It is an established fact that Pakistan is well below its economic potential. A nation of 220 million hard-working, creative workers shouldn’t be limited to a GDP that’s less than the market capitalization of one of the world’s 30 largest companies and hampered by a slower rate of economic growth than most of its regional peers. .
It’s not always the case. Until 2007, Pakistan was seen as a potential leader in the next generation of growing economies. This expectation was largely based on the promise of reforms that would unlock higher productivity and the growth that would follow. Some, like Vietnam, have continued to realize this potential while others, including Pakistan, have struggled to realize it. The main reason is that successive governments have not implemented a significant reform program.
The starting point for reversing this underperformance is to provide certainty about our economic objectives and the reform agenda to achieve them. The goal, at a minimum, should be a country that can live within its means and has a sustainable path to prosperity for its people. The IMF provides a particular view, based on the “Washington Consensus”, of what these reforms should be and their subsidized financial support depends on their implementation.
An open market economy needs competent regulators.
The government’s position suggests that it enters the IMF program under duress. This leaves stakeholders in a state of uncertainty about the reform agenda, knowing that the government may abort this agenda, as has happened previously, without offering a credible alternative. This uncertainty is at the very heart of our weak FDI, high currency volatility and other problems.
FDI flows are fungible and investments become uncompetitive once Pakistan’s macroeconomic uncertainty is factored into the cost of capital and other financial variables. Similarly, the ability to manage a floating exchange rate relies less on foreign exchange reserves than on the markets’ belief that the country is moving in a trajectory that justifies the band in which the currency is supposed to float. The case of the pound sterling leaving the ERM (European Exchange Rate Mechanism) in 1992 is a famous example.
The underlying assumption of most of the proposed reforms is that our path to prosperity is through an open market economy. This is absolutely correct because the historical record is clear. No closed economy (as is the case today in Pakistan with one of the lowest trade-to-GDP ratios) has ever generated lasting prosperity for its people. However, an open market economy requires capable regulators and competent engagement with the outside world.
The challenge is that sufficient capacity in a small closed economy turns out to be totally insufficient when it comes to dealing with sophisticated international counterparties. The consequences of these limitations at the macro level are obvious and have led to a dispute between Reko Diq, Karkey, IPPs, etc. costing the country billions in arbitration, lost investments and immense reputational damage. Nor have we deployed our forces to build mutually beneficial and balanced economic relations with other countries. This capability gap will also affect our ability to execute our policy on geoeconomics, which is a matter of national security.
It is also unfair to task officials with managing these pivots of economic strategy, negotiating trade deals or aggressively marketing investment opportunities. In recent years, this lack of professional understanding has led to the deployment of political “broad words” (like trying to fix exchange rates) where a surgeon’s scalpel would have been more effective in achieving goals.
The same limitations apply at the level of individual companies, as the development opportunities and global connections offered by the international banks, large multinationals and cross-border service companies that professionally trained my generation have diminished significantly over the past two decades. This is particularly unfortunate as Pakistan has been recognized as a talent exporter by many leading multinationals in previous years. The impact of this on our ability to operate an open economy is visible today.
Finally, the world is facing a profound transition that offers tremendous opportunities and challenges, including in climate change, digital transformation, machine learning, automation, and healthcare. Pakistan is well placed in some respects to take advantage of these trends; the nascent but dynamic venture capital ecosystem bears witness to this. Positive examples, such as Saudi Arabia, are already introducing rapid reforms that take advantage of these trends. There is clearly a moment to act and that moment will pass us by if we do not react in a timely manner.
The author is a managing partner of a UK regulated company which invests in global private markets, including Pakistan. He has held management positions in large multinationals.
Posted in Dawn, February 19, 2022