As the economic indicators nose dive, conspiracy theories run galore: On how the Finance Minister’s only agenda is to deliver the IMF program; IMF negotiating with IMF; why Reza Baqir is an ‘economic hit man’ from Washington, etc.! Had I not known Reza personally, maybe I would have also bought into some of these stories. Anyway, keeping the certificates of patriotism aside for a moment to objectively analyse the current situation: The question, which arises here is that while surely there may not be any easy solutions in the short-term, but has this government, through its sheer inexperience and incompetence, in any way exacerbated the negative economic fallout facing the nation today? The reality is that this government unfortunately started on the wrong foot with its born-again finance minister, Asad Umar, looking for capitalist solution amidst socialist slogans! Such mixed signals never work. In a market economy confidence and perception play an important role, lose this and things simply roll out of control. Sadly the prime minister and his coterie of imported advisors and friends didn’t realize that economic governance has different requirements to mere populist street politics. Pakistani economy today faces uncertainties and pessimism over a series of “black swan” moments like an eroding Rupee (with no end in sight), rising interest rates, looming FATF threat and a diminishing economic activity largely created through this government’s own follies in spreading needless panic and fear amongst the real stakeholders. Now to counter this or to pull it back will require a sound medium to long-term strategy followed by some serious work on part of the government functionaries – mere rhetoric and blame game will not do.

The problem however is that the government’s resolve to look inwards rather than outwards and its understanding on what really is required to be done seems questionable. The distrust in its competence compounds if we take a cursory look at the past 9 months performance, which shows an over reliance on basic quick fix actions and those too being ordered through external dictates – any home grown vision on how the economy should ultimately evolve or take shame, appears to be unfortunately absent. The more one listens to our ruling politicians the more it becomes clear that they remain clueless on a clear road map going forward. One hears the same arguments over and over again on how the Rupee was overvalued, thereby hindering exports and encouraging imports; why the utility tariffs need to be abruptly raised; how additional taxes need to be imposed, etc., but not a word on an admission that while these measures may have been necessary owing to some poor previous policies, still these measures in themselves are not desirable policy actions. Instead we hear arguments defending these actions, on how devaluation is good for the country, how arbitrary tariff increases are the only solution to energy sector woes, why additional taxes remain the primary tool to collect more revenues, etc. The trouble is that unless a government’s guilt in unleashing high thresholds of pain on its people – like a devaluing currency or an escalating cost of capital or a shrinking disposable income of an individual - is somehow reflected in its daily public face, it can never go on to take the right decisions even in future nor can it gain its people’s trust. The shameless way in which some of these painful decisions are daily defended on the evening media talk shows is simply appalling.

Make no mistake that devaluations can never be a justification to sustainably address competitiveness or for that matter high interest rates – even if to control inflation – since a double digit discount rate can never be commensurate to achieving sustainable equitable growth and employment generation in an economy. More than eighty years ago, prominent Russian economist, Prof. Nikolai D. Kondratiev described and theoretically substantiated through his K-cycles theory the damage (excessively) high interest rates can cause to the long term prospects of an economy. His theory, simply put, explains that: Higher the cost of capital the longer it will take the next cycle of growth to arrive. Alarmingly a typical K-cycle puts this length (of an era of meaningful growth to re-arrive) to 45-60 years once interest rates enter into double digits. Ironically, the classic textbook job description of a head of a central bank or Federal Reserve calls for safeguarding national currency and taming inflation while promoting economic activity in the markets, as his/her principal responsibilities! Conceded that the tool of devaluation is sometimes selectively cum mildly used by governments to correct market imbalances or to restore short-term export competitiveness where one’s export markets have continuously worked on lower inflation rate than at home, still the long term solutions always lie in adjusting increased costs against productivity, innovation and value addition.

There exists no credible study or a real time example to prove that currency devaluation does indeed (sustainably) boosts exports – Asian tigers, China, Bangladesh and India, all have managed a surge in their exports during a stable currency period and not through any abrupt devaluation measures. In fact on the contrary, a WTO study (2008) points to a correlation between value addition and a stable currency environment. Amongst many other types of fallout, devaluation is invariably followed by a wave of inflationary pressures - especially in a current-account-deficit economy like Pakistan – and given that Pakistani exports in general are quite low on value addition, one needs to be careful in computing the trade-off between real gains in exports with other likely fall-outs. And as for devaluation as a primary tool to discourage imports in Pakistan, there are two main flaws with this theory: First, Pakistan’s surge in imports in recent years has largely been on the back of a consumption boom, which regrettably has mainly been serviced through imports rather than boosting our own home manufacturing – meaning, the solution lies at home, in ensuring to lift domestic manufacturing, and Second, modern day management science has developed many other preferable tools than devaluation to curb imports, so why not exhaust them first. The thing is that we have to start focusing from today on why and how we have landed in this situation, and what broader measures do we need to take to come out of this mess.

Mere quick fixes or cash injections will not be enough in the long run, since the overall current underlying industrial structure of the economy is no longer sustainable. Over the years the economy has either de-industrialized mainly affecting the SME (small and medium sized enterprises) sector OR has simply shifted to industries that either encourage import based consumption through policy breaks (a legacy of Shaukat Aziz with examples being those of the automobile industry, motorcycles assembly, home appliance assembly, etc.) or today have been reduced (from being icon sectors of Pakistan) to being ones that over the years due to corruption and weakening of oversight institutions (CCP, SECP, EDB, etc.) are primarily thriving on rent seeking (IPPs, Fertilizer, Sugar, Banking, etc.); thereby killing the very advantage Pakistan once enjoyed in these sectors. Automobile or motorcycle assembly, for example, has been a futile cum costly exercise, as they mainly operate on long standing subsidies allowed through import duty breaks.

Sadly, in all these years they have done scant little in achieving the desired deletion targets. In contrast, all over the world, such assembly plants are installed with permissions based on strict targets on exports and on achieving almost full indigenous manufacturing in the stipulated period. As an example, the Czech Republic produces as many as 1.50 million cars per annum and its next door neighbor, Slovakia, produces another 1.3 million cars per year, but more than 90% of these cars in both cases are meant for exports. In addition, between 80/90% deletion has already been achieved for foreign vehicles such as Volkswagen, Audi, Hyundai, BMW, Land Rover, and others. Likewise, the permission given to BMW by the Chinese government was on the condition that operational feasibility will be based on exports and an accelerated deletion program will be put in place (5 years) for the cars meant for the Chinese domestic market. In contrast, in Pakistan these subsidized import oriented industries not only add to a huge import bill, but also stoke many other issues such as negatively affecting the delicate trade-off between public and private transport preferences; environment and pollution; safety; distorted urbanization; and last but not least, enhanced household petrol consumption that otherwise could have been avoided - Oil imports as we know constitute the largest chunk of our imports. Another example is that of the thriving FMCG (Fast Moving Consumer Goods) sector in Pakistan that despite being in the country for decades, still works on average with approximately 40% to 60% imported inputs – now this would be unthinkable say in China or India!

So the challenge is not just to re-start the process of industrialization in the country, but (through visionary policymaking) to redraw the future industrial map in a way that a) places reliance on home grown industrial solutions in a competitive manner; b) encourages exports and replaces imports; and c) promotes the SME sector - the engine of growth and employment generation in any economy. Back in the 90s working with Dr. Bentzien of Detmold Institute, I was intrigued to find that how successive German governments consciously ensure funding to seek a minimum level (as high as) of 10% for start-ups every year and to retain an industrial share of around 30% for the Mittelstadt in its manufacturing economy – Mittelstadts, as we know is the primarily family owned SME sector of Germany and its real engine of growth, employment generation and exports since the 1950s – No wonder they succeed since the planning is so clear and precise. Needless to say for us to embark on this clichéd new beginning, the journey will be a slow, tedious and with a delicately timed process that entails due transition. Also, it will take some doing. Perhaps, to make it happen, it will be prudent to seek services of the Pakistani captains of business & industry, rather than relying on imported expertise having no real practical experience of the Pakistani manufacturing environment!