Talking business

Is economic policy forever doomed to be hostage to visceral sentiments? Listening to the rage surrounding the reformed general sales tax (RGST) legislation you would think the government is trying to introduce cannibalism.  It’s easy to forget that every government since 1990 has tried to implement the reforms contained in the RGST legislation, and faced the same opposition from the same quarters.

Politics aside, it’s worth considering some of the arguments presented against the bill.  Topping the list is the one asserting that the bill will fuel inflation. This is a tricky one to explain, or even reliably pronounce on.

For one, a large chunk of the exemptions that are being withdrawn are those that deal with agriculture inputs.  Since agri products are the mainstay of our food supply, and the main raw material for our largest manufacturing sector, there is clear concern that the imposition of this tax will be passed down the supply chain to end users.

The chief concern here is with the urban consumer, who is already weighed down with a sharp increase in food prices.  The voiceless urban consumer, who has any number of parties purportedly speaking on his or her behalf.

How does one explain to this voiceless, faceless urban consumer what the root causes of inflation in this country really are?  Parties vested in tax exemptions and cheap money, our speculator and rentier elites who claim to be industrialists, are trying to stoke the fears of the urban consumer by saying the new tax and high interest rates are to blame for the price hike and high unemployment.

This is as disingenuous an argument as they get.  The root causes of inflation in Pakistan have not been studied at all and it is not possible to pinpoint cost-push factors or fiscal overruns as the main cause.

The central bank insists the monetisation of the deficit is what is fuelling inflation, while industry insists that inflation is “cost-push” – meaning raising interest rates is not going to help stem it in any meaningful way.

No independent voice has yet pronounced on the matter, no weighty verdict exists on this crucial debate in economic management that has raged at least since 2004, when inflation reared its ugly head.

This ambiguity on a key question in our economic life is today is fuelling a lot of the firestorm of controversy that the RGST has ignited.  Granted it’s difficult to get the urban consumer interested in debates over the root causes of inflation.

The urban consumer only wants that he or she should pay less next time they go to the grocery store, not clarity on whether fiscal or cost-push factors are driving the inflation that is eating away his or her standard of living.

But a “consensus of the elders” is still necessary to get certain policy measures onto the government’s radar without igniting undue controversy, and it is the absence of such a consensus that is the root of the sound and fury surrounding the RGST legislation today.

To understand what this consensus of the elders is, think of what they once called “the Washington Consensus” – the term accidentally popularised by John Williams.  A set of policy measures had behind it the support of all the major economic institutions of the world, from the Federal Reserve Bank of the US, to the IMF, to the ECB and the World Bank.

With such a powerful consensus backing it up, the same set of policy proposals found their way into all prescriptive programs for the economic difficulties faced by developing countries.  The consensus itself was open to debate, and sure enough was hotly contested.  But so long as it remained, it provided certain stability to thinking on economic policy matters.

Today Pakistan needs stability in economic thinking.  The Washington Consensus may have come and gone, but no consensus has replaced it yet.  The question of the root causes of inflation is central to forming a new consensus on our economic policy.  On that question rests our future direction over fiscal and monetary policies.  Let this be one call to all our economic managers to do the needful to forge such a consensus.  May we please know what exactly are the root causes of inflation in this country?

The writer is Editor Business and Economic policy for Express News and Express 24/7

Published in The Express Tribune, November 29^th, 2010.