Era of ‘shortage economy’

ISLAMABAD:

Economic cycles are quite common but these are mostly in linear forms of high or low.

Rarely one gets into a cycle, such as the present one, where most of the headline numbers are high and positive but still we face multidimensional shortages. We are in an era of “shortage economy”.

There are global and national factors contributing to the era of shortage economy.

Starting with the global factors, the shortage is caused apparently by supply chain bottlenecks and buoyant demand triggered by Covid-19 stimulus packages due to return of consumers to spending.

Supply chains could not cope with this sudden pressure and faltered in many areas including the logistics choke points, provision of raw material and inputs such as microchips.

There are, however, some deeper and structural issues that have led to this era of shortage economy. One of these is “slowbalisation” or de-globalisation and protectionist tendencies across the globe, thus de-tracking the rapid globalisation that we witnessed in the past few decades.

Striving towards shortening supply chains and self-sufficiency has negatively affected the global markets in almost everything, thus causing a supply dearth and resulting in shortages of various products, and even services.

Although we didn’t face the anticipated economic fallout of Covid-19 in the short run, it has certainly challenged and impacted some structural basis of our economic systems. This would show its result over the medium to long term, including in Pakistan.

At the national level in Pakistan, the first factor contributing to the shortage economy is the role of productive sectors and rent-seeking intermediaries.

We have recently witnessed many episodes such as shortage of sugar, wheat and oil inter alia. While it is easy to attribute such shortages to various “mafias”, we ought to get deeper into analysing the situation.

If you ask the relevant industrial sectors, they would come up with many plausible arguments to justify these shortages – most of these should not be ignored.

We need to focus on supply-side constraints or limitations. Are we adequately equipped for meeting energy demand for the next decade? Do we have sufficient food production and supply capacity for increasing population and changing consumer preferences? Do we have enough supply infrastructure for main products?

Unfortunately, we do not pay attention to these dimensions and rather focus on short-term attributions that too, often times, are politically driven.

The second factor contributing to the shortage economy is the ability of consumers to cope with persistently rising inflation with real incomes going down. While it is unlikely to notice a decline in consumer demand in the short run, it is quite probable to witness a downward trend in the medium to long term.

Another point in this context is the focus on discouraging imports, particularly of consumer and luxury goods, which may cause shortage in these product groups.

Amidst the aforementioned factors, the most important to note is that the world is due for an economic reset or readjustment after a long spell of liberalisation, expansion and globalisation.

Moreover, we should take note of depleting natural resources, increasing populations and adverse impact of climate change. There is certainly a limitation on productivity for the factors of production.

In Pakistan, we need to map out such trends and adjust our economic policy accordingly. This is even more important in light of the fragility of our economy due to multiple factors including a narrow base and the lack of resilience mechanisms.

The current economic scenario does not allow for any lacklustre approach, otherwise the economic shock may be converted into the social shock.

We need to map out the anticipated shortages in different sectors of economy, including the impact on exports and foreign exchange earnings as a result of global dimension of the shortage economy. There is a need to realign expenditures and find areas of squeeze with the least economic pain, should there be a need.

The most important need of the day is to recognise and declare some of the economic sectors under the ambit of national security. The most important sectors in this case are food and energy.

There should be enhanced level of government intervention in these sectors, beyond mere regulations, to manage market forces in a way that anticipated shortages do not cause serious troubles. This is not to advocate government intervention in a classical fashion, rather the public-private partnership to ensure smooth supply and avoid abrupt price hikes of essential and strategic goods.

This should be taken as a duty of care by the state, over and above any political considerations or motives.

Time is ripe to think about strategic reserves of energy, particularly oil, and food, particularly cereals. Probably, it’s a time to go back to basics in economic planning and management.

A great economic reset has started, it is better to recognise, internalise and manage it appropriately for Pakistan.

The writer is an international economist

 

 

Published in The Express Tribune, November 29^th, 2021.

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