‘Political crisis double-edged sword for economy’

WASHINGTON: Two leading economists — Atif Mian and Reza Baqir — have warned that the current political crisis will have tremendous economic ramifications, but they also hoped that it leads to key structural adjustments in the decision-making process.

In a recent discussion on Pakistan’s economic future, which Mr Mian posted online earlier this week, both economists emphasised the need to end excessive political interventions in economic decisions.

Mr Baqir served as the 20th governor of the State Bank of Pakistan, from May 4, 2019 to May 4, 2022.

Mr Mian, a professor of economics at Princeton University, has authored a widely acclaimed book — ‘House of Debt’ — which explains why debt continues to threaten the global economy.

Atif Mian, Reza Baqir want policies to be insulated from political cycles

Asked how to manage the level of fiscal deficit in Pakistan, Mr Baqir suggested that such matters should be tackled by a decision-making body that thinks beyond the political cycle. Another possibility, he said, was to delegate the power of taking such decisions to the finance secretary who is then insulated and protected from political pressure and is guided by an autonomous fiscal council.

“It would almost be a waste that as coming out of the (current political) crisis … we do not make some structural interventions on the economic front and review the governance of the policy-making institutions,” Mr Baqir said in his conversation with Mr Mian.

“I would want that (technical decisions) are insulated from political cycles, and a policy does not automatically change whenever the identity of the finance minister changes.”

Explaining the impact of fiscal deficit on the national economy, he pointed out that the year-to-year deficit can vary by three percentage points of GDP. “It’s impossible to have macro-economic stability on a long-term basis if our fiscal deficit swings like this,” he warned.

Another possibility, he said, was to involve the opposition, and other key stakeholders in the decision-making process.

In his opening remarks, Atif Mian spoke about how educated, young Pakistanis were leaving the country which, according to him, showed a lack of trust in the system.

The perception in the investors’ community and those aware of the current situation was that “Pakistan is not the place to go to right now,” he said.

Those in power, he said, needed to understand that where the country was now was a cumulative effect of very bad and poor decisions made at a strategic level, both on the economic and political/security fronts. “The flip side of that is … a structural change can take us forward if things were done differently,” he added.

Mr Baqir acknowledged that the majority in the investors community believes “it’s almost too late in an economic sense for Pakistan, which is moving toward an economic implosion … but I believe that there’s a way forward.”

The starting point for turning around the economy, he said, would be to ensure that those in government had the right balance of political representation and of those who are equipped to deal with technical issues.

A decision like “making the right tax policy that’s good for curbing the budget deficit and also gives incentives for growth is a challenge” that needs technical expertise, he said.

Mr Main urged the country’s political leadership to base their decisions on merit, particularly when making high-level appointments.

“It’s disappointing to see that when a new government comes, it lets go of very competent people, because it does not value meritocracy,” he said. “There has to be a different norm or culture that respects professionalism and is relatively apolitical.”

Mr Baqir also said that professional people needed protection from other stakeholders to do the right thing.

The country, he said, needed a system wherein decisions like tackling the deficit were not driven by political cycles, and changes within a government did not impact policies.