Pakistan’s Political Economy Has Been Hit Hard And There Is No Easy Way Out
By Jarrar Shah
This is my assessment as a student of economics and Pakistan’s political economy. Nationalisation was a huge blow to our economy. Apart from the obvious folly of having the state run business, it left the most damaging impact on our business community’s psyche.
We saw flight of capital including the infamous steel mills put up by the Sharifs in the gulf. Our business groups before nationalisation were building extraordinary things like aircraft parts and engines. Post nationalisation we saw rent seeking and cronyism with safety nests abroad. Many got foreign passports. The businesses of choice were essentially commodity businesses like spinning & weaving mills, sugar mills, the albatross around our necks power plants, fertiliser plants etc. Most businesses either sold to the state or got subsidies from the state. Competitiveness was eschewed with cartels operating in almost all sectors.
The 2000’s saw the banks and telecom sector being deregulated along with media. But in the post 2004 WTO quota free world we saw many of our textiles struggling. Apart from competitive and marketing issues many of our textile players borrowed cheap loans from banks and invested in DHA plots instead of their BMR. Many would default in 2008.
None of our big business groups tried to enter telecom, the only sector where players competed fiercely with each other. Mobilink was Egyptian owned, Telenor, Norwegian, Warid/Uphone Emirati and Zong Chinese. Their competitiveness benefiting our economy immensely. All this while we continued living beyond our means. Consumers had almost free sui gas and water. Govt intervention was ever present with FBR, WAPDA being huge drains.
In 2006, the Supreme Court buried privatisation with its steel mills decision. A mill that would have fetched US $320 Mn has cost the taxpayers 10 times more since then and resulted in privatisation derailing. This would be a huge problem post 2010.
The federation structurally bankrupted itself when Asif Ali Zardari engineered his 18th amendment and the ensuing NFC award. Since then the federation has been bankrupt. With the provinces not doing much to increase revenues, our borrowing has gone through the roof in the last decade with debt servicing being our largest share of the budget. The icing on the cake was provided by Ishaq Dar when he froze exchange rates with the help of borrowed dollars, resulting in subsidised imports. Manufacturing shifted to trading with public sector leading growth through debt laden expensive infrastructure projects.
Our energy sector is now hugely reliant on imported sources like LNG & Coal with guaranteed dollarized returns to power producers. Even public transport has been screwed up with projects like the orange train which looks pretty cutting through Lahore but is financially unsustainable. The subsidy required on it is astronomical. Today we have a debt problem and a dollar problem. We have been living beyond our means for years. As an economy our red tape and vested interests stifle innovation.
Our politics is not stable, our Rule of Law terrible. Contracts don’t mean anything. Is there an easy way out of this? No. Can we carry on like this? No.
The hard decisions needed are not raising oil and energy prices. The hard decisions are reimagining the entire social contract Patronage is unsustainable. Rent seeking is unsustainable. Plots business is unsustainable. Huge bloated govt is unsustainable. The economy needs a Thatcher. Cut govt, incentivize productivity & innovation. Subsidize only those that can earn $ and create jobs.
Starting point is getting rid of the ‘imported’ lot. Their dynasties can only function with patronage and rents being in their hands. And yes DHA/Bahria being this economy’s primary investment destination is not sustainable either! Hard decisions are needed indeed!