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Saturday January 22, 2022

Economic constraints and scenarios

By I Hussain
April 29, 2021

There are some important policy issues that need immediate attention but do not get the priority they deserve in policy discussions about the future direction of the economy. This is because targets relating to the current IMF programme such as the size of the fiscal deficit or the debt-to-GDP ratio top the policy agenda as does the country’s struggle with the consequences of the Covid-19 pandemic.

One way of compensating for short-term thinking is to create a ‘Futures Thinking and Foresights Unit’ of the type examined by the Asian Development Bank (ADB) in a recent report. The ‘Futures Thinking and Foresights Unit’ should induct experts in agricultural development and water resources management apart from economists and public health experts (the last because the age of the pandemic will persist for some years).

Pakistan is on the verge of becoming a food insecure country which is why the agricultural sector deserves, and should get, high priority. Currently, food price inflation allied to job losses caused by Covid-19 has pushed many under the poverty line.

The Food and Agricultural Organization (FAO) has published a report (‘The state of food security and nutrition in the world 2020’) in which they report that 68.7 percent of Pakistan’s population in 2017 could not afford a ‘healthy diet” which is defined as one “intended to meet all nutrient intake requirements and to help prevent malnutrition in all its forms”.

With the area under glaciers – which are a source of water for our rivers – in northern Pakistan receding each passing year because of higher average temperatures and rainfall in ‘barani’ areas becoming more erratic due to climate change, the country should undertake a major water conservation and storage programme. The low hanging fruit in this regard includes investment in installation of drip and sprinkler irrigation systems, land leveling, and proper lining of canals and water courses.

The water conservation strategy should be tied to job creation. A good example of how to create rural jobs is the road map provided by the National Rural Employment Guarantee Act (NREGA) enacted in 2005 in India when Dr Manmohan Singh was prime minister.

The NREGA guaranteed 100 days of paid work to adult members of rural households willing to do unskilled manual work at the statutory minimum wage notified for the program by the state governments. By most accounts, the NREGA enabled an increase in real wages in the off-season by increasing the bargaining power of landless labour while reducing the incidence of rural poverty.

A thought experiment related to future cropping patterns is whether Pakistan will even be able to cultivate sugarcane by the end of this decade when the country’s water stress will be a binding constraint on farmers’ choice of crops.

Sugarcane is a water intensive crop. Thus, according to a recent Pakistan Institute of Development Economics study’s estimate, the sugarcane crop uses three and a half times as much water per acre as an acre planted with cotton.

One newspaper interview quoted a Pakistani sugarcane scientist’s observation that sugarcane cultivation consumes water equal to the annual equivalent of the storage capacity of the Mangla Dam – a stunning revelation to say the least. Since no rebuttal has been offered to this expert’s observation, one can only presume that it is an accurate assessment. One inference is that when the country subsidizes the export of sugar it is also subsidizing the export of scarce water.

Pakistan is about the only country in the world where its citizens riot if sugar prices are deemed to be too high. Refined sugar is a product that is a pure carbohydrate and has no vitamins or minerals. Its consumption is associated with diabetes, fatty liver disease and heart disease, to mention but a few health problems it gives rise to.

As a nation we may have the proverbial ‘sweet tooth’ since our sugar consumption at about 25 kg per capita per annum is above the world average of 22.5 kg per capita but that is a facile explanation for our sugar fixation. A possible answer is provided by the FAO report cited above which found that the large majority of Pakistani citizens have an ‘energy sufficient diet’, albeit not one that is ‘healthy’. In other words, people eat what they can afford to meet their minimum caloric needs and sugar provides a quick energy fix. Unsurprisingly, owning a sugar mill is a virtual licence to mint money.

The emphasis on 6-7 percent GDP growth without undertaking structural reforms of the economy is challenging because of the balance of payments constraint. A working paper by two ADB economists, Kristian Rosbach and Lilia Aleksanyan, reviews Pakistan’s economic statistics from 1980-2017 and concludes that annual GDP growth at a rate consistently exceeding four percent in Pakistan is a harbinger of a balance of payments crisis. The authors indicate that to tackle the growth conundrum the economy needs structural reform; they could have added that the balance of payments problem is also a reflection of the fact that Pakistan’s saving and investment rates as a percent of GDP are far too low to sustain growth rates higher than four percent.

Climbing the ladder of development through exports, as advocated by many economists, is much more difficult today than it was forty years ago. Thus, exporters of textiles and textile products, which account for about 60 percent of Pakistan’s exports, should be prepared for the fact that supply chains will be reconfigured in favour of reshoring in the post-pandemic era.

An ILO report (‘Robotics and reshoring: Employment implications for developing countries’) with an essay by David Kucera on the apparel and footwear industry examines this issue. One of the companies reviewed by Kucera is US-based SoftWear Automation that designs and builds robots specialized in sewing.

Softwear Automation calls their robots “sewbots”. Currently these sewbots can produce one t-shirt in 22 seconds; however, plans are ongoing to diversify into production of dress shirts and jeans that are more complex to manufacture. One can anticipate that the cost of apparel production in developed countries will be competitive with apparel produced in developing countries within the foreseeable future once other advantages to home production such as reduced transportation cost, lower inventory carrying cost, and the ability to respond promptly to fashion trends are factored in.

Pakistan should therefore pivot towards export opportunities in the field of digital services. But then we have to upgrade our education and human resources capabilities to a much higher standard if we are to compete on an equal footing with other developing countries having the requisite IT capabilities.

Another cause for concern is the frequent change of finance ministers. If Prime Minister Imran Khan had shown the same faith in his first pick for the position, Asad Umar, as he has shown in his choice for Punjab’s chief minister, Umar would in my view have proven equal to the brief assigned him.

This is not because he is a whiz-bang economist (of which there is no shortage in Pakistan) but because, as a front-line politician, he has skin in the game. Besides his approach to problem solving is analytical and he asks the right questions. Also, qua politician, he would have had additional degrees of freedom in negotiations with the IMF. Argentina’s pas de deux with the IMF is a case study in how politicians can work with the IMF to mitigate the impact of Fund-sponsored austerity programs.

The writer is a group director at the Jang Group.

Email: iqbal.hussain@janggroup. com.pk

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