Economic crisis management

By Rashid Amjad
Jun 30 2018 (Dawn, Pakistan)

Do forgive the people of this country if they cannot make sense of our present economic predicament. On one hand, they are told repeatedly (and correctly) that the economy has started reaping the benefits of CPEC — the ‘game changer’ — in the form of significantly reduced load-shedding, an upturn in investment and a not unimpressive recovery in economic growth. At the same time, they are told that the economy is in dire straits!

A severe foreign exchange crisis threatens to reverse significantly the recent economic upturn. Our import bill exceeds our export earnings, including remittances, and if we add to it the repayments due on foreign loans, the gap is immense: $25 billion or over eight per cent of GDP. The country’s foreign exchange reserves are fast running out. We have already reached the critical level of just two months of imports. The alarm bells are ringing as foreign exchange reserves continue to lose almost $1bn a month. We must now wake up to the reality that, unless we can raise $8bn to $10bn in new loans and obtain a roll-over of existing debts, we could well face default on our debt payments — which is a polite way of saying ‘bankruptcy’.

The current state of economic affairs requires that some important decisions be taken.

The economic problem we now face cannot be traced solely to the previous government’s stubborn refusal to adjust the overvalued exchange rate. Our economic managers appear to have lost the plot over the last two years. For one, they were unable to keep track of CPEC-funded investment flows, whose exact form of financing has never been made transparent. The second and perhaps more important reason for our plight is that the federal and some provincial governments decided to go on a spending spree — launching projects, oblivious to their cost and foreign exchange implications. This is not new: the last two governments were equally guilty.

The current state of economic affairs cannot be allowed to continue. Some important decisions may need to be taken in the crunch, even by the interim government in the national interest. The simple reason for this is that, unless some immediate measures are taken to restore business confidence and, most importantly, to calm the foreign exchange market, the exchange rate will continue to fall. In the extreme scenario, we could enter a freefall situation. Given this uncertainty, anybody with some staying power will not be willing to part with their US dollars, betting that the rupee will fall even more. Those wanting foreign exchange will be chasing less and less available in the market.

Yet, nobody will bail us out, whether it is the IMF or anyone else, without imposing ‘conditionalities’ — primarily to ensure that they get their money back. Here, our team of negotiators (from the finance ministry and State Bank) must learn some lessons from the past. The last two governments entered into agreements with the IMF almost immediately upon coming into power. The 2008 agreement with the IMF was an unmitigated disaster in terms of its impact on growth, which fell from near 6pc to less than 1pc. The economy never quite recovered after that. The 2013 agreement, partly due to the groundwork done by the interim finance team, was able to avoid this shock through a more gradual decline in the fiscal deficit. However, agreeing almost immediately to a reforms agenda was unwise. To the extent possible, the new government should seek some time to finalise the content and sequencing of economic reforms, for which it can take full ownership and deliver.

The immediate challenge will be to agree to a stabilisation package, at an appropriate speed and sequencing of adjustment, that protects the country’s economic interests. Despite its weak bargaining position, the government should work towards a stabilisation package in which the burden of adjustment primarily falls in a sequenced way on the fiscal deficit rather than on the exchange rate. This is not to deny that we need to adjust the exchange rate, but we must keep this limited to its current overvaluation. We must remain fully aware that the cost of a very steep devaluation is especially high for our heavily indebted economy. Doing so would also raise the value of imports, especially oil products, fuelling inflation and eroding competitiveness. To that extent, it would neutralise the gains from devaluation. Most importantly, it would increase the cost of our defence preparedness, which in the current volatile situation cannot be compromised at any cost.

Of course, cutting the fiscal deficit is not without cost, even if the decline is made gradual. A 2pc drop in the fiscal deficit would reduce our current GDP growth of around 6pc to near half this amount. Most importantly, to counteract this, we must put in place measures that allow the recent growth momentum to build on the revival of manufacturing and upturn in exports and create the climate to encourage the much-awaited revival in private investment. All this will ensure that the decline in GDP growth is minimised. The emphasis here should be on reversing the anti-export trade and tariff regime and making a serious attempt at cutting down on losses from public-sector enterprises. This should entail including workers and their elected representatives in any restructuring negotiations.

Over the medium to long term, the policy focus must shift to expediting coal mining in Thar (which could finally remove our dependency on imported oil and gas), preserving and supplementing our water resources, and switching the emphasis in education from merely increasing numbers to improving the quality of education imparted and the social skills of our graduates.

If seriously and successfully monitored and implemented, this agenda will likely keep the newly elected government busy through its term in office. Come 2023, it will be judged on these achievements. Inshallah.

The writer is professor at the Lahore School of Economics and former vice chancellor of the Pakistan Institute of Development Economics.

This story was originally published by Dawn, Pakistan

Democratic regression: The “English” turn

By Imtiaz A Hussain
Jun 30 2018 (The Daily Star, Bangladesh)

Gideon Rose made an astute observation in editing the May/June 2018 Foreign Affairs cover story on the current “democratic regression”. “We have seen this movie before,” he quoted a Latin friend of his on the concurrent predicament, “just never in English.” That may be the missing element behind this “regression”: populism may be a popular explanation, since it brings to the fore many of the disturbing developments within mature democratic countries; stalled economic growth in these same countries also finds immense currency as a democracy detractor; historically-bent scholars never miss the beat to push the cliché that what goes up (for example, whatever led Francis Fukuyama to proclaim an “end of history” in the early 1990s), must eventually not only come down, but also begin climbing again. And so the story goes.

Yet rarely is the Anglo-Saxon anchor put under the spotlight these days. Even a cursory glance suggests, with a tweak here or a calibration there, democracy may still remain the fairest damsel among governmental types, if, and this is a big if, it is not pitched in a sine qua non mode.

Samuel P Huntington’s “wave” explanations get us to centre-stage. His first “wave” did not happen in England and the United States by chance from the early 19th Century, nor could it have soared high enough to be noticed anywhere else, give or take fickle France. How the 16th Century enclosure movement evicted tenant farmers and peasants, privatised the commons, and converted society into a cash-economy playground paved the long and tortuous journey towards the individualism democracy demands. Even then it took the entire 19th Century, not to mention the opening quarter of the 20th Century, to build the one-person, one-vote hallmark democratic feature.

Across the Atlantic a “born-free” country (that is, devoid of vested interests, since they promote parochial over national or global interests), was led down a different pathway. Dominated by only a handful of Anglo-Saxons fleeing monarchical abuses in England during the 17th and 18th centuries, the United States was virtually guaranteed nothing but a democratic future. Yet, this did not come automatically. As in Britain, a liberal market demanded a government from outside the prevalent box. Though the US Constitution enshrined democracy by 1787, the country still had to wait until 1964 before all adults could claim the one-person, one-vote privilege.

Both cases depict an ominously protracted journey to a representative government, demanding voluntarily engagements of its proponents/practitioners in exchange for returning as much more back to that society. This blended perfectly well with private enterprise, but it is the innovative capacity of private enterprise that permits democracy to replenish itself until perpetuity. Only by halting the process, or letting impediments intervene can democracy be disrupted. That, unfortunately, must be what has happened to produce infectious populism. Donald J Trump on yonder side of the Atlantic, and the Brexit vote, not to mention Dutch, French, German, Hungarian, and Italian electoral threats on this, portray today perhaps the sickest face of “English” democracy.

British colonies were expected to spearhead democracy. Frankly and fairly, Britain did whatever it could within its capacities; and that was a lot more than those other European countries boasting empires, whether it be Belgium in the African heartland, France across North Africa and Indo-China, Germany in Africa’s south, Italy in Abyssinia, Portugal in Brazil, or Spain across the rest of Latin America. By softening its noblesse oblige imperial approach, “English” democracy had the chance to prevail wherever the British Empire existed were it not for the coincidental emergence of the United States as not only the world leader, but also Cold War participant, after World War II. “English” democracy was hijacked, but only across the friendliest Atlantic waters.

Though still not perfectly democratic by that time (women had only just got the right to vote), the United States continued, for more than a century, to cultivate key institutions (like regular elections, stable parties, and foresighted leadership), just as Britain had done. This is the one area where Rose’s Foreign Affairs reference to “English” matters: the inability or unwillingness to permit new-born countries that same time-frame to sow and reap those very fundamental institutions. Britain may not have been behind the global steering-wheel, but in retrospect it can still boast producing one of the finest democracy-in-transition experiments among former colonies: India (even as the world’s largest democracy today faces one monumental democratic threat: religious fundamentalism).

If “blaming by default” is a lesser evil than “blaming by deliberation”, then the United States must take full responsibility for truncating what it preached: authentic democracy, not one as a tacky alternative to communism, nor as the appropriate outlet for foreign aid and investment. Beginning its world leadership on the wrong foot was enough to prevent fledgling countries from building new institutions upon democratic pillars and principles: instead of promoting the principles of its own Founding Fathers, the United States imposed a sine qua non condition that they reject communism first. A tragedy of errors followed, with dictator opponents of communism (from the Shah of Iran to Ferdinand Marcos, with an Ayub Khan here and Augusto Pinochet there, and gullible tyrants everywhere), quashing their country’s maiden democratic flag-bearers (be they Muhammed Mosaddegh, Benigno Simeon “Ninoy” Aquino, Sheikh Mujibur Rahman, or Salvador Allende Gossens). No more fatal a blow could have been inflicted upon democracy and its future than that. No wonder the third and fourth democratic “waves” from the 1980s and late 1990s fell short of delivering: the critical institutions were just not there to absorb the soaring expectations; and it was pathetic to expect them to grow overnight under military command, as in Afghanistan and Iraq, in the 21st Century, as they had done under starkly different circumstances in post-World War II Germany and Japan.

Though this “Third World” or “Fourth World” malaise may not be that far from the heart of the current “democratic regression”, which is the Atlantic seaboard, it did feed western populism after the Cold War atmosphere permitted another opportunity for democratisation: their low-waged or import-substitution policy approaches that were encouraged during the Cold War to prevent communist penetration (as across Latin America), now threatened western economies, particularly driving university-educated students into abysmal unemployment.

It may be far too late to turn back the clock (and the policy approaches) to retrieve democracy; but amid the less liberal democracy sprouting, we should be looking where the sun rises to capture the new democratic contours. They will not be picture perfect until they experience their centuries of institution-building trials and errors, as with the “English”; but that might still be a better alternative to the monarchical/dictatorial impulses that gave birth to democracy in the first place several centuries ago.

Dr Imtiaz A Hussain is the head of Global Studies & Governance Program at Independent University, Bangladesh (IUB).

This story was originally published by The Daily Star, Bangladesh