Friday, 22 August 2014

Marching to the Tune of Defunct Economists


Lord Keynes had famously said that “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist”
Pakistan offers the best illustration of Keynes’s statement.
Here we are still suffering from S M Akhtar even though most kids don’t even know who he was. If you know this name you are probably old.
I remember I could never read that book called Economic of Pakistan by S M Akhtar. It was like memorizing the economic survey and a plan both of which are unreadable documents. The trick was to memorize numbers and throw them back at the examiner. And you also had to kind of compartmentalize your mind. Whatever you learnt of real economics—theory and empirics—you kept separate from the economics of Pakistan.  
Pakistan economics is still recovering from the Akhtar. And it is never more apparent than at budget time. People treat the numbers of the economy with the same sanctity that we treated them when taking our BA exam. Regurgitating numbers without any point was enough to win you points.
Economy was not about understanding relationships between key variables, uncovering agent and agency behavior, delineating the role of policy or debating market or government failure. Mindless number pronouncements were enough. At least 2 common fallacies survive from Akhtar days. (There are more. Will cover them later)
“Targets!”
It was also an era of planning when the book was written. Hence it was important to think in terms of government targets, plans and achievements. The literature moved on and we now know that the government has no way of targeting any variable. There is no serious economic work being done in the government. In fact the government does not even employ economists.
More importantly, economists have known since the seventies that prediction is not possible given the many forces at work in the economy. Without having meaningful forecasts, how can the government announce targets? Yet headlines are written about targets and many columnists discuss these as if those targets have meaning.
There is much excitement around the setting of export and growth targets. No one asks where they came from? Just that the government fixed a target. Even in the earlier planning models, the announcement of targets were supposed to be accompanied by an analysis outlining the instruments of policy that the government had for trying to achieve the target.  Not here. The government can announce any target and tell you nothing about their policy instruments and certainly not connect their policies with the target. But the old Akhtarites have been trained merely to memorize targets and feel good.
Numbers are so all important in this scheme. The export target is always mentioned as 17% or 18 %. It remains in that narrow range and no one questions it. MOC has no analytical model or anything that justifies that number. But more importantly no one notices that the nominal GDP often is growing by the same amount. Hence in terms of the share of GDP exports will not grow.  Indeed over the last decade or more this ratio has remained constant despite MOC sounding heroic announcing the target and many media columnists being excited about it.
Numbers
Numbers are so all important that we quibble over the 3rd decimal point. For example headlines were given to the growth number this year, with MOF claiming 4.1 % and several economists claiming 3.5 %. Much excitement was generated.
I have also seen MOF claiming a great achievement by showing an improvement in the deficit of .2 %. Can we measure these numbers so finely?
Unfortunately, a course in statistics was not a requirement for graduating with S M Akhtar. I have asked many a columnist who comes to me with a question on numbers asking me to interpret a minor difference in economic numbers, have you taken a course in statistics and the answer invariably is “no”. But then this is directly from the way our curriculum was set.
Now a first course in statistics will teach you that most data collection can never be exact. It always comes with a margin of error. In reality we have an interval of possible measures. More than likely, both 3.5 and 4.1 are in the realm of possibilities statistically speaking. So the debate is useless as statistically both numbers are indistinguishable.
In a recent paper on energy and growth, Imran Choudhry, Noreen Safdar and Fatima Farooq present the mean and the standard deviation of the GDP in Pakistan over the period 1972-2012 to be 4.82 and 1.96 respectively. The well-established rule is that 2 standard deviations from the mean on either side marks a confidence interval where most outcomes can be considered possible and cannot be ruled out as different from the mean.  Given this well established rule, the confidence interval for our growth data is between .94 and 8.44.
The fuss that is being created about the numbers is totally uncalled for. The precision required to differentiate between 4.1, 3.5 and 3.3 is not there. It just makes good copy and shows people how clever we are when we question numbers even though the numbers don’t mean much.
Sadly this mindless following of a defunct economist is keeping the real economic debate away!