The road to recovery

April 18,2019

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Clouds are gathering over the present dispensation of government, but they have a silver lining. After thirty years, there is a loosening of the stranglehold on government by ‘boxwallahs’ (“A native itinerant pedlar… The Boxwala sells cutlery, cheap nick-nacks, and small wares of all kinds, chiefly European,” Hobson-Jobson, The Anglo-Indian Dictionary, 1886). As a result, above the clinking of coin-counting in government, talk of establishing good – even, virtuous – government can be heard again. This is a good omen.

The mercantile class – the class in unrestrained pursuit of self-enrichment, now broad-based in society – is indispensable to any ‘political’ community. ‘Government’ becomes necessary to pursue this collective purpose. It is ‘good’ when it observes the law, and serves all citizens. Made of guardians, assisted by soldiers and clerks, the task of government is to provide justice; of private citizens, seeking to enrich themselves, prosperity (‘development’).

Just as guardians make bad merchants (a lesson we learnt in the 1970s and 1980s), merchants make bad guardians (a lesson we refuse to learn from our subsequent experience). Our current rulers, mistaking government for business, see statesmanship as securing credit and finance to stay solvent. Unable to distinguish economics from finance, they are blind to the impact of their financing schemes on economic outcomes: employment, wages and productivity, and incentives to investment, production and exports. Viewing law and justice as business opportunities, they uphold one law for the rich, another for the poor. They provide amnesty to tax-evaders, while helplessly condoning extortion and corruption in tax-collection. They accept payment from land-grabbers, instead of placing illegally occupied land under a public housing authority.

Let us recall how we got here. With effective laws, responsible state and local governments, and established public service traditions, the UK and the US engineered an economic recovery in the 1980s and 1990s (under Thatcher and Reagan), by selectively disinvesting, divesting, privatising and deregulating markets for non-public goods, and providing tax relief to compliant taxpayers, while raising interest rates. Fortuitously, it was in this period that after a repressive martial law the larceny that is called democracy in Pakistan was inaugurated, and the government turned to the IMF for funds.

The IMF lends money so borrowers can avert default and repay its major shareholders, in return for commitments aimed at restoring creditworthiness. While these commitments are economic (tax more, spend less, raise prices, sell assets), their goal is narrowly financial (restore and expand the capacity to service debt and borrow more). Like any moneylender, the IMF couldn’t care less if borrowers starve their children to pay their instalments, as long as they remain peaceful. Clueless about specific country conditions, they offer generic ideological solutions that don’t work because the IMF programme isn’t meant to be a comprehensive economic plan, aimed at full-employment growth with price stability.

Predictably, the IMF prescribed Thatcher-Reagan solutions, to the increasing amusement and rising fortunes of our salivating robber-barons. Although government finances were stabilised temporarily, privatised state enterprises were looted, those retained were mismanaged, domestic industry became uncompetitive, poverty and inequality rose, growth slowed and the economy was ruined. Moreover, economic management was outsourced; national planning was abandoned; what was left of the civil service was destroyed; and as governing was handed over to domestic, foreign and multinational profiteers, grand corruption came to Pakistan, further eroding competitiveness.

This was all anticipated. In an article on the 1994 IMF agreement (The Government’s Present Agreement with the IMF: Misgovernment or Folly, in Pakistan Journal of Applied Economics, 1995), I had written: “It should be clear that the government presently does not have any economic strategy, other than the IMF programme, which is widely expected to fail… economic growth is down, inflation is up, the extent of unemployment remains unknown and, above all, there is no evidence of any structural improvement in the balance of payments… It is imperative, therefore, for the government to devise such [an economic] strategy, in any manner it sees fit.” This is still true, in spades, 25 years later.

Why? Because there are no sustainable financial and economic solutions without radical political and social change. Just as no one – not even economists – has distinguished economics from finance since economic management was outsourced to the IMF in the 1990s, no one has distinguished government from administration after the first generation of politicians was ousted by civil and then military officers in the 1950s. In a word, ‘government’ serves the people, by expressing their will as law and supervising its execution through its servants, the ‘administration’. A good government is just; a good administration, efficient.

Evolved from the East India Company – British merchants, who won the right to collect Indian revenues, as spoils of war – the ‘Government of India’ was not a government at all, it was a revenue-collecting administration that reported to the British parliament. This is why when natives were inducted, London made it clear to Mayo’s government that unlike the British parliament, “the authority of the [Indian] legislating body is derived from the Crown and is not founded on the principle of popular representation” (Montagu-Chelmsford, 1918). It was a government of, by and for the British people, over the Indian people.

When the British found the natives “ungovernable”, they transferred power to their English-educated collaborators (“Indian in blood and colour, but English in taste, in opinions, in morals, and in intellect,” Macaulay, 1835). In 1947, these arrangements, embodied in the Government of India Act, 1935, administered by ICS and police officers, became and with successive adaptations have remained the constitution of Pakistan. (Article 7 still defines “the State” not as the people but as the tax-collectors: “the [federal and provincial governments and assemblies] and such local or other authorities in Pakistan as are by law empowered to impose any tax or cess.”) Consequently, the Government of Pakistan today is “English rule without the Englishman” (as Gandhi complained); a government of, by and for a supra-constitutional oligarchy, over the people of Pakistan. A rootless oligarchy, more comfortable with foreigners and expatriates than the people it governs.

Unless this changes and a government of, by and for the people is established, public finances will remain unviable and the national economy, poor. Where government finance requires finding funds; the economy requires reviving domestic fixed investment: building factories, installing machinery and employing labour – not speculating in the stock market and real estate. Foreign investment, following domestic investment, can be a force multiplier but attracting foreign investment to substitute for domestic investment, through sovereign guarantees, is a recipe for disaster.

In sum, the government’s financial insolvency has both proximate (economic) and distant (political) causes. Both arise from an even deeper failure to transfer power to the people. Consequently, restoring the government’s solvency requires a comprehensive economic plan, embedded in more democratic politics, under reformed laws and constitution. This isn’t easy, but it can be done.

The writer is a retired economist.



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