Pakistan's economy is suffering from stagflation, a very unhealthy combination of very slow growth and high inflation, since 2008. These three years have also seen significant turnover in the nation's top economic management team.
Pakistan is now on its third finance minister, Dr. Hafeez Shaikh, in three years. Mr. Shahid Kardar, the third central bank governor since 2008, has just quit amid serious policy differences with the PPP-led government. Kardar is the second central bank governor to leave in just over a year and the third senior policymaker to quit in less than 18 months. During this period, the IMF has also suspended its loans to Pakistan on concerns about lack of progress on budget deficit reductions through revenue enhancements committed by the government in 2008.
"Differences of opinion on policy actions and on the implementation of certain directions that I, in my best judgment, did not consider to be judicious have compelled me to resign from office," Kardar told Reuters in response to questions about the reason for his resignation less than a year after he was appointed.
"Such differences are impeding the State Bank from discharging its mandate to safeguard its own integrity and autonomy, to ensure prudent conduct of monetary policy and to maintain the safety and stability of the banking system."
In simple terms, the biggest problem Mr. Kardar had with the government was sustained and excessive borrowing from the central bank to fill the large gap between revenue and spending. This has fueled inflation, and made a mockery of the central bankers' tight monetary policy. Rather than accept the advice of his own team of experts, it seems that President Zardari has essentially been following his own economic policy of "print the notes", a quote attributed to Mr. Zardari by the New York Times in a 2008 story.
In February 2010, there were rumors that the ruling PPP politicians, particularly President Zardari and his inner circle, ignored former Finance Minister Shaukat Tarin's key recommendations to address the acute power shortages in the country. Zardari's insistence on pushing rental power projects, rather than fix the huge circular debt problem in the energy sector first, specially frustrated the outgoing finance chief, when he first reportedly threatened to quit 2009.
To put it all in perspective, let's recall how late Dr. Mahbub ul-Haq, the renowned Pakistani economist who is credited with the idea of UNDP's human development index (HDI), explained the corrosive impact of political patronage on economic policy in Pakistan.
In a 10/12/1988 interview with Professor Anatol Lieven of King's College and quoted in a recent book "Pakistan-A Hard Country", here is what Dr. Haq said:
"Growth in Pakistan has never translated into budgetary security because of the way our political system works. We could be collecting twice as much in revenue - even India collects 50% more than we do - and spending the money on infrastructure and education. But agriculture in Pakistan pays no tax because the landed gentry controls politics and therefore has a grip on every government. Businessman are given state loans and then allowed to default on them in return for favors to politicians and parties. Politicians protect corrupt officials so they can both share the proceeds.
And every time a new political government comes in they have to distribute huge amounts of state money and jobs as rewards to politicians who have supported them, and short term populist measures to try to convince the people that their election promises meant something, which leaves nothing for long-term development. As far as development is concerned, our system has all the worst features of oligarchy and democracy put together.
That is why only technocratic, non-political governments in Pakistan have ever been able to increase revenues. But they can not stay in power for long because they have no political support...For the same reason we have not been able to deregulate the economy as much as I wanted, despite seven years of trying, because the politicians and officials both like the system Bhutto (Late Prime Minister Zulfikar Ali Bhutto) put in place. It suits them both very well, because it gave them lots of lucrative state-sponsored jobs in industry and banking to take for themselves or distribute to their relatives and supporters."
To summarize, there is insufficient revenue collected by the state of Pakistan, and the diversion of this very limited revenue to political patronage fosters dependence on foreign aid and impinges on the nation's sovereignty. It also seriously harms Pakistan's ability to invest in education, health care and infrastructure development in terms of school and hospital buildings, roads, rails, and water and energy projects for Pakistan's future.
Discussing the politics of patronage in Pakistan, Professor Lieven, the author of "Pakistan-A Hard Country", sees a silver lining to it by describing the difference between Nigeria and Pakistan in the following words:
"Rather than being eaten by a pride of lions, or even torn apart by a flock of vultures, the fate of Pakistan's national resources more closely resembles being nibbled away by a horde of mice (and the occasional large rat). The effect on the resources, and on the state's ability to do things, are just the same, but more of the results are plowed back into the society, rather than making their way straight to bank accounts in the West. This is an important difference between Pakistan and Nigeria, for example."
I personally see no better explanation for the boom under President Musharraf in 2000-2007, followed by current economic crisis since 2008, than the prevailing system of political patronage continuing to trump good public policy almost 23 years after late Dr. Mehboob ul Haq described it so well.
Haq's Musings: Political Patronage Trumps Public Policy in Pakistan
Pakistan is now on its third finance minister, Dr. Hafeez Shaikh, in three years. Mr. Shahid Kardar, the third central bank governor since 2008, has just quit amid serious policy differences with the PPP-led government. Kardar is the second central bank governor to leave in just over a year and the third senior policymaker to quit in less than 18 months. During this period, the IMF has also suspended its loans to Pakistan on concerns about lack of progress on budget deficit reductions through revenue enhancements committed by the government in 2008.
"Differences of opinion on policy actions and on the implementation of certain directions that I, in my best judgment, did not consider to be judicious have compelled me to resign from office," Kardar told Reuters in response to questions about the reason for his resignation less than a year after he was appointed.
"Such differences are impeding the State Bank from discharging its mandate to safeguard its own integrity and autonomy, to ensure prudent conduct of monetary policy and to maintain the safety and stability of the banking system."
In simple terms, the biggest problem Mr. Kardar had with the government was sustained and excessive borrowing from the central bank to fill the large gap between revenue and spending. This has fueled inflation, and made a mockery of the central bankers' tight monetary policy. Rather than accept the advice of his own team of experts, it seems that President Zardari has essentially been following his own economic policy of "print the notes", a quote attributed to Mr. Zardari by the New York Times in a 2008 story.
In February 2010, there were rumors that the ruling PPP politicians, particularly President Zardari and his inner circle, ignored former Finance Minister Shaukat Tarin's key recommendations to address the acute power shortages in the country. Zardari's insistence on pushing rental power projects, rather than fix the huge circular debt problem in the energy sector first, specially frustrated the outgoing finance chief, when he first reportedly threatened to quit 2009.
To put it all in perspective, let's recall how late Dr. Mahbub ul-Haq, the renowned Pakistani economist who is credited with the idea of UNDP's human development index (HDI), explained the corrosive impact of political patronage on economic policy in Pakistan.
In a 10/12/1988 interview with Professor Anatol Lieven of King's College and quoted in a recent book "Pakistan-A Hard Country", here is what Dr. Haq said:
"Growth in Pakistan has never translated into budgetary security because of the way our political system works. We could be collecting twice as much in revenue - even India collects 50% more than we do - and spending the money on infrastructure and education. But agriculture in Pakistan pays no tax because the landed gentry controls politics and therefore has a grip on every government. Businessman are given state loans and then allowed to default on them in return for favors to politicians and parties. Politicians protect corrupt officials so they can both share the proceeds.
And every time a new political government comes in they have to distribute huge amounts of state money and jobs as rewards to politicians who have supported them, and short term populist measures to try to convince the people that their election promises meant something, which leaves nothing for long-term development. As far as development is concerned, our system has all the worst features of oligarchy and democracy put together.
That is why only technocratic, non-political governments in Pakistan have ever been able to increase revenues. But they can not stay in power for long because they have no political support...For the same reason we have not been able to deregulate the economy as much as I wanted, despite seven years of trying, because the politicians and officials both like the system Bhutto (Late Prime Minister Zulfikar Ali Bhutto) put in place. It suits them both very well, because it gave them lots of lucrative state-sponsored jobs in industry and banking to take for themselves or distribute to their relatives and supporters."
To summarize, there is insufficient revenue collected by the state of Pakistan, and the diversion of this very limited revenue to political patronage fosters dependence on foreign aid and impinges on the nation's sovereignty. It also seriously harms Pakistan's ability to invest in education, health care and infrastructure development in terms of school and hospital buildings, roads, rails, and water and energy projects for Pakistan's future.
Discussing the politics of patronage in Pakistan, Professor Lieven, the author of "Pakistan-A Hard Country", sees a silver lining to it by describing the difference between Nigeria and Pakistan in the following words:
"Rather than being eaten by a pride of lions, or even torn apart by a flock of vultures, the fate of Pakistan's national resources more closely resembles being nibbled away by a horde of mice (and the occasional large rat). The effect on the resources, and on the state's ability to do things, are just the same, but more of the results are plowed back into the society, rather than making their way straight to bank accounts in the West. This is an important difference between Pakistan and Nigeria, for example."
I personally see no better explanation for the boom under President Musharraf in 2000-2007, followed by current economic crisis since 2008, than the prevailing system of political patronage continuing to trump good public policy almost 23 years after late Dr. Mehboob ul Haq described it so well.
Haq's Musings: Political Patronage Trumps Public Policy in Pakistan
