Another economic crisis? – by S. Akbar Zaidi

Dawn, February 4, 2011

THE problem with making arguments and stating opinions which go against the grain of what passes as current conventional wisdom is that this comes with a huge baggage of issues.

Often, contrary views are misconstrued, sometimes deliberately, because they suit someone`s interests. More often, they are simply misunderstood and people find it difficult to accommodate diverse arguments and are made uncomfortable with ideas that question their settled, often uninformed, opinions. Questioning well-established beliefs, to say the least, is unsettling. Critique is fundamental to a better understanding of issues and settled facts.

An article I wrote in these pages many months ago, which questioned the then held view about the economy, resulted in my receiving laudatory text messages and phone calls from leading members of the ruling party, saying that I had presented a `balanced` view and had `defended` the government`s economic policy.

I would be the last person to defend this government`s economic policies, for I believe it has shown the least seriousness about economic policies and issues, and I have always wondered what its vision or programme actually is. I have found none.

This long preamble is made necessary to ensure that when I critique conventional views which fill the pages of newspapers these days, I do not come across as someone who in any way whatsoever is seen to hold this government`s brief. I do not.

In the last few weeks, every single newspaper has carried dozens of articles and editorials about the state of Pakistan`s economy. The economy is seen to be in a `severe crisis`, is `collapsing`, `catastrophic`, `plummeting`, and `economic meltdown being on the cards`, and so on. Some economists have even gone to the extent of saying that, `the country is passing through its gravest economic crisis since 1971 and there is a generalised breakdown of economic order`.

Even former ambassadors and security analysts have been giving their expert opinions on the economy. The finance minister has been reported as saying that the economy was `on the verge of collapse`.

This din of collective conventional wisdom, from prominent and well-known economists, suggests that this might be the worst economic crisis which Pakistan has faced in four decades. However, conventional wisdom can also be very wrong.

There is no doubt that there are numerous serious unresolved and chronic problems with Pakistan`s economy which most writers have pointed out. The fiscal deficit is higher than it should be and might reach seven or eight per cent of GDP by the end of the fiscal year. Inflation has been persistently high and in double digits for almost the full tenure of this government.

There has been speculation about unemployment and poverty, both of which have probably increased since growth and investment are lower than in the recent past. Economists are not completely wrong in making these inferences based on a few facts and are quite justified in doing so. The excessive use of terms like `crisis`, `collapsing`, `plummeting`, `meltdown`, and the like, undermines the urgency and importance of identifying problems.

For an economist to state that the economy is facing its worst crisis in four decades only underscores the fact that many economists are not even aware of recent economic history. There have been so many real and imagined political and economic crises since 1971 that it becomes difficult to continue using the term.

For instance, after the nuclear tests in May 1998, there was far greater agreement that Pakistan was at rock bottom with no foreign assistance, and the economy had still not recovered from Gen Zia`s profligate decade and stringent IMF straitjacketing, with foreign exchange reserves non-existent. One would have been quite justified to call that time one of a severe crises.

Compared to 1998 and 1999, foreign reserves are higher today than they have ever been, and despite the energy sector on the `brink of complete collapse`, exports, surprisingly, continue to rise, quite markedly. The rural economy too, seems to be doing much better than it has in many years, despite the floods whose adverse impact was falsely and purposely overstated.

Although the problem of donor assistance is highly problematic, foreign donors are supporting Pakistan`s economy like never before. While this has caused other problems, this so-called crisis is less problematic than many earlier ones. An economy dependent on donor funding and remittances is not much to speak of, but `crisis` is altogether a different beast, and these are not indications of a meltdown, as yet.

In fact, if one wants, one could argue, that Pakistan`s economy is in a perpetual state of crisis, hence the current indicators do not necessarily suggest anything particular or extraordinary. There are chronic, serious and deep-seated problems and flaws, for sure, but a crisis of the economy, probably not. Pakistan`s economy is nowhere near collapse or plummeting. An economy projected to grow at three per cent, as announced by the State Bank on Wednesday, is not one in crisis.

If serious economists want to do serious research and analysis and make responsible statements about Pakistan`s economy, they need to understand precisely why the economy has not plummeted, collapsed or melted down. East Asia in 1997 was a clear and visible crisis, as was 2009-10 for many developed western countries. Pakistan since 2008 has been in a constant state of under-performance and an economy with numerous chronic structural problems. By no means is the economy passing through its gravest crisis since 1971. For that one probably needs to wait a bit longer.



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