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Pakistan’s Economy: The Emperor has no Clothes! ( part II)

Anyone can control the current account deficit by shutting down the economy, but only idiots would do it not knowing that the country will go into depression causing prices to rise, revenue collection to drop, and the government deficit and unemployment to soar. These problems are not clear to the general public because of the lack of timely information on economic indicators.

Unfortunately, Pakistan has no reliable economic measures that would tell the people about the status of the economy like most developed countries that publish and announce monthly data on inflation, unemployment, GDP, and other economic indicators. Further, many journalists in developed countries can explain the meaning and the consequences of these indicators in simple terms for people to understand as well as question the politicians for explanations. Because this dialog and capability are missing, the public is unaware of government actions and their effect on the people and the economy. Thus, the politicians get away with their erroneous decisions and fail to take appropriate action at an appropriate time to prevent disaster.

Many economic indicators are available to help signal future economic shocks, and they are what experts read when trying to spot-check the health of the national economy. Though no single indicator is best to follow, some are more widely watched than others, such as the yield curve, confidence indexes, employment data, and gross domestic product.

Yield curve: One of the most closely watched indicators of an impending recession is the yield curve. It is the interest rate on government bonds. The curve shows the changes in interest rates over time. Typically, the interest rate – how the government issuing these securities compensates investors for risks – is higher on a bond with a longer maturity. Most of the time the yield curve is upward (positively) sloping. When the yield curve inverts, i.e., it becomes downward (negative) sloping, the bond is considered riskier and, thus, may predict a recession. In the United States, the curve has faithfully indicated recessions for the past 50 years. Unfortunately, in Pakistan, because of its large deficit, the government borrows regardless of the interest rate. In addition, IMF dictates interest rates, which has nothing to do with the economic condition. Thus, the yield curve should not be used as an economic indicator.

An output gap shows the difference between the actual output for the economy and what economists view as its maximum potential, and it can be either positive or negative. However, it is a lagging indicator

Confidence indexes: The confidence index measures how people feel about the economy. It is a very effective measure in a consumer-oriented economy in which the economy relies largely on whether consumers will buy products that determine the economic activity of the market.  If businesses and consumers feel less confident about the future, they will spend less, and the economy will contract. In the United States, the University of Michigan publishes a monthly Index of Consumer Sentiment with two updates: first a preliminary and then a final reading. The Conference Board, a research and business membership association, publishes its own gauge. Bloomberg also has its own Consumer Comfort Index published weekly. The relationship between confidence and spending, however, is fairly loose in the short run.

Employment Data: In the United States, the Department of Labor publishes the broadest measure of the job market. Its report contains a number of data points, including the percentage of the workforce that is unemployed and the number of jobs each sector has created. Some economists say the number of hours worked is a leading indicator. When the economy slows, businesses worry about future sales, so the first thing they do is to cut hours. Temporary help is another good measure, because hiring temporary workers could indicate that employers are not as confident about the future of the economy.

Gross domestic product (GDP): GDP measures economic performance. A recession basically means that the economy is in decline. But we should also compare the gross domestic product with economists’ longer-run expectations. This can help us know whether general fluctuations in GDP are cause for concern, and it can also help determine what the output gap is. An output gap shows the difference between the actual output for the economy and what economists view as its maximum potential, and it can be either positive or negative. However, it is a lagging indicator.

Unfortunately, Pakistan does not have most of these measures. So it may have to rely on the GDP only, which is lagging. But to really measure economic activities, Pakistan needs many of these measures mentioned above and must properly release them to the public at specific times during the year so people know when to expect them and can properly compare them to determine or predict economic activities.

The writer is PhD. (USA) and Professor Emeritius (USA)

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