Rethinking structural adjustment

Reforms should bring the middle classes and the poor into the process of investment and high wage employment.

It is apparent that the post-election government will have to negotiate with the International Monetary Fund (IMF) to get some relief as pressures on the exchange rate become unbearable. It may be helpful to rethink the idea of “structural adjustment” to change the pattern of seeking recurrent bailouts from the IMF.

The IMF’s Structural Adjustment Programmes in the past have suffered from two conceptual flaws in the analytical framework within which these programmes were specified. First, the term “structure” was misconceived. The IMF’s notion of structure refers to the configuration of proximate constraints in the financial sphere. These include a budget deficit considered unsustainable and a balance of payments deficit bursting the ceiling within which exchange rate stability could be maintained. Now, the term “structure”, in my humble opinion, should be understood as the fundamental design features of the real economy, which determine the pace and pattern of economic growth. Second, adjustment in terms of this definition of structure would require addressing the weaknesses in the design of the real economy within a medium-term framework rather than simply trying to slash public expenditure and raising interest rates within a short-term perspective.

As a member of the Prime Minister’s Committee on Economic Policy in the first government of Mohtarma Benazir Bhutto in 1989, I had argued with the then managing director of the IMF that his proposed policy of public sector cuts and increasing interest rates would be counterproductive even for the objective of reducing the budget deficit. This is because such a policy would translate into reduced development expenditure and reduced private sector investment which would combine to slow down GDP growth. Consequently, a few years down the line, Pakistan would be placed in a double bind: slow GDP growth would reduce revenues and thus generate high budget deficits while, at the same time, we would suffer from increased poverty and deterioration in public service delivery. He countered that the IMF does “battlefield surgery” and economic growth was not the issue. We swallowed the bitter pill but tragically did not get cured: GDP growth fell sharply in the decade of the 1990s, poverty increased and high budget deficits reappeared. The same problem of slow growth, rising poverty, and high budget deficits emerged in the period of the latest IMF programme during the period 2008-13.

In view of Pakistan’s experience and indeed the world, another programme of economic contraction in the face of economic recession now would be indefensible. Instead, we need a new growth strategy. The Fund programme ought to be part of a home-grown medium-term policy strategy that addresses the structural roots of recurrent high fiscal and balance of payments deficits. Dr Nadeemul Haque at the Planning Commission, in his latest paper, has made a courageous and eminently sensible argument that the new Fund programme should combine stabilisation with economic growth within a framework of institutional reform. Perhaps the time has come for his framework for economic growth.

The economy is, indeed, in dire straits. With per capita income almost stagnant and a declining investment rate, it is not surprising that the incidence of poverty has increased to over 39 per cent, according to a Social Policy and Development Centre estimate. If we include unaccounted power sector liabilities, the budget deficit is over eight per cent. If we include forward buying by the State Bank of Pakistan (SBP) of $2.3 billion, then by June this year, Dr Haque estimates that the SBP reserves will be as low as $6 billion, which is only 1.5 months of imports.

Let us move out of this crisis within a strategy of growth and institutional reform. Reforms in the institutional structure should not merely release the spirit of entrepreneurship but should bring the middle classes and the poor into the process of investment and high wage employment. What we need is not only higher growth but a growth process in which the deprived sections of society, through their innovation and enterprise, can become the driving force of economic growth as well as the recipients of its fruits.

Published in The Express Tribune, April 29^th, 2013.