Economic pessimism in economic literature refers to a situation when economic units of society including households, firms, producers, inverters and capital lenders make assessments about future results of their economic activity with a negative approach.
Economics is all about rational behaviour of consumers, firms and producers. Motives of utility maximisation on part of the consumers and profit maximisation on part of the producers are based upon rational expectations about economic parameters like wage rate, employment opportunities, inflation, profit on investment, interest rate, etc.
Level of political stability and consistency in legal and governance regimes affect the rational expectations. Persistent doubt and uncertainty about any, some or all of the above mentioned factors give way to irrational expectations across all economic agents; be it household consumers, firm owners, traders, investors, capital providers and even the government.
Lack of mutual trust among these agents further aggravates the rationality of decision-making. Uncertainty and trust deficit translate into economic pessimism.
In the middle of the throes and pangs of uncertainty and pessimism, all economic agents start to see the future outcome of their moves worse than is actually determined and forecast by statistical and empirical observation and trends.
Since the vision during periods of economic pessimism becomes blurred, behaviour of all the players gets weird and uncanny. The households become cautious about their spending and tend to hold money with themselves, the firms slow down production and lay off workers, investors are shy of taking risk in the face of uncertainty and lenders raise interest rates.
These individual decisions can lead to fluctuations in the overall national aggregates like output, price level and employment. All this leads to the shrinking of economy and decrease in economic growth.
In Pakistan, all is happening. Because of the prevalent uncertainty, mistrust and pessimism, our country is going through certain unhealthy behavioural trends, which are not based on economic dynamics otherwise.
Pessimism innately is contagious in its nature. Once started, even by word of mouth, it permeates entire society and all economic sectors.
Examples are pre-emptive hoarding, panic stocking of food items and other household goods, individual in-hand holding of foreign currencies especially US dollars, cash transactions outside banking or other formal organised channels, aversion to take initiatives especially by small investors, entrepreneurs, traders and businessmen. The squeezing of foreign exchange has already badly affected essential imports like raw materials for pharmaceuticals, food processing and automobile parts, to mention a few.
Real estate and construction sectors are severely hit by prevailing negativity about the future economic outlook. The real estate is considered by many an analyst, perhaps rightly so, as an unproductive activity as this is an area where huge sums of money are parked only to make easy and instant profit.
This sector is at a standstill these days. A number of property dealers and owners, when interviewed, said that there are negligible sale-purchase deals because of uncertainty and taxation. It means that large capital is simply stuck up somewhere creating no economic activity.
Construction sector, however, is the one that involves and supports a whole chain of upstream and downstream industries. This sector provides livelihood to hundreds of thousands of households; millions of daily wagers earn their bread from it.
Construction activity is also at the lower ebb. Developers, contractors and constructors described the situation as highly volatile, gullible and uncertain in the face of swiftly increasing construction costs, unavailability of safe loans and a dubious housing policy.
A real concern is alarming pessimism in youth about economic failing in the country. In later half of 2021, UNICEF came up with the results of a ‘multigenerational, international survey on 21st century childhood’. The survey was conducted between January and June 2021, in 21 countries across the globe. The survey was conducted on two age groups; 15-24 and 40 plus in order to have their opinions about the future of youth.
Interestingly, pessimism among youth from high-income developed countries was higher than lower and middle-income developing countries. It is easy to understand that in developing economies having chances for jobs in expanding markets with increasing wage rates, optimism should prevail.
However, in Pakistan the situation is the other way round due to the factors mentioned above.
While developing the concept for this write-up, the writer talked to dozens of young students at graduate and post-graduate level and millennials entering or looking to enter job market. Sadly, about two-thirds of the youth see the future as bleak and dismal.
While the sentiments of pessimism or optimism are geared generally by economic dynamics, in Pakistan the air of pessimism is rather fanned mainly on political motives. Threats of default, unrest due to economic recession, comparison with defaulted countries and professing such a situation in our country, mainly come from those who are eager to change the political setup.
Even the economists and analysts who make regular appearances on electronic media’s prime time, are those who either already have some political affiliations or aspire to become part of some future scenario. Then there are self-proclaimed pundits who are advising people to stock foodstuff and other grocery for months.
The result is obvious; hoarding, price hike, unemployment on economic side as well as general chaos, distrust, doubt, anxiety, stress and lethargic inertia on social front. It may be understood that the economic challenges that Pakistan is facing will remain there for quite some time, regardless of the political leadership, whosoever it be. Sitting with IMF, building confidence in international brethren and going for corrective measures is need of the day, whichever government might come to power.
Temporary hike in prices of petroleum products and utilities has to be taken as a bitter pill. Exchange rate, said to be artificially managed for this or that expediency, has to be let take its natural course in the face of global economic dynamics.
Now that the outcome of parleys with IMF is shaping up, we may look up to some positivity. Stock market has just turned for better, policy and plan for reducing circular debt is showing up, doing away with unnecessary subsidies is on the cards, stream of remittances is almost steady and friendly help from donors is expected.
Let an optimistic sentiment take place. All the leadership is requested to sit together, rise above political gains and unite for economic uplift at this critical juncture.
Finally let ‘us’, the common man play a role for this national cause. Reducing consumption on luxuries, saving on petroleum, gas and electricity, and paying taxes duly and timely are certain to help steer the nation out of this temporary rough patch. Ultimately, it is the nation that matters, not individuals or faces.
The writer is ex-joint economic adviser to the government of Pakistan, now a freelance consultant
Published in The Express Tribune, February 13th, 2023.
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