The State Bank of Pakistan (SBP), has experienced immense pressure this week to devalue the rupee for the fifth time in a year owing to higher oil prices and emerging markets currency uncertainty. The currency continues to remain under depreciatory pressure due to lack of sufficient external finances. The turmoil continued to clutch the foreign currency markets on a weird October 9 largest single-day rupee drop against the US dollar in over a decade. Succumbing to the pressure exerted by the ballooning current account deficit and diminishing foreign currency reserves, the rupee saw a derogatory depreciation when it dropped by 7.5 per cent on the day thus settling close to a humiliating figure of Rs 139.
The SBP, according to media reports, stated the reasons behind this sharp rupee fall as: “This movement broadly reflects the current account dynamics and also the demand-supply gap in the foreign exchange market”. It is expected that the rupee will further depreciate in the days to come. In the short run, the rupee can stabilize with the possible injection of external finances from Saudi, Chinese or International Monetary Fund (IMF) sources. The real issue, however, is to take concrete economic and financial steps to ensure the strength and credibility of the rupee in the long run.
Long term policies for boosting indigenous economic growth are urgently needed because the scope of artificially injecting external finances, as a short term measure, is limited to several constraints. Furthermore, the injection of hard cash from external sources, whether bilateral or multilateral, has its own shortcomings in the long term. The theory of Dutch Disease, for example, treats such injections as bad for innovation, entrepreneurship and economic growth. The argument is to increase economic growth through rigorous efforts, innovation and entrepreneurial hardships rather than relying on readily available foreign cash. The theory of Resource Curse also has similar arguments underlining that the countries rich in natural resources suffer from the paradox of plenty resulting in slow economic growth, weak democracies and shallow development.
Readily available cash, in short, can make people and nations economically lethargic alongside inculcating a business spirit that resists change, innovation and entrepreneurship. The end result would be that such countries prefer foreign goods because of availability of cash that increases the volume of imports. Furthermore, lack of competitiveness in local firms decreases the level of exports. In such a scenario, the current account can remain in deficit. The countries rich in resources keep compensating for this deficit from their indigenous sources while cash strapped countries, like Pakistan, look for foreign finances.
It is pertinent to mention that Pakistan has a long history of receiving aid from different countries. As a short term measure, a rightly directed aid can help developing countries promote economic growth by bridging the savings and foreign exchange gaps, alleviating poverty, promoting liberalization, integrating the countries into the world economy, strengthening institutions and ensuring good governance. However, the economic impacts of foreign aid, when received over a long period of time, are similar to that of the ‘resource curse’ and the ‘Dutch disease’. Receiving aid on long term basis creates a culture of lethargy in the public and private sector institutions that discourages innovation and out of box solutions pivotal for sustainable economic growth.
Pakistan’s reliance on foreign aid over a long period of time has created anti-innovation and anti-entrepreneurial culture resulting in sharp decline in the country’s ‘ease of doing business’ ranking. External finances can only provide a temporary cushion to come out of this monetary turmoil
Pakistan’s reliance on foreign aid over a long period of time has created anti-innovation and anti-entrepreneurial culture resulting in sharp decline in the country’s ‘ease of doing business’ ranking. External finances can only provide a temporary cushion to come out of this monetary turmoil. However, relying on such options for a long time further exacerbates the culture of economic lethargy. There has to be a strategic thinking in our economic policies focusing on maximizing profits through minimum capital. This kind of strategic economic thinking was successfully implemented by our neighboring country China.
There is also a need to deeply analyze how did the powerful Chinese economic and business model evolve in the world over time? China initially started her business concerns through stereotyped copying of the products from other markets legally or illegally. Through this imitation, the Chinese businessmen earned free profits and royalty on the copied products while the entire burden of laborious and expensive research, innovation and development was left to the actual entrepreneurs. This way many of the Chinese businessmen accumulated badly needed capital alongside experiencing the phenomenon of ‘learning by doing’ in business and technological imitations. This way they were able to reduce their current and fiscal accounts deficit. Although, initially they were not much interested in the Research and Development (R&D) activities, they could still experience the spillover effect of the research activities by the original business entrepreneurs. Whenever a new model of a product was introduced in the market, it was a challenge before them to imitate it. This was in fact an informal R&D activity in the Chinese business that evolved over time and ultimately transformed into a full-fledged formal R&D activity at par with the Western World.
As far as exports are concerned, Pakistan should engineer the Chinese business model in its favor and follow it as a long term measure. Our local business dynamics should integrate with this model as part of such business engineering. That means earning urgently needed capital through innovation, imitation and entrepreneurship. Let me reiterate that imitation is not bad if done sensibly. The government may consider launching a countrywide drive to identify the local industrial and business expertise of the people at the district, tehsil and even street level and prepare an exhaustive list of the areas of comparative business advantage. These areas can map our future strategic economic planning for increasing exports in specified areas of goods and services. The concerned deputy commissioners and assistant commissioners of districts and tehsils may easily be assigned this task.
On the identification of such areas, an exhaustive list of industries, businesses and expertise should be prepared at the national level containing a detailed ‘industrial and business potential map’ of Pakistan. On the basis of this map, ‘industrial and business poles’ should be established that would act as a nucleus for the concerned local business and industry. Such areas may be considered for establishing special economic zones. Instead of locating new special economic zones along China-Pakistan Economic Corridor only, let’s also map our local potential areas in finalizing their locations. In this regard, the coastal areas will have more advantages. The data already collected by various industrial censuses may be partially helpful for this purpose.
These steps will provide an urgently needed industrial and economic network that would create small industrial and business units revolving around a bigger unit called ‘pole’. I have picked up the word ‘pole’ from the growth poles theory. These steps will discipline, harmonize and integrate the country’s industrial potential and business activities. These steps can pave way for preparing Pakistan for an economic ‘take off stage’ mainly aimed at boosting exports exponentially. One can safely believe that if these steps could be made part of a coherent economic policy, supported by necessary political will, Pakistani rupee can be transformed into a strong and reputable international currency. s
The writer is Additional Commissioner, FBR, holding PhD in Economic Planning from Massey University, New Zealand
Published in Daily Times, October 13th 2018.