Lessons from history ….Sakib Sherani
RECENT history has witnessed many countries experiencing episodes of severe economic stress similar to what Pakistan is currently going through. Several countries in Latin America fell en masse into debt repayment difficulties in the early 1980s. Since then, a truncated summarised chronology of financial crises runs something like this: Turkey in 1980 and 1994, Mexico in 1994, the East Asian crisis of 1997, Russia’s rouble crisis in 1998, Argentina in 2001, the global financial crisis of 2007, Ireland, Iceland, Portugal, Greece circa 2009, Europe’s banking crisis of 2012, and Egypt, Turkey, Lebanon, Argentina, Sri Lanka in the interim.
With so many episodes of economic crises, there is potentially a rich trove of lessons to draw from. What fault lines are more likely to lead to a crisis? What determines the severity, as well as the path and duration, of a crisis? And, perhaps most pertinently, how have some countries managed to use a crisis to launch their economies on to a higher trajectory?
Notwithstanding unique country-specific characteristics in each case, these crises can broadly be categorised into a typology as to their triggering causes. The way the crises have played out and the social as well as economic consequences for the citizens have also been broadly similar, with currency collapses, painfully high inflation, dollarisation, capital flight, a shift into inflation hedges, decimation of the middle class, a sharp spike in unemployment and poverty, etc, all being ‘standard’ features.
While many countries have achieved, much like Pakistan, short-lived stabilisation in the aftermath of a crisis, only a handful of countries have used a severe economic crisis to craft a reform programme that has led to a durable turnaround and economic take-off. (In some cases, the turnaround lasted for a decade or so before economic mismanagement and political mis-governance turned the clock back full circle).
Valuable lessons can be drawn from the experience of countries that reformed and prospered.
Arguably, the three successful episodes of reform and recovery that stand out since the 1980s include Turkey under finance and then prime minister Turgut Ozal, Brazil under finance minister and later president Fernando Henrique Cardoso, and India under prime minister P.V. Narasimha Rao (1991).
As finance minister, Turgut Ozal responded to Turkey’s crisis-prone and anaemically performing economy with sweeping reforms starting in 1980. The economy’s orientation was shifted from an inwardly focused one reliant on import substitution to an export-oriented one. State-owned enterprises were privatised and a wave of liberalisation was ushered in. A flexible exchange rate was introduced, public expenditure was reduced, substantial tax reform was undertaken and foreign investment was encouraged.
In the case of Brazil, noted academic-turned-politician F.H. Cardoso laid the basis, as finance minister, for turning around the country from a promise-rich economic backwater to a vibrant modern industrial economy via the Plano Real (or the Real Plan). In the first phase, public spending cuts were implemented, tax revenue measures taken, and fiscal relations with near-insolvent states rebalanced. The second phase saw the dismantling of the wage and price indexation mechanisms via an innovative scheme, and the removal of extensive subsidies to private businesses. A new currency, the Brazilian Real, was launched in 1994. The rest is history. The Real Plan was so successful that the successor socialist government of President Luiz Inácio Lula da Silva kept the core of the reform plan intact.
Perhaps the most striking reform experience in terms of results has been India’s. A fairly moribund economy till the end of the 1980s, the catalyst for India’s turnaround proved to be the economic crisis of 1991. Unlike in Turkey or Brazil, India’s reforms were more gradualist, yet the dismantling of its ‘licence raj’ provided an impetus that allowed subsequent reform efforts to build on the initial success.
The key lessons that stand out from these successful examples of reform include:
Competent technocratic reformers, supported by visionary politicians, are a necessary condition: This is illustrated in all three examples highlighted, but in none more so than the case of India. While history books generally tend to credit Dr Manmohan Singh and the likes of Dr Montek Singh Ahluwalia for the country’s turnaround, the vision for reform as well as the political support was provided by none other than prime minister P.V. Narasimha Rao.
The importance of a public mandate: One of the key points from the foregoing is that successful reform efforts have been led by politicians with a vision. Most acquired public mandates via elections to launch and continue with wrenching reforms, and had the standing and credibility with the nations they led. This was especially true for president Cardoso and prime minister Narasimha Rao.
A glaring recent example is provided by Alexis Tsipras in Greece. A staunch leftist, leading a radical left political party opposed to capitalism and neo-liberal economic policy (Syriza), Mr Tsipras virtually abandoned his ideology when Greece was left with no choice other than to roll out an IMF and ECB-supported economic agenda. Syriza went to the polls, and despite the hardships the IMF programme had wrought on the Greek population, it won back-to-back election victories in 2015 that gave it endorsement for the plan to deal with the economic crisis. It has subsequently lost two national elections, a combination of losing political capital as well as ‘the plot’. Nonetheless, the recent Greek experience, along with Brazil and India’s experiences, underscores the importance of a whole-of-nation approach in dealing with crises of magnitude.
Successful reforms have had large ambitions: The reform plan has to have much larger ambition than arranging dollar inflows in the short run. It has to be a comprehensive, multi-generational plan to restructure the economy, if not the polity itself. As I have emphasised many times in the past, Pakistan requires not just structural reform but institutional reform as well, including, but not restricted to, how the components of the federation interact not just in terms of fiscal relations but in terms of obligations and responsibilities in a wide array of domains.
History offers many lessons, not just in economics. We should learn to embrace it.
The writer has been a member of several past economic advisory councils under different prime ministers.
Courtesy Dawn, September 23th, 2023