An Analysis of Pakistan’s Macroeconomic Situation and Prospects

Conclusions

Pakistan’s latest growth experience during 2003–2007 was the result of

short-sighted policies driven by high remittances of overseas workers, FDI,
“hot money” and loan inflows, as well as some government pump-priming.
While initially this led to high growth, it has now become clear that this
growth model failed to address the main problems afflicting the Pakistani
economy:

(i) a crisis of confidence in the political order and a strong perception of a

weak government, unable to undertake strong economic measures, such as
improving revenue collection, switching from price subsidies to income
subsidies, and solving the power and water shortages

; (ii) a neglect of the supply side of the economy (i.e., productive capacity,
technological upgrade of the economy); and

(iii) inability to address the increasing fiscal and current account deficits.

Like other developing countries that have implemented questionable

domestic policies, external shocks have put Pakistan in a very difficult
situation. However, inducing a reduction in aggregate demand through
recessionary policies to cure problems that have strong supply-side causes
(i.e., the oil and food price shocks and poor infrastructure) will not help
Pakistan. Often international institutions have been excessively preoccupied
with fears of inflation. Excessive austerity has forced countries to cut
unnecessarily on high-return public investments, and has led to higher
unemployment and to larger gaps between actual and potential output. All
this has ended up harming growth. The very painful lessons of the East Asian
crisis (although it had different roots), and of the subsequent Turkish and
Argentine economic collapses (as a result of the ”shock treatment”
approach), have led some economists to recommend more heterodox
economic policies in periods of crises. Achieving political stability is a key
piece of the solution. Austerity measures in the monetary and fiscal fronts
will not bring back, on their own, much-needed confidence. Likewise, the
situation requires a coordinated effort at the international level.

With this in mind, any sensible solution to Pakistan’s problems will have to
consider:
(i) A coherent economic program that tackles macroeconomic imbalances, as
well as a long-term program that leads to the modernization of the economy.

(ii) On the fiscal front, the government must have enough political muscle to:

(a) implement progressive direct taxes to generate more revenue

(b) switch from price subsidies to income subsidies with clear targeting
mechanisms for poor households;

(c) protect vital social and economic services when poverty is increasing; and

(d) allot funds to address the power and water shortages.