ESSEX: Pakistan is in the grips of a malignant paradox. Confusion abounds. In the one hand there have been year on year improvements in physical infrastructure. The bazaars are healthy with sounds of hustle and bustle of shoppers, restaurants are packed with gastronomic customers, and routine daily life is seemingly normal. However, on the other hand statistics are exposing doom and gloom and the national and international media are painting Pakistan as a basket case.
The ostensible signs of progress are blurred by the numbers and the grumblings of its people.
In this backdrop, Pakistan provides an excellent example of moral hazard and the free-rider problem. Everyone, from the president of the country to a common man on the street, is in the habit of complaining. The government complains against the “invisible hand” that is not allowing it to function properly; and the man on the street talks against corruption, inflation and load shedding. Businesses are complaining of the lack of trade and economic activity; and the farmers are not happy because of lack of output and whatever else they can think of complaining. While the “tried and tested” (from the main political politicians in the government and outside) are trying their best to please the populace, there are others from the “third option” who are raising slogans against the status quo.
Against this so-called doom and gloom, Karachi Stock Exchange (KSE) is flirting with the 14,000-point mark and not far away from the all-time highest level attained by KSE-100 index of 15,210.17 on April 1, 2008.
Pakistan’s textile sector continues to grow, with an expected bumper cotton crop of 15 million bales by the end of 2011-12 fiscal year. Textile exports are likely to further grow despite the on-going power shortages and electricity crisis. The health of the construction industry is reflected by the cement production in the country and the stellar performance of cement producers DG Khan Cement and Lucky Cement.
Despite all these good signs, GDP figures for the country are depressing, with an estimated growth rate of slightly over 3.5% for the current fiscal year. Why is this so?
While it is true that the country faces some genuine economic and political problems, the real reason for this paradoxical situation may very well be due to the rise in the black economy, which is unaccounted for and hence not reflected in the national statistics. When money can be seen in the market but not reflected in the national statistics, then one can only think of problems with the structure of the national accounts system. It can be argued that there is either fiddling with it or it is simply not used for some transactions. If this is true, then the people in political power are sharing the benefits of unaccounted growth with the businesses that are effectively paying less taxes by paying kickbacks, bribery and other corruption related money.
This moral problem has apparently trickled down to the masses. In current circumstances, no one is willing to accept that they are better off, giving rise to the free rider problem, whereby everyone from the wealthy to the poor alike are riding a ship but unwilling to pay the fare because in their opinion it is sinking.
If the above analysis is true (one should hope not), then the current leaders in the government are the smartest people on the planet, who have devised a governance system that is enriching everyone, especially the people in the government who are unwilling to acknowledge it, knowingly or unknowingly.
In this doom and gloom, one thing is certain, the country is progressing and prospering in a private way, resulting in weakened government institutions, which would ultimately give birth to a completely privatised economy. If this model succeeds, this will certainly be the first privatisation programme of its kind in the world, which unfortunately would not be emulated elsewhere for its obvious inherent moral hazard problem.
The writer is an economist and PhD from Cambridge University.
Published in The Express Tribune, April 16th, 2012.
COMMENTS (12)
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@khalsa
In a pure capitalist economy, the private sector would manage those sectors as well. There is an educational institute that is run be a friend and that has grown 10 folds in the last 10 years. School like those that are aimed at the middle/lower middle class are booming--and although they are nowhere near the scope of government schools and only exist in urban centers--I believe that an educational system without government is possible.
What about security? Some private guards are better trained than the police. Medical institutions? Check.
I think it's the mindset of the people we must change. You can blame all your problems on government. Hard work is something most people evade and justify their laziness by blaming either the government or "halaat."
Pakistani economy can be turned arond. Thar coal is unexplored area, it is one of the biggest coal reserve in the world (175 billion tones). The value is more than saudi arabia's oil. If we look across the border (India), who are having power problems to keep up with the demand and they are desprate for coal, im sure paksitan can export huge amount ot coal to india, which will certenly increase the income of sindh. Pakisntan also got oil and mineral reserves in B'chstan area, which at the moment is hard to extract due to instability of B'chstan. At the moment the total out put is about $210 billion (GDP, excluding informal sector), (compared to India close to 2 trillions). The biggest challenge is to encourage the informal sector to play its part in the economy, the government needs to come up with strict rules to collect tax from informal industry, which is not happening.
the informal economy makes people happy and calm down internal situation but this creates a bigger problem of weakened central govt who gets weaker year after year cutting its spending on essential sectros like education health and infra. the comments on this news supports my point that because of poor govt many of the able paksitanis have moved out the country to canada uk and usa. in the end its loss of pakistan- it losses monetarily and human resource wise too. just imagine though pakistanis are patriotic but again after 20 years they will be sitting in us, uk and canada while pakistan will be left with much poorer govt with no resources (whatever left will go to army) and a common man will be forced to steal electricity and taxes
I agree with the author. Everyone knows that everyone is evading tax except employees of Corporate & Govt. Sector. The dark side of this fact is that inflation is rising like bamboo and average suicide incidents per day due to financial problems for last 4-5 years are all time high. Why is this so? Yes, the economy is growing in fact faster than appearing in papers but the gulf between the haves and havenots is also widening. The size of poor class is increasing and the size of lower middle class is reducing. The income level of poor and lower middle classes is further detriorating.
Its hard to imagine where this situation is leading towards.
I am inclied to agree; the official numbers are under-stating what is going on. Manufacturing is only the tip of the iceberg. The real deal is what is happening to the SME sector, the real creator of jobs in the economy. I believe the data on the SME sector is pretty dated and there has been no fresh survey for decades. The are using fixed coefficients to estimate it's growth.
More money to the Govt means more money to the Army. Black economy is better than the alternative.
Not many analysts have written about it, so it remains to be seen how true this really is.
But, high population growth rate, low foreign investment, terrible violence all over Pakistan suggests this might not be that true.
The advantage is no one can say for sure the no one can disagree with it. Other factors suggest this view is not true.
@ Humyon dar
Despite all these good signs, GDP figures for the country are depressing, with an estimated growth rate of slightly over 3.5% for the current fiscal year. Why is this so?
If you can compare the statics of India vs Pakistan for the last few years, Pakistan seem to have gained few points on GDP vs India even though the Indian economy is 11 times larger and growing at a faster pace of 6% plus (even though the population ratio is 1:6).
My feeling is the Pakistan GDP needs to be further downgraded. It is right now bloated- not the real value. This cannot last very long, results of Musharraf era lies and figure fudging which seems to be going on even right now. Empty bravado is of no use.
Just because you find shops are full of customers and your stock marklet is booming makes no difference to GDPs. The reality is manufacturing- which is suffering in pakistan right now, mainly due to Karach unrest.
My grand-father (dada) was a taxi driver and my dad used to work from his bedroom after graduation from NED University. Now Mashallah say he has his own business and has been enable to provide education in Canada for my brother and I. This just shows if you are willing to put your blood and sweat into it you can achieve anything and the situation of the country will not be a hindrance in your progress.
To a large extend I agree with the writer, we have problems with the economy but a robust informal economy, better terms of trade in agriculture than any other times, a reasonable infrastructure (road network, communication), good natural resources base and more importantly major growing economies close to our door would provide impetus for economy to readjust and find its true comparative and competitive advantage. Mostly the vocal media who deals only with urban issues, and industrial voices from the past who were pampered with favors and subsidies bring every day this doom day scenario. Our economy is shaping up based on economic prices than distorted finical prices which has been the hall mark of rent seeking. Yes if we continue on this path and let it survive for few years, it would be a unique private sector driven model, very few country posses, only seen in Lebanon an economy so resilient to bounce back in hard times, where role of Government was so minimal.
Mahmood Ahmad, Islamabad based international consultant
This is true. My father, after being kicked out from the job is now serving as a middle man for trade between Iran and Dubai and other gulf states. Alhumdullilah, my dad has earned so much that my sister is now studying in London and i am studying in Canada.
Paper assets are nearing end. Good things Pakistan economy is based on actual assets & commodities, not toilet papers with government logos on it. Future looks bright if only US puppets leaders move out of the way.
The estimates of the size of Pakistan's underground economy vary from 30% to 50% of the official GDP of just over Rs. 18 trillion (US$200 billion). In a recent piece, Businessweek claims that the government is losing as much as Rs. 800 billion (US$9 billion) in taxes from the informal sector...nearly enough to wipe out Pakistan's current fiscal deficit.
In my view, there are two major problems that arise from the underground economy. First, the massive tax evasion fosters Pakistan's dependence on foreign aid which comes with strings attached and infringes of national sovereignty. Second, the widespread theft of electricity is largely responsible for the huge circular debt and the ongoing power shortages that affect all aspects of life and scare away investors. The sooner the government and the people realize the severe downsides of the underground economy, the better it will be for Pakistan.
http://www.riazhaq.com/2012/04/pak-consumer-boom-fuels-underground.html