Archive for June 15th, 2009

Recently, media outlets have used the words “faltering,” “fragile,” and “bleak” to describe Pakistan’s economy. Below, contributor Bilquis, a consultant from Lahore, assesses the current situation and challenges the notion that former President Musharraf‘s greatest legacy was Pakistan’s economy:

People often consider that General Musharraf’s brilliant legacy was Pakistan’s booming economy. During his military tenure, most felt that our standards of living had improved: mobile phones in the hand of street vendors, multiplication of cars in every household, value of property tripling — made us all feel wealthier. The belief was further cemented by growth figures stated in the Economic Survey of Pakistan (2007-2008) that showed the economy grew by 7 percent per annum. These figures would suggest a vast improvement in standards of living, falling poverty ratios, stronger core economic sectors and a build up foreign reserves. However, post-Musharraf, the Pakistani economy is in an appalling state. The new government faces a totally opposite condition of the economy than would have been expected after a decade of 7 percent growth.

So, where is the brilliant economic legacy quoted by General Musharraf?

Many economists actually doubt the authenticity of these growth figures. Herald magazine (December 2008 issue) reports that Karamat Ali, executive director of the Pakistan Institute of Labour Education and Research, ‘believes that the official growth figures were often met with skepticism.’ With regards to the poverty level figures, Karamat Ali states, ‘In 2007, the Planning Commission’s chief economist was transferred when he refused to approve government’s claim that poverty level had been reduced by 10 percent from 33 to 23 percent. These figures were clear manipulation as according to the latest UN assessments, poverty has intensified to the extent that in over half the country, hunger stalks one-fifth of the population and malnutrition about two-fifths. In Dawn this month, Kaiser Bengali, reported, ‘The years 2000-2007 … composition of growth brought little solace to half the population and, in fact, misery for the bottom quarter.’

The current government was more upfront regarding the figures and blamed the previous government for not accounting for them appropriately. Ex-finance minister Naveed Qamar (PPP) accused them of not including the interest cost on government borrowing in the budget of 2007-2008. Furthermore, Rs 138 billion subsidies on petroleum products, Rs70 billion on account of non-payment to Wapda, and Rs 45 billion incurred on importing wheat, were all excluded from the budget 2007-2008. This meant that, in the budget 2007-2008, Pakistan understated its liabilities by more than Rs 253 billion and presented a better picture than actually was the case. Moreover, the impact of these omissions was felt in the following year budget 2008-2009, causing the haphazard finance ministry of the current government to frantically triple the electricity and oil prices to make ends meet.

Moreover, contrary to general perception, economic policies did not bring about any remarkable benefits for the whole economy; instead these policies were detrimental for long term economic growth.

To begin with, development and growth in an economy results in falling unemployment level. However, in Pakistan, this was not the case. Unemployment levels actually rose in some sectors. In the industrial sector, for example, unfavorable economic policies led to the closure of mills and subsequently high unemployment. Furthermore, reported Kaiser Bengali, “in the period when the agriculture sector grew by 1.5 percent and the banking sector grew by 30 percent ….. this was jobless growth. It was profit-centered and not wage-centered. It ensured that stock market indexes and corporate profits boomed but was meaningless for the people, who are now faced with the stark reality of unemployment and declining real wages. Of course, official labor force statistics have reported a decline in unemployment. That, however, is a product of blatant data manipulation that the previous regime had come to specialize in.”

With an expanding economy and money flowing in, following sensible economic policies result in building up reserves and decreasing a country’s debt level. In Pakistan, our debt levels rose dramatically between 1999 and 2008. If you sift through history, debt levels between 1947 and 1999 was Rs 2,946 billion. Conversely, if you look at the trend in the past ten years, the government borrowed so heavily that our debt level increased by Rs 2,749 billion to Rs 5,695 billion. Ultimately, it took the previous government eight years to bring up the debt to what was accumulated in over 50 years. Ishaq Dar (the first Finance Minister under the current regime) said in Nation that “those who claim to have broken the begging bowl have actually enlarged it…” High level of debt is not conducive for sustainable development as debt is a burden and has to be paid off. It suggests that Pakistan was living way beyond its means and needs to either expand its economy (which it was unable to do) or contract in future to bridge the gap (which is currently happening).

For sustainable economic growth, unless a country doesn’t have absolute advantage (a country has an absolute advantage over another country in the production of a good if it can produce that good more efficiently/cheaply) in a sector, policies should target all sectors. In Pakistan, we did not have an absolute advantage in the service sector as we were entering an internationally mature market. Also, the service sector boom was a consumer boom and it would not continue indefinitely. Hence, the approach of spuriously strengthening our service sector while neglecting other sectors was not a beneficial policy as it would not bring in long term benefits.

Moreover, if we look at the breakdown of real GDP by sector for the fiscal year 2007-2008— agriculture grew by 1.5 percent while the service sector grew by whopping 8.2 percent. Finance & Insurance, part of the service sector, grew by a massive 17 percent. The small growth in agriculture sector shows that hardly any policies were implemented to make the sector more competitive. Agriculture and manufacturing sectors employ a large amount of people. If strategic uncompetitive sectors are not improved through the right incentives and care, it can lead to massive closure of businesses and rise in unemployment within that sector. For instance, we have witnessed our neglected knitting and weaving industries collapse, resulting in the rise in unemployment within the lower income bracket.

The government’s blatant disregard of other sectors emphasize that contrary to popular belief, economic policies pursued were neither broad based nor sustainable. And the impact of growth was for a few, not for the masses as often implied.

Economists further argue that even with the world being in recession, if our agriculture and manufacturing sectors hadn’t been left in a dismal state, our economy would not have been in such a wretched condition. For example, although the economies of India and China have declined, they have done so at a lesser rate because local demand is fueling growth.

Finally, the policies pursued by Musharraf’s were free market and Pakistan rapidly liberalized its economy without protecting its core sectors. Although everyone advocates for the removal of barriers to trade (tariffs, quotas, etc.), in reality, countries protect their core industry. For example, the United States provides subsidies to its agricultural and steel industry, while Europe subsidizes its agricultural sector. India and China  were protectionist economies for the longest time and only after building a strong base did they liberalize. Unfortunately, the previous government did not strengthen core economic sectors. By liberalizing the economy, we inherently subjected our incompetent yet crucial sectors to failure. This again highlights that prudent and long-term policies were not pursued. Instead, these policies have exacerbated economic conditions and our industries witnessed a massive collapse.

Therefore, as evidence reveals, rather than implementing beneficial economic policies, it was obvious data manipulation and hullabaloo of executing good policies that built up the perception of a brilliant legacy. In reality, only the rich got richer while the poor got poorer.

The contribution is the sole opinion of the author and does not necessarily represent the opinion of CHUP. If you would like to contribute a piece to CHUP, please email Kalsoom at changinguppakistan[at]gmail[dot]com. Pieces should be no longer than 800 words please. For past contributions, click here.

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