The fault lines in our economy

Shahid Mehmood outlines the constraints of Pakistan’s economy

The fault lines in our economy
'Fault lines’ is an oft-used phrase in academic discourse. Economics fault lines denote those weaknesses that can inflict substantial damage on an economy. Pakistan’s economy is no exception. As its economy goes through yet another tumultuous period, it is appropriate to analyse some of these fault lines which are different from trite observations like “we don’t have enough resources,” “Pakistan’s enemies don’t want it to become an economic power,”  and other such statements that one comes across in books and conversations.

Let us start by noting that Pakistan’s economic fortunes are closely tied to the fortunes of two major cities: Karachi and Lahore, but especially Karachi. If they suffer an adverse shock (like Karachi in the 1990s and the last decade), Pakistan’s economic fortunes tend to suffer as well. Since cities are engines of growth, another way of putting this is that Pakistan’s engines of growth are not diversified but rather concentrated.

Closely tied to the above is the way cities are governed. Pakistan’s cities are still run on colonial style management that is out of sync with modern day realities. It is shocking, for example, that only one individual (commissioner) can lord over the affairs of a city of more than 20 million people (Karachi). Similar is the case with other cities. This kind of management only begets difficulties. For example, continued horizontal expansion means that cities have expanded way beyond administrative capacities, implying added expenses on part of government in the future. Skyscrapers and high rises - a fundamental part of modern metropolises - are either absent or cover an abysmally low part of total land area in Pakistan’s major cities.
Sustained economic growth and real improvement in quality of life cannot exist without economic freedom. Moreover, economic growth cannot be fostered without an environment that guarantees freedom of voluntary exchange and limits harmful interventions

In a given fiscal year, hardly 15 percent of the total expenditure of the federal government is audited. That is because its audit setup is capacity constrained and compromised. Even audited expense comes to little use since those who mismanage money have a solid, legal platform in the form of Public Accounts Committee (PAC) to avoid punishment. The audit objections of a particular year are discussed after five years (on average) in PAC, and nothing comes of it. Individuals involved in mismanagement usually find a friendly politician in PAC to provide them legal cover, who themselves usually preside over audit of their own governments. On other occasions, officers from finance and accounts get themselves appointed in federal audit, thus pre-empting any mention of their misdeeds.

Public money, thus, is ripe for a heist. This assertion is backed by audit data. Between FY 2008-09 and 2017-18, a total of Rs31 trillion was audited, of which recovery was only Rs171 billion (0.55 percent). Surely, no country can live for long with such free riding.

Almost all policies are supply-centred, with little emphasis on the demand side. Three examples amply demonstrate this. Every government harps on the bandwagon of increasing electricity production. But none take efficiency standards of electric appliances seriously, or solve the serious shortcomings of distribution networks. Similarly, almost all the emphasis is upon increasing water supply through mega projects like dams. But there is little or no effort towards managing demand by pricing water efficiently, or using technology and pricing to avert water wastage. And then there is the oft-repeated mantra of increasing revenue, but there exists no vision about efficient spending of resources already at hand. Put another way, efficiency of capital is missing from the picture altogether.

Its economic planning and execution is in the hands of bureaucracy, courtiers and touts who look after keeping entrenched power centres happy. Finance ministers are either party or family loyalists, or imported from abroad. Economic policies are rarely based on ideas, research or data. In fact, these mainly tend to work towards strengthening the already formidable hold of rent-seeking classes.

Sustained economic growth and real improvement in quality of life cannot exist without economic freedom. Moreover, economic growth cannot be fostered without an environment that guarantees freedom of voluntary exchange and limits harmful interventions. Such a state of affairs, in turn, can only come about if a country has a robust justice dispensation system. Unfortunately, the system of provision of justice in Pakistan is in shambles. It is as much a fault of successive governments as of the judiciary, who make some ill-conceived decisions that have financial repercussions later (Rekodik penalty being one example).

Provincial finances and economic management reflect poor quality. Despite getting extra trillions after the 18th Amendment, provincial finances are in the red. Resources have either been badly mismanaged or siphoned off (Sindh and Balochistan), or have fallen prey to populist policies (Khyber Pakhtunkhwa and the Punjab). They are deep in debt, and their solutions to their financial problems can be bizarre. KP, for example, has increased the retirement age to 63 as a solution to its financial woes. This is music to the ears of babus, but not for millions of unemployed youth.

Arguably the most critical component of modern growth is the quality of human capital. Pakistan’s education system, however, churns out inferior labour supply rather than quality entrepreneurs and creative minds. It is all about increasing the number of schools and increasing enrolment, but quality enhancement is largely missing. In the end, millions of youth enter the labour force every year, mostly looking for a job rather than creating businesses that can create jobs.

Pakistan’s economic managers have yet to find a way to price the country’s resources properly. I mentioned water, which is available almost for free relative to its availability issues. Similarly, other natural resources (like natural gas) have been priced in a manner that incentivises waste rather than conservation. Take Balochistan’s natural gas from Sui as an example. For decades, all Pakistan used this source to propel its economic growth and consumption. Yet it was priced ridiculously low, thereby inviting waste. The end result is that Sui will now run out of gas within a decade (mind you, Balochistan didn’t have gas connections till 1984, at a time when the whole country was free-riding on gas supplied from it).

Pakistan’s economic managers and rulers are infatuated with the idea of increasing cemented structures. They see it as a sure sign of “progress.” Infrastructure under CPEC is the latest example of this. However, the fact is that Pakistan’s existing infrastructure is underutilised and there really arises little need to build new ones.

It is all about macroeconomic indicators and policies, with microeconomics getting little or no attention in policymaking and media. This one-sided view is propelled and peddled by the ‘baba brigade’ of Pakistani economists who tend to occupy social media. Barring few exceptions, this baba brigade is completely devoid of any new ideas and looks down upon others who challenge them.

Finally, there is the challenge of population growth, which is a serious issue when viewed through the overall mismanagement prism. Pakistanis take pro-creation business pretty seriously. Even if half of this seriousness were devoted to intellectual pursuits, civilized manners and culture, Pakistan could have been a different country altogether.

This is not an exhaustive list by any means. What I stated above, though, should be enough to inform the audience of the main challenges that Pakistan’s economy faces.

The writer is an economist

The writer is an economist. He tweets at @ShahidMohmand79