A matter of life and debt
In every crisis lies an opportunity. Many countries across the world that faced an economic crisis were able to use that as an opportunity to bounce back stronger and more resilient. Southeast Asian nations that experienced a financial crisis in 1997 did that by undertaking fundamental, painful reform and addressing structural problems through tough economic measures. Similarly, India in the 1990’s and several Latin American states in the 1980’s and 1990’s went through severe economic crises, but managed to not just recover but embark on a path of robust growth and build economic sustainability. In each case, wrenching structural adjustments, tight fiscal policy and other reform measures were launched by leaderships aided by able teams who were convinced that long-term commitment and consistent policy implementation was essential to move forward and that patchwork ‘solutions’ were in fact no solutions.
The question this raises is whether Pakistan can turn its economic crisis into an opportunity and break from its past of managing crisis by band-aid measures which only set the stage for the next crisis. This brings up the question of what it takes for the crisis to be turned into an opportunity. The conditions or characteristics to make this happen seem to largely transcend national boundaries.
The most important pre-requisite isn’t economic. It is the quality of a country’s leadership and whether it leads a competent government that sees the significance of structural reform and has the motivation, political will and credibility to take measures that are painful in the near-term but yield rich and enduring dividends in the long run. Pakistan’s economic crises have in fact all been rooted in governance crises, with ruling elites averse to reform and who almost always sought pain-free ways of dealing with economic problems that avoided taking structural measures.
Pakistan’s case is not encouraging given the progressive decline in the civil service and its predominantly generalist nature. In various periods in the past, the finance ministry, for example, didn’t even have a single trained economist.
Leadership is important but so is a capable team of professionals who can assist the government to fashion and implement reforms that enable the country to navigate through crisis towards sustained recovery and growth. In every successful case of a country that took the path to a better economic future, the quality of professionals who shaped and oversaw the reform process was significant. But again, it is the leadership that chooses the right team and then inspires them to deliver.
The political context also weighs heavily on the success or failure of economic reform. Buy-in of structural reforms by major political actors and consensus between them is necessary as that lends support and legitimacy to the process and assures policy continuity, which is crucial to the sustainability of reform. Political support is important to overcome resistance from vested interests opposed to reform, as this can invariably be expected. Pakistan’s case is illustrative for what happened but in a contrary direction. When some reform measures were undertaken in the past, for example by Moeen Qureshi’s interim government in the 1990’s, they were reversed by subsequent governments. In fact, low levels of investment in the country have much to do with lack of policy continuity.
Institutional quality and strength are also critical factors. This ensures how robustly reform measures are implemented and how efficiently adjustments are made during the process to respond to changing circumstances. Again, Pakistan’s case is not encouraging given the progressive decline in the civil service and its predominantly generalist nature. In various periods in the past, the finance ministry, for example, didn’t even have a single trained economist. The eroding capacity of state institutions has emerged in recent years as a key impediment to policy implementation.
There is much for Pakistan’s economic managers to learn from how other countries have achieved sustained levels of high growth. Among useful publications that have analysed this is the Growth Report, which offers important lessons from the experience of countries around the world. The report was the work of the Commission on Growth and Development set up by the World Bank, which comprised distinguished members mostly from developing countries. Though published in 2008 its findings are just as valid today. Most instructive is the report’s identification of characteristics shared by countries that implemented successful growth strategies. They fully exploited the world economy, ensured macroeconomic stability, maintained high rates of saving and investment, allowed markets to allocate resources and they all had credible and capable governments. Above all, the report points to the understanding by policy makers that “successful development entails a decades-long commitment and a fundamental bargain between the present and the future.”
Today Pakistan faces a stark choice about just such a bargain. Either it can steer the economy out of the immediate crisis by the same kind of fire-fighting it has done in the past – more borrowing, bailouts and accumulating greater debt while postponing reform and creating no capacity to repay higher levels of debt. This would simply guarantee another crisis down the road and do nothing to spur growth and investment. Or it can use the ongoing crisis as an opportunity to launch wide-ranging reforms and break out of the vicious cycle it is mired in – unsustainable financial imbalances, heavy domestic and foreign borrowing, soaring inflation and stagnant growth. If this choice is made it would serve as grounds to seek external debt restructuring. This will give the country the breathing space to institute measures that position the economy on a high growth path and also avoid imposing unbearable austerity on people already faced with an unprecedented cost-of-living crisis.
- Maleeha Lodhi is a former Pakistani ambassador to the US, UK & UN. Twitter @LodhiMaleeha