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Why Pakistan will go to the IMF again, and again and again

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Why Pakistan will go to the IMF again, and again and again
Shahrukh Wani Updated October 16, 2018


Former finance ministers Shaukat Tarin and Ishaq Dar with current Finance Minister Asad Umar.
Pakistan’s formula for economic growth is as flawed as it gets: borrow foreign currency-denominated loans, build some large-scale infrastructure, get a minor growth spurt in the process, and wait until this growth spurt fades so we can repeat the process again.

This is what the previous government did. And, the one before that. It could have worked if, while borrowing to build infrastructure, it did not ignore the underlying constraints to growth and productivity.

Because they did not do that, Pakistan has ended up with an increasing level of debt, a balance of payment crises, and a government struggling to keep the growth spurt going.

When these challenges become dire — Pakistan often ends up getting a loan by the International Monetary Fund (IMF).

This time, if we’re successful in persuading them which looks to be the case, will be the 22nd occasion we will be loaned capital by the fund since 1958.

And, if our public discourse and policies remain the same, we will without doubt keep knocking at IMF’s door every few years (or some other lender for that matter).



The logical argument made by analysts in Pakistan here is that the government needs to bring meaningful reforms to our economy.

So, in due course, we are in a fiscally sound enough condition that we not require bailouts like the ones we get from the IMF.

This is a perfectly accurate demand. But, it often masks the politicalcauses to our economic despair.

The problem with talking about the economy divorced from politics is that we end up with superficial reforms.

This is because any meaningful reforms are impossible if the political structure does not allow them.

For this to change, our public discourse needs to take a holistic overview of our institutions. This is a contribution to that end.


Digging deeper
Let me explain. Take the much talked about balance of payment crisis as an example.

The most direct culprits are lack of exports and the increasing cost of imports. Pakistan imports nearly twice as many products and services than it exports.

In turn, there are many causes for low exports, some are macroeconomic determinants. The unsound infatuation of the previous government with an appreciated rupee is an example of this.

Dig deeper, we are exposed to the fact that Pakistan has developed little comparative advantage over the years. Which means that we mostly export basic textiles, cotton and rice and other related products.

Most of them are low-value items in the global value chain, so we earn little revenue from exporting them, and are hence unable to cover our import bill.



Dig further, we find that even in products which we do export, we face structural problems  —  such as lack of capital, whether it is human or financial.

Hence, exporters struggle to grow, move up the value chain, compete with foreign firms, and boost productivity.

But, why is this? Why does Pakistan fail to provide an environment which is conducive to developing globally competitive enterprises?

There are many explanations here — but one persuasive thought is that our institutions do not create the set of incentives needed for the growth of a competitive market.

Instead, they encourage a reliance on state patronage even if it comes at the cost of the larger industrial growth.



Pakistan’s public discourse has been rather good at ignoring these underlying causes. The result of this has been that, whenever Pakistan has found itself in such crises, it has been able to get loans to sail, or crawl, through the crisis.

But, all those reasons why this crisis emerged in the first place will remain — waiting to fuel another crisis down the road.

It is like putting the fire out but not fixing the leaking gas socket in the basement.


What are institutions?
A good place to start is understanding what institutions are, and how they influence our collective behaviour.

Simply put, institutions are the ‘rules of the game’ as Douglas North popularly put it in his 1990 book.

Think about cricket — we have certain rules under which everyone plays the game. There has to be a fixed number of players, they have a number of balls to play with, and everyone has a consensus on how we determine which team wins.

Now, apply the intuition behind this analogy to the broader institutions which shape our daily life.

Like the rules which govern the game of cricket, we have humanly devised rules which govern our lives in a more consequential manner.



They can be formal which are written down, such as the laws of the land often codified in the constitution, or informal ones widely accepted by the population, such as kinship bonds.

These institutions are important because without them, society as we know it would collapse. But, these institutions differ from country to country, and a persuasive strand of economic literature argues that they are the key to understanding our development outcomes.

We can also split them between economic and political institutions. The former directly shape our economic incentives, such as ownership rights of property, and the latter determine the political structure, such as whether we’re a parliamentary democracy or not.

As a society, we decide which economic and political institutions to adopt, and these institutions shape much of our behaviour through shaping our incentives.

Incentives, any economist can tell you, are fundamental to understanding any society’s prosperity or lack thereof.


It’s not economics, stupid. It’s politics
The political institutions, I’d argue, are more important in determining our prosperity. As Acemoglu and Robinson argue, those who control the political power determine economic institutions.

So, if political power (which in turn determines the political institutions) is controlled by a small, extractive elite, they will set up economic institutions which benefit them, not the majority.

If the elite benefit from an economy underpinned by clientelism and patronage rather than a well-functioning competitive economy, they will choose the former.

It is important to remember that there is plenty of profit in poverty. It just happens to be controlled by few.

Now, look at Pakistan. Our political economy is defined by an embedded culture of rent-seeking and patronage.



This means we have a system which grants profits to certain players in our economy unfairly, hence undermining the central principle of efficient market allocation — fair competition — and creating a wrong set of incentives for businesses.

Our manufacturing sector is rife with examples of rent-seeking practices. For example, Pakistan’s automobile sector is dominated by a handful of Japanese manufacturers known for selling low-value cars while making a considerable profit.

Despite this, Pakistan provides them with extensive trade barriers to protect them from foreign competition. The recent finance bill (since amended) further shows the extent of their political patronage.

This is not by accident. Because Pakistan’s political power is controlled by an extractive elite, it has allowed for such political institutions to emerge which permit its government to provide these rents to certain car manufactures with immunity, even if this negatively impacts our shared prosperity.

Direct evidence of our political structure influencing economic outcomes comes from a paper by Asim Ijaz Khwaja and Atif Mian.

They show that politically connected firms in Pakistan receive loans from government banks in Pakistan at lower rates despite defaulting more than non-politically connected firms.

This is evidence of unaccountable political power translating into inefficient economic allocation.

Look at this from another angle. A large amount of economic history literature argues that one of the many reasons why some East Asian countries prospered in the second half of the 20th century was because of land reforms.

By undertaking substantial land reforms, these countries were not only to increase agricultural output but also raise living standards for their surplus labour, which, in the long run, subsidised their move towards industrialisation.

If land reforms are important for growth, would Pakistan ever adopt them in any meaningful way?



Despite attempts to do so, Pakistan has not gone through significant land reforms and over 10 million acres of land still remains under tenancy, while one estimate puts the average farm size in Pakistan at about six acres.

In South Korea, despite a significant increase in average farm size over the recent past, it still averages at about 3.5 acres (as of 2005).

Without making a deep dive into the history or merits of land reforms, if we agree for the sake of argument that more radical land reforms are needed in Pakistan — can we undertake such reforms when political power and institutions are so highly influenced by those who control large farm holdings?

In other words, if feudal lords control the political institutions, it shouldn’t be a surprise that economic outcomes will favour them.


To fix the economy, focus on the political discourse
What may seem to a passerby as a country which continues to choose poorly thought-out economic policies, sees rampant corruption and a failure to establish a productive industrial base, are in fact symptoms of the political institutional structure which benefits a narrow extractive governing elite at the cost of everyone else.

Our economic failure is a symptom of our collective political choices. Once we can allocate political power more fairly, we can make better economic outcomes.

Tweaking institutions at the margins does have some impact. Hence, the IMF’s stabilisation programme will provide some macroeconomic stability.



The stock market might recover, the fiscal deficit might get narrower. Taxes might increase a bit, so will inflation.

And, in due course, we will issue a statement saying goodbye to the IMF for few years. Before repeating the process again and again.

But, if the new government wants to break this cycle and make a sincere attempt at reforming Pakistan into some sort of an egalitarian, prosperous nation, it needs to start by looking at political power and the political institutions which rise from them, as they are the real constraints to our growth.

Even if it can make marginal changes on the economic front, they would not unlock the kind of transformative shift we need for widespread prosperity.



Shahrukh Wani is a graduate student at the London School of Economics and a researcher based at the International Growth Centre at the Blavatnik School of Government, Oxford. He tweets @ShahrukhWani

The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.
 

Indus Pakistan

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Why Pakistan will go to the IMF again, and again and again
Shahrukh Wani Updated October 16, 2018


Former finance ministers Shaukat Tarin and Ishaq Dar with current Finance Minister Asad Umar.
Pakistan’s formula for economic growth is as flawed as it gets: borrow foreign currency-denominated loans, build some large-scale infrastructure, get a minor growth spurt in the process, and wait until this growth spurt fades so we can repeat the process again.

This is what the previous government did. And, the one before that. It could have worked if, while borrowing to build infrastructure, it did not ignore the underlying constraints to growth and productivity.

Because they did not do that, Pakistan has ended up with an increasing level of debt, a balance of payment crises, and a government struggling to keep the growth spurt going.

When these challenges become dire — Pakistan often ends up getting a loan by the International Monetary Fund (IMF).

This time, if we’re successful in persuading them which looks to be the case, will be the 22nd occasion we will be loaned capital by the fund since 1958.

And, if our public discourse and policies remain the same, we will without doubt keep knocking at IMF’s door every few years (or some other lender for that matter).



The logical argument made by analysts in Pakistan here is that the government needs to bring meaningful reforms to our economy.

So, in due course, we are in a fiscally sound enough condition that we not require bailouts like the ones we get from the IMF.

This is a perfectly accurate demand. But, it often masks the politicalcauses to our economic despair.

The problem with talking about the economy divorced from politics is that we end up with superficial reforms.

This is because any meaningful reforms are impossible if the political structure does not allow them.

For this to change, our public discourse needs to take a holistic overview of our institutions. This is a contribution to that end.


Digging deeper
Let me explain. Take the much talked about balance of payment crisis as an example.

The most direct culprits are lack of exports and the increasing cost of imports. Pakistan imports nearly twice as many products and services than it exports.

In turn, there are many causes for low exports, some are macroeconomic determinants. The unsound infatuation of the previous government with an appreciated rupee is an example of this.

Dig deeper, we are exposed to the fact that Pakistan has developed little comparative advantage over the years. Which means that we mostly export basic textiles, cotton and rice and other related products.

Most of them are low-value items in the global value chain, so we earn little revenue from exporting them, and are hence unable to cover our import bill.



Dig further, we find that even in products which we do export, we face structural problems  —  such as lack of capital, whether it is human or financial.

Hence, exporters struggle to grow, move up the value chain, compete with foreign firms, and boost productivity.

But, why is this? Why does Pakistan fail to provide an environment which is conducive to developing globally competitive enterprises?

There are many explanations here — but one persuasive thought is that our institutions do not create the set of incentives needed for the growth of a competitive market.

Instead, they encourage a reliance on state patronage even if it comes at the cost of the larger industrial growth.



Pakistan’s public discourse has been rather good at ignoring these underlying causes. The result of this has been that, whenever Pakistan has found itself in such crises, it has been able to get loans to sail, or crawl, through the crisis.

But, all those reasons why this crisis emerged in the first place will remain — waiting to fuel another crisis down the road.

It is like putting the fire out but not fixing the leaking gas socket in the basement.


What are institutions?
A good place to start is understanding what institutions are, and how they influence our collective behaviour.

Simply put, institutions are the ‘rules of the game’ as Douglas North popularly put it in his 1990 book.

Think about cricket — we have certain rules under which everyone plays the game. There has to be a fixed number of players, they have a number of balls to play with, and everyone has a consensus on how we determine which team wins.

Now, apply the intuition behind this analogy to the broader institutions which shape our daily life.

Like the rules which govern the game of cricket, we have humanly devised rules which govern our lives in a more consequential manner.



They can be formal which are written down, such as the laws of the land often codified in the constitution, or informal ones widely accepted by the population, such as kinship bonds.

These institutions are important because without them, society as we know it would collapse. But, these institutions differ from country to country, and a persuasive strand of economic literature argues that they are the key to understanding our development outcomes.

We can also split them between economic and political institutions. The former directly shape our economic incentives, such as ownership rights of property, and the latter determine the political structure, such as whether we’re a parliamentary democracy or not.

As a society, we decide which economic and political institutions to adopt, and these institutions shape much of our behaviour through shaping our incentives.

Incentives, any economist can tell you, are fundamental to understanding any society’s prosperity or lack thereof.


It’s not economics, stupid. It’s politics
The political institutions, I’d argue, are more important in determining our prosperity. As Acemoglu and Robinson argue, those who control the political power determine economic institutions.

So, if political power (which in turn determines the political institutions) is controlled by a small, extractive elite, they will set up economic institutions which benefit them, not the majority.

If the elite benefit from an economy underpinned by clientelism and patronage rather than a well-functioning competitive economy, they will choose the former.

It is important to remember that there is plenty of profit in poverty. It just happens to be controlled by few.

Now, look at Pakistan. Our political economy is defined by an embedded culture of rent-seeking and patronage.



This means we have a system which grants profits to certain players in our economy unfairly, hence undermining the central principle of efficient market allocation — fair competition — and creating a wrong set of incentives for businesses.

Our manufacturing sector is rife with examples of rent-seeking practices. For example, Pakistan’s automobile sector is dominated by a handful of Japanese manufacturers known for selling low-value cars while making a considerable profit.

Despite this, Pakistan provides them with extensive trade barriers to protect them from foreign competition. The recent finance bill (since amended) further shows the extent of their political patronage.

This is not by accident. Because Pakistan’s political power is controlled by an extractive elite, it has allowed for such political institutions to emerge which permit its government to provide these rents to certain car manufactures with immunity, even if this negatively impacts our shared prosperity.

Direct evidence of our political structure influencing economic outcomes comes from a paper by Asim Ijaz Khwaja and Atif Mian.

They show that politically connected firms in Pakistan receive loans from government banks in Pakistan at lower rates despite defaulting more than non-politically connected firms.

This is evidence of unaccountable political power translating into inefficient economic allocation.

Look at this from another angle. A large amount of economic history literature argues that one of the many reasons why some East Asian countries prospered in the second half of the 20th century was because of land reforms.

By undertaking substantial land reforms, these countries were not only to increase agricultural output but also raise living standards for their surplus labour, which, in the long run, subsidised their move towards industrialisation.

If land reforms are important for growth, would Pakistan ever adopt them in any meaningful way?



Despite attempts to do so, Pakistan has not gone through significant land reforms and over 10 million acres of land still remains under tenancy, while one estimate puts the average farm size in Pakistan at about six acres.

In South Korea, despite a significant increase in average farm size over the recent past, it still averages at about 3.5 acres (as of 2005).

Without making a deep dive into the history or merits of land reforms, if we agree for the sake of argument that more radical land reforms are needed in Pakistan — can we undertake such reforms when political power and institutions are so highly influenced by those who control large farm holdings?

In other words, if feudal lords control the political institutions, it shouldn’t be a surprise that economic outcomes will favour them.


To fix the economy, focus on the political discourse
What may seem to a passerby as a country which continues to choose poorly thought-out economic policies, sees rampant corruption and a failure to establish a productive industrial base, are in fact symptoms of the political institutional structure which benefits a narrow extractive governing elite at the cost of everyone else.

Our economic failure is a symptom of our collective political choices. Once we can allocate political power more fairly, we can make better economic outcomes.

Tweaking institutions at the margins does have some impact. Hence, the IMF’s stabilisation programme will provide some macroeconomic stability.



The stock market might recover, the fiscal deficit might get narrower. Taxes might increase a bit, so will inflation.

And, in due course, we will issue a statement saying goodbye to the IMF for few years. Before repeating the process again and again.

But, if the new government wants to break this cycle and make a sincere attempt at reforming Pakistan into some sort of an egalitarian, prosperous nation, it needs to start by looking at political power and the political institutions which rise from them, as they are the real constraints to our growth.

Even if it can make marginal changes on the economic front, they would not unlock the kind of transformative shift we need for widespread prosperity.



Shahrukh Wani is a graduate student at the London School of Economics and a researcher based at the International Growth Centre at the Blavatnik School of Government, Oxford. He tweets @ShahrukhWani

The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.
Soloman, I very rarely agree with you and never agree with articles you post here but this is bullseye. Every Pakistani on PDF and beyond needs to read this. I have been saying for long time Pakistan has no real industry or real industrialists. All we have is rent seekers and patronage politics conjoined in a extractive monopoly. The only way this rickety structure has survived is by exporting people [ex-pat remittances] and borrowing money or pawning to geo-politics by getting grants from superpowers. The real economy can be summed as -

  • foreign remittances
  • loans/borrowing
  • grants for geo-political services

@Cybernetics
 

313ghazi

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Well of course if we do the same thing we did last time we'll end up in the same place. The solution is not hard, don't spend more than you earn, or alternatively earn more to at least match your spending.

How does a state earn money - you generate wealth. The key to that is job creation, setting up industries, businesses etc and then you tax that wealth (or income). You can of course sell resources, but you make more money and generate more wealth (or at least share the wealth amongst more people) if the raw products are processed into goods (and similarly if the raw human potential is provided as a service rather than just as labour).

Land reform, enough energy, training and education, infrastructure, tax reforms, ease of business, support for business etc, all this stuff supports the generation of wealth, but alone, without the intention to generate wealth - none of these reforms do anything.

The next question is, do we expect the state to generate wealth, or the awam? Personally I'd prefer a mix of both, right from high state involvement in key industries and national resources, through to minimial state involvement in the form of support hubs for other industries.
 

VCheng

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Soloman, I very rarely agree with you and never agree with articles you post here but this is bullseye. Every Pakistani on PDF and beyond needs to read this. I have been saying for long time Pakistan has no real industry or real industrialists. All we have is rent seekers and patronage politics conjoined in a extractive monopoly. The only way this rickety structure has survived is by exporting people [ex-pat remittances] and borrowing money or pawning to geo-politics by getting grants from superpowers. The real economy can be summed as -

  • foreign remittances
  • loans/borrowing
  • grants for geo-political services

@Cybernetics
Given the above, why did PTI promise so much in its election campaign, when there can be no real plan to change patronage politics and extractive monopolies? Just to get elected? If not, then where is any viable plan to change any of that?
 

313ghazi

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Given the above, why did PTI promise so much in its election campaign, when there can be no real plan to change patronage politics and extractive monopolies? Just to get elected? If not, then where is any viable plan to change any of that?
Surely this isn't the first election campaign you've ever focused on. The Pakistan it was the first eleciton campaign anyone mentioned a manifesto but you live in the US, surely you've seen the way it works there. Huge promises, quite backtracking and lots of noise to cause confusion until the next election.

This is why I dislike democracy as we know it - it's a popularity contest and everyone loses sight of the facts. I can assure you in 5 years time, the only thing people will be talking about is the next set of promises, rather than the ones that weren't delivered.

In answer to your next question: so why support PTI, aren't they the same as the rest?

We hope they're not. They are a political party and they won't deliver everything they promised, let alone everything we need, but we hope they will deliver as much as they can - and they won't skim x% off the top whilst doing it.
 

Quwa

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Given the above, why did PTI promise so much in its election campaign, when there can be no real plan to change patronage politics and extractive monopolies? Just to get elected? If not, then where is any viable plan to change any of that?
Best case, they probably figured that once they get in, they can do anything (and everything).
 

war&peace

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Soloman, I very rarely agree with you and never agree with articles you post here but this is bullseye. Every Pakistani on PDF and beyond needs to read this. I have been saying for long time Pakistan has no real industry or real industrialists. All we have is rent seekers and patronage politics conjoined in a extractive monopoly. The only way this rickety structure has survived is by exporting people [ex-pat remittances] and borrowing money or pawning to geo-politics by getting grants from superpowers. The real economy can be summed as -

  • foreign remittances
  • loans/borrowing
  • grants for geo-political services

@Cybernetics
I didn't read the article but I did your post and I objectively disagree because simply you are not aware. There are great industrialists in Pakistan and some of them are related to me. However, govt's policies have often been very anti-industry. First major strike against the industrialisation was done by Zulfiqar Ali Bhutto through his stupid nationalisation and I rate that as a bigger disaster than the cessation of Dhaka.

Then during Zia's time the main focus was the Afghan war and he relied on the aid but industry did start to take a foothold again in the country. But the musical chair played by BB and NS effectively stopped industrialisation. The political instability and constant reversal of policies by the two, bankrupted many industries and destroyed the confidence of industrialist. For example, Gaddon Amazai was made an industrial zone by BB with tax holidays and subsidies so a lot of industrial growth happened in that area but NS reversed it and so all those industries became unprofitable and filed bankruptcies. Then BB shackled the nation with extremely expensive IPPs as she and her husband took their cuts for the deals and bought multimillion dollar properties in Europe. Still there are a lot of great industrialists and Abdur Razzaq Dawood is the ex-chairman of Descon that carries some of the biggest construction projects in the middle-east.
P. Musharraf time industry started to grow again but the terrorism started in the country but still industry grew. However, again PPP came into power and started its anti-industry policies. NS govt was not any better either.. but I hope the industry will start to grow now as this govt has provided a good rate for gas to the industry and thus many closed industries have already started to work again.
 
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M. Sarmad

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Given the above, why did PTI promise so much in its election campaign, when there can be no real plan to change patronage politics and extractive monopolies? Just to get elected? If not, then where is any viable plan to change any of that?
Election campaign slogans and Campaign taglines only rarely live beyond elections.
"Naya Pakistan" reminds me of "Naya Qanoon" by Saadat Hassan Manto ..
 

bananarepublic

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Given the above, why did PTI promise so much in its election campaign, when there can be no real plan to change patronage politics and extractive monopolies? Just to get elected? If not, then where is any viable plan to change any of that?
frankly i laughed when they announced the 50 lakh housing project which was just a clear show so that the people would steer away from the imf fiasco.
i dont see any immediate reforms in our government unless IK has the balls to do so
nor i see the people of Pakistan accepting such reforms as our people will try to cling to every bit of jahiliat for their own profit.

I didn't read the article but I did your post and I objectively disagree because simply you are not aware. There are great industrialists in Pakistan and some of them are related to me. However, govt's policies has often been very anti-industry. First major strike against the industrialisation was done by Zulfiqar Ali Bhutto through his stupid nationalisation and I rate that as a bigger disaster than the cessation of Dhaka. Then during Zia's time the main focus was the Afghan war and he relied on the aide but industry did start to take a foothold again in the country. But the musical chair played by BB and NS effectively stopped industrialisation. The political instability and constant reversal of policies by the two bankrupted many industries and destroyed the confidence of industrialist. For example Gaddon Amazai was made an industrial zone by BB with tax holiday and subsidies so a lot of industrial growth happened in that area but NS reversed it and so all those industries became unprofitable and filed bankruptcies. Then BB shackled the nation with extremely IPPs as she and her husband took their cuts for the deals and bought multimillion dollar properties in Europe. Still there are a lot of great industrialists and Abdur Razzaq Dawood is the ex-chairman of Descon that carries some of the biggest construction projects in the middle-east.
P. Musharraf time industry started to grow again but the terrorism started in the country but still industry grew. However, again PPP came into power and started its anti-industry policies. NS govt was not any better either.. but I hope the industry will start to grow now as this govt has provided a good rate for gas to the industry and thus many closed industries have already started to work again.
we just need a good ruler (who will provide stability) not a revolutionist for 15 years Pakistan can do a lot if it has 15 years of internal stability.
 

VCheng

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Best case, they probably figured that once they get in, they can do anything (and everything).
Well, now they are in, in-charge and responsible for delivering on what they promised. Let us wish them luck and see how and how much of that they can actually deliver.

Election campaign slogans and Campaign taglines only rarely live beyond elections.
"Naya Pakistan" reminds me of "Naya Qanoon" by Saadat Hassan Manto ..
I have said many times, unpopularly of course, that naya Pakistan will be just like purana Pakistan.

In answer to your next question: so why support PTI, aren't they the same as the rest?

We hope they're not. They are a political party and they won't deliver everything they promised, let alone everything we need, but we hope they will deliver as much as they can - and they won't skim x% off the top whilst doing it.
Lots of luck to them. I hope they are able to actually achieve some real good, but I have my doubts, for many reasons based on evidence.
 

313ghazi

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Lots of luck to them. I hope they are able to actually achieve some real good, but I have my doubts, for many reasons based on evidence.
In a post election world we need to look at things objectively. PTI do not have an overwhelming majority neither is PTI full of revolutionaries. What our expectations are competence, patriotism, sticking to the law, and hopefully some out of the box thinking.

These are things our previous governments have lacked for the last 30 years. The last time anyone did out of the box thinking we had Kargil followed by an NRO. :(
 

Indus Pakistan

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Given the above, why did PTI promise so much in its election campaign, when there can be no real plan to change patronage politics and extractive monopolies? Just to get elected? If not, then where is any viable plan to change any of that?
You live in USA and I in UK. Every political party promises the stars. I have yet to see a manifesto which did the 'sell' with -

  • can't do that
  • won't do that
  • imposible to do that
That does not mean PTI can't do anything. Pakistan has problems that have built up over seven decades. To fix everything in 5 years is impossible. What we can expect is PTI to lay the groundwork for change - which thrn rolls in increments over time. Raise literacy standards and health etc A better educated and healthier Pakistan will go on to a better future.

I didn't read the article but I did your post and I objectively disagree because simply you are not aware. There are great industrialists in Pakistan and some of them are related to me. However, govt's policies have often been very anti-industry. First major strike against the industrialisation was done by Zulfiqar Ali Bhutto through his stupid nationalisation and I rate that as a bigger disaster than the cessation of Dhaka.

Then during Zia's time the main focus was the Afghan war and he relied on the aid but industry did start to take a foothold again in the country. But the musical chair played by BB and NS effectively stopped industrialisation. The political instability and constant reversal of policies by the two, bankrupted many industries and destroyed the confidence of industrialist. For example, Gaddon Amazai was made an industrial zone by BB with tax holidays and subsidies so a lot of industrial growth happened in that area but NS reversed it and so all those industries became unprofitable and filed bankruptcies. Then BB shackled the nation with extremely expensive IPPs as she and her husband took their cuts for the deals and bought multimillion dollar properties in Europe. Still there are a lot of great industrialists and Abdur Razzaq Dawood is the ex-chairman of Descon that carries some of the biggest construction projects in the middle-east.
P. Musharraf time industry started to grow again but the terrorism started in the country but still industry grew. However, again PPP came into power and started its anti-industry policies. NS govt was not any better either.. but I hope the industry will start to grow now as this govt has provided a good rate for gas to the industry and thus many closed industries have already started to work again.
No offence my friend but most of them are rent seekers feeding on patronage. I made a sweeping statement which stands. Industry in Pakistan is like Sahara desert. A few scattered oasis of green here and there in a vast expanse of sterile sand. You know how you can differantiate the rent seekers from real industrialists? The latter do not depend on the state and can operate on the international scene where the market is cut throat and you have no protection. Think of all those sport goods exporters of Sialkot. Yes I give them credit because they have even won world contracts like footbals with FIFA. But those are the 'oasis' in the desert. Pakistan is a 200 million country. Tell me where is our TATA? Where is our Reliance?

Tell me one Pakistani brand that I can go right now to purchase in my city?
 

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What our expectations are competence, patriotism, sticking to the law, and hopefully some out of the box thinking.

Those are good expectations, and certainly realizable, but unfortunately the economy works in hard facts like money. That will be how all the above will be judged, rightly or wrongly.

That does not mean PTI can't do anything. Pakistan has problems that have built up over seven decades. To fix everything in 5 years is impossible. What we can expect is PTI to lay the groundwork for change - which thrn rolls in increments over time. Raise literacy standards and health etc A better educated and healthier Pakistan will go on to a better future.
I understand that, and I agree too. But actual results will matter the most to the people, specially the swing voters, who tend to be fickle. I wish them luck in the stormy seas ahead. The ship of state will take on a lot of additional water with the bilge already full, and capsizing is simply NOT an option for anyone.
 

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Why Pakistan will go to the IMF again, and again and again
Shahrukh Wani Updated October 16, 2018


Former finance ministers Shaukat Tarin and Ishaq Dar with current Finance Minister Asad Umar.
Pakistan’s formula for economic growth is as flawed as it gets: borrow foreign currency-denominated loans, build some large-scale infrastructure, get a minor growth spurt in the process, and wait until this growth spurt fades so we can repeat the process again.

This is what the previous government did. And, the one before that. It could have worked if, while borrowing to build infrastructure, it did not ignore the underlying constraints to growth and productivity.

Because they did not do that, Pakistan has ended up with an increasing level of debt, a balance of payment crises, and a government struggling to keep the growth spurt going.

When these challenges become dire — Pakistan often ends up getting a loan by the International Monetary Fund (IMF).

This time, if we’re successful in persuading them which looks to be the case, will be the 22nd occasion we will be loaned capital by the fund since 1958.

And, if our public discourse and policies remain the same, we will without doubt keep knocking at IMF’s door every few years (or some other lender for that matter).



The logical argument made by analysts in Pakistan here is that the government needs to bring meaningful reforms to our economy.

So, in due course, we are in a fiscally sound enough condition that we not require bailouts like the ones we get from the IMF.

This is a perfectly accurate demand. But, it often masks the politicalcauses to our economic despair.

The problem with talking about the economy divorced from politics is that we end up with superficial reforms.

This is because any meaningful reforms are impossible if the political structure does not allow them.

For this to change, our public discourse needs to take a holistic overview of our institutions. This is a contribution to that end.


Digging deeper
Let me explain. Take the much talked about balance of payment crisis as an example.

The most direct culprits are lack of exports and the increasing cost of imports. Pakistan imports nearly twice as many products and services than it exports.

In turn, there are many causes for low exports, some are macroeconomic determinants. The unsound infatuation of the previous government with an appreciated rupee is an example of this.

Dig deeper, we are exposed to the fact that Pakistan has developed little comparative advantage over the years. Which means that we mostly export basic textiles, cotton and rice and other related products.

Most of them are low-value items in the global value chain, so we earn little revenue from exporting them, and are hence unable to cover our import bill.



Dig further, we find that even in products which we do export, we face structural problems  —  such as lack of capital, whether it is human or financial.

Hence, exporters struggle to grow, move up the value chain, compete with foreign firms, and boost productivity.

But, why is this? Why does Pakistan fail to provide an environment which is conducive to developing globally competitive enterprises?

There are many explanations here — but one persuasive thought is that our institutions do not create the set of incentives needed for the growth of a competitive market.

Instead, they encourage a reliance on state patronage even if it comes at the cost of the larger industrial growth.



Pakistan’s public discourse has been rather good at ignoring these underlying causes. The result of this has been that, whenever Pakistan has found itself in such crises, it has been able to get loans to sail, or crawl, through the crisis.

But, all those reasons why this crisis emerged in the first place will remain — waiting to fuel another crisis down the road.

It is like putting the fire out but not fixing the leaking gas socket in the basement.


What are institutions?
A good place to start is understanding what institutions are, and how they influence our collective behaviour.

Simply put, institutions are the ‘rules of the game’ as Douglas North popularly put it in his 1990 book.

Think about cricket — we have certain rules under which everyone plays the game. There has to be a fixed number of players, they have a number of balls to play with, and everyone has a consensus on how we determine which team wins.

Now, apply the intuition behind this analogy to the broader institutions which shape our daily life.

Like the rules which govern the game of cricket, we have humanly devised rules which govern our lives in a more consequential manner.



They can be formal which are written down, such as the laws of the land often codified in the constitution, or informal ones widely accepted by the population, such as kinship bonds.

These institutions are important because without them, society as we know it would collapse. But, these institutions differ from country to country, and a persuasive strand of economic literature argues that they are the key to understanding our development outcomes.

We can also split them between economic and political institutions. The former directly shape our economic incentives, such as ownership rights of property, and the latter determine the political structure, such as whether we’re a parliamentary democracy or not.

As a society, we decide which economic and political institutions to adopt, and these institutions shape much of our behaviour through shaping our incentives.

Incentives, any economist can tell you, are fundamental to understanding any society’s prosperity or lack thereof.


It’s not economics, stupid. It’s politics
The political institutions, I’d argue, are more important in determining our prosperity. As Acemoglu and Robinson argue, those who control the political power determine economic institutions.

So, if political power (which in turn determines the political institutions) is controlled by a small, extractive elite, they will set up economic institutions which benefit them, not the majority.

If the elite benefit from an economy underpinned by clientelism and patronage rather than a well-functioning competitive economy, they will choose the former.

It is important to remember that there is plenty of profit in poverty. It just happens to be controlled by few.

Now, look at Pakistan. Our political economy is defined by an embedded culture of rent-seeking and patronage.



This means we have a system which grants profits to certain players in our economy unfairly, hence undermining the central principle of efficient market allocation — fair competition — and creating a wrong set of incentives for businesses.

Our manufacturing sector is rife with examples of rent-seeking practices. For example, Pakistan’s automobile sector is dominated by a handful of Japanese manufacturers known for selling low-value cars while making a considerable profit.

Despite this, Pakistan provides them with extensive trade barriers to protect them from foreign competition. The recent finance bill (since amended) further shows the extent of their political patronage.

This is not by accident. Because Pakistan’s political power is controlled by an extractive elite, it has allowed for such political institutions to emerge which permit its government to provide these rents to certain car manufactures with immunity, even if this negatively impacts our shared prosperity.

Direct evidence of our political structure influencing economic outcomes comes from a paper by Asim Ijaz Khwaja and Atif Mian.

They show that politically connected firms in Pakistan receive loans from government banks in Pakistan at lower rates despite defaulting more than non-politically connected firms.

This is evidence of unaccountable political power translating into inefficient economic allocation.

Look at this from another angle. A large amount of economic history literature argues that one of the many reasons why some East Asian countries prospered in the second half of the 20th century was because of land reforms.

By undertaking substantial land reforms, these countries were not only to increase agricultural output but also raise living standards for their surplus labour, which, in the long run, subsidised their move towards industrialisation.

If land reforms are important for growth, would Pakistan ever adopt them in any meaningful way?



Despite attempts to do so, Pakistan has not gone through significant land reforms and over 10 million acres of land still remains under tenancy, while one estimate puts the average farm size in Pakistan at about six acres.

In South Korea, despite a significant increase in average farm size over the recent past, it still averages at about 3.5 acres (as of 2005).

Without making a deep dive into the history or merits of land reforms, if we agree for the sake of argument that more radical land reforms are needed in Pakistan — can we undertake such reforms when political power and institutions are so highly influenced by those who control large farm holdings?

In other words, if feudal lords control the political institutions, it shouldn’t be a surprise that economic outcomes will favour them.


To fix the economy, focus on the political discourse
What may seem to a passerby as a country which continues to choose poorly thought-out economic policies, sees rampant corruption and a failure to establish a productive industrial base, are in fact symptoms of the political institutional structure which benefits a narrow extractive governing elite at the cost of everyone else.

Our economic failure is a symptom of our collective political choices. Once we can allocate political power more fairly, we can make better economic outcomes.

Tweaking institutions at the margins does have some impact. Hence, the IMF’s stabilisation programme will provide some macroeconomic stability.



The stock market might recover, the fiscal deficit might get narrower. Taxes might increase a bit, so will inflation.

And, in due course, we will issue a statement saying goodbye to the IMF for few years. Before repeating the process again and again.

But, if the new government wants to break this cycle and make a sincere attempt at reforming Pakistan into some sort of an egalitarian, prosperous nation, it needs to start by looking at political power and the political institutions which rise from them, as they are the real constraints to our growth.

Even if it can make marginal changes on the economic front, they would not unlock the kind of transformative shift we need for widespread prosperity.



Shahrukh Wani is a graduate student at the London School of Economics and a researcher based at the International Growth Centre at the Blavatnik School of Government, Oxford. He tweets @ShahrukhWani

The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.
No shit sherlock, stating the obvious, if we keep on repeating the process, we will end up going to the IMF again and again. The new Government has revised its budget a lot more as seen in Punjab Assembly, shifting from the focus on infrastructure to a sharp focus on Human Development instead, and so is the ultimate narrative of the new Government different compared to previous.
 

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