Comparing economic performances.

PAKISTAN is again facing a severe economic crisis, with the usual debate about which government is to blame. The question is, how should we compare the performance of various governments if we are looking for a fair and non-partisan assessment? The purpose of this piece is to offer a framework.

Editorial: Budget blame

The underlying causes of our repeated crises relate to our poor productivity and low investment level. From examples of high growth countries, we need investment/GDP to be somewhere close to 30 per cent to grow around 7pc. With our investment/GDP of around 15pc and dismal productivity, it is no wonder that we cannot grow faster than 4pc or so without developing deficits that result in a crisis.

The only way we can have sustainable growth is through reforms that improve productivity, reduce rent-seeking, and reorient our economy from excessive consumption towards higher saving and productive investment. But reforms are harder, and it is easier for governments to use ad hoc measures to pursue growth.

When the economy grows, the rise in consumption also increases our imports. As our foreign exchange earnings fail to keep up, we run into a balance-of-payments crisis.

Such a crisis is marked by a rapid fall in the currency which is inflationary, and the shock brings down the growth rate sharply. To prevent the currency from tanking further, the interest rate must be increased, which is also contractionary. The government is also forced to take austerity measures as an external deficit goes hand-in-hand with the budget deficit. Last but not least, the money borrowed to stabilise the economy means more external debt.

Had PML-N been re-elected in 2018, it would have more or less done what the PTI government did.

Some people often blame governments and the IMF for devaluing the currency. The reality, however, is that devaluation is a misnomer. The exchange rate is determined by the supply and demand for dollars; if we are not earning enough dollars to cover our imports, the rupee is bound to fall. The only way to keep the exchange rate fixed, despite a large external deficit, is for the State Bank to sell dollars in the market to make up for their shortage, assuming that it has the dollars to sell. However, this is only a recipe for depleting reserves and worsening the external deficit by effectively subsidising and encouraging imports. Consequently, when the reserves run out, the currency has a bigger fall. Such a policy is therefore...