The myth of stability and Pakistan’s economic underperformance
Trade barriers placed on foreign products are mistakenly considered a benefit by many politicians, when in fact they hurt their own citizens and economy and in turn make exports more difficult. Photo: file
A "generally" held opinion is that Pakistan's economy has performed better in military-led governments and that democracy has held back our economic potential. The last such episode under General Musharraf (1999-2007) saw a high growth rate, better-managed fiscal policy and a high level of investment.
Based on a rather superficial analysis of these facts, it is believed that sustained economic growth requires political stability, which is not possible under a democratic dispensation where politics trumps economics. About the military rule and economic growth, we now understand that Pakistan's foreign policy role in the evolving geopolitical situations has facilitated inflows and consumption, which jacked up growth. During the last 10 years, essentially since the Panama scandal, Pakistan has entered a new "hybrid" regime of economic and political governance.
This hybridity, or being on one page, is considered the sole guarantee of a stable and predictable economic policy, which is what, we are told, investors are always looking for. With each passing year, this bond has been strengthened. The current regime is the third iteration of this model. The amendment in the Army Act and the establishment of the Special Investment Facilitation Council (SIFC) clearly point in this direction.
Despite these flawless arrangements, it should be clear that we have not seen any noticeable increase in the level of foreign direct investment (FDI). The last spike in FDI came with the China-Pakistan Economic Corridor (CPEC) investments, with around $27 billion over 2013-2018. That period culminated in a huge current account deficit of $18 billion in 2018. Since then, or even before, the export level has been falling in a relative sense. Also, the levels of poverty and unemployment have gone up. Clearly, the hybrid regime theory, the imaginary foundation of political stability, though well implemented, is not delivering.
Have we oversold the slogan of political stability as a precondition of sustained economic growth? I am not concluding, but I am questioning the theory here.
There is an inherent instability in any democratic dispensation, as changes in the political mandate can lead to shifts in economic policy. It is not dissimilar to the uncertainty and fatality of market forces. In that manner, both democracy and market economy share some characteristics. We cannot predict their outcomes. While operating within a larger environment of policy uncertainty, investors, whether local or international, demand certainty in institutional arrangements. They want property rights, easy regulations, transparency and cooperative administration. That depends on impartial courts and a professional bureaucracy. Businesses also need highly skilled human capital and a healthy workforce.
Pakistan does not have a shortage of financial capital but is clearly short of institutional and social capital. Therefore, we now need to move beyond the slogan of political stability and talk more seriously about what really matters. This is where, unfortunately, we have seen failure of all types of regimes – be it democratic, military or hybrid.
Can a non-political and technocratic approach fix it, as recently argued by Atif Mian? I tend to disagree. A short-term possible path within the existing political economy, which seems to be emerging now, is open communication and collaboration between the government and the private corporate sector. The formation of eight working groups and their recommendations are good signs. I can mention three solid reforms which have been proposed and, in some cases, accepted.
The Export Development Surcharge, a useless nuisance of the last 30-odd years, a deduction of 0.25% on all exports, is now abolished. Another working group has proposed tax cuts reaching a total of Rs975 billion over the next two years. One group has recommended devaluation of the exchange rate as per the real effective exchange rate, which indicates that our exchange rate is overvalued by 4%.
These are not transformative measures and will not directly and immediately address the crisis of institutional and human capital shortage. However, these are solid and meaningful changes that we can appreciate.
In the long term, we need to embrace economic democracy. This is a leaf from the Indonesian constitution, and its recent economic growth story tells us that it has worked really well. Their high level of growth and FDI, and a per capita income already surpassing $5,000, is a great transformation.
Quoting the OECD (Organisation for Economic Co-operation and Development) note on the Indonesian model of economic democracy, "The regulation of the economic system in a country is inseparable from the national resource and asset ownership system, the resource allocation mechanism, and the mechanism for implementing the national production and distribution process. That economic democracy and business competition are two things that run smoothly and cannot be separated in economic life."
A sustained, informed, inclusive and transparent conversation on economic transformation has to start now. Pakistan will continue to experience political instability; however, we can evolve and achieve broad agreement on the economic roadmap, its direction and institutional design.
The writer is the founder and CEO of the Policy Research Institute of Market Economy