Wednesday June 07, 2023

Price of compromised sovereignty

January 04, 2022

The most recent wake-up call for the Pakistani elite was last week’s mini budget. Nearly every aspect of this mini budget exposes a profound crisis at the heart of what is and what will be Pakistan for the over 110 million Pakistanis below the age of 23. Let’s count some of the more obvious crises to begin with.

Shaukat Tarin, the finance minister was left dangling despite a six-month timeline afforded to the good folks that brought him into office in the first place, to convert his status to one of holding elected office, i.e., the Senate of Pakistan. Tarin’s selection itself was a product of the need to replace Abdul Hafeez Shaikh, whose Senate election was lost (either by commission or by omission), despite all mathematical indicators suggesting a safe win.

The issue here is not just that Pakistan can’t seem to decide on who will hold the most important office in the country – the minister of finance – but also that when it does decide, it can’t seem to find a path past simple and straightforward processes.

When the country’s finance ministry is a merry-go-round for macro-economic management talent one day and a milestone document like a new National Security Policy is hinged on the country’s economic potential the next, something is badly wrong. Something is badly wrong.

The personalities involved in the various economic crises that afflict Pakistan are largely immaterial when compared to the content of economic policy. At COP26 a few weeks ago, Pakistan joined most countries on the planet in declaring its intention to engage in a coherent climate transition that would privilege renewable sources of energy above fossil fuels. The government’s reasonably robust climate change team, led by Malik Amin Aslam and Rina Saeed Khan, admirably seeks to bring climate issues closer to the centre of gravity of Pakistani policy making. At last week’s mini budget, we witnessed the cold hard mathematics of the insatiable appetite of the Pakistani uber-elite take a flame thrower to the foundational logic of mitigating climate risks. Solar electricity, hitherto untaxed, will now cost an extra 17 percent but neither fiscal nor climate related reform will result from this bargain.

The perpetual cul-de-sac that the Pakistani elite finds itself in is a product of these kinds of choices. Keep replacing one macro-economic manager with another, keep chasing little bitty scraps of revenue from economic transactions, consequences be damned. In a geo-economics first Pakistan there are two kinds of sovereignty that matter – monetary sovereignty and fiscal sovereignty. Economists like Stephanie Kelton and other Modern Monetary Theory economists would argue that there are very few monetary sovereigns, the most obvious being the United States of America. But monetary sovereignty isn’t anchored entirely in the pure freedom a country enjoys doing what it pleases with its currency. Rather it is whether a country can make decisions about money supply that are principally informed by domestic economic interests, such as price and wage inflation. Pakistan is not a monetary sovereign.

Fiscal sovereignty is a relatively much simpler proposition – a truly fiscally sovereign country affords itself the power to decide on how much it taxes its people to keep the lights on. The mini budget presented last week is the equivalent of a contractual arrangement that confirms the absence of such fiscal sovereignty.

In the short run (and everything the Pakistani elite does is for the short run), there are only three ways through which monetary sovereignty can be proxied. The first is to have a quantum of exports that mitigates against the absence of monetary sovereignty. The second is to have a quantum of remittances that mitigates against the absence of monetary sovereignty. And the third is to have a source of low-cost lending that mitigates against the absence of monetary sovereignty. In short, if you don’t have your own dollars, you need to have either products and services that the world can’t live without (exports) or skilled and unskilled labour the world can’t live without (remittances) or sugar mommies and sugar daddies that will pay your bills for you.

Pakistan’s elite have lived and thrived off the labour of its remittance generating expat workers and the availability of grants and cheap loans for so long that the country does not know how to even begin making products and services that the world needs. The recent external pressures on Pakistan are not because expat and migrant workers have stopped sending home money, but rather because the country’s various creditors have begun to harden the terms under which their benevolence is available. Whiny complaints about the US or China or Saudi Arabia or the IMF are the obvious and the easiest out for a Pakistani elite that simply refuses to introspect and reform.

The lack of fiscal sovereignty is even more comical in terms of the dynamic that sustains the Pakistani elite. The wealthy Pakistani would like anyone but the wealthy Pakistani to pay for the extravagance that the Pakistani elite affords itself. The mini budget is a perfect example of the embarrassing and cancerous Pakistani tradition of paying the bills by cutting into the family budgets of poor and middle-class Pakistanis. Since the early 1990s, a parade of insipid, colourless and remorseless robot-men have pimped the idea of tax reforms with virtually zero impact on the country’s bottom line. Those stricken by isomorphic mimicry continually bank on metrics like tax-to-GDP ratios and resulting bloated debt profiles. But the truth is that fiscal stasis in the country is a product of a low-risk, zero innovation, and therefore, low growth economic culture. Exactly the kind of culture that we might expect when the strongest and most able in the room are given subsidy after subsidy after subsidy, are never held to account, and are allowed to continue to dominate all key decisions.

The wider political culture that has emerged should be of little shock value. Low IQ conspiracy theories and low intellect solutions like a return to an Ayub, Zia or Musharraf capture and sustain the top of mind in the public discourse.

The only disruptors to this mind-numbingly stupid pattern are groups like the TLP and identity-driven narratives like those employed by various sub-national groups around the country. The cherry on top of all of this is the ‘genius’ solutions that are bandied about to the challenge of radical postures. Everybody outside the ever-shrinking tent is a terrorist and all terrorists should be dealt with an iron-hand. And so the state’s only real skill is to hammer away. This is, like coal and furnace oil, a non-renewable resource: it has limits. The growing death toll from actual terrorism in recent months, as Pakistan’s second war on terror continues, is not disconnected from these issues

The negotiations that any so-called group of radicals seek are those that will alter the mathematics in the have and have-not dynamic in Pakistan. Sadly, the top of the pyramid within elite Pakistan is occupied by greying men, all too stupid or myopic to realise this. The short-term cost of ridiculous new taxes and the inevitable inflation in the country is borne by poor and middle-class families, especially in the cities. But the medium and long-term cost is systemic and will ultimately be borne by the Pakistani uber-elite: because at some point, the costs will overrun the system.

In the next three decades, most estimates indicate continued dramatic population growth. By 2047, when the young population is expected to peak, the total population in the country will almost certainly exceed 325 million. Not a single of the macroeconomic systems in place today is capable of catering to even the 220 million population we currently have. Price controls, vaccinations, local government administration, environmental regulations, food and drug administration, schooling, maternal and neonatal health – every one of these systems has failed and collapsed.

How much worse will it get as fiscal and monetary sovereignty continue to shrink? Keep watching the Pakistani elite continue to play chicken with this incoming freight train.

The writer is an analyst and commentator.