Third world developing countries have always been susceptible to economic policies that have political consequences as also politics that impacts economy. The relationship between the satisfactions of people is directly linked to political policies affected by economics. When the satisfaction index drops, law and order is the fallout. The anarchy can then be used to attain political objectives by those who create it. Because countries are known to cede much more to economic compulsions than what they would in a war, such political economy provides invisible tools through which countries can be subverted.
Latin American countries provide many case studies. This is why I advocate Pakistan to study Latin American political economy marred by bad governance, corruption, coups and poverty. The tools to create such situations are provided by non-state actors like International financial institutions, banks, venture capitalists, cartels, multi nationals, political parties, regulators, autonomous authorities, speculators, NGOs, sanctions and the list keeps getting longer.
The 13 year nuclear sanctions on Pakistan were a blessing. Rather than strangulate the country, they stimulated home led growth, exports and import substitution. Growth, inflation and poverty lines remained in check while parallel economy grew to sustain lower middle and poor classes. The stimulus was not a result of government policies but a mechanism that evolved through needs boosting the irregular sector to survive through difficult times. The fact that it dwarfed the regular economy was a miracle. The agriculture and manufacturing sectors were providing the major indices of sustainable growth.
Political governments looking in obverse were unable to tap this potential. They accepted IMF interventions to address external balance of payments. International consumer manufacturers were aware that they were deprived a big share of dumping and could ultimately be overtaken by domestic led growth in Pakistan.
Devaluation to boost exports is an old argument that never delivered. Since 1947, the rupee has nosedived from a parity of 3 to a dollar to its present state at 116. Yet Pakistan’s exports in terms of GDP have remained static or below. Exports mean value addition and not raw materials. Successive governments in Pakistan have consistently discouraged value addition due to bad industrial, energy and taxation policies; a reason why Bangladesh, Thailand, Cambodia and Vietnam are far ahead in finished textiles than Pakistan; the major raw material producer. Devaluation resulting in corresponding increase in external debt, inflation and price hikes throughout the supply chain will never become a magic wand. So why take such a risk?
The question gets back to international consumer manufacturers. They produce because the world consumes. If the world does not consume, their economy will stagnate. Pakistan is a big market of consumer goods and by 1997 Pakistan was consuming far more than it was importing. The GDP was expanding by default. The sanctions were not working. International actors helped by political parties and Babus wanted to boost import oriented consumerism so as to dig Pakistan deeper in the quagmire of a debt trap. What followed were suffocated agriculture policies, promotion of imported GM seeds, discouragement of Pakistan’s very strong agriculture research sector, curbing of evolving livestock and dairy sectors, bad industrial policies and constant devaluations. Consumptive taxes began to dwarf direct taxes right through from 1997 to date. This ultimately suffocated the agriculture, manufacturing and irregular sectors who by producing less became bigger consumers. The import bills rose and rupee declined. Once the rupee declined, the external debt increased.
Post Panama, my two decades old argument that Economics Reforms Act 1992 was a manipulative act for money laundering proved true. International and national criticism of this Act was set aside. The policy bludgeoned. The seizure of foreign currency accounts in 1997 was meant to punish Pakistan for going nuclear. The dollar rupee parity at Rs 47 drove the local currency into a nose dive. The Industrial and manufacturing sector were never geared to boost exports.
Till 2000s, Water and Power Sector of Pakistan was the biggest consumer of foreign debts as much as 70% consumed on aimless feasibility studies. By early 90s, it had started to link with the IPPS. Slowly a new dynamic began to take shape in the form of non-hydro energy. The oil and gas sector stepped in. Reorganization of PSO in 2004 put all eggs in one basket. All regulators connected with all forms of energy were interlinked. Circular debt was born. The emphasis was on importing oil and gas and not developing indigenous reservoirs. The development of lignite coal energy in Thar has been constantly discouraged. Environmentalist Mafia has stepped up campaign against lignite without a hang of how it is refined.
This created a monster known as circular debt, an instrument effectively used in 2007 to bring Pakistan to knees. The government got weak and promptly negotiated an NRO. Now boosted by imported furnace oil, LNG and coal, this growing sector shall dictate the course of Pakistan’s economy and governance. Pakistan is hostage or so do Pakistan’s present economic managers reckon.
Consumerism in Pakistan went into an overkill beginning 2000. Credit cards and leasing began to grow exponentially. The stocks and property catapulted alternatively. Suddenly imported consumer items from a hand wash to a car became purchasable. Irregular manufacturing sector lost competitiveness and became a retailer of cheap imports. The auto manufacturing industry collapsed. Agriculture research came to a standstill. Dr. Zafar Altaf from Pakistan’s most innovative agriculture economist became a fugitive sought after by Nawaz Sharif.
Come 9/11 and the entire political economy changed. Sanctions were lifted and debt rescheduling came through. By 2002, overseas worker’s remittances jumped from $ 900 million to $ 4 billion. USA pumped billions in logistical support. The rupee appreciated from 65 to 57. In order to maintain the rupee parity State Bank opted to run out of sterilisation capacity. The government decided to devalue the rupee. The government deliberately ignored that in a trade deficit it must regard appreciation of domestic currency as a means for cheaper imports and import priorities. This included energy. The economy was strung for later manipulation.
To cause insult to injury, State Bank left Rs. 1 Trillion in the banking system. This equaled the entire long term savings of Pakistan from 1965. Banks’ profits in a single year jumped from Rs. 30 billion to Rs. 100 billion. With a throttle on consumptive taxes, Pakistan had been plunged into a vicious consumer cycle.
Economic hitmen occupy every sinew of Pakistan. They are well placed in businesses, cartels, bureaucracy, political parties and NGOs. It requires a high suction vacuum cleaner to plug them out. It’s a task easier said than done. This will be THE CHALLENGE for the next government.
The writer is a political economist and a television anchor person.