The Control-Loving Economist is Coming Out of the Closet Again

Economists and the Role of the Government


In 1990, I had written a critique of Pakistani economic thinking an extract of which is as follows:

"The eminent Pakistani economist sees the large and benevolent state as the ultimate salvation. He uses many arguments to support his case. The poor illiterate masses are incapable of helping themselves and therefore the government must provide for them. It needs to feed, clothe, educate, and look after the health of the poor. The rich are too rich and are overly fond of conspicuous consumption and therefore equity considerations require the government to step in. In their opinion the private sector is greedy and incompetent and has little, if anything to contribute to our economic development. The aims are all laudable. And no one can deny that these economists genuinely care and have hearts that bleed for the poor. For this, they are occasionally rewarded with jobs and contracts by the large and ever-growing government."

Since then I have tried to make the point, that our economists are too control oriented, suspicious of the market, and strongly in favor of the government, again and again. Perhaps as argued in a recent analysis of the economics profession in Pakistan, this is a legacy of economic planning and government led growth that was left to us by the Fabian thinking of our colonial masters and later reinforced us by the Wold Bank and Harvard Advisory Group in our formative years.

Unfortunately, in seeing the response of the Pakistani economist to the nuclear crisis, I find that the demon of control orientation, suspicion of markets, and government-led growth has not been exorcized from our economist. The government response first has been the proclamation of an emergency, seizure of foreign currency deposits, foreign exchange controls on trading activities, and the promise of further controls. The so-called economists have devoted very little time to the analysis of these controls. What their impact will be? Were they necessary? What are the long term impacts of these? Instead there is now a virtual growth industry of proposals for further controls by the economic journalists and prominent economists.

The "control-junky" in the Pakistani economist that the recent liberalization had bottled up is now out of the closet again. Most of our attempts to gradually (oh so painfully gradually!) to liberalize, open out and be a part of the globalized world, have been reversed. We are now back into the Ayub era with fragmented exchange markets, exchange controls, and contemplating travel restrictions. I remember going overseas to study meant about three months of lobbying and paperwork with the State Bank and then leaving with $10 in my pocket. I also remember when the government tried to tell MIT that all scholarships should be send directly to the government who would decide who merited a the honor. They learnt to their surprise that reputable institutions do not need to bend to such requests from governments that have not yet acquired global stature. The promise of planning was that our children would not have to suffer such indignities.

Pakistan's First Domestic Default


For the first time Pakistan has defaulted on its obligations and there has been no analysis of this in the Pakistani press. Surprisingly this has almost gone unnoticed and perhaps even been tacitly applauded. Shahid Kardar (Dawn June 2) did note that the FCD scheme had reached the point of insolvency and that the government would have been forced into a default even if the recent nuclear crisis had not occurred. Despite some of my differences with Kardar, I found his analysis in the first half of his article quite convincing. Was the crisis then used as a cover up for a default? However, given this inevitability, there seems to be a widespread acceptance among businessman, policymakers and analysts that this step was almost desirable. Ghausi in Dawn of June 1 notes that

"All, however, agree that government's decision to stop foreign currency payment to depositors was practical and pragmatic. But no one foresees whether it would eventually lead to shrinking of this scheme or it is a stop gap arrangement to overcome the present uncertain situation."

Similarly, Nadeem Malik in The News of June 2 notes that:

"Independent analysts argued that de-dollarization of the economy will revive confidence (sic) in the local currency. They also said that less reliance on dollar deposits will also discourage speculative trends in the economy and would decrease vulnerability of the banking system."

Could the government not have used other options that would have allowed prevented an outright denial of its obligations. This could have allowed it to maintain its credibility a term that we are finding is increasingly important in today's economy. Perhaps a longer term bond (say three years and not encashable before term) would have placed pressure on the government to set its house in order so that people would allow a rollover of the bond when it comes to time to pay it off. With a lag, trading in rupees could be allowed for the bonds on the stock market.

Experience has shown that predatory governments find confiscation an easy means of cleaning up their debts only to find other means to accumulate further debts. This is inevitable since they refuse to fix the structural problems that lie at the core of their profligacy. Option such as the one being exhibited in Pakistan makes confiscation and default palatable and hence is an easier options than fixing spendthrift ways.

However, the response of the people is "once bitten, twice shy." They lose faith in the government and find ways of parking their funds overseas. Alternatively the government loses credibility. Capital flight ensues and people the demand for government obligations is reduced. As this process deepens, the government has increasingly to rely on money financing of the deficit. The net result is that inflation. Such inflationary episodes are exceedingly difficult to control and economies have to give up a lot to bring them under control. In most economies that have gone the route of a domestic default, the result has been long spells of stagflation--spiraling inflation and a sharp slowdown often reduction of output. How do they get out the mess? Often through drastic monetary and fiscal reform which virtually amounts to the acceptance of a rule based monetary regime which leaves no room for a discretionary monetary policy. Argentina had to adopt a currency board, Brazil and Mexico had to adopt a fixed exchange rate regime that had to be financed through the budget. In many cases, all the confiscation did was to postpone the crisis.

More Controls


Not only are analysts not analyzing the event from a market and openness perspective, they are also busy dreaming up schemes for further controls.
We hear of tightening our belts whatever that means. I have heard this from all our leaders all my life. Yet all it means is that for a few days, the leaders roam around in smaller cars but then gradually return to their profligate ways. There is little analysis of what it actually means from the analysts.
We are told that we should reverse the tariff liberalization that was achieved with great difficulty. It is even argued that that may have been misplaced. The government is taking us into a rationing regime with only essential imports (defined by the bureaucrat) being allowed into the country. This is not questioned. In fact some even argue that we should have a more complicated tariff regime that favors manufactures or intermediate goods (News June 3). The lessons form the Bonus Voucher days and the hugely complicated tariff regime that we had in place are so easily forgotten.

We are told that we should place limitations on foreign investment allowing it only hi-tech industries because consumer goods should be protected for home-grown entrepreneurs (Ghayur Nation June 4).

"Soon, the government will seriously have to consider sealing bank lockers and conducting tax raids" (Dawn June 2). There are no stretches of imagination that we will not go to find revenue for the spendthrift government. Even the unthinkable indignity of having my personal effects searched is all right.
Dollarization occurs because depositors feel that the rate of return on dollars is favorable. Most often dealing with dollarization requires an upward interest rate adjustment on domestic assets to make them more attractive. In the case of an impending currency crisis (especially in the case where fiscal freedom is limited) the medicine is again to raise interest rates. Even fiscally strong countries of the far east had to do that to stem a currency crisis. Yet the Pakistani analyst argues for a "lowering the yields on domestic securities and saving schemes" (Kardar, Dawn June 2).

Once again the easy option of a default


An international default is also talked about as well as attempting to place a cap on our payments in terms of our export earnings, ("In the opinion of this writer, this problem is inherently insoluble without external debt relief and urgent restructuring of our external debt, so that its servicing cost is not more than 10% of our export earnings" Dawn June 2). Thus if we become lazy and do not earn anything, we do not have to service our debt after all 10 % of nothing is nothing.

It seems that we have developed a default mentality. We have been bad and profligate, yet we want others to pay. The idea is that the somehow we should not have to pay for our mistakes. The easy option is to default. The government can always wipe the slate clean whenever it likes. What will our obligations mean in the world. Perhaps we should begin by talking about what reforms we are willing to undertake so that our cashflow will be improved and then consider default only as a last solution. That would be the honorable way of doing things as well as the corporate way.

I would not say that default should not be a consideration ever. But let us also not take the decision to default lightly too. Certainly let us not mention the term default until we have a full and comprehensive plan to deal with our fifty year legacy of blunders in place. More importantly, let us at least publicly debate and own this reform and be prepared as a nation to pay its price before we think of defaulting on our commitments either to foreigners or even to our citizens.