Samundar Paar

Monday, July 05, 2010

'Don't use price controls to curb inflation'

By Rana Fawad
Posted June 5, 2008

WASHINGTON: Don’t subsidize energy sector, don’t use the government as a last resort employer, don’t provide open-ended protections to specific sectors, don’t use price controls to curb inflation, don’t neglect urban infrastructure, don’t underpay public servants, and don’t allow exchange rate to appreciate.

These are the ingredients mentioned in an economic recipe offered by renowned Pakistani economist and Senior Scholar Wilson Center Shahid Javed Burki while speaking on “Pakistan's Economic Difficulties and Their Consequences,” at a discussion organized by the Woodrow Wilson International Center for Scholars on June 4.

Asia Program director Robert M. Hathaway introduced Shahid Javed Burki to audience and f that Burki has accepted to join WWC as Senior Scholar. During his 25-year career at the World Bank, he served as vice president of Latin American and Caribbean and director of China operations. Moreover, he served as Pakistan’s Finance Minster briefly in 1996-97.

He has contributed several books on economy. Referring to the current state of economy, he regretted that the political elite were preoccupied with the restoration of judiciary, distribution of power, etc., whereas the common Pakistanis were worried about power outages, food prices, galloping inflation, real reduction in real incomes brought about by significance amount of price changes.

“If this situation is allowed to continue, I think the country could be headed to social and political turmoil,” he warned.

To make the audience understand the current economic conditions, Burki walked them through various stages of economic ups and downs of the country since its inception in 1947.

Pakistan’s economic history: a roller coaster of 61 years
Labeling Pakistan’s economic journey as a roller coaster, Burki declared it an impressive performance. He argued that the average economic growth rate remained over four per cent a year during the past 60 years and the economy today is around 18 times the size of the economy of 1947.

He categorized it as one of the most impressive records of sustained growth anywhere in the world. “Not the most impressive, but amongst the more impressive ones,” he added.

Comparing the present with past, he pointed out that the country’s economic structure has changed. He pointed out that at the time of the Independence Pakistan really had no industry, banking sector, service sector, etc.

“And my guess is that about 60-65 per cent of GDP (Gross Domestic Product) was accounted for by agriculture and it employed about 70-80 per cent of the workforce. It was not only a rural economy it was a rural place as the urban population was accounted for only about 10 per cent of the population.

He told the audience that in 1947 Pakistan’s population was 30 million whereas today it stands at 160 million. “And because of the steady rate of growth GDP per capita increased at a rate of about 2.2-2.3 per cent a year in 60 years, which again is not an insignificant performance,” he commented.

He pointed out that one consequence of this growth is that there is fairly a significant decline in the incidence of poverty. “I’ve estimated in one of my works that the incidence of poverty in the year 1947 was around 65 per cent of the total population. It is now around one-third. Pakistan is much more urbanized now although official statistics endorsed by the World Bank put our urban population less than 40 per cent, my own hunch is that it is much higher than that, probably close to 60 per cent,” he said.

Burki explained that at present the agriculture sector accounts for only 20 percent of GDP. “The largest sector of economy is service sector which accounts for about 53 per cent.”

However, he lamented that the growth did not occur evenly and pointed out that here were three periods of very rapid economic growth: 1960-1969; second one was around 1977 to 1988 and the third one more recently was from about 2001/2002 to 2007/2008.

“So, if you count them all together you’re talking about 27 years of very rapid good economic growth almost as good as the rates of growth of some East Asian economies, close to seven per cent a year,” he added.

He also noted that for the remaining 34 years, the growth rate was 3 to 3.5 per cent. “Pakistan, therefore, has ridden a roller coaster. It does extremely well for about a decade and then a crisis sets in and it takes time to recover from the crisis and goes back to a high growth of rate.”

The veteran economist told the gathering that the first period of high growth in 1960s was dubbed as a model of growth even by the American economists of that time.

He mentioned that it was interesting to note that the Indian economy in the first 40 years grew at what some Indian economists called the Hindu rate of growth (around 3 to 3.5 percent a year) as compared to Pakistan’s five per cent a year.

“So, there was a gap between the rates of growth. But then the lines crossed after that. In the case of India there was a paradigm shift. From 1947 to 1985-1986 there was a period of slow growth and after that it witnessed high growth,” he illustrated.

Why so? Shahid Javed Burki analyzed that Pakistan depended very heavily on external cash flows, especially when its strategic interests conformed with the United States in 1960s (containment of communism), in 1980s (frontline ally in Afghan-Soviet war) and now in war against extremism and terrorism.

“However, there is a difference. Today, external flows are not coming from official sources as much as they are coming from private sources. The structure of external finance has changed quite dramatically for Pakistan,” he added.

He said another reason was that governments in Pakistan neglected development of human resources and the country was paying a price for that. “Pakistan has one of the very young populations in the world. So it could turn demography into an asset rather than a burden but for that to happen it has to invest very heavily in education, research, health and so forth.”

On current economic scenario: Commenting on the current economic situation in Pakistan, Shahid Javed Burki said, “At this point the economy has run into some very rough weather. There are a number of deficits that have appeared and these have to be tackled.”

He mentioned that two of them, fiscal deficit as well as balance of payment deficit, are particularly important. He said according to different estimates fiscal deficit stands between 7.5 per cent of GDP and 9.5 per cent of GDP. “Both numbers suggest a very large deficit, fairly significant imbalance which needs to be addressed."

As a consequence, Pakistan’s trade deficit and balance of payment deficits have also mushroomed and they are about 7 to 8 per cent of GDP.

“We have estimated that a country in Pakistan’s situation can n tolerate fiscal deficit of about 4.5 to 5 per cent and a balance of payment deficit of about four per cent a year on a sustainable basis, which means the current deficits are twice the level of what we consider to be sustainable levels,” he added.

He suggested that adjustments will be needed which should fairly be sharp equal to about two per cent of GDP in terms of fiscal policy which then also translates to an equal amount of adjustment on the balance of payment side. He warned that it should be done in a two-year period to avoid the squeeze over a one-year period. He also cautioned the policy makers that cutting down of public sector expenditure should be done in a way that the growth is not compromised.

Referring to the economic performance of Pervez Musharraf’s government during 1999 to 2001, he commented that the breaks were applied very hard both on the fiscal as well as monetary side.

“But having done that it suddenly lifted the foot from the brake and put it on the accelerator and the economy took off which is not surprising economies do take off if they have been squeezed very hard and Pakistan was no exception.”

He said in his own view that was not a good way of managing an economy. “It’s like a machine. You don’t give it jolts. Musharraf government gave it two jolts and we are feeling some of the consequences.”