Economy - time to act is now

Talk about disconnects in Pakistan and the biggest one that comes to mind is between our economic managers and the economys real stakeholders When indulging in performance evaluation, the question perhaps from their perspective being: 'How well has Pakistan been doing lately? Something that they would tend to simply measure in terms of macro-stability indicators like reserves, inflation, current account deficit and fiscal deficit, whereas, to an average person the underlying question instead being: 'How well off are the Pakistanis due to their recent policies? After all, isnt it the people whose interests are the foremost and shouldnt democracys success in essence be measured by the tangible difference it makes in their lives? Not that one cannot create dents in the governments claims to macro-stability successes, but of more relevance today is this developing feeling of mounting 'unhappiness in the air, when it comes to the common man and the business sector
Latest economic studies by economists guide us towards the notion that national balance sheets or sometimes even the material national standards do not matter. What really matters and creates happiness is economic activity per se, employment, satisfaction of being creative, hope, opportunity and last but not least, an environment that gives you a feeling that your govt is a help and not a hindrance, and it is one that protects and not eyes asset formation. In support, a recent report compiled by five Economics Nobel laureates under the Chairmanship of Joseph Stiglitz, highlighted that although Americans are richer than the Indians, the average Indian today in real life is happier than an average American, mainly because economic activity (and with it hope and opportunity) in recent years has shifted from the US to India.
Now, this whole phenomenon takes us back to the good old John Maynard Keynes, who is invariably dug up and remembered in times of trouble by the victims of depression, recession, unemployment, and as in our case, a case of growing economic inactivity, allegedly by lack of vision and incompetence. Such a case in turn leads us to ponder that should Keyness insights be drawn upon by us as a toolkit to designing and implementing stimulus packages? Or do his ideas, coupled with our recent experience, demand a more fundamental overhaul of our economic policies? Surely it is the latter we need to focus upon. If we take some time to read one of the recent works on Keynes, The Return of the Master, by Robert Skidelsky (a scholar who arguably knows Keynes better than any other), he recommends breakdown Keyness insights into two broad categories: Why economies lose their way; and why they cant find a way out - incidentally also the main topic of Keyness most important work, The General theory of Employment, Interest and Money.
Here he showed that, contrary to the beliefs of classical economists, supply did not always create its own demand, and more importantly governments needed to step in to prevent unemployment even if it meant reducing their share of the pie in the short-term and subsidizing essentials to the public to buy, (a) confidence in markets and (b) faith in governance - ironically, the very two elements eluding us today.
More interestingly, Keyness other big insights that are often less focused upon, relate to Radical or Irreducible uncertainty as the root cause of economic instability. This immeasurable uncertainty, he argued, explains why people hoard cash (or indulge in off book transactions), why investment (domestic or foreign) gets volatile and why the entire financial outlook of the country begins to get unstable. And the reason he gives for all this is the deep connection of uncertainty with confidence, which in-turn has a direct correlation to governmental policies. Elaborating further, he explains, for example:
* Tampering with tax regulations in downturns can be disastrous and the governments need to curb their urge of collecting more revenue, especially in times of cash crunch.
* Even if you label it as an extreme view, the reality is that the process of stimulating an economy is the sole responsibility of the government and it needs to do this by intervening in markets in a manner where employment can be created by reducing uncertainty, creating public sector demand and bringing cost of production down in order to boost manufacturing.
Well, that is hardly the recipes we seem to be using.
Successful economic management is mainly about flexibility and entrepreneurship. Time and again economic models have proved that coercion and scare tactics get to be counter productive. Legislations and subsequent revenue collection drives that are based on incentives and reciprocity, and the ones that largely rely on expansion as a fraction of growth, tend not only to fare much better, but also help remove uncertainty and build public confidence. Then of course, timing is always of extreme importance. In times when the government is withdrawing public subsidy/support, inflation is stubborn, markets are depressed and unemployment is rising, it makes little sense to embark on ambitious revenue collection drives. Also, under such circumstances, citing a prevalent low tax to GDP ratio loses effectiveness when mentioned in isolation of other related ratios like indirect tax to GDP ratio and total public subsidy to GDP ratio. Further, the growing perception that no serious efforts is being made on the part of the government itself to reduce public sector wages, curtail expenses and rein in loss-making state corporations, does not help either.
Finally, it is noteworthy, that while we struggle to even reach a GDP growth rate of 3%, our next door neighbour India is targeting a double digit growth rate in 2010. They have just embarked on their own brand of tax reforms, which on the contrary aim to reduce the average tax burden on the common man and mainly on Indian businesses by rationalizing the existing tax structure in capping state ceilings on imposition of local taxes. In addition, following in the footsteps of China, the Indians have also announced a 2010 energy priority policy that gives preference to supplies and production cum manufacturing over all other users. In contrast, we seem to be sleeping Given the predominantly young population that Pakistan supports coupled with our extremely high population growth rate, the IMF packages cum stockpiling of debt will take us nowhere. Before we know it will be pay back time with nothing really to show in the kitty. Instead of rejoicing a tranche release, the vision should be to stand on ones own two feet. Global economies are full of examples where economic inactivity can fast assume the shape of an 'embedded culture. Even strong and developed economies like Japan once down in such a vicious cycle struggle to recover. Pakistan with its cocktail of challenges has little option but to grow at a healthy pace and the sooner we realize this, the better it will be for our future, since time is fast running out