Another counter-cyclical approach to budget
Commercial banks have continued to increase the rate of return on financing to the government keeping in view the high demand for budgetary financing. PHOTO: file
Amidst multiple crises, the government is busy planning the budget. It is a humongous task given the prevailing situation.
The government has to come up with innovative ideas to manage scarce resources and sustain the pressure of international financial institutions like the International Monetary Fund (IMF), World Bank, etc. It is common knowledge that the IMF is exerting significant pressure on the government. Additionally, the government is under constant pressure and struggling to manage the debt crisis, which has shaken the economic and social fabric.
Despite the huge depreciation of Pakistani rupee, lower growth, and rampant inflation, the IMF is still demanding more from Pakistan. Political instability further complicates the situation, and the upcoming election is forcing the government to provide an overdose of subsidies.
Thus, the government is left with limited choices. Now, Pakistan has to decide whether to follow the IMF and adopt stringent monetary and fiscal policies, austerity measures, and let inflation keep growing, or break the cycle by adopting a different approach. In this backdrop, there are a few suggestions for the government to consider.
First of all, Pakistan should try to avoid the IMF and utilise indigenous knowledge. Analysis of historical data shows that no country has grown under IMF’s guidance. Instead, countries that followed IMF’s advice fell into deep crises, such as Argentina, Brazil, Mexico, etc. Argentina is a classic example in this regard.
Argentina has been doing everything to please the IMF for decades. Initially, Argentina sold its assets to repay loans and stimulate growth. Unfortunately, it did not work and created a double-edged problem.
On the one hand, Argentina lost productive assets, and on the other hand, the loan kept increasing.
After implementing the latest IMF programmes (worth $50 billion), the situation has further complicated. Now inflation has crossed the 100% mark. Therefore, Pakistan needs to avoid IMF’s will and explore alternative means to fulfill its national agenda.
Second, Pakistan should move away from the mentality of austerity (which seems to exclude the perks of bureaucracy, politicians, or institutions) and rigid monetary and fiscal policies. These measures will not help break the cycle of stagflation and put the economy on the path of growth.
We are already witnessing the impact of IMF’s advice, austerity, and rigid monetary and fiscal policies. They have wreaked havoc on the economy, and initial government estimates indicate that the GDP has shrunk to 0.8%, large-scale manufacturing growth is negative, and the services sector has only posted 0.9% growth.
Therefore, it is advised that the upcoming budget should be prepared with a focus on a counter-cyclic approach. Fortunately, Pakistan has two excellent options: state-owned enterprises (SOEs) and the China-Pakistan Economic Corridor (CPEC), which can help apply a counter-cyclic approach and break the trap of stagflation.
SOEs have the potential to provide immediate relief and create sustainable avenues for non-tax earnings. Unfortunately, in Pakistan, SOEs are considered a bad economic choice.
Liberal economists and experts have been urging successive governments to get rid of SOEs, as they believe SOEs are the ultimate hurdle in the country’s development. They cite the poor state of affairs as an excuse to privatise them and have successfully convinced ruling elites of the assumed benefits of privatisation. However, they are not telling the real story; why are these SOEs in a bad state? The truth is that successive governments have misused and abused SOEs.
They never tried to run SOEs based on economic rationality. Instead, they used SOEs for their political interests and to favour their cronies. SOEs were filled with political supporters, disregarding merit. As a result, SOEs including PIA, steel mills, railways, etc, are all overstuffed with cronies or supporters. In a nutshell, the ruling elite is exploiting SOEs without any mercy or regard for national interest.
From the above discussion, it can be inferred that the real problem lies in management and governance, not SOEs. Hence, the government needs to work on improving management and governance. Privatisation is a bad strategy, and Pakistan will lose its assets without any gain. The example of Argentina, which has been discussed above, is apparent. The same would be true for Pakistan.
If we want to turn SOEs into profitable businesses, we should learn from China. We can learn how China runs SOEs and uses them to turn around the fate of the country.
Despite the thriving private sector in China, SOEs are still a major contributor to the national economy, accounting for almost 30-32% of GDP.
The first and foremost lesson from China is to run SOEs based on economic rationality, not favouritism or cronyism. There should be respect for merit, and the best person for the job should be selected. By following China’s example, we can immensely benefit from SOEs.
Furthermore, SOEs are also a good option because the infrastructure is already available, so there is no need to invest in building infrastructure from scratch. The only thing that needs to be done is to improve the governance and management of SOEs.
Second, SOEs will not only create jobs for local people but also be a good source of direct earnings for the government. As we know, every government needs non-tax revenue to address the increasing needs of the people. Secondly, CPEC is another option that can help Pakistan implement a counter-cyclic approach. There are three elements that can help Pakistan in the short run.
First, Pakistan can benefit from agricultural cooperation, which is an extremely low-hanging fruit. Second, the construction of Special Economic Zones (SEZs) can spur rapid growth, job generation, and economic opportunities. Third, the implementation of ML-1 can bring multiple opportunities.
In the long term, industrialisation, modernisation of agriculture, and cooperation in science and technology can put Pakistan on the path of sustainable development. However, to benefit from these opportunities, Pakistan needs to put its house in order. In conclusion, the budget should not be prepared with the upcoming election in mind. It should be planned with a focus on the long-term goals of the country.
Thus, the government should avoid providing subsidies or counterproductive social protection programmes. It should allocate maximum resources to sectors that can boost economic growth and development, such as SOEs, CPEC projects, and agriculture. Social protection programmes and subsidies should be tied to economic activities, like subsidies for small farmers.
Furthermore, the government must focus on creating livelihood opportunities, and there should be no free lunch like free cash transfers. Cash transfers should only be for those people who cannot work, such as the elderly, children, or disabled individuals. Lastly, it is time to make tough decisions, or else be prepared to face tough situations.
THE WRITER IS A POLITICAL ECONOMIST AND A VISITING RESEARCH FELLOW AT HEBEI UNIVERSITY, CHINA
Published in The Express Tribune, May 29th, 2023.
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