Daily Times

Last week’s article on industrial policy included a swipe at the irksome statement about Pakistanis making jharoos. I am sure that readers are curious about the background of this irritation, and while curiosity kills the cat, I figure it is worth killing a few cats, no offense to real cats and animal lovers, to get it out of the system.

As the story goes, a while ago at a social gathering, the discussion turned to the miserable financial condition of the national airline and the almost unanimous view was to privatise and get rid of it. Obviously, true to my convictions, I ended up being the sole voice of sanity, ferociously opposing the motion. The esteemed participants immediately pulled out the notion of comparative advantage to defend their position, which was summarily subjected to severe critique, once again, by a particular wise man. Notwithstanding that it was fully evident that of those present, none fully understood what comparative advantage meant in the first place. However, as is the case in our society that the loud majority stubbornly believes it is always right, the debate was unceremoniously concluded pursuant to an outburst, ‘If Pakistan can only make jharoos then so be it.’

Unless you belong to the loud majority who believes that making jharoos is the future, and free trade is good for Pakistan, read on. Rest assured that a policy bent upon providing better and cheaper options to consumer through imports, contradicts a fundamental principle, live within your means and save for the future. What works for individuals, and this may come as a shock, works for the nation as well; except in the case of the nation the responsibility of controlling largesse falls squarely on the government.

I lately came across a book, which I believe was read by the incumbent US President and forms the basis of his ferocious hostility towards free trade. The book in question is Free Trade Doesn’t Work by Ian Fletcher and is a strongly recommended read for our Finance Ministry. The book has a chapter on comparative advantage which begins with a categorical statement, ‘The theory explained in this chapter is false.’

In its simplest form the theory of comparative advantage stipulates that if another nation is more efficient producer of a product than free trade will cause us to import from them which will be beneficial for both nations. Dear readers you can probably guess now how jharoo came into the aforementioned discussion. When it was pointed out that due to superior technology and economies of scale, developed nations most likely are efficient producers of most all products, the Jharoo became the proposed star of our manufacturing industry. I was at a complete loss then, and remain so today, as to how selling jharoos can in any way be beneficial for Pakistan.

Fletcher in his book eloquently thrashes what he refers to as the seven dubious assumptions on which the theory of comparative advantage depends. The discussion hereunder is primarily based on extracts from his book and commentary thereon, for which due credit to him is acknowledged; except we may not necessarily need to touch upon all seven dubious assumptions.

The first to fall, is the most fantastically ridiculous assumption that trade is sustainable. Categorically, if trade deficits are financed through debt and debt is subsequently paid off by selling assets, referred to as privatisation, in the long run, it cannot and will not be advantageous to the importing nation such as Pakistan. Eventually, others will stop lending or there won’t be enough assets left to sell. In the medium-term cost of borrowing will go up and as aptly said by Ernest Hemingway, ‘At first you go bankrupt slowly, then all at once.’ This should also answer the uninformed critics who insist that Pakistan has always had financial problems and nothing happened. Rest assured it is happening!

Another assumption that is equally ridiculous is that factors of production can easily move between industries. So, for instance, if it was deemed that Pakistan is not efficient in making shoes, and note that the domestic shoe industry has almost been kicked out of the market by Chinamen, then all the now idle factors of production, which include capital and labor, can easily move to manufacturing of the Jharoo. This is laughable at multiple level; how can a plant and labor attuned to manufacturing shoes suddenly start making jharoos; not withstanding whether or not there is an international market for jharoos in the first place.

Free trade definitely increases income inequality. In our shoe and jharoo example, it would not be incorrect to assume that since shoes are a more valuable commodity, there is a likelihood that wages will go down for labor which can move, if at all it can, to jharoo manufacture. Coupled with the unchallengeable fact that any time you import goods you export domestic jobs, and with more and more jobs getting exported, the likelihood of unemployment increasing becomes greater thereby further aggravating income inequalities; the rich get richer and the poor get poorer.

In the case of the rich and the factor of production they control, capital, the assumption under comparative advantage that capital is not internationally mobile has become completely outdated today. The rich unable to invest in the home country, because of the vagaries of free trade, have multiple options to invest abroad. Recall the Finance Minister’s recent assertion that close to $ 7.6 bn have left Pakistan in the last 5 to 6 years for investments in Dubai.

We need not get into the rest on the assumptions; critically the jharoo example establishes that free trade, pursuant to the theory of comparative advantages, will shut down industry, increase income inequality, result in flight of capital and is unsustainable. And what we need to be aware of that eventually this trade deficit, financed by external borrowing today, will result in curtailment of consumption in the future. The only way to ultimately pay for imports is exports; the great time we are having importing luxuries to our heart’s desires, will come back to haunt our future generations. Effectively, all of the above debate has much to do with the economic security of Pakistan, which if not more, is equally important as all other definitions included in national security.

In the end I am grateful for Fletcher for providing the impetus, and substance, to bury the jharoo, comparative advantage and free trade, hopefully, once and for all.

The writer is an Islamabad-based chartered accountant. He can be reached at syed.bakhtiyarkazmi@gmail.com and tweets @leaccountant