Past lessons to solve financial crises

It is ironic that while the political games continue the country is going through an economic meltdown. Whereas it may be important for the institutions to clarify constitutional and legal issues, perhaps at this juncture it is more important to first grapple with the economy—with a looming default the survival of 220 million people is riding on it! Given the high debt burden (almost 30 percent of the total national revenues are consumed in debt servicing), a tanking growth, and punishing headline inflation at almost 40 percent, if the present economic policy framework is not reversed, real solutions may not be forthcoming. Regrettably, the recipes are not easy and if world economic history is anything to go by, then the solutions seem to be the ones that cannot easily be implemented by classical democratic political dispensations, which by their sheer design are necessitated by populist decision-making at the expense of national exchequer. The current situation of economic affairs depicts a Zambia-like situation back in the 80s and 90s where the central bank failed to take a clear position on the daily currency clearing rates (in particular imports) and the banks made hay while the country went down under. Sadly, one has dropped to this level when giving comparative examples of Pakistan and needless to say it is quite painful. Uncertainty rules the roost and the small business—always the real engine of growth and employment—are undergoing rapid closures. The interest rates, which for now bear no significant correlation to inflation, are unsustainable and the new taxation drives coercive, meaning if the entire mindset of the rulers does not change quickly, the very private sector’s will to invest in the country will simply fade. After all, it is not the junta that is responsible for the current economic impasse and it would be unfair to conveniently shift the entire burden of state mismanagement onto them, especially when they have not even been the main recipients of the amassed debt.
The trouble is that our economic managers in their policies are simply focused on the short-term (that is on today). We often hear from them about how some serious economic surgeries are needed for us to survive and then this rationale in turn becomes the underpinning of some rather draconian cum counterproductive policy decisions. Conceded that dire situations require difficult decisions, however, what the leadership perhaps needs to understand is that economic management neither works in isolation nor the policy frameworks can be compartmentalised—the short-term is invariably and inextricably linked to the long-term and there is no escaping the fall-out unless the two are launched in tandem and even more importantly unless they complement each other. What in essence is required is some serious soul searching on what went wrong that has brought us to this situation and what kind of a course correction is required for the Pakistani economy to become sustainable. There are no quick fixes here and the malaise collected over the last five decades cannot be wished away in a day. The requirement is to carefully assess wrong policy directions over the last 40 or 50 years and then re-design a fresh strategy that slowly but surely starts chipping away at the unwarranted mass haemorrhaging of productive investment and growth. For example, a few good areas to focus on would be,
a) To question whether a high-interest rate regime is in our favour or counterproductive to the long-term prospects of the country, especially in a quest to achieve that ideal blend of having the right mix between the small and large enterprises and the economy’s share between the public and private sectors? Some studies show us that between 1984 and 2020, the private sector share in the total national lending in Bangladesh grew from 14 percent to 52 percent, in India from 25 percent to 56 percent, whereas, in Pakistan, it reduced from almost 30 percent to 18 percent in the same period. As the capital moved from inefficient hands to efficient ones or vice versa, the results are there for everyone to see. b) Another question is what kind of a taxation environment do we want to see in our economy? Again, in Bangladesh and India the quest has been to distance the taxpayer from the state revenue collector, resort to zero-rating to encourage exports and to minimise corruption, and last but not least, to reduce tax slabs to induce potential taxpayers, we, unfortunately, have been going the other way with our pending tax reforms, resorting to super-tax, giving unbridled powers to the FBR and blindly imposing sales tax on our exports. Again, the results are there for everyone to see. c) Yet another sector that we need to revisit by asking the question: what kind of industry do we want in our country? The famous Tiger economies and now of-late China, India and Bangladesh have played a very clever hand by consciously allowing mainly the investment that can in-turn shore up national exports. In fact side by side, they also managed to keep a lid on unwanted imports. Classic examples are Japan, China, Malaysia and rather quite glaringly, India. The automobile sector in India is still to complete a 100 percent deletion program that requires collectively matching foreign currency outflows through the foreign currency inflows it is required to achieve. In Pakistan, it has instead been a worrying story of foreign car manufacturers having an unchecked market to themselves with no responsibility for helping the country’s external account. d) Likewise, there are many other fundamental questions that we have to ask ourselves to come up with economic policies that are in our self-interest, but another one that requires a mention here is on embarking on an emergency import substitution drive and the nature of the state’s role in fast-tracking it? We know how India undertook it back in the 70s and 80s, which helped them maintain an equilibrium once the economy was opened under Manmohan Singh.
Fortunately, while the research and data gathering and its deep analysis have become imperative to succeed in the modern-day management environment, at the same there have evolved several tools that help us in using lessons of the past to solve financial crises. For example, the Yale School of Management recently developed a New Bagehot Project, a comprehensive resource for financial crisis intervention. Launched in 2017, the New Bagehot Project looks to the past to expand the financial crisis-fighting playbook for future policymakers. Curated by experts, the online platform provides detailed analyses and practical lessons drawn from specific interventions implemented throughout a domestic history and then its comparatives around the world. One is sure that there are other such tools available in the market, but what is required is for the leadership to assemble a competent economic team, which not only digs deep to come out with the right solutions but also can subsequently set up operational structures to undertake their due implementation.

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