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Political Instability & Economic Growth

Political Instability

Making A Strong Case for Governance Reforms

Economic growth and political stability are deeply interconnected. If, on one hand, the uncertainty associated with unstable political environment reduces investment and the speed of economic development on the other, the poor economic performance may lead to government collapse and further political unrest. Economists consider political instability as a serious malaise that impedes economic growth because it not only shortens policymakers’ horizons leading to sub-optimal short-term macroeconomic policies, it may also lead to a more frequent switch of policies, creating volatility; thus, negatively affecting macroeconomic performance. The uncertainty that has engulfed Pakistan because of intermittent instances of political instability has taken a heavy toll on Pakistan’s economic development.

In theoretical and empirical literature, the fact that political factors impact economic performance is well established. It is also true that there are many channels of political impact on the economy. Political instability hampers economic growth as it attracts lower investment which leads to low-key economic activities. In the modern-day world, there are many instances where the political volatility phenomenon led to shortened government tenures which, in turn, jeopardized the prospects of implementation of sound economic policies. Fragile political systems in many countries of Sub-Saharan Africa, the Western Europe and the Middle East have been a major constraint for economic development. The experience of these countries reinforces that political factors be accorded an important place in the discussion of economic progress of countries.

Prerequisites for Economic Growth

There are at least four essential prerequisites to achieving the goal of a sustained economic growth.

Political Instability 1First, is a long-term vision that the country’s leadership provides to set the direction of the country’s economy as well as the goals to be achieved. It is the leadership that also formulates the execution strategy through which this vision is to be translated into reality. Today, all countries of the world are faced with changing environments and uncertainty is besetting them. This requires a continuous adjustment and fine-tuning is required by the policymakers.

For instance, China laid down its 25-year plan in 1980 under the visionary leadership of Deng Xiaoping. Every succeeding leader followed that plan after some modifications to suit the contemporary circumstances. One of the explanations for China’s stellar achievements in infrastructure and energy is the disciplined pursuit of this long-term plan.

Second, political stability is another sine quo non for economic growth. If the investors are constantly told that the government’s days have been numbered and that it is going to be removed or toppled any time soon, they would never put their money at risk. Candidly, if they are not sure about the returns they will get on their investments, they would never invest. As investment remains shy, growth will remain a dream. This leads to high unemployment and acute poverty. Political stability can be cultivated only if there is an orderly and predictable transition of power at regular intervals. Premature and abrupt dismissal of elected governments — which Pakistan has witnessed many times — is highly inimical for sustained economic growth.

Third, almost every new government in Pakistan reverses the policies, suspends or abandons the programmes and projects initiated by the previous government without any solid justification. So, the private investors shy away from committing their money in the country. Although a broad political consensus does exist in Pakistan on the direction of economic policies, yet every government tends to condemn whatever has been done during the tenure of the previous government. This causes serious handicaps for economic development. Continuity, consistency and predictability, thus, are the things which foreign investors  like.

Fourth, overall governance structure and the strength of institutions determine whether we can achieve the goals we have set for ourselves. If the enforcement agencies are saddled with corruption, incompetence, indifference and ineptness, there will, surely, be a lot of leakages and waste. A rupee, if properly invested, can bring 10pc returns but if only half rupee is invested and the other half is pocketed for personal use, then we will end up with negative returns and, ultimately, a faltering economy.

Positive Factors Influencing Pakistan’s Growth

At present, there are at least six factors which serve as good omens for the future of Pakistan’s economy.

First is the size of domestic market. With a population of more than 180 million people, Pakistan offers a huge and attractive market for goods and services. Pakistan’s ever-growing middle class with its rising purchasing power creates demand for goods and services. Expansion of this demand helps the industry in achieving economies of scale and lowers per unit cost of production.

Second factor is the favourable demographics. While the rest of the world, particularly the advanced countries, would have rising dependence ratios due to increase in ageing population, Pakistan has relatively a younger population — 63 percent of Pakistan’s population is below the age of 25 years while almost 50 percent is below the age of 19. If properly educated and skilled, this youth would serve as the workforce for the labour-deficient countries.

Third, Pakistan enjoys a highly favourable geostrategic location. Two giant economies of the world — India and China — are immediate neighbours to the country. With India, a peaceful relationship can spawn benefits to our country’s economy through trade, economic cooperation and scientific and investment collaboration. On the other side, linking western China with Gwadar Port through railways, highways, pipelines, etc., can be mutually profitable for both the countries.  Some important Central Asian Republics as well as Afghanistan are landlocked countries. If Gwadar serves as the most economical transit route for their international trade, the  hydropower and gas resources of the CARs can help resolve Pakistan’s acute energy crisis.

Fourth, the Indus Basin of Pakistan is one of the largest and well-developed irrigation systems in the world and it has boosted Pakistan’s agricultural productivity over time. Although both the share of labour force employed in agriculture sector and the share of agriculture in the GDP have declined over time, the physical output has multiplied eight to ten times.

Fifth, Pakistan’s enterprising Diaspora, which has ventured out to almost all parts of the world, accounts for more than 3 million people. This migration has been a consistent and upward inclining source of foreign exchange in form of remittances. In many instances investment has flown into Pakistan from the relatively well off overseas Pakistanis.

Sixth, Pakistan is capable of performing well if the economy is managed properly.  However, the record is not too good compared to other countries in Asia which have overtaken us and have done much better than us.

Challenges

A. Domestic

There are nearly six negative factors that are pulling Pakistan’s economy down. However, all these factors are very much in our own control and can be rectified with little but sincere efforts.

Political Instability 21. Our domestic savings rate is dismally low. So, we have to depend on foreign savings to boost our investment rate. To grow by 6 percent per annum, a country needs at least 24-25 percent of GDP. Thus the effect of low domestic savings rate is either we have inadequate investment rate and consequently a much lower growth rate or we have to seek assistance from foreign sources to fill this void.

2. Pakistan’s fiscal imbalances are a source of macroeconomic stress. Financing fiscal deficit by heavy borrowings from the Central Bank and rising public debt have created inflationary pressures, giving rise to high interest rates and crowded out private sector credit.  Public debt servicing now eats up one-third of government budgetary expenditure and leaves very little degree of manoeuvrability in fiscal management. Unless tax evasion is curbed, tax net is widened and tax collection machinery is improved, fiscal imbalances are likely to persist.

3. Public sector enterprises and corporations have become a major burden on the country’s exchequer. The enormous waste, corruption, leakages and losses are adding pressures on the budget. Government should have a strong regulatory framework and an enabling environment to facilitate private sector to run these businesses.

4. Weak social indicators and lack of attention to human capital formation over last sixty-seven years has done more damage to the country’s economic potential than any other single factor. However, investment in social services and human capital formation does not impose a great burden on the finances but requires improvement in the organization and delivery of services.

5. In recent years, the energy crisis has wreaked havoc on economy. The benefits of rupee depreciation could not be availed by our exporters as they were not able to deliver the orders on time due to load-shedding and gas shutdowns. Overdue reforms in the energy sector as well as new investment in non-fossil oil energy sources are urgently needed to overcome these problems.

6. The poor governance and dysfunctional civilian institutions are the main culprits for most of the economic woes of the country. Civil service, police, judiciary were all well functioning institutions but with the passage of time they have gone through a decay. The writ of the state has eroded and the capacity to implement projects and programmes has weakened. But, economic welfare is closely linked with good governance and sound institutions and the reforms for revamping them would make a huge difference to the lives of the ordinary citizens.

B. External

Pakistan has suffered at least four major external shocks during the recent years:

1. The first shock was precipitated by Pakistan’s participation in the US-led war on terror which has caused colossal losses to the economy that far exceed $100 billion along with the unaccounted for losses of human lives and a state of anarchy permeating throughout Pakistan by the unending suicide bomb attacks. A country in dire economic conditions like Pakistan can hardly afford to tolerate such a heavy financial burden.

2. The second shock occurred in 2007-08 when the global food and fuel prices went through an abnormal and abrupt hike. Oil prices went up from $55 per barrel to $150 per barrel in a period of twelve months and so did the prices of commodities such as palm oil  that  Pakistan imports. These price hikes put enormous pressures on the current account as the import bill jumped by almost 20-25 percent in one year.

3. The third shock was the Global Financial Crisis of 2008-09 that resulted in a worldwide recession of the magnitude not witnessed since 1930s. As the incomes slumped in the US and Europe, the demand for Pakistani goods and services also slackened.

4. The fourth and most severe shock has been the floods that time and again devastated a large chunk of arable lands, displaced countless people, destroyed or damaged millions of houses, roads, bridges, power grids, embankments, spurs, railway tracks, etc.

To sum up, the challenges faced by Pakistan’s economy are quite formidable but the salvation lies in resumption of growth that will result in decline in both unemployment and the incidence of poverty and preserve the living standards of the middle class. The reprioritization of development expenditures, savings on recurrent expenditure, reduction in across-the-board subsidies to PSEs and corporations and improvement in tax collection can provide the stimulus for growth. Governance reforms are the key to economic stability and growth in Pakistan and those should be relentlessly pursued.

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