The road to growth

Musharraf’s creative national accountants messed up data to such an extent that now they themselves cannot read it.

Musharraf apologists are not giving up on a paint job for his la-la land. First, it was the declaration of victory over poverty. Having ‘eliminated’ the poor, they have now been justifying, nay glorifying, the conspicuous consumption and the rat race of keeping up with the Joneses — expressions laughed out of the window on the first day of a class in development economics. In a developing economy, it is the good old world of saving and investing, the class was told, and not the Keynesian world of promoting demand through cheap money for the output of the investment already made. A push in this direction created spurious growth or a bubble, which burst before the very eyes of Musharraf. In ignorance and much to the annoyance of consumer rights activists as well as marketing gurus, the game has been named consumerism. The ignorance did not stop here. Wonder of wonders, it was observed that consumption is the largest component of aggregate demand and, therefore, had to be the largest contributor to growth as well. Everywhere it is the largest component but growth in poor countries comes from consuming less (and saving more). One should be aware that in the national accounts of Pakistan, this largest component is the least known as well. It is treated as a residual of net exports, investment and government consumption. A preoccupation with the acquisition of consumer goods produced by overprotected industries was the direct result of cheap consumer credit. It also led to huge profits for banks. Growth was not only consumption led, it was also services-led. The former killed saving, the latter had low intensity of employment.

It was not all pure economics, though. Musharraf’s creative national accountants messed up the data to such an extent that now they themselves cannot read it properly. Fiscal year 2003-04; 2004-05, in which they achieved “historic GDP growth and poverty reduction”; and 2005-06 are full of idiosyncratic numbers. For instance, GDP growth in 2003-04 was an impressive 7.5 per cent. It was based on a more than doubling of growth in large scale manufacturing (18.1 per cent) in a single year! This was despite the fact that real total fixed investment declined by six per cent and investment in large-scale manufacturing by 4.6 per cent. With a decline of 2.2 percentage points of GDP in total fixed investment, growth could have come only from consumption! A Nobel Prize should have been awarded for this innovative formula of growth without investment. But wait, 2003-04 was adjusted to correct the base for the master stroke in 2004-05 when GDP growth resulting from creative accounting was shooting through the roof and into double digits. It was contained to nine per cent with great difficulty by showing a 13.5 per cent real increase in total fixed investment. Gross investment was jacked up by increasing, without any basis, the value of stocks by 7.3 per cent in real terms. Stocks do not change so rapidly. In 2003-07, this was changed with impunity.

In its composition, growth for 2004-05 had a number of maverick elements, the most disturbing being a growth of 42.9 per cent in finance and insurance, an indication of rapid ‘financialisation’ leading to premature deindustrialisation. Investment in Pakistan has never really recovered from the 1965 war. The peak reached in 1964-65 of around 25 per cent of GDP became the trough of 14 per cent by the time of the second war in 1971-72. There have been sporadic upsurges since but not a sustained path. The road to growth and poverty reduction is through investmentalism, not consumerism.

Published in The Express Tribune, November 11^th,  2011.