Behold the ‘beauty’ of democracy: death by a thousand debts

[Jacob Martin]

I understand that. Hence it will be even more jarring of a change for the IMF loan repayments. I guess the exact impact would depend on how much the Pakistan debt is from the IMF w.r.t World Bank and other lenders that use GDP figures to base their loan repayment calculations. I've definitely read the impression that the World Bank is more forgiving and open to restructuring loan repayments in general....whereas the IMF is more the harsh taskmaster. A bit of the US vs EU mentality I guess.

It's all airy-fairy, I guess. Sample this gem from the IMF website about the difference in the purpose of the two institutions:

At Bretton Woods the international community assigned to the World Bank the aims implied in its formal name, the International Bank for Reconstruction and Development (IBRD), giving it primary responsibility for financing economic development. The Bank's first loans were extended during the late 1940s to finance the reconstruction of the war-ravaged economies of Western Europe. When these nations recovered some measure of economic self-sufficiency, the Bank turned its attention to assisting the world's poorer nations, known as developing countries, to which it has since the 1940s loaned more than $330 billion. The World Bank has one central purpose: to promote economic and social progress in developing countries by helping to raise productivity so that their people may live a better and fuller life.

Contrast that with IMF:

The international community assigned to the IMF a different purpose. In establishing the IMF, the world community was reacting to the unresolved financial problems instrumental in initiating and protracting the Great Depression of the 1930s: sudden, unpredictable variations in the exchange values of national currencies and a widespread disinclination among governments to allow their national currency to be exchanged for foreign currency. Set up as a voluntary and cooperative institution, the IMF attracts to its membership nations that are prepared, in a spirit of enlightened self-interest, to relinquish some measure of national sovereignty by abjuring practices injurious to the economic well-being of their fellow member nations.

Two things:

1. If the IMF's understanding of the remedy to the Great Depression was that the problem was solved by allowing free exchange of currency, I don't know what to say.

2. The World Bank's stated objective seems to be more in line with what is required for poorer countries. The Structural adjustment programme inflicted by IMF on poor countries to ensure fiscal discipline is not what they need. Fiscal profligacy is the last thing on the mind of countries where basic needs of people - education and healthcare, are not met.

So why do countries patronize the IMF is the question the, I guess. IMF is more suitable to middle income or high income countries that are currently suffering from a bout of fiscal mismanagement, like Greece. They did some good work with the Greek government, and were instrumental in exposing the atrocious mismanagement of the Greek economy. Countries like India and Pakistan should avoid the IMF like the plague.

 

[Nilgiri]

It's all airy-fairy, I guess. Sample this gem from the IMF website about the difference in the purpose of the two institutions:

At Bretton Woods the international community assigned to the World Bank the aims implied in its formal name, the International Bank for Reconstruction and Development (IBRD), giving it primary responsibility for financing economic development. The Bank's first loans were extended during the late 1940s to finance the reconstruction of the war-ravaged economies of Western Europe. When these nations recovered some measure of economic self-sufficiency, the Bank turned its attention to assisting the world's poorer nations, known as developing countries, to which it has since the 1940s loaned more than $330 billion. The World Bank has one central purpose: to promote economic and social progress in developing countries by helping to raise productivity so that their people may live a better and fuller life.

Contrast that with IMF:

The international community assigned to the IMF a different purpose. In establishing the IMF, the world community was reacting to the unresolved financial problems instrumental in initiating and protracting the Great Depression of the 1930s: sudden, unpredictable variations in the exchange values of national currencies and a widespread disinclination among governments to allow their national currency to be exchanged for foreign currency. Set up as a voluntary and cooperative institution, the IMF attracts to its membership nations that are prepared, in a spirit of enlightened self-interest, to relinquish some measure of national sovereignty by abjuring practices injurious to the economic well-being of their fellow member nations.

Two things:

1. If the IMF's understanding of the remedy to the Great Depression was that the problem was solved by allowing free exchange of currency, I don't know what to say.

2. The World Bank's stated objective seems to be more in line with what is required for poorer countries. The Structural adjustment programme inflicted by IMF on poor countries to ensure fiscal discipline is not what they need. Fiscal profligacy is the last thing on the mind of countries where basic needs of people - education and healthcare, are not met.

So why do countries patronize the IMF is the question the, I guess. IMF is more suitable to middle income or high income countries that are currently suffering from a bout of fiscal mismanagement, like Greece. They did some good work with the Greek government, and were instrumental in exposing the atrocious mismanagement of the Greek economy. Countries like India and Pakistan should avoid the IMF like the plague.

The ultimate irony is that the US is generally more "right wing" and Europe more "left wing" (in very broad economic context).....yet their premier lending agencies suggest otherwise. (I consider the IMF to be "European" since the MD is always from Europe). Its even more ironic given how Europe was uber reliant on the world bank-like American Marshall plan post-ww2 to get rolling again.

You are completely right about the IMF though. It must be avoided as much as possible by developing countries. But Pakistan seems to be very entrenched in business with them. Thats going to be bad news for them down the line.

The IMF engages in economics....for economics sake. World Bank sees economics as a means to an end. Therein lies the fundamental difference.

 

[Jacob Martin]

Does Pakistan use the GVA -based calculation like India rather than factory output sampling?

Methodology New Base 2005-06 | Pakistan Bureau of Statistics

It seems Pakistan has been using GVA since 2005-06. My guess is the IMF would refuse to accept Pakistani figures regarding baselines and meeting targets for eligibility of further tranches unless their recommendations are implemented.

 

[Nilgiri]

It seems Pakistan has been using GVA since 2005-06. My guess is the IMF would refuse to accept Pakistani figures regarding baselines and meeting targets for eligibility of further tranches unless their recommendations are implemented.

I think I'm going to give up trying to understand this stuff w.r.t what PBS tried to do here. The problem stems from their haphazard attempt at reform in bringing in the 2006 baseline +methodology and then withdrawing this after realising some numbers were not looking good (industrial production especially shrunk by some large amount apparently). They should have just gone with it and later changed the older data as needed when better numbers/coefficients/sample data became available. ...instead of putting up the white flag and reverting to 2000 base year again. Fear about retroactive punitive payments from IMF plus the real impression that direct cesses + industrial tax revenue didnt look strong enough to back the transition (on paper) may have influenced their decision....who knows.

Now its neither here nor there and there is no sense of solid coherence....and people were complaining about the India GVA + base year change!

Or do they have one set of calculations of GDP they release specifically to only the IMF with GVA + 2006 base year...but thats not used as the official GDP figure by them?

A friggin headache is what it is.

 

[Jacob Martin]

You are completely right about the IMF though. It must be avoided as much as possible by developing countries. But Pakistan seems to be very entrenched in business with them. Thats going to be bad news for them down the line.

The IMF engages in economics....for economics sake. World Bank sees economics as a means to an end. Therein lies the fundamental difference.

The thing with the IMF is, it treats governments like corporations. According to them, a government's books should always be balanced. That is just not feasible for developing countries as they need to invest in the social sector. Social sector spending is anathema to IMF, they treat it as money wasted. A standard Structural adjustment programme for distressed countries that they try to push across looks something like this:

1. Fiscal balance by reducing the deficit.
2. Deregulation of the economy.
3. Privatization.
4. Reduction of trade barriers.

The prescription differs slightly from one country to another. In the long term, there is nothing wrong in these policies per se; trouble is that they are often required to be implemented at breakneck speed that puts the economy in shock. Rapid loss of government jobs, extinction of entire sectors of the economy, and reduced expenditure on education, healthcare and social security for the poor cannot be good for countries like India and Pakistan.

IMF would like our governments to show profits. They behave in much the same way as Private equity firms and hedge funds. When these funds buy into a business, they start manipulating accounts in order to turn a profit in as short a period as possible. Jobs are shed, R&D outlay is slashed, promising future projects are shelved, assets are sold. All in an effort to make the books look good so that the business can then be palmed off to the next investor. These firms have played financial slash-and-burn for so long with the world economy that everyone seems to have internalized their methodologies. After all they do seem to create miracles. Just that more often than not, the companies they sell for huge profits are in distress shortly thereafter, due to obvious reasons. The IMF implements these same policies on individual countries.

I think I'm going to give up trying to understand this stuff w.r.t what PBS tried to do here. The problem stems from their haphazard attempt at reform in bringing in the 2006 baseline +methodology and then withdrawing this after realising some numbers were not looking good (industrial production especially shrunk by some large amount apparently). They should have just gone with it and later changed the older data as needed when better numbers/coefficients/sample data became available. ...instead of putting up the white flag and reverting to 2000 base year again. Fear about retroactive punitive payments from IMF plus the real impression that direct cesses + industrial tax revenue didnt look strong enough to back the transition (on paper) may have influenced their decision....who knows.

Now its neither here nor there and there is no sense of solid coherence....and people were complaining about the India GVA + base year change!

Or do they have one set of calculations of GDP they release specifically to only the IMF with GVA + 2006 base year...but thats not used as the official GDP figure by them?

A friggin headache is what it is.

Beats me...statistics is not my cup of tea. As far as the GDP figures though, I know one thing. The government releases the figures, and then IMF/World Bank/UN/CIA use their own deflators to arrive at a final figure.

 

[AnnoyingOrange]

India has about 50% of the debt....how come you don't write about that???? Why does EVERYTHING from Pakistan irk your passion to show your hatred? When your own country has issues as serious as Humans getting killed by Hindu fanatics who kill minorities because of what they EAT!!! Go solve this human resource fukkup that the Hindu terrorists have created, officially supported by the Indian government and Modi.

When India has 0 debt and the minorities live their in peace, then come comment on others. Living in a dirty, stinky house, your first goal is to clean up. Not stay in the filth and tell others about their mess!!!

And sadly, there are Pakistanis who, for personal issues and hatred, will take the bait and will "show themselves" off to the world readers in "true colors". How shameful, you guys make your country look bad in front of others!!

National Debt Tops $18 Trillion: Guess How Much You Owe?

Yaa.. and somethign about tolerance...'I'm Frightened': After Attacks in Paris, New York Muslims Cope With a Backlash
Does this remind you of some place?

 

[Nilgiri]

The thing with the IMF is, it treats governments like corporations. According to them, a government's books should always be balanced. That is just not feasible for developing countries as they need to invest in the social sector. Social sector spending is anathema to IMF, they treat it as money wasted. A standard Structural adjustment programme for distressed countries that they try to push across looks something like this:

1. Fiscal balance by reducing the deficit.
2. Deregulation of the economy.
3. Privatization.
4. Reduction of trade barriers.

The prescription differs slightly from one country to another. In the long term, there is nothing wrong in these policies per se; trouble is that they are often required to be implemented at breakneck speed that puts the economy in shock. Rapid loss of government jobs, extinction of entire sectors of the economy, and reduced expenditure on education, healthcare and social security for the poor cannot be good for countries like India and Pakistan.

IMF would like our governments to show profits. They behave in much the same way as Private equity firms and hedge funds. When these funds buy into a business, they start manipulating accounts in order to turn a profit in as short a period as possible. Jobs are shed, R&D outlay is slashed, promising future projects are shelved, assets are sold. All in an effort to make the books look good so that the business can then be palmed off to the next investor. These firms have played financial slash-and-burn for so long with the world economy that everyone seems to have internalized their methodologies. After all they do seem to create miracles. Just that more often than not, the companies they sell for huge profits are in distress shortly thereafter, due to obvious reasons. The IMF implements these same policies on individual countries.

Yah everyone knows how well it worked for Mexico. They still have a severely lopsided economy and horrible wealth distribution as a result.

 

[Jacob Martin]

Yah everyone knows how well it worked for Mexico. They still have a severely lopsided economy and horrible wealth distribution as a result.

Yup, Mexico was standard reading at University as exhibit A for Structural Adjustment. The problem with Pakistan is that the IMF is tightening the noose ever so slowly. They are well aware that Pakistan is not meeting most of the conditions set out for release of further tranches. But they are deliberately looking the other way. They want Pakistan to take the money and get into a situation where it cannot repay. A few billion dollars is chump change for buying up a the government of one of the largest countries in the world.

I am just stunned at how meekly the Pakistan government surrenders to the IMF. They seem to have no idea of how large they are as a country. I guess this is the price to be paid for isolating itself from the world economy - friendly terms with Japan alone would have met all their development assistance needs for the foreseeable future.

 

[Nilgiri]

Yup, Mexico was standard reading at University as exhibit A for Structural Adjustment.

Yeah I have an old paper I wrote on it somewhere gathering dust. I read about it as early as High School.

 

[Grevion]

Yup, Mexico was standard reading at University as exhibit A for Structural Adjustment. The problem with Pakistan is that the IMF is tightening the noose ever so slowly. They are well aware that Pakistan is not meeting most of the conditions set out for release of further tranches. But they are deliberately looking the other way. They want Pakistan to take the money and get into a situation where it cannot repay. A few billion dollars is chump change for buying up a the government of one of the largest countries in the world.

I am just stunned at how meekly the Pakistan government surrenders to the IMF. They seem to have no idea of how large they are as a country. I guess this is the price to be paid for isolating itself from the world economy - friendly terms with Japan alone would have met all their development assistance needs for the foreseeable future.

Yup. But don't you think that Pakistan right now is not considered a safe place to Invest by the world community. For Pakistan it has become a priority problem they have an energy crises but for them it is not as bigger as their huge security problems. They are fighting a war with Pakistani Taliban and much of their resources are draining up in that war and it leaves them with not much to invest back in their economy which the IMF want's them to do.

 

[mpk1988]

Great discussion between @Nilgiri, @Jacob Martin and @farhan_9909. Ofcourse, there was some trolling by a few of my countrymen and the false flagger who believes "Einstein created the light bulb" losing it like a baby (a classic btw).. but other than that it was very enjoyable.

 

[gambit]

The thing with the IMF is, it treats governments like corporations. According to them, a government's books should always be balanced. That is just not feasible for developing countries as they need to invest in the social sector. Social sector spending is anathema to IMF, they treat it as money wasted.

Just out of curiosity...What if governments behaves and leads countries like corporations ?

The way I see it, governments behaves in the same wide varieties like corporations. We have wise leaderships who maintains steady hands on the wheel thru successions of CEOs, then we have governments that were/are essentially kleptocracies, like the many African developing countries, that mirrors poorly led and managed corporations who eventually died bankrupted.

 

[Nilgiri]

Great discussion between @Nilgiri, @Jacob Martin and @farhan_9909. Ofcourse, there was some trolling by a few of my countrymen and the false flagger who believes "Einstein created the light bulb" losing it like a baby (a classic btw).. but other than that it was very enjoyable.

Yah jacob martin seems to be a kindred spirit. A brother from another mother Always great when he drops in for a chat.

Just out of curiosity...What if governments behaves and leads countries like corporations ?

It works with small and wealthy enough countries. Take the example of Singapore for instance.

Large countries become much harder to pul this off for a myriad of reasons.

The way I see it, governments behaves in the same wide varieties like corporations. We have wise leaderships who maintains steady hands on the wheel thru successions of CEOs, then we have governments that were/are essentially kleptocracies, like the many African developing countries, that mirrors poorly led and managed corporations who eventually died bankrupted.

There are parallels yes. But there are also tons of combinations. The African basket case is a very omnipresent stereotype.

But take the case of Nyerere's Tanzania. He was a relatively benevolent, forward thinking leader who espoused some very lofty ideals. The problem (as always) was the implementation of said ideas. At a fundamental level, a leader has to believe that the people are going to make the worst decisions, act selfishly and resist change.....and accomodate for this appropriately and find pragmatic work-arounds/life-hacks for the short term till the level of education itself reaches a certain threshold. If he believes the opposite, real bad things tend to happen.

This pragmatism is more what Suharto of Indonesia excelled at. He was quite conceited, power-hungry, corrupt guy. A kleptocracy if there ever was one. Pretty much the anti-thesis of Nyerere. Yet he suceeded in developing Indonesia to a very decent level unlike Tanzania under Nyerere which stagnated horribly for the most part. That's because Suharto knew how to use the corruption, knew how to wield power where required to get something done, and how to grease the right hands and deliver the right image to keep everyone satisfied......more out of self preservation than idealistic vision.

I am kind of exagerrating both these personalities, but its generally not a clear cut case in the world that kleptocracies fail and wise/strong legislature/rule of law deliver.

Wisdom is often judged in hindsight anyway.

So TL;DR the answer is (as always) it depends...and "luck" is often a big factor too!

 

[Jacob Martin]

Yup. But don't you think that Pakistan right now is not considered a safe place to Invest by the world community. For Pakistan it has become a priority problem they have an energy crises but for them it is not as bigger as their huge security problems. They are fighting a war with Pakistani Taliban and much of their resources are draining up in that war and it leaves them with not much to invest back in their economy which the IMF want's them to do.

A lot of Pakistan's problems arise out of lack of awareness. Not many voices speak out against government policies that are NOT going to benefit them in the long term. As you rightly said, the security environment in Pakistan is such that foreign investors are not willing to lock into the country through FDI. Seems the Pakistani government's solution to it is - never mind, we will borrow our way through. Money from abroad is no good if it can be withdrawn the next day in the face of a crisis. Mexico, as @Nilgiri mentioned, suffered from such devastating capital flight that the economy didn't recover for over a decade - some say it still hasn't. Malaysia, Thailand and South Korea suffered similarly in the 90s.

They learned their lessons; today, these countries neither welcome loans nor portfolio investment. They want FDI and technology transfer. Unless you make other countries stakeholders in your own well-being, they will withdraw capital at the first sign of trouble and that is the end of that. And yes, for that, you need security. Unless FATA, KPK, Balochistan and Karachi are safe places to do business, all Pakistan can look forward to are loans at 18% sovereign guarantee and selling bonds at 8.5% interest. The cost of servicing the finance they are raising is unsustainable in the medium term.

 

[Jacob Martin]

Just out of curiosity...What if governments behaves and leads countries like corporations ?

The way I see it, governments behaves in the same wide varieties like corporations. We have wise leaderships who maintains steady hands on the wheel thru successions of CEOs, then we have governments that were/are essentially kleptocracies, like the many African developing countries, that mirrors poorly led and managed corporations who eventually died bankrupted.

Hi,

Million dollar question, isn't it? Well, this is a very long debate to have. @Nilgiri has already responded to your question by way of a contrasting study of two countries. I would like to present some other dimensions:

In an ideal world, there would be nothing wrong in governments functioning like corporations. However, we don't live in an ideal world. The essence of fiscal management as prescribed by the IMF is to cut down on government spending to reduce the fiscal deficit and eventually eliminate it altogether. That may sound good in theory, but what actually happens is that when it comes to identifying "wasteful" government spending, those sections of the economy that do not wield influence in decision-making loose out. In country after country, fiscal tightening has meant reducing budget allocation for education, healthcare, and other critical sectors.

Now at this point, you might ask - so what is wrong in government privatizing these areas like many countries have? Firstly, primary services such as education and healthcare for the poor cannot, and will not, be provided by the private sector in poor countries. The government has to cover the cost, period. Secondly, the squeeze on public expenditure does not arise in a vacuum. It is almost invariably matched by taxation policy that disproportionately benefits the richest people in the country by lowering their taxes. The IMF is very clear that the government must be frugal. It has never suggested that any government increase taxes on the rich, as it believes that it will be counter-productive. Similarly, the IMF advocated increase in consumption-based indirect taxes rather than income tax, as it disproportionately benefits the 1% at the expense of the rest.

Look, one way to look at it would be to simply agree with what the IMF prescribes, as those who oppose Keynesian and/or development economics would do. Those who support Milton Friedman's free-market economics have wielded too much influence in Bretton Woods institutions. Some of what they support - deregulation, ease of doing business, rationalized taxation, free movement of capital etc are all desirable goals. But unfortunately, all too often, they become a trojan horse for vested interests to promote crony-capitalism, reverse transfer of wealth from the poor to the rich, and dismantling of the social sector and replace it with for-profit services for a few.

Of course, what I stated above would be merely the opening remarks in the broader discussion. The questions you need to ask are:

1. Do you believe that the government should spend more on incentivizing the rich or ensuring that vital services reach everyone?

2. Do you believe in Milton Friedman's free market, supply-side policies or John Meynard Keynes' demand-driven model where the government intervenes to ensure equitable outcomes?

3. Do you believe that in no circumstances can the government be allowed to run up deficits for sustained periods, or do you think that deficits are fine, as long as one is sure that the cause is a necessary one?

We can discuss these issues. Some of it may be outside the purview of this thread but nonetheless I think it is an interesting discussion to have.