Stuck in the middle

Ammar Habib Khan
Monday, Feb 06, 2023

Clowns to the left of me, jokers to the right, here I am stuck in the middle with you. These are lines from a seminal song by Stealers Wheel, from almost forty years back. In the current economic and political context, the people of the country are stuck in the middle, while there are clowns to the left, and jokers to the right.

Successive administrations with similar faces recycled for over three decades till they reach an expiry date have come up with the same prescriptions for the economy, which to no one’s surprise have consistently failed. Since we do not like learning from past mistakes, we are destined to make the same mistake as if we are cursed to do so. Propping up a cash-based economy, reallocating and directing capital towards unproductive areas like real estate, and refusing to believe in basic economic principles, are some of the policy errors we continue to commit. If there is anything on which there is national consensus, it is a belief that we are special, and basic principles of economics are not really relevant for us, even though the same are relevant for other countries in the world.

An unhealthy obsession with debt to fund perennial budget deficits, and a complete failure to increase tax revenues in line with the expansion of the economy has led to a situation where the state has completely crowded out the private sector, as it takes up an increasingly large chunk of the formal capital available in the economy. Increase in tax collection in nominal terms is celebrated as some kind of achievement, when in fact the inability to even beat inflation in terms of growth is a resounding failure.

Currency in circulation makes up almost 20 per cent of our GDP, and is potentially in excess of Rs8 trillion – this is Rs8 trillion of cash sloshing around in the economy, driving demand, and creating a parallel undocumented economy. The parallel economy over the last ten years has continued to gain strength, growing by more than five times if currency in circulation is considered as a proxy. As the informal economy gained strength, the formal economy kept weakening, as capital kept being allocated towards the informal economy. A targeted real-estate boom triggered during the last few years deteriorated the situation further, as there are now trillions parked in various real estate, and other informal assets, while the formal economy struggles to attract even nominal amounts to bridge its deficits.

People respond to incentives, and the incentives laid out by successive administrations propped up an informal economy, which is too large to manage now. The informal is big enough that even the central bank now through muted directives is suggesting to importers to arrange funding offshore to settle any import payments, thereby potentially making gray transactions quas-acceptable. As we have clowns to the left, and jokers to the right, any pivot from the existing policy framework seems unlikely. Even a change in guard is also expected to bring about people who like to prop up real estate and the informal economy, rather than redirecting capital towards more productive areas that can potentially generate export earnings.

The state has failed its citizens for the last many decades, and the way things are looking the state is all set to fail the youth of the country as well – as they lack access to quality education, healthcare, infrastructure, and even jobs. Brain drain is accelerating, while the geriartic musical chairs continue. Sadly, the music isn’t expected to stop anytime soon for a particular segment of society, as they keep gaining strength, and keep accumulating capital, stealing away from the population of this country. The music for the rest of the population stopped a long time back, and it is all about survival.

Inflation is expected to exceed 35 per cent, further gaining strength and setting new records as food shortages and a supply chain crisis continue. Despite having large tracts of agricultural lands, and a young population, our yields and agricultural productivity remains consistently low, and below the global or even regional average. Despite natural endowments, the incentive structure has led to a scenario where we are food insecure and have to rely on food imports to ensure sustenance.

This is a consequence of policy failure over the years, and the same people who were at the helm of such failures are now prescribing similar solutions, with no remorse for how they actually were responsible for creating a crisis in the first place.

If the same policy indecisions and musical chairs continue, we may potentially enter a hyperinflationary regime, which will erode purchasing power of an already impoverished, malnourished, and food-insecure population. There is still hope if necessary policy actions are taken to stabilize the economy, and there is a pivot to broad-based economic growth where people come first. Many economies over the years have grappled with even tougher challenges and have emerged stronger.

India and Bangladesh are examples from the region. The lost decade of the 90s has not become lost decades. A generation that was born in that period is jaded, and has little to no hope. We have failed successive generations. If there is no course correction, we will fail more generations, and lose out on a demographic dividend – and the population will remain stuck in the middle of clowns and jokers.

The writer is an independent macroeconomist.