Atif Mian Profile picture
Aug 14, 2018 15 tweets 3 min read
1/ On Pakistan's #IndependenceDay2018 , why is the country still far from economic independence? (e.g. seeking its largest bail out ever this year)

I'll focus on last 5 years as an example ... it will get a bit technical but i'll try to be clear.
2/ Economic growth is almost entirely a function of *domestic* productivity growth. What matters is investment in building your institutions and people.

Instead pak govts have increasingly looked *outside* in what i'd call an attempt at "import-led" growth ... it doesn't work
3/ The idea is to borrow from outside, and task another country with building your infrastructure or institutions, and hope some magic others .

The latest example starts in 2013, when PML-N comes to power and decides to outsource growth to China. I'd explain why it doesn't work
4/ Gov funds large infrastructure projects through China's Belt and Road Initiative (CPEC in pakistan), external debt rises from 62 to 90 billion $. The borrowing raises domestic demand "artificially", making Pakistan more expensive and less competitive globally.
5/ This is a variant of the famous "dutch disease" and Pak suffered an extreme version of it. Poof?

Real effective exchange rate (pak prices relative to trading partners) increased by 20+ % and total exports DID NOT INCREASE over past 5 years.
6/ To make matters worse, Pakistan's "in-law" finance minister strips away independence of the central bank and sets the terrible policy of keeping the exchange rate appreciated. Now Pakistan has the dutch disease, on steroids.
7/ Meanwhile there is a blanket ban on any objective assessment of CPEC. Ask a question, and you'd be accused of conspiring against national interest.

Media feeds the frenzy that its a "game changer" & a big bubble develops in the port city (currently largely sand) of Gawadar.
8/ Real estate bubbles further artificially raise domestic demand, & given the senseless exchange rate policy, it makes the dutch disease sclerotic

Notice we haven't even gotten into whether the $$ borrowing is "sustainable", the damage is being done before any repayment is due
9/ So lets talk about debt sustainability now.

The first thing to remember is, you are borrowing in dollars, while most revenue from the projects are in rupees (think domestic transportation use and local energy consumption)

This is a big problem for two reasons.
10/ First, the whole enterprise is exposed to exchange rate (ER) risk. A future depreciation of the currency, which is almost certain to happen given the inane ER policy, will jeopardize profitability.
11/ Second, the country must generate sufficient additional exports to pay back, or else it will be forced to become poorer in order to generate an export surplus to pay back.

This, again, makes things more difficult given the dutch disease in the first place.
12/ Another big ? on sustainability is that the borrowing and spending deals are highly opaque. No one really knows what's going on.

For example, what is the cost of capital in CPEC? A loan contract may report a "concessional" rate of 2%. But is it really 2%? Consider this ...
13/ There is no open bidding and Chinese companies decide everything. They charge 100$ for equipment, but put in place lower quality equipment worth only $80.

Guess what, the "true" cost of capital just went up to (2+20)/80=27.5%!
14/ There is a lot China and Pakistan can gain from each other. But deals have to be structured properly, with proper macro-prudential framework. Unfortunately, none of that was done.

The govt wanted a shiny new road real bad before the next election, which they lost anyways.
15/ Let's hope for better economic sense this time.

🇵🇰پاکستان زنده باد

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More from @AtifRMian

Sep 18, 2018
1/ Are u interested in reading books that explain important economic ideas for the world around us? Written by some of the best economists and based on solid research? I'd recommend three recent books (in no particular order)
2/ First, "Euro Tragedy" by @AshokaMody . Learn the power of *monetary economics*. How poor monetary design and poor policy response to ensuing problems can create havoc with people's lives. Written with a focus on the creation of Euro and crisis of 2008.
3/ Second, "Radical Markets" by @glenweyl and Posner. It's about *market design*, how to write "rules of the game" to create a more inclusive, equitable and just society. Read it for sheer creativity and boldness of ideas - you'd want to study economics.
Read 4 tweets
Sep 14, 2018
1/ Can governments in poor countries facilitate development by supporting certain industries? When does such "industrial policy" make sense? This is an old and contentious question. A lovely new paper by Ernest Liu provides sharp new insights. I will try to explain ..
2/ The starting point is that each industry suffers from a potential "weakness", such as poor access to credit markets (imperfection in econ lingo). Should the government help industries with the biggest weakness? Or the largest industries with most value-added?
3/ Liu shows that the answer is *none of the above*. Instead, the key is to focus on industry network structure - or input-output matrix - and identify industries that serve as "fundamental inputs", i.e. as inputs in the supply-chain of other industries.
Read 8 tweets
Sep 7, 2018
1/ For the sake of the stability of the Government of Pakistan, I have resigned from the Economic Advisory Council, as the Government was facing a lot of adverse pressure regarding my appointment from the Mullahs (Muslim clerics) and their supporters.
2/ Nevertheless, I will always be ready to serve Pakistan as it is the country in which I was raised and which I love a great deal. Serving my country is an inherent part of my faith and will always be my heartfelt desire.
3/ Moving forward, I now hope and pray that the Economic Advisory Council is able to fulfill its mandate in the very best way so that the Pakistani people and nation can prosper and flourish.
Read 4 tweets
Jun 19, 2018
So why has Pakistan fallen behind others over the last four decades? In my view, the single most important factor is Pakistan’s **eroding state capacity**. 1/n
State capacity is essential for providing the environment that enables individuals, firms and markets to flourish. Pakistan's state has not only retreated, but essentially reneged in providing this capacity. For example, 2/n
consider public education, an obvious state responsibility. A quarter of Pakistan’s school-age children remain out of school, and many who do end up in school learn next to nothing. 3/n
Read 10 tweets
Jun 9, 2018
As Pakistan heads to the polls, what is the most important issue facing the country? In my view, it is the persistent economic slide over the last forty years. Consider this ... 1/n
In 1980 Pak income per capita was 40% to 60% higher than India, China or Bangladesh. But now Pakistan is the poorest in this group. The average Indian is now 60% richer and the average Chinese a whopping five times richer than their Pakistani counterpart. 2/n
In 1980 Pakistan's exports per capita were 2 to 3 times those of Bang., India or China. Today, Pak's exports are the lowest by far. Indian and Bangladeshi exports have grown at a rate that is five times that of Pakistan, and China’s at a rate that is forty times faster! 3/n
Read 5 tweets
Apr 15, 2018
A society’s inability to provide quality education, health insurance and justice to its people perpetuates poverty and lowers economic growth. Some anecdotes I came across in Lahore ... 1/n
A young Christian man is picked up by police who then demand a bribe to release him - his poor family cannot afford to pay, so his brother and cousin sell their kidneys to get him released. 2/n
A driver making ok money is sending his children to school. Falls sick with a chronic disease and cannot drive long distances ... is forced to take his children out of school. 3/n
Read 14 tweets

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