Friday, August 13, 2010

The Economic Collapse of Pakistan

Cyril Almeida is one of the most level headed commentators one can find directly writing out of Pakistan. If he is worried, then I would recommend ladies and gentlemen, that it is time to get worried. For your reading pleasure, and apocalyptic contemplation, I would like to present, today`s edition of Mr Cyril Almeida`s weekly Column:

ECONOMIC COLLAPSE.

Economic Collapse by Cyril Almeida


What could be worse than floods that have displaced millions, killed thousands and destroyed huge swathes of farmland, a catastrophe the country will take years to recover from?
Some people think they know, and the answer terrifies them. Away from the political mishegoss in Islamabad, calculators are anxiously being pulled out and back-of-the-envelope calculations are furiously being made by the serious-minded folks.
The numbers are numbing: even before the floods, Pakistan seemed to be heading for economic collapse; after the floods, that appears to be all but a certainty.
Gone will be the days of loadshedding — because there will be no electricity at all in the grid. Inflation, which has stayed stubbornly high, will spike again — because a sustained budget deficit is forcing the government to borrow money, keeping the economy awash in surplus money, more cash chasing the same amount of goods.
Revenue projections could collapse — because piling on indirect taxes eventually causes inelasticity to turn into elasticity: in time, the market shrinks as taxes go up. The current account deficit could balloon yet again as remittances, the great, unexplained boon the past few years, stagnate, putting pressure on the exchange rate and making the days of the 100-rupee dollar a distinct possibility.
Must all this necessarily happen? No. Is it politically inevitable? Yes.
The challenges may be grim, but they are not insurmountable — yet. What is terrifying some people in Islamabad, however, is the attitude of the present government. Like first-class passengers demanding caviar on a sinking Titanic, the federal government seems supremely unaware of the storm that is slowly engulfing it.
Meetings are held on critical economic matters, but decisions are deferred. Ministers prefer to rearrange papers on their desks, if they bother to come in to office at all, rather than study how to push through reforms. At the very top … well, never mind. A presidential helicopter touching down at a chateau in the land of Marie Antoinette said it all.
How can an elected government be so catastrophically, diabolically, maniacally bad? It doesn’t seem to make any sense. The panic alarms are ringing furiously across the country, warning the PPP of an electoral wipe-out the next time round. Wouldn’t surviving to plunder this land some more be an incentive? Why court your own doom?
The answer, alas, seems to lie in a game somewhere else. Zardari and his ribald bunch of misfits appear to be making the ultimate high-stakes bet: that if Pakistan stands at the precipice, arms aloft, seemingly ready to embrace her fate, western hands will claw her back to safety.
It goes something like this. The West will generally not let Pakistan fail because the consequences of failure here are too serious for the region and the world at large. The West will specifically not let the present government fail because it represents the best coalition for claiming public support in the fight against militancy. Combine the general with the specific, and voila! You have an unbeatable hand.
Welcome to Bailout City. Why do the heavy lifting when others will do it for you?
Except, not really. One, there’s little to no appetite in the US to bail out a profligate, corrupt government unwilling to get serious about governance. The Americans have a back-up plan: the IMF. That’s where they send the serial offenders and chronic delinquents for the one-size-fits-all treatment.
Since we are already in the embrace of the IMF, round two will call for tougher measures. The first time they forced us to slash subsidies; the second time they’ll take the scalpel to the public sector.
Public sector enterprises (PSEs) lost Rs250bn last year. Outsiders like the International Monetary Fund (IMF) don’t know how to stop that haemorrhaging in a sophisticated way; they will force the obvious: slash salary expenditures. Which means layoffs. A more sophisticated negotiating team from the Pakistani side may be able to minimise the cutbacks, but if sophistication was a trademark of this government, we wouldn’t be in the mess we are in.
Note, though, that the first round of the IMF package hasn’t saved Pakistan, it has just made a bigger mess of things. Electricity prices have been jacked up by 70 per cent in some instances, and yet the sector is on the verge of collapse
It doesn’t take a PhD in economics to figure out why: inefficiencies — a nice word for incompetence, corruption, mismanagement, malfeasance, misfeasance, general thuggery and an unwillingness to play by the rules — aren’t fixed by throwing more money at a problem.
Even if you were to double the price of electricity, the sector wouldn’t become liquid. In fact, it would probably veer towards insolvency, with customers refusing to pay their bills altogether, the fundamental reason for the circular-debt crisis today.
Similarly, slashing the headcount at PSEs will not stanch the losses there. The Railways loses money not because it has too many employees but because it is operating in a structurally flawed market. If you support road carriage at a policy level, as has been the case for decades since the creation of the National Logistics Cell (NLC), there’s little a railways can do — the market will gravitate towards the cheaper option, in this case cheaper because of a deliberate, dubious policy.
(As an aside, the civil-military imbalance has skewed the economy in ways not many understand or even recognise, NLC being a major example.)
In short, the IMF sausage maker is really a meat grinder: what comes out is often messier than what goes in. And a second bailout — post-floods, a virtual certainty — is often worse than the first.
So Zardari & co are really making a losing bet: the financial ‘rescue’ from the West may be worse than the original problem. Then again, that may not seem like such a big deal when you have a chateau — or are selling it or renovating it or whatever he was doing out there. But the rest of us don’t have a chateau to escape to and so we must worry about things like a collapsing economy.
Which brings us to Zardari’s second problem: survivability. In a high-stakes game of bluff, you need to be sure the other side doesn’t have options. But that’s never the case in Pakistan. There are always options.
1999-2002 wasn’t very long ago. Many remember it fondly, for its attention and commitment to reform. Why green-light another bailout for a tried-and-failed lot that will just kick the reform ball down the road again? Why not just fold and walk away from a swaggering Zardari?
Zardari may be too arrogant to care about the media response here, but the scorn heaped on him by the western media will have send chills down the spines of his smarter (!) advisers.
They know the West’s demand for reform is greater than its love for democracy here.

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