Dr Ashfaque was the head of the Debt Office and his claims have always been countered by Dr Meekal Aziz Ahmed and a very objective view is held by Dr Ali Cheema. Dr Ashfaque defends the policies he initiated as flawless and does not even accept the smallest of failures.
Simplifying economic matters for the average person has extreme negative consequences and people tend to take things at face value without reading between the lines and observing if factors have been adjusted/twisted to give a better picture.
If I were to simplify accounts, (which is a crime but let's allow one exception) of the previous decade of superficial economic growth :
Consumption led growth is impossible to sustain and a completely wrong path for a developing country. While it promises radical urbanization, industrialization and economic diversification; it is in itself flawed for a developing nation has to produce rather than consume to move ahead.
But these issues are suited for academic debates rather than one-line-smug-smile-on-my-face comments. Objectivity is required when analyzing economies and it has never occurred that all economists agree on a certain mode of economic progress or they stop debating the effects of any policies.
On poverty numbers
Friday, November 06, 2009
On poverty numbers
I am aware that some of your readers are weary of reading me and Dr Ashfaque H Khan disagree with each other. However, may
I seek their indulgence once again and urge Dr Khan to stop distorting the facts of economic history (Oct 27)?
After having done his little nauseous publicity gig about how well the economy performed in the period 2000-07, Dr Khan proceeds to describe how things fell apart in 2007-08.
He gives the impression that it all happened overnight, in just one year and out of the blue, and was due entirely to external exogenous, non-policy factors, namely, the oil and commodities price surge, the global recession, and so on. This is simply not true. How could the so-called economic managers of the day not know that the economy growing as fast as claimed was clearly under immense strain and overheating? The only way that fast growth would not have ignited inflation and put pressure on macroeconomic imbalances would be if there had been a concurrent sharp upward jump in economy-wide Total Factor Productivity (TFP). There is no evidence of this. While TFP typically rises in an economic upswing, it needs to be a permanent, structural shift, not only a cyclical one, if there is to be sustainable non-inflationary growth with moderate imbalances.
As I have been at pains to point out, the seeds of the economic crisis of 2007-08 were sown during the halcyon days that Dr Khan is so obsessed with. The operative word is 'lags', Dr Khan. The exogenous factors that he describes exacerbated the crisis of 2007-08. They were neither the initiating nor the causative factors of that crisis. A private IMF warning of the dangers of overheating went unheeded. A highly critical IMF report was re-written and the mission chief's name removed from the document. If Dr Khan wishes, I can send him the contact email of the expunged author, provided the author gives me his permission to do so.
Let us stop misleading people because we owe it to them, and ourselves, to be truthful. Even the great guru, Alan Greenspan, in evidence before the US Congress apologised for his mistake in keeping US interest rates too low for too long and creating asset bubbles that popped and almost caused another Great Depression. The world economy is lucky to get away with only a Great Recession. Dr Khan needs to be similarly forthcoming even if he is no Greenspan. Distortions of the truth get us nowhere and we know the old saying about those who do not learn from history being condemned to repeat it.
Dr Meekal A Ahmed
Virginia, US
*****
This is with reference to Dr Meekal A Ahmed's letter titled "On poverty numbers" (Oct 3).
The writer is right about the collapse of growth rate, the increase in poverty numbers and the burst of economic bubble created by the economic team led by Shaukat Aziz. Former prime minister Shukat Aziz was not an economist but a smart investor and he knew very well how to create 'fake money' and then add it to the consumer market. This is now part of record that the economic growth rate and productivity figures were cooked up to give an impression of false growth. To add to misery, pension funds and government-linked companies were told to invest in the stock market.
Undoubtedly the sudden increase in consumer credit gives a boost to the production industry but as long as the investment in the production sector is higher than consumer credit, it will result in overheating and inflation. During 2006-07 the well-manipulated fake growth was managed by deferred oil payments, rescheduled debts and non-payments to power producers. The entire saving from these payments was directed to the consumer market and equity trading. The Karachi Stock Exchange rose from meagre 800 points in 1999 to over 15,000 points in 2007, meaning an injection of $70 billion. Although there was growth in the production sector it was not proportionate to the huge injection in equity markets. During the surge in the stock market, many earned hefty profits and became billionaires without adding anything to real 'productivity' or GNP.
I also agree with the writer that non-inflationary growth with moderate imbalances is healthy for economy but it has to be backed by proportionate growth in the production sector. Otherwise, it can never be sustained.
This is what happened to Shaukat Aziz's economic bubble. When the new government took over, the immediate liabilities were far greater than available foreign exchange reserves and the entire structure created in a vacuum collapsed. Although the figures, fudged in his time as the economic wizard, were pretty attractive that was merely a scam. The most unfortunate aspect of this manipulation was of non-investment in the power sector, especially the dams, and it will continue to haunt us in future.
Ahmad Nadeem Gehla
Kedah, Malaysia
*****
With reference to Dr Meekal Ahmed's letter in the Nov 5 edition of your newspaper, I would like to assure him that a great number of the readers of The News welcome his letters on economic issues as they give an unbiased opinion of a seasoned economist who has a vast experience both in Pakistan and at the International Monetary Fund. Dr Ahmed is right in saying that "
the seeds of the economic crisis of 2007-08 were sown during the halcyon that Dr Khan is so obsessed with". An economy is like a human body which shows signs before the actual malaise strikes.
These signs were visible long before 2007-08, but Musharraf's economic team either could not see or deliberately neglected them as it was busy all the time portraying a rosy picture of the economy. The members of that team still waste no opportunity to tell us how the economy was moving up and prosperity was all around during 2000-07. In this backdrop, Dr Ahmed's brief and succinct letters clear the fog and misconceptions created through the manipulation of facts and figures.
Prof Dr Sabit Rahim
Islamabad
Days of milk and honey
By Meekal Aziz Ahmed
Dr Ashfaque Khan wrote an interesting article in your paper recently entitled: “Imperatives of growth.” I support his central thesis which he buttressed with empirical data and sound argument, that macro-stabilisation policies can be pro-poor.
Dr Khan talks wistfully about the last time the Pakistani economy experienced macroeconomic stability, namely, from 2000 to 2007. He lists all the wonderful things that happened, namely, fast growth, low inflation, tight domestic and external balances, rising foreign-exchange reserves, surging foreign investment, rapidly diminishing poverty, and so on.
I would put two points to the good doctor.
First, while some good things admittedly happened, there remains deep suspicion over the data that are used to recall those days of wine and roses. This is especially so in regards to the data on growth, possibly inflation, investment, budget deficits, expenditures, including defence expenditures, US reimbursement for services rendered (no one knows where the $10 billion went), and, most controversial of all, and most likely wrong, the pace and character of poverty reduction. “Lies, damn lies, and statistics.”
Second, I would say to Dr Khan that, even assuming the data to be acceptable,
he is too smart an economist not to know how fragile and unsustainable the much-touted high growth rate was. He is too smart not to have known that the macroeconomic policies that were being implemented contained the seeds of its destruction.
It did not need much intellectual effort to sense that while there was growth, and other positive things were happening, the economy was clearly overheating and in danger of going off the cliff, unless policies were adjusted quickly. Both fiscal and monetary policies should have been tightened, slowly, but firmly, in recognition of the evidence of economic overheating and what dire consequences it would bring in its wake: widening domestic and external deficits, a pickup in inflation, and, as confidence ebbed, exchange-rate depreciation, capital flight and reserves loss.
Instead of taking measures to slow the torrid pace of domestic demand growth that was pushing against the economy’s supply capacity, everyone carried on as merrily as before, no doubt amid much self-congratulation and back-slapping over how well things were going. If there were voices of concern, they were drowned out. And with no IMF programme, the IMF, which looks at the stance of macroeconomic policies in member countries and assesses their sustainability in the context of its annual Article IV health-check report, had no “leverage” over the fatally flawed policies the government was following. A confidential warning by the IMF in 2004 about the looming risks to the economy went unheeded.
As the output gap closed, the pressure on resources began to manifest itself in many ways, but, most glaringly, and ominously, in rising inflation. No action was taken. When a senior “economic manager” was asked whether he was worried that inflation had gone from two per cent to eight per cent, was rising fast and signalling that something was going very wrong, he remarked, “it is manageable.”
Well, sir, it was not “manageable.” Because, as we knew then, know now, and you did not know at all, inflation accelerated with astonishing speed, to touch levels never seen in Pakistan’s economic history. It is now deeply entrenched, is stubbornly resisting measures to tame it, and it will take years to bring it down, at a huge cost in terms of output and employment.
With no social protection for the fixed-income groups and the poor, millions of people have been pushed into poverty because the “economic managers” of the day displayed an appalling lack of good judgment.
In any event, looking back at the golden era to complete the story, with the economy being driven by bubbles in consumption spending, real estate and the stock market, all that was needed for everything to unravel was for the economy to be hit by an adverse exogenous shock. Sure enough, this shock came in the form of the oil- and commodities-price surge. When superimposed on loose economic policies, which were getting looser each year, these exogenous shocks simply accelerated the economy’s slide towards the abyss, and we ended up, as we always end up, bankrupt and in the lap of the IMF. It is misleading and wrong to attribute the “severe macroeconomic imbalances” that Pakistan experienced recently to external shocks, security issues and poor governance, as Dr Khan does. The timeline of events, factoring in the lags between policy actions and outcomes, clearly shows that the economy was already in serious trouble and headed for disaster well before the impact of adverse exogenous shocks was felt.
It was the cavalier and self-destructive macroeconomic policies being followed by the government of the day that played a major role in bringing the economy to its knees. To be sure, domestic and external shocks, compounded by a reluctance to take strong adjustment measures sooner by the present government, made matters worse; but they were neither the principal nor precipitating factors in yet another costly and needless economic implosion.
The writer has a doctorate from Oxford University and has worked at the Planning Commission and the IMF. Email: meekal
ahmed2@aol.com
Yes, Dr Ashfaque, the data are fudged
Monday, July 20, 2009
I write in response to Dr Ashfaque Hasan Khan’s comment on an article I wrote recently challenging the economic accomplishments of the previous regime. Rather than concentrate on the issues I raised, he attacks me for being political and looking for a job. I would say to him that such an attack is in bad taste and quite unnecessary. I would also say to him I thought he knew me better. Dr Ashfaque says that our economic data is credible and is endorsed by all the smartest professionals in various international agencies. He has a short memory.
One of the first things our now-absconding Shaukat Aziz did on taking over as finance minister in the previous government was to accuse the previous government (of Nawaz Sharif) of falsifying the data provided to the IMF. One of the first things Ishaq Dar did on taking over as finance minister early in the present government was to accuse the previous government (of Shaukat Aziz) of fudging the data. This was payback time. Given this background, is the dark cloud of suspicion that hangs over our economic data something new? Is it only me?
Dr Ashfaque asks me to do a bit of reading before making generalised statements. I suggest he do the same. He should go to the IMF website and read the staff report on the subject of fake data that Pakistan presented to the IMF. As a senior adviser to the executive director in the IMF at that time, I have never been so embarrassed for my country.
At the executive board meeting on the subject, the minutes of which are unfortunately confidential but are available with me if Dr Ashfaque would like to do some more reading, all I could do was hang my head in shame as each executive director, all 23 of them (excluding our chair which presented a weak defence written by me), castigated Pakistan in the strongest possible terms for taking money from the IMF based on
cooked up data.
The IMF staff which had led missions to Pakistan during the fudging period, the smart professionals who are the best in their field and can never be duped according to Dr Ashfaque, were especially shamed because they had been taken for a ride and were shown to be clueless. A burning issue dominated the meeting. Did the IMF staff know what was going on? If they did, they misled the IMF executive board, were complicit in the fudging, and should be dismissed. If they did not, they should be dismissed for incompetence.
At the end of a highly-charged five-hour meeting, it was the decision of the executive board to fine Pakistan millions of dollars and ask the money back they had taken from the IMF during the fudging period. This is a matter of record which I suggest Dr Ashfaque look up before lecturing me on how good our economic data is. One further point. This fudging went on during an IMF programme when scrutiny of data is at its most rigorous. Imagine the fun the previous government had when there was no IMF programme!
Dr Ashfaq quotes a long list of accomplishments of the government he served in, conveniently hiding everything behind averages. I believe he was the previous government’s spokesman. He certainly still speaks like one. In my article, I conceded that some good things were done. This is undeniable. But I, like many others, continue to harbour serious doubts about these so-called accomplishments. Take just one example. It is claimed that poverty was cut by a half in seven years. If the Musharraf government had continued for a few more years, poverty in Pakistan would have been eliminated altogether! Does Dr Ashfaque seriously expect me, or anyone else of sound mind, to believe this fantastic fabrication?
Dr Meekal Aziz Ahmed
Virginia, US
Stabilisation policy: ‘myth and reality’
By Dr Ali Cheema, November 24, 2008
The best myths are found in the media about the Pakistani economy and are told by bankers, chartered accounts and finance specialists. Let me run through some of the myths.
Stabilisation is not needed. This means that there is no need to cut aggregate demand by tightening of monetary and fiscal policy. Instead, what is needed today is an expansionary monetary policy. This will benefit citizens because it will lead to economic growth. The so-called “ground reality” is that other countries in the region, essentially India and China, are opting for expansionary fiscal and monetary policies.
An expansionary monetary policy is not required because the recent inflationary episode was entirely caused by rising food and fuel prices.
That is, bad luck and not bad policies of the previous regime were to blame. Now that these prices have and are coming down, we need not worry about inflation and, instead, need to position ourselves for economic growth. The government has adopted an IMF programme – all stabilisation measures such as removing utility subsidies and increasing interest rates have only been taken to please the IMF.
And no country has come out of an IMF programme successfully.
The first three myths are interesting in that they challenge the very need for macroeconomic stabilisation.
If it is true that recent economic deterioration was bad luck, reflecting rising international prices, and not bad policies of the previous regime, it must be the case that (a) Pakistan’s inflation rate increased after the 2007 global price hike and (b) the trend rise in inflation rate must be in line with India’s during the same period.
Figure 1 shows the increasing trend in annual inflation rate by 2006, well before the global price hike. Notice India’s trend rate, during the same period, does not show anywhere near the same increase and remains flat even after the global price inflation. More than bad luck is needed to explain worsening inflationary performance relative to India. Inflation as an economic problem is much more severe in Pakistan than in India. The two cases are not quite comparable!
What caused the much larger increase in relative inflation rate? The two factors responsible are increasing fiscal deficits (figure 2) and its consequence an expansionary monetary policy. The important thing to glean from the trend lines of growth and fiscal deficits (figure 2) is that Pakistan created massive budget deficits during a period of high growth. That is, its fiscal deficits were pro-cyclical and were overheating the economy at a time when aggregate demand was already exceedingly high.
The Indian experience is the reverse that of Pakistan’s (Figure 3). India, for the first time, cut fiscal deficits during a period of high growth. India’s fiscal deficits were counter cyclical, which allows them greater fiscal space to manoeuvre now! This reinforces the earlier point that the two cases are not quite comparable. It also suggests that Pakistan’s relatively higher inflation rate is due to bad policies of the previous regime and not bad luck!
Coming to consequences, rising aggregate demand, due to expansionary fiscal and monetary policies, and increasing inflation resulted in the appreciation of the exchange rate. The State Bank and the government chose to keep the nominal value of the rupee stable which exacerbated the rise in the real effective exchange rate. The appreciation of the real exchange rate meant that our exports were becoming price uncompetitive (figure 4) and imports were made affordable and attractive. The net effect of these policies was the creation of a galloping current account deficit (Figure 5).
It is a myth that export performance was buoyant during the Musharraf era; in actual fact our export performance remained stagnant and deteriorated rapidly after 2006, well before the global price escalation (Figure 4). Notice that during the same period India significantly improved its export performance. Unlike Pakistan, India was able to secure maximum returns from vibrant global growth!
Similarly, galloping current account deficit had reached unsustainable levels of over four per cent of GDP by 2006 well before the global price hike. As opposed to this, India’s current account deficit, albeit rising, remains at a manageable level of around 1.5 per cent. This means that an unsustainable current account deficit is a legacy of the post-2005 Musharraf regime and was caused by its choice of expansionary policies.
So what is the reality and why is it so different from mythology? The reality is that Pakistan’s economy is saddled with crippling inflation, an unsustainable fiscal deficit and a severe balance of payments crisis. The Indian economy is not suffering from these crises and hence it is not facing the crisis of depleting reserves, a fragile currency, external trade defaults and the possibility of large-scale capital flight.
Coming back to the myths! Is it wise to run an expansionary monetary policy and not stabilise? “No” because it would result in an increasing divergence between Pakistan’s inflation rate and that of economies such as India. This would exacerbate the current account deficit and lead to a further loss of confidence in the rupee.
In turn, an unstable and depreciating rupee will fuel further inflation and will be bad for growth, equity and living standards. There is no trade-off between inflation and ‘sustainable’ growth!
It is time to worry about both a fall in inflation and a reduction in Pakistan’s inflation rate relative to its competitors. For this, we need to control the policy-induced component of inflation. As a result, in the short-run there is a need to curb aggregate demand through contractionary monetary and fiscal policies.
What can be discussed is whether macroeconomic adjustment should place a greater weight on fiscal rather than severe monetary contraction. Whatever the political choice, it is important that the tradeoffs are transparent and debated publicly.
Could the government have stabilised without IMF assistance? It could have in principle; however, given the state of the current account deficit, the cost of a stabilisation programme without foreign inflows would have been extremely high. The IMF programme gives this buffer.
Another myth is whether a country has come out of an IMF programme successfully? I am not sure what the answer to this is. What I do know is that India went through an IMF funded stabilisation programme in 1992, which proved to be the turning point for the Indian economy.
What forced India into the stabilisation in 1992? Its current account deficit had touched three per cent of GDP; its exports were falling; its external debt to GDP ratio reached a new peak; it was confronted with extremely high fiscal deficits and a sharp rise in oil prices following the Gulf War. Sounds familiar!
The stabilisation saw a sharp devaluation of 18 per cent in the value of the Indian rupee; a policy that allowed the exchange rate to adjust; fiscal cuts backs; and the adoption of other structural measures. The Indian economy bounced back after two years and has not looked back since.
However, what made India turnaround is not only stabilisation but structural reforms aimed at boosting the growth potential of the economy. It also benefited from access to foreign capital and expatriate capital and skills.
Like India in 1992, Pakistan needs to stabilise the economy in the short-run by curbing inflation and resolving the balance of payments crisis. There is no way around it. Furthermore, no matter which way you cut it, stabilisation is going to hurt. The policy debate is really about how to share the burden of adjustment and who should bear it: government or business; poor or rich; producer or consumer?
However, it must be realised that stabilisation is a necessary but not a sufficient condition for economic recovery and sustained poverty reduction. Other conditions include: successfully completing the stabilisation phase and avoiding a political spending bonanza; using this space to design and implement structural reforms that increase the growth potential of the economy; ensuring that programmatic loans taken from multi- and bi-laterals are well designed and will increase the economic growth rate.
The hard questions that we need to pose are about growth recovery measures and about policies and interventions that make growth inclusive and sustainable and not about the inherent need for stabilisation!
These measures and policies need to be home-grown. The government needs to draw a distinction between seeking IMF assistance for the stabilisation phase and developing its own programme for economic recovery and for poverty reduction and growth expenditures during stabilisation.
The government must make a substantial allocation for social protection and poverty alleviation. This is because we will see a large escalation in poverty as a result of a slowdown in growth and unemployment.
Dr Ali Cheema is an Associate Professor of Economics with a joint appointment in Political Science at the Lahore University of Management Sciences
