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Articles |
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It's time to change our economic
development paradigm
BY : MIAN ASIF SAID
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ARTICLE (February 01 2010): For the past 62 years, under the paternal care
of Bretton Woods institutions (WB and IMF), our economic planners have
ostensibly practised what is called the "Trickle Down Theory" of
development...a capitalistic model that envisages industrialisation in key
sectors of perceived international advantage in the hope that resultant
economic growth would eventually trickle down to the impoverished masses.
And what do we have to show for it? Let's briefly examine the evidence at
two levels, macro and micro.
Macro level:
-- With explosive population growth, we are now a 185 million multitude
(four times its number at partition), largely illiterate and without
economically employable professional skills; good for little else except as
exportable "grunt labour". Ironically enough, inward remittances of this
grunt labour at USD 750 million a month is now the bedrock of our economy,
far exceeding the value addition of our entire industrial sector. But, we
can scarcely claim this unintended consequence was planned by our economic
managers.
-- A spiralling USD 55 billion foreign debt (where did all that moll go?)
and a matching PKR 4.5 trillion domestic liability - a PKR 50,000 burden for
every man, woman, and child - a patently unserviceable overhang, unless we
can climb onto a sustained Chinese GDP growth trajectory of 10% per annum
for at least the next couple of decades;
-- A rapidly declining tax-to-GDP ratio that currently stands at 8.8%;
perhaps the lowest in the developing world. Could it be that we are loath to
pay taxes because we know they will be put to no good use?
-- Persistent twin deficits (fiscal and trade) that can only be sustained as
long as America stands in the breach as it has done, though historically,
only during periods of military rule (Ayub Khan, Zia-Ul-Haq, and Pervez
Musharraf) when large capital inflows supported conspicuous consumption
rather than investment. Each time, the resultant economic euphoria
evaporated as soon as the spigot was turned off by our ill-loved benefactor.
-- And at 2.5% of GDP, globally among the lowest rates of investment in
education and health, internationally recognised as the sine qua non for
sustained economic development.
The foregoing bleak macro model of economic management has been aggravated
by perpetually corrupt and inept governance, both civilian and military.
Consequently, the resultant outcome at the micro level is equally pathetic
as enumerated below:
Micro level:
-- A moribund textile sector that, having gobbled up billions of rupees in
subsidies (R&D handouts and export refinances) can't hold its own even
against late entrants like Bangladesh much less China and India;
-- An automotive sector unable to indigenously produce competitively priced
vehicles of international standards despite 40 years of indigenization
protected with stiff import barriers;
-- Fertilizer factories that can't produce enough urea and DAP sorely needed
by the country's backbone farming sector despite provision of precious
natural gas at throw-away prices; we'd probably be better served importing
the needful from SABIC (Saudi Arabian Basic Industries) and using our own
scant gas resources to fire our textiles and cement sectors.
-- Cement and sugar factories that, despite low-cost and abundant raw
materials gifted by nature (mountains of gypsum) and hardworking farmers
(sugarcane), rather than dominating global markets in their respective
segments, struggle to survive without price-gouging and cartelization;
-- A self-serving scandal-ridden Karachi based capital market (KSE) that
regularly scams small investors and was hard put to finance even half a
dozen IPO's last year;
-- An urban-centric banking sector that thrives only by scalping its
depositors and borrowers with the highest interest spreads in the world
while persistently spreading 75% of its credit among the same 600 odd
corporate borrowers, while resenting SBP directives to lend more than 5% (PKR
175 billion) of total credit to agriculture that represents the economy's
backbone;
-- A perpetually scandal-ridden 1930's Russian vintage steel mill unable to
produce even a million tons of steel billets at anywhere close to
competitive prices and unable to meet 10% of domestic needs; forget the fact
that all pricey steel products like coiled and flat steel have to be
imported anyway!
-- A bankrupt and continually deteriorating communication network of rail
and air travel that annually gobbles up hundreds of billions of subsidy
without a semblance of acceptable service; and
-- A water and power sector unable to meet the needs of the nation either
for adequate irrigation or for power even at unit costs that are double the
global average; and this in a country that is nature's cornucopia of hydel
and coal resources.
This state of affairs should convince the most cynical observer to conclude
that if we persist with our current practice and methodology of economic
management we shall soon be envying the likes of Somalia as beacons of
progress and prosperity. The latest WB report on South Asia says as much. In
it, Pakistan's GDP, having recorded an abysmal growth of 2% in 2008-09, is
expected to grow barely at 3-4% per annum for the next 3 years...the
erstwhile Hindu rate of Growth! India is expected to do more than twice as
well, while even Bangladesh will far outshine us. In short, despite expected
terrorism related assistance of over USD 10 billion over the next three
years along with matching incremental borrowings from WB/ADB/IMF hoisting
our foreign debt to USD 70 billion by 2014; we shall remain a "Basket Case".
To allay the fears of our economic planners, who shudder at the thought of
thumbing their noses at WB/IMF assistance, I draw their attention to the
recession in south-east Asian economies (Thailand, Indonesia, Malaysia,
Singapore, South Korea, and Hong Kong) back in 1997-98. It was then argued
that unless these economies deflated (raised interest rates, eliminated
fiscal deficits, and choked money supply) in line with the prescriptions of
IMF, they would collapse.
Mahatir Mohamed, then the PM of Malaysia, vehemently differed. He fixed the
country's exchange rate at 3.8 Malaysian ringgit to the USD, and with strict
capital controls, revived the economy without assistance from the Washington
institutions; his country fared much better than those that swallowed IMF's
medicine, much to the chagrin of speculators like George Soros, who had bet
heavily against the Ringgit and expected to clean up much like he did
earlier when he made a fortune betting against the British pound sterling.
Little wonder then that Mahatir was not very popular with the West.
Surveying chronologically closer events, if the WB/IMF programmes so
assiduously applied for Third World ills were such universal laws, why were
they not recommended to all the OECD countries immediately after their
sub-prime mortgage (real estate) bubbles burst in 2007? Instead of
restricting money supply and raising interest rates, why did their central
banks shovel out trillions of dollars to shore up their banks and bleeding
corporates while lowering discount rates to practically Zero? Why were the
champions of Laissez Faire happily nationalising their sick financial and
manufacturing companies? Because there is a fundamental difference between
the two sets of economies, ie the developing Vs the developed:
Whereas the developed world has over the last couple of centuries acquired a
vast capital infrastructure. I.e. the marginal return of capital is low. Its
economies are primarily kept afloat by consumption demand. Any faltering of
the latter can very quickly lead to deep recession or even depression. The
developing world, on the other hand, has no problem with pent up demand. It
has a surfeit of it. What it needs is continued high savings and
reinvestment to build its capital infrastructure that, in turn, underpins a
sustained high economic growth. In short, our economic policy needs to be
focused on supply management rather than demand suppression!
Unfortunately, the weak political government we have today seems to think
that our salvation again lies with IMF bromides that have actually made
matters worse in any number of countries that it has "assisted" in the past.
Consequently, we are today saddled with the highest interest rates in the
world, falling manufacturing output, and high unemployment...all recipes for
shrinking our economy to a "Stable and Sustainable" lower GDP growth
trajectory.
The answer to our current economic chaos is not continuation of Musharraf
era policies implemented by Ishrat Hussain and Shaukat Aziz (I hope they are
listening). Their version of development called for inflating consumption
with cheap consumer credit, fuelled by confiscatory domestic interest rate
spreads robbing distressed savers, to enrich the financial sector (banks and
KSE). Foreign debt, where not deployed for conspicuous consumption, was used
to build USD reserves, ie for funding America's burgeoning deficit. Clearly,
our economy would have been in much better shape had these wizards focused
on investing in infrastructure (schools, hospitals, dams, and cost effective
transport) and boosting agricultural production via better inputs financed
through mandatory credit and viable agri-industries leveraging off our
abundant dairy, fruit/vegetable, and cereal output.
Fundamental paradigm shift:
Endowed with abundant natural resources, but lacking the infrastructure,
institutions, and technology to rapidly industrialise, we need to forthwith
change our development model based on a Keynesian mindset designed for
developed economies. What we need is a strong dose of "supply side
economics". Quite clearly, given the pathetic state of our industrial sector
noted above, we have to look elsewhere. What we need are policies that focus
on promoting a high rate of domestic savings by single-mindedly boosting our
agricultural and agri-industrial output. Fiscal and monetary policies, in
turn, should be designed to promote investment in basic infrastructure,
education, health, and communications, which would not only assist the agri-sector,
but more importantly, set the stage for subsequent solidly based
industrialisation.
This is the road that was followed by China nearly 30 years ago. Had Cheng
Xiao Ping not emphasised an urgent quadrupling of the country's agricultural
output, the flood of small savings thus generated for later
industrialisation may never have materialised. Having debunked our current
economic model of development, I shall endeavour to outline my supply side
model of development, which is the crying need of our country. Its core is
agricultural development; a subject that I shall address in greater depth in
these columns in coming weeks and months.
Copyright Business Recorder, 2010
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