The economy is progressing but not on paper

Black economy, unaccounted for in national statistics, may be on the rise.


Humayon Dar April 15, 2012

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.

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COMMENTS (12)

Anonymous | 8 years ago | Reply | Recommend

@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."

Rameez | 8 years ago | Reply | Recommend

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.

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