A recipe for economic survival

We will have to revive the philosophy of social democracy that puts people before profits

The health of an economy can be measured through the lens of two gaps: the dollar-gap and the rupee-gap. The former arises if imports are greater than exports and the latter arises if domestic expenditures are greater than revenues. Today, Pakistan’s imports are more than exports and domestic expenditures are more than tax revenues.

While imports and domestic expenditures are continuously growing, exports and revenues are stagnant. The two gaps are so large – and growing – that the country is abjectly dependent on more loans – foreign and domestic. In this situation, Pakistan has lost its economic sovereignty and is in danger of losing its political sovereignty.

So, it will not be an overstatement to say that today the economy is being managed like administering steroids to a patient, who will look healthy momentarily but die eventually. The dollar gap is being bridged by attracting “hot money”. With interest rate in US and Europe below 2 per cent and Pakistan offering over 13 per cent, the only beneficiaries are money speculators, while Pakistani businesses are being squeezed. To address the rupee gap an attempt is being made to extract more taxes from the economy. The fact is that Pakistan’s economy is now structurally weak and cannot generate more tax revenue. Attempts to extract more taxes will weaken the economy further.

Furthermore, the tirade against the rich for not paying taxes is misplaced. Admittedly, many of the rich are not paying taxes; however, even the total revenue potential is low. This is because, while the consumption of the rich is visible, the numbers are small. This is true of rich farmers too. Small farmers account for 80 per cent of all farmers and are exempt from taxes anyway.

This situation did not arise abruptly; in fact it took us some time to reach here. Till 2003, for every 100 dollars of exports, our imports were about 125 dollars; the deficit was about 25 per cent. This was managed with some remittances, some capital income and some loans. Today, for every 100 dollars of exports, our imports are about 225 dollars; the deficit is about 125 per cent. The inflow of imports is such that it is now difficult to find Pakistan’s products in supermarkets. Even dog and cat food and shampoo are imported – all with borrowed dollars!

No doubt, it is essential to ban all non-essential consumer imports. At the same time, we must realise that the other end for plugging the dollar gap is exports, which are stagnating at below $24 billion for some time now and occasionally falling. We can sell only if we produce and that is where the problem lies.

The manufacturing sector is contracting, with many industries closing down. Former industrialists have turned to making money on the stock market, the property market and the commodity market. And here, money is made from speculation. We have created a casino economy. Such an economy cannot generate exports or jobs.

Industry is closing down mainly because of the anti-industry macroeconomic policy framework. Admittedly, our tax-GDP ratio is low at 10-12 per cent; however, the tax-GDP ratio that manufacturing faces is 29 per cent. We are killing the goose that lays the golden egg. It is essential to revert Pakistan to a production economy. This will require a series of steps, but two core steps are necessary: one, reduce the GST (on goods) rate from the current 17 per cent to 5 per cent and, two, revive the Pakistan Industrial Development Corporation (PIDC).

There might be criticism that adopting such proposals will further widen the fiscal deficit. For example, the reduction of non-essential consumer imports and reduction of the GST rate will reduce government revenues. Balancing this reduction will require reduction in domestic expenditure – non-development expenditure, including the non-combat defence expenditure.

So, a total reduction of 20 per cent or one trillion rupees is urgently needed. At least a third of the Divisions in the federal government can be abolished. After all, the 18th Amendment required them to be abolished. And defence expenditure that is not directly related to the defence of the country needs to be reduced.

Coming to the PIDC’s revival, we can say the neo-liberal lobby has created a series of narratives:

- that nationalization in the 1970s damaged Pakistan’s economy

- that the public sector is inefficient and corrupt, so the state has no business to be in business

- that only the private sector can deliver growth

All of the above are false.

Following the military defeat in 1971 and breakup of the country, the private sector would have taken their money and run out of the country. The economy would have collapsed. Nationalisation pre-empted this exodus. And the public sector revived and expanded the economy. It is the public investments of the 1970s that are still holding up the economy.

Contrary to the false perception, it was not the private sector that laid the foundation of industrialisation in the country. It was PIDC that set up industries in the 1950s and 1960 and sold them to the private sector. It was the public sector that conceived, planned, designed and constructed the Tarbela and Mangla dams and over 100,000 kilometres of canals and water courses. Result? Where not a blade of grass grew, now we have two crops a year and there are vibrant towns where there was only a dusty landscape.

Contrary to the false perception, it was not the private sector that laid the foundation of industrialisation in the country. It was the PIDC that set up industries in the 1950s and 1960 and sold them to the private sector. It was the public sector that conceived, planned, designed and constructed the Tarbela and Mangla Dams.

Admittedly though, public sector capacity has now weakened. But Pakistan’s private sector is also weak and lacks entrepreneurial capacity. They have proved this by failing to invest in the productive side of the economy over the last 40 years. They cannot be relied upon to act as the engine of growth.

Therefore, we must let the PIDC initiate industrial investment with government finance and partner with the private sector for management. Private parties can then purchase the units after they achieve commercial production. This can be the model for existing public sector entities – public ownership, private management. The Steel Mill and the PIA should remain public property. Their management can be contracted out to the private sector.

Pakistan is a resource-rich country and we can deliver full employment and zero poverty in our lifetime. But for this we will have to bury deep the neo-liberal philosophy that breeds inequality. We have to revive the philosophy of social democracy that puts people before profits.


The writer is a renowned economist and can be contacted at [email protected]

A recipe for economic survival