Boss, strategy kya hai?
The IMF deal means we’ll survive, but what do we need to do to thrive?
It’s Day 1 of the Test match. The sun is shining, the pitch is pristine, and Captain Ishaq Dar walks out for the toss – what’s his strategy to win? Well, the batters have promised to score big runs, and the bowlers have been banned from conceding any. Problem solved. (Pakistan go on to lose by an innings)
We have a current account deficit problem – our imports consistently outweigh our exports. Remittances from overseas Pakistanis help a bit, foreign direct investment would be useful – but we don’t get much, and so we end up borrowing ever-increasing sums of money to cover the shortfall.
How can we break this cycle of dependency? The government has two main answers – subsidising exports, and restricting/taxing imports. Let’s look at why they don’t work.
Export subsidies are not a negative per se. Many developing countries have successfully employed them to generate long-term economic growth. The problem is we don’t know which subsidies are actually useful and which ones are wasteful. Or to quote Atif Mian, “Does the credit subsidy lead to investment that otherwise would not have happened? Or are we simply handing over subsidies to cash-rich firms that would have invested anyway?”
That’s a pretty big question, and one which we do not have an answer for. Despite doling out billions of rupees in subsidies every year, there has not yet been a single analysis published by the government of which types of firms – size, industry, etc – are the most cost-effective to subsidise and how long those benefits should last (hint: not permanently).
Adopting an evidence-based approach is crucial. Take the example of a study published last year in Italy’s Campania region that analysed subsidies given to firms to encourage innovation. It found that the subsidies only statistically increased innovation investment among low-tech medium/large sized firms. For all other micro, small, and high-tech firms, the effect was insignificant. That is the kind of specificity with which we need to be making our subsidy decisions, especially as resources are scarce.
So, if there is little analysis, on what basis are we making these choices? Here’s a clue: a paper by Asim Khwaja and Atif Mian found that politically-connected firms borrow 45% more from government banks and have 50% higher default rates. What a surprise.
In general, Pakistan is a patronage-driven economy. So, when the government chooses to provide a credit scheme (EFS) to 800 out of roughly 15,000 exporters, it is likely that the exporter’s political and financial capital had far more to do with their selection than any independent analysis. Predictably, the World Bank found the EFS scheme to be extremely inefficient, with each extra dollar of exports costing the government 83 cents. Another similar program (LTFF) cost 93 cents per dollar.
It’s also not as simple as just reducing imports while increasing exports. The two are inextricably linked. Take textiles, our largest export sector at around $15 bn per annum. Most of our textile exports are not value-added goods – ready-made garments comprise less than 20% of our cotton exports. And while other textile-exporting countries have branched out into producing clothing mixed with synthetic fibres, most of our garment production is still only cotton. Why don’t we change that – oh right because we have import duties on synthetic fibre, which makes it expensive to use as a raw material in our export products. And what is the basis for determining import tariffs in Pakistan? Let's not even…
Ultimately though, that’s the key issue. We can make all kinds of minor tweaks, but if we really are to break out of the IMF trap, the fundamentals underpinning our economic decision-making need to change. Can we do it? Forget Captain Dar, that’s a question for the “Chief Selector”.
What I’m reading this week:
Private jails in Balochistan’s fiefdoms - Powerful sardars enjoy total impunity in their open defiance of the law (Akbar Notezai, Dawn)
The myth of underdevelopment - Legal autonomy and land reform in Jammu and Kashmir (Sehar Iqbal, Phenomenal World)
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Very interesting. Writing more about politics myself, but these are closely intertwined.