Sunday, 5 January 2014

Economics in Pakistan

The tragedy with economics is that everyone is an economist. At gatherings there are several people who are pontificating on how the economy would pick up if only we would make sure that everything works well. Economics to these people is just wishing—just say all that you wish should happen and expect it will. So fix the economy and all will be well is the usual prescription I hear. Our education system has not taught them tautologies!

Such speakers will say in one breath, build Bhasha, Kalabagh and several other dams and several coal based plants and then import LNG, educate all, export more, expand industry and agriculture especially horticulture, develop more infrastructure. These speakers will not stop for a minute to think that most of these are objectives or wishes of things to happen. To make these happen, we must think of processes on how to make them happen, the instruments that we have at hand if any to make them happen, financing if required, and most important of all the human skills and incentives that will make them happen. But unlike economists, speakers and columnists of this variety will assume that instruments, capacity and financing for their wish lists exist.

There is another group of economic pontificators who only think fiscal deficit and stabilization. For them, every speech/column is lamenting the fiscal situation and presenting a single item remedy—increase taxes. They seem to have confused economics with accounting. Expenditure minus taxes is the fiscal deficit. Since the deficit has gone up and they feel that expenditure should not be cut down, let us collect more taxes. Simple arithmetic.

Column after column, speech after speech this arithmetic is repeated. If you ask a few questions like fundamentalists they turn on you to shout out a defense of their arithmetic. Why not cut expenditures? Can you not see that social sector spending is so low, public investment is so low, debt servicing is high! More arithmetic!
Of course the slightly more erudite will very cleverly argue, “How will you finance your deficit?” Print more and you will increase your inflation rate and we do not want inflation. More debt is not possible since we are already way beyond our self-imposed debt limit. Still in arithmetic mode.
And of course there is the constant reminder of our reserves and declining BOP situation. More arithmetic.

Then of course there are those who will vociferously argue for subsidies to industry and exports after all there can be no growth without this. Is that not what East Asia did? This is the model of the sixties that these people are clinging on to without realizing that the world has changed. Nor do they know that each country’s path to development is unique and mimicry wins nothing.

There is another tiresome refrain, “we know all the solutions and all we need is implementation.” When you ask them what is it that you know they will hand you there wish list and ask for its implementation. It is like wishing to be a Wimbledon champion and asking someone to implement your wish.

Economics is not mere accounting or arithmetic. Nor is it wishes. Nor is it static, stuck in the sixties. Nor is all known. Anyone who is following the global crisis will be stuck with the complexity of the problem. The best minds of the world are involved and solutions are far from obvious. So a little humility is in order. But not our know-it-alls!

Without research, thought and reading to claim that we know all is very dangerous and should be shunned.

What these people need to understand is that economics is most importantly concerned with understanding human behavior at the individual and group level. People individually or in some collective develop responses to their environment to maximize their own, their family’s or their groups welfare. The environment is largely the manmade frameworks of laws, regulations, systems of governance, market organizations that humans operate in every day. The varieties of these responses make up what we know as GDP in the economy.

If GDP grows it lifts up not only welfare in general it also gives the government more operating room allowing space for more debt and deficits while also inducing more tax revenue. Most economies think of ways to increase growth for good things to happen. But our accountant/economists are focused merely on stabilization, accounting and arithmetic.

Those who want growth cannot have growth through wishing for all good things. If only we could trade regionally from China to Kazakhstan to Sri Lanka. If only we could build a solar station on mars and give all manner of subsidy to industry and exporters. Growth does not happen like that.

We know now that growth happens when the institutional/incentive framework is conducive to people’s efforts to innovate and engage in entrepreneurship in open competitive markets. This is clear. However, operationalizing this statement is a huge research agenda. No one can claim to know what is it that needs to be done. 

We can now all start researching and learning and see how we can create the winning institutional/incentive system. It will have to be a slow learning process and one that we will have to continually research and tweak for this system is high maintenance and needs constant attention.

This is why I have been writing for over 2 decades on why and where our economic system needs change. Which is why serious economists argue, the government should stop chasing money, wish lists, false targets and yesterday’s models. Instead it should focus on economic reform to make a system of incentives and property rights that is conducive to economic growth. But this cannot be done while thinking that we know all and that we can be mere monkeys mimicking some distant country.

Instead this will mean serious research, serious debate, serious humility at every level—bureaucracy, politicians and thinkers—an acceptance of our ignorance.
Serious economists in their speeches and columns should discard the outmoded method and start developing ideas on understanding our economic system and educate the rest of society on how to think afresh on the economy.

The Framework of Economic Growth (2011) of the Planning commission could be one such point to departure. It deliberately talked of only a small number of linchpin reforms that underpins the rent-seeking system and has the potential of disrupting it. It should be understood and discussed more widely.