The complexity in the embeddedness of the economic within the political (or vice versa?) and an economist’s ordeals in steering clear of value judgements in what is essentially a social science, is captured succinctly in Lionel Robbins’s works. The departure from attempts at holistic analyses covering the political, social, and moral aspects of policies to a purely mathematical-logical approach aimed at quantifying policy effects marked the transformation of what was known as political economy in the 16th-19th centuries to ‘economics’, beginning the late 19th century.
While quantitative comparisons of the effectiveness of alternative policy choices proved to be immensely helpful, attempting to predict the direction of a country’s economy still forces one to grapple with issues that lie in the political sphere. Policy uncertainty and expectations, for instance, are essentially political questions, but now part of most mainstream economic models.
Consider a set of questions on everyone’s mind these days. Resuscitated by the IMF Stand-by programme (SBA), what will be the course of the Pakistan economy? Will the GDP recover? Will there be more jobs? Will the inflation ease?
One way to answer these questions is to take a pure economics approach, devoid of the political. It gives rather simple, straightforward answers. The GDP growth will not rebound substantially and there won’t be noticeable growth in opportunities either. An IMF SBA, after all, is meant to stabilise the economy, not bootstrap economic growth or rescue the poor (even if IMF’s official press releases assume a somewhat philanthropic air).
For things to improve, the complex interconnectedness of the political and the economic needs to be understood. The road to economic recovery, in a world of free capital flows and geographically dispersed supply chains– where businesses are hunting globally for places to reduce costs (and nuisance) to a minimum– can only be paved through an effective system of justice, contract enforcement, and upholding of property rights. The political and the social, precede the economic, not follow it. But we seem to be putting the cart before the horse.
As for inflation, it will likely ease only very slightly– if at all– declining in the monetary component but rising due to fiscal readjustments, as new taxes are imposed and subsidies are eliminated.
Still, at the end of the SBA, the economy would be in a somewhat better position, and should qualify for the larger, perhaps a three-year, Extended Fund Facility (EFF). It’s ironic but the success of this IMF programme may be measured in terms of qualifying for another IMF programme, without the sort of unnecessary drama that accompanied this one.
Think of the nine-month SBA as a patient being rushed to the emergency ward of a hospital. The doctor shifts them to intensive care right away, but has to restore the body’s vital signs– blood sugar, pulse, and so on– in order to stabilise them and prepare them for operation. The three-year EFF may be thought of as the extended surgery and rehabilitation that the patient is to be administered later to get him to his feet.
This, however, delineates the rather rosier scenario. Here we are discussing the economy in purely biological-physical terms, without the trickier, stochastic, human-political aspect: we give this medicine and that happens– simple and sweet.
Yet, given the intricate relationship of the economic and the political spheres, the doctor may not be allowed to administer the medicine as scheduled, as the guardians of the patient may consider the pills to be too bitter, not least because it may reflect badly on them, such as the IMF-advised market determined exchange rate may cause the Rupee to be revalued further downwards and the removal of subsidies may make the utilities and/or makes fuel too costly, even if both these steps are crucial to balance the country’s external and domestic payments’ position.
Put differently, even if sticking with the IMF-programme is the rational economic choice, the logic that governs politics may not, unfortunately, be in tandem, and may throw the programme off track.
Zoom out a little more to have a sense of the longer run uncertainty that the economic and political layers are operating within. Will there be elections at all? If yes, when? Which party– if one– is going to form the next government? What will their economic manifesto be?
For things to improve, the complex interconnectedness of the political and the economic needs to be understood. The road to economic recovery, in a world of free capital flows and geographically dispersed supply chains– where businesses are hunting globally for places to reduce costs (and nuisance) to a minimum– can only be paved through an effective system of justice, contract enforcement, and upholding of property rights. The political and the social, precede the economic, not follow it. But we seem to be putting the cart before the horse.
