Take the crisis head-on: reshape Pakistan’s economic policy

Pakistan rupee has sunk to an all time low of Rs 85 to a dollar and it is still on the downward spiral.

Ordinary people, and not simply economists, are debating whether Pakistan’s economy can be prevented from an almighty crash. That is supposed to follow after the default on external payments some time in the spring of next year, which would put a stop to LCs being opened for import of goods. Pakistan rupee has sunk to an all time low of Rs 85 to a dollar and it is still on the downward spiral. The government deficit is running high. The fear is that the inflation rates may not be easy to bring under control.

It is relevant to ask: the ultimate disaster is for whom? The government and the rich folks who consume all manner of foreign goods including luxury goods and defence equipment will find it hard to get them. As for the common people, it is true that they cannot be benefited but it is a moot point whether their living standards can go down very sharply.

Import of foodgrains, machinery and industrial raw material and some agricultural inputs stand on a different footing; at first sight, they may not need the axe. But there will be a need to discourage the import of industrial goods, that can be fabricated at home. Indeed why should not basic industries be set up as a measure to reduce the import of machines and raw material? The same for the priority for importing food grains. Why can’t agriculture grow at two per cent above population growth?

The point is that the change from a military dictatorship to a supposedly democratic government, run by a supposedly left-of-the-centre party, PPP, has brought no real change. It is pursuing all, repeat all, the policies of the deposed military dictator General Pervez Musharraf. Even the economic team remains in place minus one official. What was the point of the Febuary 18 change? Anyhow, the possibility of a break down of the economy is the immediate threat.

The first problem is with the payments that have to be made for imports. This is a huge sum: over $ 40 billion. The net outflow of hard cash, is more than the total earnings of the economy. These payments cannot be unduly delayed. The second great evil has actually two sides: one side is the high fiscal deficit amounting close to eight per cent of the GDP and the second is the high inflation rates, led by a much higher food inflation rate.

The simple solution may be some harsh measures: cut the imports ruthlessly as can humanly be done, without hurting the import of productive machinery and necessary raw material. While these imports have to be protected at all costs, all the less vital imports have to be cut. This would save nearly half the cost of imports.

The government’s current expenditure too has to be cut. A great deal of government money is being spent on needless expenditure. The expenses have to be tested against a hard criterion: Are they really necessary for realising more taxes, discouraging or keeping lawlessness under control or reducing the crime rate or funding economy’s growth processes? These measures would be a good start.

There is need for import of foodgrains for the common man. Domestic production is not adequate for the needs of the country. Population growth rate continues to be much higher than what the government claims, not to mention the influence of mullahs who proclaim that human beings should not interfere with God’s will. The real challenge would be to increase agricultural production to meet the requirements.

Then, there is the mostly poor population. Half the population is under 30. All the persons above 18 and not employed are an army waiting to cause trouble. They have to be provided with jobs. That can only be done if economic development is oriented to create more employment. The need is to have a real base of producer industries. The government should enable the private enterprise to process food, fruit and vegetables. It is the state’s business to provide adequate infrastructure. The priority government activities ought to be concentrated on agriculture and industry. The services sector growth should continue under its own steam and the government has to find resources for increasing the expenditure on both education and health.

The culture of reliance on aid and foreign direct investments needs to be given up. The country is awash with black money and the evil of keeping a fortune abroad needs to be fought. The government must promote savings and austerity so that surplus money can be productively invested.

Good economic arguments can be adduced for these ideas: a lot of it would be in strict consonance with Keynesian thought. The government ought to be spending much more during slumps and recessions and spur demand. Of course Keynesianism has to be applied in a more nuanced manner in underdeveloped countries.

If a default cannot be avoided let it be faced with courage and imagination. This would do a lot of good to the country’s government and economists. They will learn more of economics from experience in rebuilding.