Thursday, July 3, 2008
Shaukat Aziz's Economic Legacy
Is Shaukat Aziz to Blame?
Former Prime Minister Shaukat Aziz is frequently blamed in Pakistani media and political and economic circles for the rapid decline of Pakistan's economy during the last six months. The critics say the economic boom under Mr. Aziz was short-lived because it was achieved by easy, plentiful consumer credit, massive borrowing and construction spending in public and private sectors. They further charge that Mr. Aziz promoted the service sector while ignoring large infrastructure projects to enhance Pakistan's agricultural and industrial sectors. They also claim that, if Mr. Aziz had done a good job, the economy would have continued to perform well in spite of all the changes that have transpired since he quit. Some go to the extent of claiming that there was no real economic boom and the whole boom story was a fabrication.
How Do Modern Economies Work?
To examine the validity of the charge sheet against Mr. Aziz, let us try and understand how modern economies work. Modern economies are all consumer driven and cyclical. To manage growth in modern economies, there are a number of tools and policy options deployed by economic leadership consisting of government and central bank officials. Controlling money supply is a key tool. When the economy is slowing, the governments resort to deficit spending, and central banks lower interest rates to encourage consumer borrowing. Government and consumer spending then produce increased demand for goods and services which encourage more investment in plant, equipment and real estate etc. These investments create jobs which further stimulate demand.
Can the Economy run on Autopilot?
There is no such thing as an economy on autopilot that continues to perform well by itself over long periods of time without competent human intervention. As the economy overheats, the inflation starts to become an issue which then requires the central banks to raise interest rates and tighten money supply to cool growth. The governments act in concert with the central banks to reduce spending and limit money supply in the economy. The monetary and fiscal policies must be coordinated. Pakistan's latest 2008-2009 budget should not have massive deficits with 30% increase in spending to cancel the effects of the central bank raising interest rates to tighten money supply.
Wise stewardship by country's economic leadership helps reduce the severity of the economic cycles. But it does require close monitoring and constant tweaking to keep the economy performing well.
The confidence of business and investor community in the economy also plays a significant role. If the businessmen and investors feel the government and central bankers are managing the economy well, they continue to play their role to maintain economic health. On the other hand, if they lose confidence in government's economic team, they begin to slow or even withdraw their investments which hits the economy hard.
How Did Shaukat Aziz Do?
Unlike many of his critics, Shaukat Aziz is a banker by training and extensive experience in New York. He is not an academic. His credentials are similar to those of the successful US treasury secretaries such as Bob Rubin and Nick Brady who did well under Clinton and Reagan administrations. He understands the role of banking, finance, investment and consumer credit in economic growth of a nation. He carried out basic structural reforms and focused on building strong banking, investment and finance sectors in Pakistan to underpin its economy. He strengthened capital availability, an essential and increasingly important economic input, in addition to labor and land improvements. With higher education budget up 15-fold and overall education spending up 36% in two years, he focused on education to improve the availability of skilled labor to fill new jobs. He pushed land development and public and private construction spending to improve infrastructure and facilities to attract greater business investment, creating more jobs. Mr. Aziz was largely successful in his efforts.
Taking a leaf from the US housing policy to stimulate the economy, Mr. Aziz introduced low-rate mortgages in 2003. This initiative led to a construction boom and expanded housing for the growing middle class in Pakistan, contributing significantly to the GDP growth and job creation.
Pakistan's tax base grew with rapid economic growth over the last 9 years. The Federal Board of Revenue's tax collection surpassed Rs 1 trillion in 2007 from Rs. 500 billion in 1999. This effort was essential in managing the current account deficit during Shaukat Aziz's term in office.
When Shaukat Aziz took over as finance minister and later as Prime Minister, Pakistani economy was in shambles. In 1999 Pakistan’s total debt as percentage of GDP was the highest in South Asia – 99.3 percent of its GDP and 629 percent of its revenue receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% & 384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% & 264.8% respectively in 1998) and India (44.0% & 358.4% respectively in 1998). Read more about it here.
Most recent figures in 2007 indicate that Pakistan's total debt stands at 56% of GDP, significantly lower than the 99% of GDP in 1999. It also compares favorably with India's debt-to-GDP ratio of 59% and Sri Lanka's 85% in 2007. From being the highest debtor nation in South Asia, Pakistan has, in fact, become the lowest debtor nation in its region and achieved economic growth rate of about 7% a year during the last 6 years.
The Economist magazine in its June 12 issue comments on Pakistan's current and past Economic Performance as follows:" (The current) macroeconomic disarray will be familiar to the coalition government led by the Pakistan People's Party of Asif Zardari, and to Nawaz Sharif, whose party provides it “outside support”. Before Mr Sharif was ousted in 1999, the two parties had presided over a decade of corruption and mismanagement. But since then, as the IMF remarked in a report in January, there has been a transformation. Pakistan attracted over $5 billion in foreign direct investment in the 2006-07 fiscal year, ten times the figure of 2000-01. The government's debt fell from 68% of GDP in 2003-04 to less than 55% in 2006-07, and its foreign-exchange reserves reached $16.4 billion as recently as in October."
The turn-around engineered by Shaukat Aziz was applauded around the world. A 2005 Bloomberg headline, as reported by China's Peoples Daily, proclaimed as follows: "The world's second-fastest growing economy after China is no longer India. It's Pakistan."
The Wall Street Journal did a story in September 2007 on Pakistan's start-up boom that said, "Scores of new businesses once unseen in Pakistan, from fitness studios to chic coffee shops to hair-transplant centers, are springing up in the wake of a dramatic economic expansion. As a result, new wealth and unprecedented consumer choice have become part of Pakistan's volatile social mix."
Here's an excerpt from a UN Economic Survey 2008 report: "Pakistan’s economy maintained its momentum in 2007, growing by 7%, slightly more than the 6.6% for 2006. Agricultural sector growth recovered sharply, from 1.6% in 2006 to 5% in 2007, while the manufacturing sector growth continued at 8.4% in 2007, slightly more moderate than the 10% for 2006. Services grew at 8% in 2007, down from 9.6% in 2006. But exports were sluggish in 2007, with economic growth largely driven by strong domestic demand. Investment overtook consumption, helped by a surge in domestic private investment and record foreign direct investment (FDI) flows. In 2007, investment in real terms increased by over 20%."
The strong consumer demand in Pakistan drove large investments in real estate, construction, communications, automobile manufacturing, banking and various consumer goods. Millions of new jobs were created. By all accounts, the ranks of the middle class swelled in Pakistan during Shaukat Aziz's term in office. According to Tara Vishwanath, the World Bank's lead economist for South Asia, about 5% of Pakistanis moved from the poor to the middle class in three years from 2001-2004. In 2007, analysts at Standard Chartered bank estimated that Pakistan has a middle class of 30 million which earns an average of about $10,000 per year. And adjusted for purchasing power parity (PPP), Pakistan's per capita GDP is approaching $3,000 per head.
The one sore spot that sticks out in Shaukat Aziz's record is his lack of attention to the rising energy needs of the country. Appropriate planning should have comprehended new power plants to support growth forecasts. There were other mistakes as well, such as the decision to export wheat in 2007 that created shortages and price hikes that helped bring down the PML (Q) government.
What Comes Next?
As the PPP and PML leaderships continue their political posturing, the larger story is the massive loss of confidence by business and investment communities in Pakistan. There is no one in charge of the economy at the moment.
It is worrying to see a sudden halt to foreign investments and the flight of capital by Pakistani investors to investments elsewhere in the world. Foreigners bought just $97m-worth of Pakistani stocks in the first ten months of this fiscal year, compared with over $1.5 billion in the same period a year earlier. No amount of blaming and escape-goating of Shaukat Aziz can be a substitute for real action by a competent economic team to stabilize the economy. Instead of shifting blame, Shaukat Aziz's critics should help fix the current mess Pakistan finds itself in. The first step toward fixing the economy is to put an experienced and competent leader in charge with a few smart technocrats on the team.
Here's a video clip of world leaders, including Shaukat Aziz, at the World Economic Forum in Kuala Lumpur talking about Global Food and Energy Crises:
Structural Reforms in Pakistan's Economy
Memorandum of Economic and Financial Policies in Pakistan 2008
Video: Who Says Pakistan Is a Failed State?