Sunday July 03, 2022

Emerging picture

October 19, 2021

The recovery from the economic shock of Covid-19 appears to be faster and stronger than what most had expected some eighteen months ago. The pace of recovery varies in different parts of the globe with countries’ distress or optimism being defined by their own unique circumstances.

The recovery thus far has mainly been defined by two key factors: one, the stimulus in terms of inflated government expenditures coupled with central banks’ quantitative easing policies – in simple words, printed money; two, the development and mass production of more than one Covid-19 vaccines – a notable scientific achievement indeed.

The vaccination drive has, however, reminded us of an astounding reality – the impact our nationality has on our lives. High-income countries have been able to fully vaccinate about 60 percent of their populations so far. The emerging economies are close at around 40 percent. While booster shots are starting to be administered in some developed countries, an overwhelming majority of people in low-income countries are still looking for their first dose of the life-saving vaccines. Also, inequitable access to vaccines and health facilities continues to be at the heart of economic disparities. It should be noted that the Covid-19 pandemic is still here with the emergence of new variants.

New concerns and challenges have surfaced with the ongoing economic recovery. At such a difficult time, the world is overwhelmed with the spectre of rising prices. The debate is still open on whether the current inflationary phenomenon is transient or more permanent. Prices continue to rise especially for food, medicines and oil. A global rise in energy prices is inflicting financial hardship on the less fortunate and hampering the nascent recovery. Currently, oil prices are hovering around a seven-year high. As heating costs, especially of gas, have soared, it looks like it is going to be a tough winter for all. The significant increase in energy prices is also inflationary. Inflationary trends, in turn, limit a government’s ability to keep stimulating the economy.

The emerging picture is a bit like that of the 1970s when oil prices increased on Organisation of the Petroleum Exporting Countries (OPEC) supply cuts, pushing inflation higher. That configuration led to a global growth slowdown. In such a situation, raising interest rates rarely helps to increase supply. Price pressures may not be easy to fix, as they are a result of a shortage of resources and supply constraints increasing prices of all things from energy to logistics. On the other side, pent-up demand is emerging with the reopening of the global economy amid the pandemic.

In an emerging outlook obscured by uncertainty, prudent policy decisions will determine how well citizens are shielded from the travails of an uneven supply-side constrained recovery. We know better that if we increase money supply rapidly beyond the rate of economic growth and improvements in productivity, the result will inescapably be inflation. The other problem is equally concerning. Investments in fossil fuels have fallen by 40 percent since 2015. It is simply not possible to increase the supply of windmills and solar panels fast enough to offset the declining fossil fuel capacity – the result is the unusual increases in energy prices over the past few weeks.

For Pakistan, beyond the fervour of remaining in an IMF programme and firefighting, the wilful ignorance of the underlying problems in the economy cannot be left unresolved. Pakistan holds considerable potential to increase agricultural productivity and transition from traditional to cash or export crops. Increasing crop yields, curtailing the overall waste of 33 percent, and saving around 46 percent of irrigation water that seeps into the ground before reaching agricultural farms, besides getting ourselves in the game of precision agriculture, are some of the steps we must take.

But even with more productive agriculture, young people entering the workforce will continue to leave rural areas for the allure of urban lifestyle. Many of those will be employed in informal, micro and small enterprises in low productivity activities with low expansion prospects. The need of the hour is a forward-looking growth strategy which will target these micro and small enterprises and find ways to increase their productivity levels.

By offering a range of ‘handholding’ services like technology, business plans, easier regulations, training, etc, it may be possible to unfold the growth potential of the more entrepreneurial among them. This framework has the potential of increasing livelihoods of urban low-income earners and increasing productivity in labour-absorbing sectors of the economy.

The key is to apply a different mindset. The ideal social protection is poverty reduction and enhanced economic security by creating productive, better jobs for unskilled workers. Government-backed financial assistance must go beyond merely distributing money to households and focus on supporting businesses, as much, if not more than households. Productivity growth is an outcome of many elements: affordable access to finance; technology access; and continued training – imperative to gradually move up the scale from micro to small and from small to medium and beyond.

Pakistan’s growth strategy, if any, must focus on improving the productivity of the existing workforce, as well as the workforce that will enter in the future. Also, a strong qualitative emphasis must be put on enhancing economic opportunities and raising the overall productivity – through sweeping macroeconomic, trade policy, legal and regulatory reforms.

The emerging economic picture for the next few months is indeed challenging. In the court of public opinion, the combination of rising prices and low job availability is unlikely to win accolades. It is, therefore, crucial to steer a well-orchestrated policy response of thinking beyond macro fundamentals with a strong bias to the underlying faults of the economy.

Countries that implement do-it-yourself measures will always emerge as winners. For Pakistan, it means a true focus on addressing the issues of raising productive capacity of a rural and urban market-based economy. It could be highly beneficial to put more effort in championing an entrepreneurial and productivity-enhancing culture.

The writer is former advisor, Ministry of Finance, Government of Pakistan.


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