Keynes

in Islamabad
THE story of modern economic policies starts in 1929 during the Great
Depression, an economic crisis like no other. Its most severe impact was in
the US where the economy contracted by almost 30 per cent, leaving one in
four Americans without employment.

This crisis created an existential challenge for the liberal order — capitalism and
democracy — with people wondering what good was a system if they could not
put food on the table. Some scholars even connect the rise of Nazism in Germany
to the ravages of the Great Depression.

John Maynard Keynes was the first economist to identify that capitalist
economies had a tendency to remain stuck in a recession, unless shocked by the
infusion of more money. Keynes showed that once someone’s income went up
after obtaining a job, they increased consumption, which, in turn, increased the
income of firms that sold whatever these newly employed people were
consuming, enabling the firms to create still more jobs. In other words, the final
impact of an extra unit of money would be far greater than the initial amount
injected into the economy.

This ‘multiplier effect’, argued Keynes, would increase the overall demand in the
economy, thereby pulling it out of an economic recession. Keynes believed that
monetary policy would fail to stimulate the economy. Thus, Keynes singled out
fiscal policy — public or government expenditure — as the most effective policy
tool for stimulating stagnant capitalist economies.

Had Keynes been our finance minister, he would have serious reservations.

Taking a cue from Keynes, President Franklin Roosevelt implemented a massive

fiscal stimulus called the New Deal. Hundreds of public projects entailing huge
government spending were set into motion with the government injecting money
by employing almost eight million previously unemployed Americans, at times
even employing out-of-work artists to paint elaborate murals. By the time the
New Deal ended in 1938, massive government spending had brought an end to
the Great Depression.

A recent World Bank report points out that Pakistan’s economic growth will
average only around 3pc in the next two years. Given this anaemic growth, the
economy cannot generate jobs to absorb millions of people entering the labour
force each year. At the same time, the government’s austerity programme aimed
at reducing the fiscal deficit through cutting expenditure is alarming. Evidence
from Britain’s austerity experiment since 2010 (Big Society initiative) shows that
curtailing expenditure has led to entrenching poverty.

Had Keynes been Pakistan’s finance minister today, he would have serious
reservations about present economic policies and would have offered a different
prescription for taking Pakistan out of the economic impasse.

Keynes would have made the case that this government has taken an incorrect
approach by focusing on reducing fiscal deficit by cutting expenditure as the
multiplier effect also works in reverse. When the government cuts spending on
infrastructure projects, like new roads, construction firms do not hire labour.
This not only leads to job losses but those without jobs cut back on consumption,
thereby forcing other firms to reduce production, which leads to further job
losses.

Instead of curtailing expenditure and trying to squeeze more revenue, Keynes

would have the government provide a fiscal stimulus for increasing the size of
Pakistan’s economy or GDP. This would involve putting more money in the
pockets of people belonging to the lower socioeconomic groups since they end
up re-spending a big portion of their income. Doubling the size of the Benazir
Income Support Programme would thus be an ideal policy for the short term. A
higher GDP not only creates more jobs, it also leads to still higher tax revenues,
which can then be used towards reducing the fiscal deficit.

Keynesian policies have made a comeback in the shape of Job Guarantee

programmes. Argentina introduced the JG programme after the economic crisis
of 2001 in which heads of households were provided employment for at least
four hours per day. India has the National Rural Employment Guarantee which
gives guaranteed employment of 100 days per year to rural workers — it
increased the incomes of low-income households by 13pc.

The severe economic crisis facing Pakistan demands out-of-the-box thinking and
agile leadership. Keynes has shown how nations can come out of economic
recession by injecting — not withdrawing — money from the economy. JG
programmes have been tried successfully in a number of countries where they
have created jobs, raised incomes and provided economic fillips. The best brains
in the nation need to get together in order to conceive, design and implement
effective JG programmes that will not only reduce poverty in Pakistan but will
also take us out of these economic doldrums.