so senior economists, who, when they were questioned before the Bank’s credit committee met, predicted that either the policy won’t change or there may be a slight rise in the rate. The bank’s action confounded economists and further eroded the confidence of those watching economic developments on the seriousness of policymakers with regard to addressing the grim economic situation the country currently faces.
The answers to these questions are not to be found in economics but in politics. As democracy continues to take hold in the country, policymakers are working to ensure their survival by not keeping the men in uniform satisfied with their performance. This is what happened when a series of prime ministers were sent home by the powerful military for having failed to provide good economic management. Their removal was in fact demanded by senior politicians who occupied the opposition benches in the legislature. And when the military intervened, even the press welcomed their arrival. There are no calls this time around for history to repeat itself. The reason is that political forces are looking at some of the developments outside the country’s borders and drawing important lessons for shaping their own actions. Three of these developments are particularly important. Two of these occurred — or, more accurately are still occurring — in the Arab world, while the third took place in Turkey.
The first of these is the effective use by the youth in the Arab world of new media to get organised and challenge the established political order. They used such new instruments of communication as Facebook and Twitter and such devices as the iPad and mobile telephones to gather and demonstrate on the streets. This expression of discontent didn’t need political organisations for mobilisation. The strength of this uprising was drawn from the depth of despair that had built up over years and decades. The authoritarian regimes in Tunisia and Egypt were not able to use their well-developed security forces to keep themselves in power. Once the military establishment in these two countries indicated that it would not intervene to keep in place the discredited leaders, regime change became inevitable. Yemen, Libya and Syria have not gone the way of Tunisia and Egypt for the reason that those in power have managed to stay there by exploiting the social, cultural and religious divisions in their societies. They may have bought some time for themselves but not longevity.
The second lesson is that the ‘political street’ has been inserted as another balancing factor in the evolving political systems. If there is general dissatisfaction with the way the executive branch is acting and its actions cannot be constrained or controlled by the legislature and the judiciary, the street will be prepared to act. The street is not just in the Arab world but in all parts of the Muslim world. It is ready to throb with activity because of the age of the population. The median age of the populations in Muslim countries is much lower than in other parts of the world. It is only 21 years in Pakistan, which means that some 90 million people in a population of 180 million are below that age. Most of them are not active participants in the established political order. They are deeply concerned about their present economic situation and future prospects and could come out on the streets if they lose hope in their future.
The third important development of note is the sudden departure of all senior military commanders in Turkey. As Anthony Shadid, the Pulitzer Prize-winning journalist, wrote recently in The New York Times, “50 years ago, when a populist prime minister tangled with the Turkish military, he ended up on the gallows, the mandate of three election victories little consolation. This time around, the rivalry climaxed with most of Turkey’s military high command resigning simultaneously, its leader complaining of powerlessness and bad press.” There is a consensus among analysts that this action by the commanders has strengthened the position of Recep Tayyip Erdogan, the thrice elected prime minister, rather than weakened it. The once powerful militaries in the Muslim world have had to recognise that the people of their countries want representative political orders in place rather than rule by strongmen.
The main lesson Pakistan’s political establishment has drawn from these developments is that it cannot simply rely on the support of its traditional constituencies. It has to keep an eye on the way people are reacting to their policies. The street also matters. The politicians have also gained some confidence that the military, while still influential in several aspects of policymaking, is not likely to directly intervene. These are reasonable responses to the important developments outside the country’s orders but they have not resulted in good economic policymaking.
One important illustration is the way Islamabad is dealing with the State Bank and the way it is using the monetary policy to keep the street on its side. Most political mistakes are made by sacrificing the future to the present. It is quite clear that the current rulers are getting ready for the next general elections. They have to be held in the next 20 months. If held under the current political dispensation, this would be the first time that an elected government would have completed its full term. To get to that point, the PPP-led government seems to have concluded that it is important to bring growth back by easing money supply and that tightening of money would reduce investment by the private sector and thus slow down the increase in employment. These are short-term responses to a difficult economic situation but their consequences will, in the long run, be politically and economically grim.
Published in The Express Tribune, August 8th, 2011.
COMMENTS (9)
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Central bank have limited tools, the financial crisis in the wast has revealed that. http://online.wsj.com/article/SB10001424053111903366504576486321427677798.html Central Banks Run Short of Policy Options
@SharifL:
The SBP is independent, ore so than many developing countries. It has the powers to "determine and enforce" government borrowing. Whether or not it does that depends on who is in charge as Governor.
In many developed countries, the state bank chiefs are completely independent and the decisions are not influenced by governments. May be Pakistan should try this method. But in Pakistan, as we see independence is thought as taking more powers. like supreme courts is doing, or the army meddling. But time and democratic success will sort out these shortcomings. So independent banking chiefs should be the talk of day.
Your discussion goes too far in highlighting the external factors and too little in understanding the impulse of Pakistan. [2]
Javed,
I like many others was taken aback by the recent decision of the SBP despite market participants and other economy watchers sensing that the SBP would hold its ground.
But as you point out, this is politics and not good economics.
The pity is that the 0.5% cut will be unavailing. Investment by the private sector is not being held back by the cost of capital. It is never so simple. We can all list the factors that are detering private sector investment and the cost of capital would probably come last in any rank-ordering.
If this cut (and others to follow?) alongwith a boost in development spending that is embodied in the federal and provincial budgets is supposed to "jump-start" the economy as elections loom, the only thing it will jump-start is a larger fiscal deficit and more inflation.
No wonder Shahid left. Some people say he was asked to leave. To me that is neither here nor there. If he was asked to do something and he refused, I say all power and good wishes to him. He was a fish compltely out of water and it was only a matter of time before a clash would result in his departure.
Prices are sky rocketing? People are getting hungrier and everyone is fed up with power situation. The Govt. policy is one reason why inflation is rising. It doesn't seem to get that. Govt. also doesn't understand that local government structures and autonomy play a powerful role in economy. As you were at World Bank you should know how China used local autonomy and structures to grow. The Chinese systems are integrated and decentralized, they use a type of structure that is the silent urban revolution. In Karachi, Pakistan got its most advanced urban model-and best one. The Chinese system apply the South east Asian variant, the Pakistan system reflects the French variant. The latter is the one that is common to western countries and former colonies of Western countries.
Agreed.
Why Pakistan is not looking for another “khaki” coup d’état. The reasons are more internal and less external. Your discussion goes too far in highlighting the external factors and too little in understanding the impulse of Pakistan.