Oct 26, 2017 Dr. Niaz Murtaza Comments Off on Booms and busts
Dr. Niaz Murtaza
States must ensure high economic growth and constant upgrading into higher-value sectors to generate sufficient jobs and increase national incomes. They must arrange physical, technical, financial and human capital to support growth, and avoid fiscal and external deficits that harm growth. Standard macro-economic recipes usually end here. But liberal political economy recipes say growth must also be shared fairly across regions, classes and ethnicities and shouldn’t produce conflict or ecological stress.
Pakistan has failed on both recipes. Several writers recently have pinpointed the boom-bust nature of our economy, with 6-8 years of rapid growth and then a bust. In contrast, Asian Tigers have sustained high growth for decades. The writers have provided useful macro-economic analysis and recipes. But a political economy lens can better reflect the root causes of such cycles and predict whether the macro-economic recipes will succeed.
Our major booms were all ignited by transient political alliances the US struck with our dictators. The alliances produced booms for 6-8 years only sans major economic upgrading or equitable progress. But they also ignited major extremism and violence which have been harming us for decades. The booms ended due to shifting US interests, the violence sowed during the boom and our rivalry with India.
The first major boom started under Ayub, aided by a political alliance with the US which gave much economic aid. While both industry and agriculture did well, the boom didn’t match South Korea’s 1960s boom. We could only set up light industry while it moved into intermediate and then heavy industry later given its internal capacities and higher levels of US aid. But our boom slowed once the US imposed sanctions after the 1965 war. The top-down political and elitist economic models also caused high ethnic and class tensions which led to Ayub’s fall.
Growth resumed under Zia, based on a new US alliance, but only until ’89 when the US re-imposed sanctions over our nuclear rivalry with India. While the growth from this alliance lasted only a few years, the violence that it ignited continues to harm us even now. The same pattern occurred under Musharraf: a few years of growth that did not upgrade the economy but a re-ignition of long-term violence that has killed thousands and cost billions in economic losses. The violence was partly caused by the use of non-state actors in the rivalry with India. Fiscal and external deficits have also often undercut growth. Both deficits reflect the low-end nature of our economy. Producers produce low-end goods which don’t fetch enough export revenues to cover increasing imports. The state doesn’t collect sufficient taxes from this low-end economy to cover its increasing expenses.
Dictators are usually praised for their economic management. But, as shown above, their plans were unsustainably reliant on transient US aid. This route to booms has likely ended forever. The two will unlikely ever ally again given the low trust levels. Even otherwise, we must search for drivers of growth not reliant on transient US geo-politics. Ironically, the two economic strategies that were not reliant on the US were both crafted by elected regimes. Bhutto aimed to establish a socialist economy. But faulty strategy caused failure.
The current CPEC-led strategy too is reliant not on the transient political aims of a distant power but the long-term economic aims of a nearby one. This may produce a longer run of high growth. But will it upgrade the economy the way US aid to Asian Tigers did? The US was an advanced economy that could afford fiscal and trade deficits to help Tigers industrialize. China is a middle-income state reliant on trade surpluses. Pakistan still has a trade deficit and is suffering de-industrialization under its free trade pact with China. So the results of our economic links with China are still opposite to those from the US-Tigers ones. Our current twin deficit problems reflect these trends though they are not so serious as to justify a technocratic set-up.
Whether CPEC reverses these trends remains unclear. Plans to establish industrial zones for Chinese investment have picked up. But given that it is a middle-income state, the plants that relocate to Pakistan may be low-end ones that don’t help much in economic upgrading, solving our twin deficits or ensuring equitable progress. China is also highly corrupt and greater links with it may strengthen our own high corruption levels. But despite these gaps, the current CPEC-led strategy is better than anything our dictators ever crafted.
In short, one major cause of our boom-bust cycles (reliance on the US) has ended while the violence from the Musharraf era has abated. But other causes, like the rivalry with India and the low-end nature of our economy that produces the twin deficits, remain intact. Thus, our boom-bust cycles may abate but will likely not end fully soon.
The Express Tribune > Pakistan > Sindh ‘Local government system virtually abolished in Sindh’ ‘Local government system virtually abolished in Sindh’ Speakers point out flaws in functioning of local bodies at launching ceremony of research study By News...
Islamabad-Advocating further political, administrative and financial devolution, experts on Wednesday pointed out several flaws in the Islamabad local government (LG) system. A review report launched by INSPIRING Pakistan and Pattan Development Organisation, Islamabad called for legislative...