Economic policies - Need to focus on the basics

The government just announced its trade policy a few days back and the monetary policy is to follow after a couple of weeks. As anticipated the trade policy hinges on the notion to generate economic activity through enhanced market access mainly in exports. Ironically, the policy comes across as being rather vague on how it plans to achieve this and what specific strategy it plans to implement to attain the growth it is looking for - Any announcement on textiles, the largest national sector, has been deferred for at least another week. While in general and gauging from the overall mindset of the trade policymakers they thankfully seem to be favouring enhanced trade and heightened economic activity in the year to come, but the same cannot be confidently said about the managers responsible for drafting the upcoming monetary policy. The government is still confused whether to lower interest rates or not and if yes, then to what extent, and then of course there is that on-going dilemma on should we even have a thinking process independent of the IMF? Regardless, care should be taken that trade and monetary policies do not end up being contradictory to each other because not only will this further confuse the stakeholders but also cement the perception in investors minds that our economic leadership lacks vision. Purists on laissez-faire believe that even extraordinary support or facilitation measures are in essence regarded as regulation and tend to advise governments on staying away from too much regulation when announcing their trade policies, i.e. either in form of trade controls or as explained, by artificially pushing for enhanced trade. Their argument simply being that even if markets are imperfect at times, regulators are more so. Not only are they human, they are also bureaucratic and subject to political influence. While the argument is very valid and agreed that more often than not regulations (which include subsidies, support measures, cash grants, rebates, etc.) of any kind should be kept to a bare minimum, we must remember that Pak economy is passing through a critical stage and the government at least in the near-term needs to take some extraordinary measures in order to enhance economic activity, boost exports and protect manufacturing (Pakistans competitive rating has already declined by nine points in 2009), even if this is tantamount to moving away from the free-market principles. Further, three basic principles should always be kept in mind when announcing market related policies. First, since markets in the real world cannot be left on an autopilot, the policymakers must accept responsibility for failures and under performance. Understandable that they do not have a crystal ball to gaze through to be sure on future results, but such a responsibility they must accept even if they know that they are bound to go wrong on certain counts. Such an accountability will not only oblige them to remain vigilant on market feedback, but will also make them act promptly to continually re-calibrate and correct their mistakes. Secondly, to control inflation, it is not enough to control the money supply; we must also control the availability of credit. This in turn leads to greater challenges like fair shares between the private and public sectors of the available credit and the risk of wasted investment cum productive growth potential due to non-availability of adequate cum timely credit. Therefore, the key here is to acknowledge that this cannot be done with monetary tools alone and a thorough review of the supply side is necessary. Only after ascertaining the true nature of inflation and by separating its impact on a sector-by-sector basis we can determine which tool and strategy to use in taming specific inflation types in different sectors - Horses for Courses Third, we must re-define an equitable level of risk both for the financial institutions and their customers, meaning businesses, industry, savers, etc. We have seen unhealthy spreads (at times more than seven percent) given to the banks in the past and all it achieved was the erosion of national businesses as the banks profited at the expense of other economic activities and then the resulting complacency on the part of these profiteering financial institutions saw them wasting precious access to cheap funds (during the Shaukat Aziz era) by squandering them on non-productive consumerism. No wonder, that in spite of the boast of possessing one of the most developed banking sectors in the world our per capita savings rate still remains amongst the lowest not just globally but also regionally. Finally, to be able to meaningfully develop and prosper, our numerous ministries (finance, commerce, industries, labour and manpower, and privatisation) need to work in tandem; in fact why even have so many ministries in the first place? Talking about privatisation, after the present economic meltdown, there is now more and more talk about preserving ones family silver and to go down the selling route only and only if it (a) visibly benefits the institution itself (i.e. the company and not the government coffers) and (b) tangibly reduces poverty. In fact the word 'privatisation, in developing countries and especially in the ones where unemployment and poverty levels are high, and governments are cash strapped, is being regarded as a taboo. Prudence demand that the Privatisation Ministry should be wrapped altogether and in its place an independent/autonomous apex body consisting of management professionals be constituted that helps the government develop a mechanism to make these state enterprises sustainable by locking them into market practices through professional governing structures. God knows with a regularly devaluing Pak Rupee coupled with our continuously dwindling internal capacity, once sold we may never be in a position to recreate such entities - at least not in our lifetime

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