A widespread impression held by the public in Pakistan is that the country needs foreign aid to survive. But the better informed know that this is not correct. What makes the situation so tenuous is a lack of international currency. Since the country’s exports are less than half its imports, and the rupee is not accepted as an international currency, to buy goods from abroad and to repay foreign currency loans, Pakistan needs additional international currency. When there is talk of the risk of default, that is about not having sufficient international currency, as the country traditionally depends upon the dollar for foreign transactions.
Pakistan is in this debt cycle because of taking foreign currency loans to import, as well as even for some domestic projects – and then it imports even unnecessary and extravagant things! Once its exports, remittances and foreign investment are greater than its foreign currency requirements (to import, repay loans and repatriate profits on foreign investments), it will no longer be beholden to financing agencies. At present, since the country is indebted to international agencies, it is under the pressure of their ‘guidance’, such as not restricting unnecessary imports and not guiding its currency exchange value - which results in more loans and digs the country deeper into the predicament.
For decades, in Pakistan, economists and finance specialists have focused on interest rates, currency exchange rates, GDP growth rates, deficit rates, and such – short-term tinkering perhaps within their comfort zone, at the expense of focusing on the real economy. But this tinkering essentially just relates to financial levers that the government has. Pakistan’s real economy is its agriculture, industry and services. There is no mystery here: the country’s agriculture is highly inefficient, with low yields and quality not tailored to the export market, and what is being called industry and manufacturing is more often the assembly of imported parts and mostly internationally uncompetitive businesses, and services (e.g., wholesale, retail, hotels, transport, real estate business, telecommunications, IT, banks, insurance – here excluding public sector services) are mostly for domestic purpose – they do not attract much foreign investment (besides perhaps telecommunications) and have very low exports. To top it off, it can be argued that the country’s governance functions largely through cronyism, instead of on merit.
A peculiar perception has been created in Pakistan that business enterprise has to be given subsidies and concessions to motivate and incentivize them to undertake their business; especially for exporters.
The result is the dire condition of the economy and poverty amongst the majority of the people. When the real economy is in such a state of disarray, no economist has any hidden formula for progress. There is only one way - fix the real economy and progress will come. Under the current circumstances, technical specialists can tinker with financial levers as much as they want, to little effect. Media analysts, not knowing better, follow their lead and endlessly focus on these rates and percentages, detracting focus from the real economy and real long-term solutions.
A peculiar perception has been created in Pakistan that business enterprise has to be given subsidies and concessions to motivate and incentivize them to undertake their business; especially for exporters. And it seems that some businesses attempt to give the impression that national patriotism and uplift is their only goal. Not true. Profit earned in open and fair competition must remain the incentive and motivation for private business. If a business is running at a loss, let more competitive entrepreneurs take its place. It is wrong to give hard-earned taxpayer money to subsidize uncompetitive private businesses, which then keep the resulting profit and assets as their private wealth, while the citizens whose contributions were given as subsidies get nothing in return. Profit earned in competitive business (on a level playing field, at least domestically) must remain the reason and motivation for private business, not state concessions and subsidies.
Assembly of imported parts does not qualify as a mature manufacturing sector. Among other disadvantages, it raises imports (requiring spending scarce international currency). It means that as assembly rises, instead of imports going down, they also go up – such ‘manufacturing’ does not substitute imports (or create exports) it is a part of imports and during times of shortage of international currency its efficacy ought to be assessed. It needs to be kept in mind that for import-dependent countries, such GDP growth has a major negative side.
Similarly, as people in the industry understand, when textiles or other manufacturing uses imported materials (machinery and inputs), it means that if the rupee value is depreciated, exports do not rise as predicted since the cost of manufacturing also goes up, as a higher price has to be paid for the imported materials and machinery that go into manufacturing. So the assumption of elementary economics that a devaluation of the rupee will result in higher exports does not materialize, as the country is highly import-dependent for its manufacturing, apart from other issues such as producing low-end products. The answer is to make better quality, higher value-added, products whose sale does not depend on them being cheap or low-end (and very price sensitive); devaluation is not the answer. And the expertise required here is in business management not in economics or finance.
When textiles or other manufacturing uses imported materials (machinery and inputs), it means that if the rupee value is depreciated, exports do not rise as predicted since the cost of manufacturing also goes up, as a higher price has to be paid for the imported materials and machinery that go into manufacturing.
Many economic ‘experts’ are skeptical of encouraging trade in national currencies or arranging mutual direct exchange of goods. Such trade by mutual direct exchange is a means to encourage (or leave no other option) for international sellers to in-exchange buy some things from this country, which otherwise they are unlikely do to. It also means that the country ought to buy not from traditional sellers, but from those who agree to in-exchange purchase from it. That is what can make direct exchange (also called barter) trade, to the extent that it is possible to do, a better option for the country. Direct exchange trade does not necessarily mean an actual exchange of items, but it might be in the form of accepting payment in national currencies which can later be used to buy from each other.
More and more countries are beginning to realize that they can trade with each other directly without first having to somehow get hold of traditional international currency through loans and favors with conditions attached. However, many Western-trained economists find that difficult to assimilate with the established tenets of their field.
There is a misconception about the role of economists in Pakistan. “Economists have no special competence in determining what the objectives should be, but they can help in translating the objectives into a more operational form,” to quote M.S. Ahluwalia, former Director Evaluation IMF and Deputy Chairman Planning Commission of India. Education in economics is valuable for economic policymakers but by itself it is simply not sufficient. By training, economists support policymakers by presenting them with results of economic analysis, but that by itself is not sufficient to make policy. To give a crude illustration – China has achieved the fastest economic growth in world history, but most people have not heard of any Chinese economist, there is not a single Noble laureate in economics from China.
Then the question is what qualities are required in policymakers to address national development issues? They include: being intimately aware of the living conditions of the country’s people and their needs; understanding society’s core values and priorities; considerations such as fairness and equality; an analysis of interest groups and an understanding of the influence of socio-political institutions; clear long-term national goals and strategy; loyalty only to this country; deep knowledge and experience in one or more sectors, or in administration; being chosen by the people as their representative and not having any conflict of interest. Such policymakers ought to make decisions after considering the inputs from economists and other technical specialists.
While certainly invaluable in their fields, commercial bankers and accountants have little direct relevance to policy issues in national development.
Former staffers of IMF and multilateral financial institutions or development banks rarely have these qualities. Further, with a few worthy exceptions who might have a much broader perspective and experience, the former staffers of multilaterals are oriented to follow their given institutional policies and procedures. But equally worrisome is the potential conflict of interest. Those receiving a pension from international agencies or hoping for lucrative future assignments (revolving door system) from them have a clear potential conflict of interest. A few might conceivably be more loyal to their international employer, with the added prospect of settling in a developed country, rather than to a low-paying unstable Government of Pakistan. And while certainly invaluable in their fields, commercial bankers and accountants have little direct relevance to policy issues in national development.
Because India is doing so well in IT, with current annual exports of $190 billion, we are also capable of doing so is a common refrain. No, unfortunately -- our country’s educational foundation is very weak. We have drifted from (sometimes donor-led strategies) a focus on access to primary education to a focus on filling gaps in school infrastructure, to a focus primarily on the girl-child, to pushing PhD studies (on the climate crisis) and so on. In some educational institutions, there are many times more students enrolled in Urdu, Pakistan Studies and Islamiat than in Science subjects and Math. Educational content is crucial, it must not be overlooked, otherwise graduating students have no work prospects, and national development cannot go forward. Donor agencies have the liberty to focus on their global priorities in supporting education – on the flavor of the year or five years, but we do not have that liberty. We need to have very clear objectives, strategy and timeline to achieve the educational requirements for national development, and brook no ideological hindrance.
To reiterate from my earlier articles in Dawn, in Pakistan, while a few donor agencies usually work through the government, most agencies also sponsor projects themselves. International NGOs bring in their funds or implement donor agency projects. To illustrate, let’s say there are some 17-20 major donor agencies present in the country and perhaps 20 significant INGOs. Each of these might have many projects ongoing, and some projects may involve numerous national and local NGOs. Therefore, at a time, hundreds of projects/local partners can be working in diverse sectors under the guidance of these foreign agencies and INGOs.
This has meant that there has not been a single fully integrated development strategy or program for the country over the last few decades. Donor agencies and INGOs while formally sharing progress with the government, are in reality answerable to their external management. Such outsourcing of country priorities and development strategy and implementation goes against any recognized concept of management.
Pakistan’s defense budget can be affordable, even enhanced, provided the country can produce and export modern armaments to friendly countries.
When projects end, experienced and trained project staff are let go. There is a knock-on effect on government capacity, as its regular staff has missed out on that, not received any experience and training in program design, implementation and oversight. Institutional learning and memory are lost.
The right course would be for the country to make its own provincial and federal policies and strategies and then any willing friendly countries or funding institutions may pick up a portion of that, as it is, for their financial support only.
Till now, Pakistan’s defense expenditure has taken a substantial part of the budget, but it still cannot come close to the spending of a neighboring country. Pakistan’s defense budget can be affordable, even enhanced, provided the country can produce and export modern armaments to friendly countries. It is said that usually, militaries prepare for the last war, we must prepare for the wars of the near future, and export the surplus produced. In the foreseeable future, there will be heavy dependence on advanced air defenses, electronic warfare, hi-tech ISR (intelligence, surveillance, reconnaissance) linked to precision targeting, combined arms warfare with all elements interlinked through satellites and other means, intelligent armed and networked drones, long-range precision missiles and artillery, motorized mine laying, very long range over-the-horizon air attack capability, massive quantities of artillery ammunition and such. Pakistan could take up the challenge to produce a few such armaments (or some key components) and export them at premium prices.
The Way Out
Real and long-lasting progress will come from raising agricultural output to international standards, using existing methods.
Industry (not assembly of imported parts) and its exports, or else at least to the extent of reducing unaffordable imports – for example, manufacturing of public transport, railway equipment, agricultural machinery and storage, utility infrastructure, machinery for factories, and essential consumer items, like refrigerators must be developed through wise industrial policy. But not energy-hogging optional items like air conditioners and expensive personal cars. Professionally led mining and export of precious minerals at favorable prices must be a national priority. And domestic open competition with equal opportunity for all must be ensured, with an end to cronyism networks that dominate the status quo.
Support must be given to push the services sector such as IT to attract foreign investment, or else export abroad as much as possible. The necessary human resource must also be developed. Professional management of the overseas labor export, and a transition from unskilled labor to (higher paid, low turnover) skilled and highly skilled work must be managed.
Attempts must be made for fair and full (direct) income tax collection, including from large landholders and the services sector.
Imports ought to be restricted and kept within the limits of the country’s international currency earnings. The country has a right to only import in international currency as much as it has such currency to buy. No multilateral agency has a right to force the country to ‘open’ imports and do away with restrictions when Pakistan does not have the international currency to pay for such imports, and then it is forced to plead for more loans denominated in international currency.
There is a widely held belief in the general public that the country is poor because a few people have stolen all the money and taken it abroad. This is easily debunked by the facts.
Expenditures must be budgeted by national development priorities. Unnecessary spending must be cut – ‘unnecessary’ must be defined by the needs or measure of a country where the growth of one-third of the under-five population is now classified as stunted, due to malnutrition and frequent infections, and in the short term, cut low-priority items. Losses on state-owned enterprises have to be dealt with and eliminated by professional reorganization if and where still feasible, otherwise by outsourcing management to a minority shareholder or by transparent privatization.
Exports must be raised by selling items besides the country’s traditional exports (textiles, rice etc.), and with a focus on better quality products, not only low-end highly price-sensitive items. New export destinations must be found, especially among less developed countries, and as far as possible, mutual direct exchange trades must be prioritized, instead of buying with international currency.
Relevant and effective education, vocational training, and reasonable healthcare for all, and social protection for those in need are essential for real sustained economic development. The export of military equipment produced, to a level to at least offset the costs of military equipment that the country wants to import must be prioritized by the military leadership.
To be able to do all the above, it is crucial to get rid of governance by cronyism and instead strictly follow merit and fairness - financial corruption is just one result of cronyism.
There is a widely held belief in the general public that the country is poor because a few people have stolen all the money and taken it abroad. This is easily debunked by the facts. A quick Google search of Pakistani dollar billionaires (who have lived and earned in Pakistan, excluding those who migrated in youth and have built businesses abroad) shows that even the richest are estimated to be worth less than $4 billion – the numbers are unlikely to be accurate, but give some idea. The two richest politicians are estimated to be worth less than $2 billion each. Pakistan has yearly (gross) domestic production of more than $300bn. Therefore, emphatically, a few people have not taken away all the country’s money.
The bureaucracy still hasn’t realized they no longer represent a colonial occupier but were now supposed to provide a service to the people, not to speak of incompetence or corruption.
On the other hand, unjustified annual subsidies and concessions of an estimated Rs 2,660,000,000,000 (2.6 trillion, according to a UN report), to the corporate sector and banks, to big agricultural land owners, high-net-worth individuals, large traders and others get minimal airtime on the media.
Finally, people in the country constantly complain about corruption and in particular vilify the politicians. But that is misleading, the responsibility is spread all around. People related to sectors and entities with a problematic background ought not just to ignore that and constantly point to others.
Let us list some such sectors and people associated with them ought to ponder their own share of responsibility. The police – nothing more needs to be said; judiciary (including lawyers) – is totally dysfunctional and does not provide justice for the weak and hinders quick resolution of business disputes. The bureaucracy still hasn’t realized they no longer represent a colonial occupier but were now supposed to provide a service to the people, not to speak of incompetence or corruption. The electricity companies – they have a well-deserved awful reputation.
The corporate sector and banks are the biggest recipient of state concessions and subsidies, but it would be hard to argue that they deserve it the most. The military, with its role in grooming the vilified politicians, is also now the largest conglomerate of business entities in Pakistan. Manufacturers, who demand concessions and then mostly assemble imported parts contribute close to nothing to the economy’s productivity. Some leaders of industry occupy the positions they do not because of their innovation or efficiency, but due to being ‘insiders’ in the networks that matter. Large agricultural landowners make it impossible to levy direct income tax. High earning professionals hide their true income; the list goes on.
Media people often put forth the question of who is ready to take tough decisions. They refer to raising prices and indirect taxes, which impact the poor the most. So wrong!
Those who partake in such distribution of the spoils really shouldn’t protest too much. It is a sad state of affairs that most people who have some influence to make much needed reforms are the greatest beneficiaries of the dysfunction.
Then, prices are raised for electricity and petroleum products, and resultantly the masses endure inflation in the prices of food and household goods, on the premise that there is no other option, nothing else can be done. Gas prices are illustrative - in Pakistan, natural gas has been priced much higher in cylinder form, widely used by the poor, compared to piped gas supplied to where the rich live.
Media people often put forth the question of who is ready to take tough decisions. They refer to raising prices and indirect taxes, which impact the poor the most. So wrong! The real tough decisions are to impose justified income tax on large landholders, to make traders keep proper business records and pay their full shares of taxes, to remove all unjustified advantages for ‘insiders’ in the corporate sector, to make government service contingent on performance, to ease out the military from its diverse for-profit businesses and so on. That is the way to deliverance for the country.