Bankers win battles, but lose the war

High growth in services can increase GDP, but not the desired employment levels in economies with large populations.

General (retd) Pervez Musharraf’s economic team essentially created a consumerist bubble that burst while he was still reigning supreme. This conclusion drawn by M Ziauddin (January 22), who was an economic reporter par excellence before reaching editorial heights, in his article “Musharraf”, prompted Shahzad Chaudhry to come to the defence of Shaukat Aziz in his article “The politics of economy” (January 25). The main point that was argued was that Shaukat Aziz’s financial background enabled him to understand what works for growth. At a time when the world is still grappling with the havoc wrought by the financials, their apology could only have emanated from an unlikely source.

Defining his background more specifically, Shaukat Aziz was into private banking, a secretive world of finance where anything goes. No wonder, he is associated with some of the worst speculative episodes in the history of the Karachi Stock Exchange. Shaukat Aziz’s plan was simple. Behind the suave facade was an artful dodger, who would fix a target and then manipulate the whole statistical system to show to a boss looking for legitimacy in economic performance that the target had been overachieved. GDP growth, poverty, employment, inflation and even specific prices in certain locations, were all subjected to creative accounting.

Ziauddin was right in saying that growth picked up only after the 9/11 bonanza. It was three per cent in the first three years of Musharraf’s rule. With net external inflows averaging four per cent of GDP from 2004-05 to 2007-08, growth also became higher. Ziauddin was spot on about consumerism as well. On the demand side, over 90 per cent of the growth between 2003-04 and 2007-08 resulted from consumption. On the supply side, over 54 per cent of the growth was contributed by the service sector. This consumption depended on unsustainable aid inflows and a loose monetary policy encouraging a leasing spree. Motor vehicle imports rose from $321 million to 1.4 billion, telecom — from being negligible to $2.5 billion — and luxury foods to around a billion dollars. Chaudhry is fascinated by the service sector as a trigger of growth, in this case, consumption based on finance. Only finance and insurance, out of the six subsectors included in the service sector, posted growth rates as high as 31 and 43 per cent in some years. As a result, the share of the subsector in GDP doubled from 3.1 per cent in 2000-01 to 6.3 per cent in 2007-08. The only other subsector that increased its share was social, community and personal services, from 9.3 to 10.6 per cent, reflecting the emergence of beauty parlours, private health and education. The bulk of the foreign direct investment was also in finance and telecommunication, mostly a change of ownership.

There is no doubt that the massive fiscal space was not used to restructure the economy. Chaudhry thinks the structure did change, but in favour of the service sector. He does not “think anyone else is hiring”. Structural change involves a declining share of agriculture in GDP and a rising share of manufacturing. The predominance of services is a post-industrial phenomenon. The explanation lies in job creation. Between 1999-2000 and 2007-08, agriculture’s share in jobs declined by 3.8 percentage points, which is how it should be with rising agricultural productivity. Despite its neglect, manufacturing increased its share in jobs by 1.5 percentage points. Decline in its share occurs at a certain level of maturity and expansion of human capital. Finance, despite massive growth, could increase its share in jobs by only 0.6 percentage points. High growth in services can raise GDP growth, but not the desired employment growth in economies with large populations. The trouble with bankers (and accountants) is that both mistake trees for the forest. Their plans win battles, but lose the war.

Published in The Express Tribune, January 31^st,  2014.

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