Sachs on Pakistan’s economy …. Ashraf Jehangir Qazi
‘Koi khwaab na ho to bataen kya?’ (When no dreams stay what can one say?) — Athar Nafees (sung by Farida Khanum)
ON Nov 21, Dr Jeffrey Sachs, the renowned development economist of Columbia University, addressed the Sustainable Development Policy Institute in Islamabad. He began by referring to the general “failure of political systems to address people’s needs” and referred to the militarist global policy of the US as a prime example.
He noted US strategic policy was motivated more by “jealousy” towards China than concern for Americans. He observed if there was peace between India and Pakistan, the people of the subcontinent could benefit enormously.
Sachs noted that, according to IMF “diagnostics”, the Pakistan economy appeared “stuck” in low growth and that this year, negative growth was likely. Moreover, “there was no clear prospect of change”. Domestic investment at 14 per cent of GDP last year was “barely enough to cover depreciation.”
The twin disasters of the devastating floods and the Covid pandemic had further exacerbated the situation. China, Pakistan’s great friend and neighbour had, in contrast, sustained a domestic investment rate of 40 to 50pc since Deng Xiaoping’s Opening Up and Reform in 1978! Pakistan was simply “not investing in its future”.
As for school education, an essential ingredient of developing human capital, the situation in Pakistan was just as bad. The School Life Expectancy, ie, the number of years an average child spends in school in Pakistan, was just eight years according to the World Bank.
If technical and vocational education and training are also considered, the situation becomes much worse. Moreover, government revenue, which is the primary source of finance for development and human investments, was a mere 12pc of GDP.
If Pakistan is to achieve the educational and technical standards it absolutely needs to develop its economy, it would spend 83pc of its current government revenue. This would leave practically nothing for everything else.
Pakistan’s economic crisis is as much a political as it is an economic challenge.
Sachs noted that there was no way the private sector would or could make up the gap and the same held true for the healthcare sector — an equally vital ingredient of human development. To make matters still worse, the budget deficit of Pakistan in the fiscal year ending in 2023 was 7pc, contributing to an annual inflation rate of 30pc. In view of such statistics, Sachs bluntly observed, “a significant lifestyle change in Pakistan was required”.
Sachs also noted Pakistan had gone to the IMF for another bailout. And what did the IMF demand? Cut spending! At a time when Pakistan’s spending on critical ingredients of human and economic development was already too low!
In answer to Pakistan’s protests, the IMF command was: Be quiet! Don’t make a crisis! Austerity, Sachs admits, is needed, but it is not a solution. So what is to be done? A national investment plan is needed.
According to Sachs, the Chinese followed the right model, and as a result, have doubled their national income five times, resulting in a 32-fold increase in their GDP since 1978! While Sachs did not expect Pakistan to match China’s performance, he clearly suggested it should try to follow its example, even though “it won’t be easy”. Pakistan had no alternative but to make the attempt.
Where should Pakistan invest? Sachs reiterated his well-known six areas of education, healthcare, energy (decarbonised), sustainable land care use (land reforms), urban renewal (where half the population now resides), and digital transformation (5G is indispensable.) To even begin this odyssey, Pakistan would need to raise its revenue collection to 25 or 30pc of its GDP — essentially doubling its current rate.
This would require a similar raising of the savings rate, including household savings, even from poor households for which the banking system would need to be appropriately redesigned. Pakistan’s national debt at 35pc of GDP was not very high. But it was short-term rather than long-term debt, which created a liquidity problem and deterred international investment.
Accordingly, a debt management strategy was essential in order to attract public and private international lenders. All of the above, Sachs concluded, was difficult but possible. Pakistan’s performance needed to convey its development commitment to the global investment community.
Comment: One of Pakistan’s respected economists noted there was nothing “new or surprising” in what Sachs had said. This was not a criticism. It was a recognition that resolving Pakistan’s economic crisis was as much a political as it was an economic challenge. Textbook economics and IMF panaceas at best provided insufficient and short-term answers.
Other economists said the quality of investments was more important than the quantity of investment and the breaking of international production chains had disrupted Pakistan’s economic policies. There was a view that Sachs’ presentation was “too macro, as the devil lay in the details”.
Another view stressed that a significant percentage of Pakistan’s government revenue was spent in interest payments. As for foreign direct investment in Pakistan, it was observed that it was relatively short-term, the profits of which were repatriated in foreign currency. (In this regard, Sachs said Pakistan had to attract long-term loans and investments from international financial institutions and the global investment community, thereby suggesting the need for radical structural reforms. China is, in fact, the only country that has made long-term investments and granted longer-term loans to Pakistan. This upsets the US and it has, accordingly, put our ruling elites on notice.)
Conclusion: Prof Jeffrey Sach’s presentation was a breath of fresh air. The implications were clear. Pakistan has to first get out of the failing state syndrome before it can hope to respond to the challenges he identified. How will it do so? This can only be answered by actions, mobilisation, movements, organisation, pro-people governance, etc.
Our externally dependent, internally hostile, and fearful power and political elites, however, will never facilitate this. This is the challenge our middle classes have the primary and historic responsibility to confront. Otherwise, Pakistan is history.
The writer is a former ambassador to the US, India and China and head of UN missions in Iraq and Sudan.
ashrafjqazi@gmail.com
Courtesy Dawn, November 25th, 2023