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Friday March 29, 2024

Letting go of external debt

By Shahzad Saeed
March 18, 2018

Any economy can go awry if unfounded and speculative assertions are made regarding economic indicators. Where a rise in public debt is claimed as an indicator of economic debilitation, it has, at the same time, also proved as a stimulating force activating sluggish economies that have recently attained high growth rates – notably Southeast Asian economies.

Pakistan’s highest external debt, of around $80 billion, and debt-to-GDP ratio, of around 60 percent, have not only initiated a discussion on economic uncertainty, but have also increased the level of anxiety among the country’s distraught population.

The gross public debt along with its other derived metrics, including debt-to-GDP ratio and debt per capita, may not necessarily completely explain the economic condition of a country. For instance, Japan and Libya are countries with the highest and the lowest debt-to-GDP ratio – 219.3 percent and 7.4 percent respectively. Does this mean that Japan’s economy is more vulnerable than Libya’s? The answer is not that simple if considered without taking into account other factors; including the nature of debt (domestic or external), existing physical capital stock, social infrastructure, tax base, position of external payments, and most importantly, the GDP growth rate. It is these factors that explain the ability of an economy to repay in the future. In the case of Japan, all aforementioned factors support its economy, contrary to Libya’s. According to the CIA Fact Book (2017), the most developed countries including the US, EU, UK, France, Germany and Japan fall among the top 10 externally indebted economies.

Nowadays, economic developments in Indonesia and South Korea are compared with Pakistan’s weak economic conditions – characterised by the lowest levels of local and foreign investment in the wake of terrorism, negative or low GDP growth rates, poor physical and social infrastructure, dwindling exports due to energy crisis, and last but not the least, a decade of political chaos. South Korea, Indonesia and Pakistan are ranked 31st, 33rd and 58th respectively, according to their external debt. On the other hand, South Korea and Indonesia also rank 11th and 16th as per their higher GDP values of around $1.411 trillion and $932.45 billion respectively. This reflects the ability of Indonesia and South Korea to repay – contrary to Pakistan, which ranks 43rd with a GDP of around $300 billion.

If we look at South Korea’s economic history, it is evident that its government, deficient in local financial and natural resources, only encouraged foreign borrowings to accentuate its exports and never welcomed Foreign Direct Investment to avoid foreign economic dependency. Similarly, the Indonesian economy experienced industrialisation in the 1960s and its external debt played a pivotal role in achieving high levels of industrial growth.

What has been the role of external debt in South Korea’s economic development? Amesden (1989) concluded that from 1962 to 1982 Korean public-sector expenditure usually remained higher than local borrowing, and the external debt became a critical problem for its economy. The only positive factor was that the Korean government did not spend on short-term consumption but on long-term investments in various infrastructural projects, including electricity, gas, railroads, highway, irrigation and a subway system, across the country – from Seoul to Busan.,

Though Korea’s economic growth was regularly disturbed by internal and external shocks – oil crises, global depression and intensified internal competition – from 1962 to 1982, it kept up its impressive GDP growth rate by ensuring a conducive environment for export related industries. Korea and Indonesia’s experience of external debt concludes that borrowing externally is not harmful to the economy if it is invested keeping in mind future returns.

However, an advantage that the government of Pakistan earned in the last four years is that it made public investments worth over $70 billion in transport, roads and infrastructure and energy sectors. Besides this, a number of complementing initiatives pertaining to technical education and training of unskilled labour were also undertaken. All of this may buttress a comprehensive export-oriented growth strategy in the coming years.

Pakistan’s strength lies in its strong advantage in the agriculture sector, skilled and cheap labour, developed business diaspora, improved physical and social infrastructure, low investment cost and a well-established financial market. The need of the time is to address the weaknesses, which include concentration of resources, low value added goods, labour-intensive production techniques, high cost of business, limited export destinations and absence of a long-term export strategy for the last two decades.

Only an export-oriented growth strategy will help Pakistan widen its industrial base, improve employment opportunities, enhance tax base and ensure fiscal balance. Therefore, sound fiscal conditions may enable the public-sector to strengthen social infrastructure through development of health, secondary and higher education, and improve amenities without foreign dependency.

Regardless of what political ideology a country follows, it is only the continuity of a democratic system that can ensure the implementation of long-term policies – because it delivers effectively under the process of ‘creative destruction’. Democracy is always considered advantageous, in contrast to autocratic rule, as it can develop room for better economic ties and attain the trust of other economies to explore more options.

Instead of adopting a retributive approach, all political stakeholders in our country need to reach a consensus and orchestrate a common national agenda with respect to a long-term export policy. This would guarantee avoiding external debt in the future by putting the economy on the track of exponential growth.

The writer is assistant chief inthe Planning and DevelopmentDepartment, Government of Punjab.