Consumption-led growth
Saturday, March 27, 2010
The indefatigable Dr Ashfaque Hasan Khan in his recent article "On economic growth" (March 23) berates some of Pakistan's accomplished economists for criticising his favourite government's accomplishments -- the one led by the now-absconding duo of General Musharraf and his chief sidekick, the incomparable Shaukat 'Shortcut' Aziz. Dr Khan's basic thesis is that there is nothing wrong with a consumption-driven growth strategy since consumption is the biggest component in the national accounts in any country, including Pakistan. Arithmetically speaking he is right. But that is not the point. The flaw in such a strategy, as the world has learnt (but obviously not Dr Khan) after the worst global financial implosion since the Great Depression, is that distorting the instruments of macroeconomic policy, and specifically interest rate policy, courts disaster. It is bad economics; it is unsustainable and it will end in a calamity. Even in the 'ideal' policy case which focuses on stimulating savings and investment and, crucially, boosts net exports, there will be positive feedback effects which raise per capita consumption. There is nothing wrong with that. It is a welcome manifestation of a growing economy. What is wrong is when you cut interest rates sharply and flood the economy with cheap money and excess liquidity. All you will get is speculative bubbles in consumption, the real estate sector, in commodities such as gold, and the stock market. Worst of all you will 'crowd-out' exports while the excess liquidity spills over into higher imports. You will also get very high inflation -- something about which Dr Khan is strangely silent when regaling the 'accomplishments' of his favourite regime.
Good macroeconomic policy is all about maintaining balance between policy instruments, using them wisely and ensuring that they are consistent with realistically ambitious targets and objectives. Good policy is eschewing the temptation to resort to policy-driven distortions which are populist but self-defeating because they will get you into trouble. Even the great guru of monetary policy, the 'maestro' himself, Alan Greenspan, in his trademark mumbling incoherent evidence before US Congress apologised for keeping interest rates too low for too long and creating 'The Great Recession' in the US which spread around the world through contagion effects and caused untold human suffering. Since Dr Khan is no Greenspan, I don't expect him to offer an apology any time soon. As his favourite duo decamped to greener pastures, they left the economy in a heightened state of vulnerability and susceptible to the smallest exogenous shock that would send it over the brink. This came in the form of the global oil and commodities price surge that pushed Pakistan's fiscal and external current account deficits to in excess of eight per cent of GDP and inflation to a never-before-seen 26 per cent per annum. With the economy trapped in a stagflationary mode, there was massive capital flight, the rupee lost a third of its value, our foreign exchange reserves disappeared and we ended up, as always, hat-in-hand at the doors of the IMF blaming the global price of oil and food and 'security issues' for all our economic troubles instead of looking at the truth: short-sighted and misguided macroeconomic policies that produced the chimera of growth and prosperity for a while but would ineluctably self-destruct.
Dr Meekal A Ahmed
