Daily Times

The Economist (September 3rd-9th, 2016): “Countries that initially welcomed Chinese loans for infrastructure projects, coming as they do without political conditions, have grown nervous at the scale of their debt. The sight of Chinese workers building roads while domestic economies wobble has stirred popular resentment, as have Chinese purchases of local assets and businesses.”

Fortunately, that particular article was about Australia and shenanigans in the Pacific Ocean, and obviously, we are different. Our friendship with China is decades old, exemplary and immune to international political intrigue. On the other hand, we are gullible enough to have been fooled, and that too repeatedly, by American overtures of everlasting friendship. Perhaps, someday, we may eventually realise that the only friend we have in this whole wide world is ourselves, and thereafter, start watching our own interests rather than toeing the line of our financiers. We must, however, understand that as good friends, we may well be required to agree with our friend’s claims in the South China Seas, which are viciously being disputed by our former, if that is the case, good friend and its allies. A rather complicated situation, wouldn’t you agree?

Across the world the primary strategy to kick-start economic growth is currently to build infrastructure; in our case, perhaps that is more out of necessity than choice, especially in the case of power generation. Except that there is a segment of experts who repeatedly point out that generation alone won’t tackle the load-shedding genie; significant investment is required in upgrading transmission and distribution line to solve the problem. We can only hope that these technocrats err in this pessimistic assessment, and that after 2018 load-shedding will be a thing of the past.

Irrespective, government is convinced that spending on infrastructure projects will create jobs and result in economic growth. In fact, the intelligentsia is convinced that Chinese spending on infrastructure across the length and breadth of Pakistan is the forebearer of economic stability and prosperity. Without going into the debate underlying this economic theory, lets seriously analyse this particular notion.

In the case of China building the infrastructure, the unauthenticated but generally uncontested feedback is that in such projects the material and significantly the labour is brought from China; accordingly, if all this building is improving anybody’s economic growth, it has to be China’s, with perhaps a trickledown impact on Pakistan’s economy. Once these projects are completed, future economic growth will depend upon the productive utilisation thereof. For instance, if electricity generated from imported coal is utilised for reducing residential load-shedding, the net result will be a loss to the exchequer. Optimists, on the other hand, assert that this entire infrastructure is a gift from China, without any expectation on the latter’s part of ever being paid back; that being the case, Trojan horse aside, free infrastructure will surely have a net positive impact on economic growth!

But what if it is not free, and China wants to be paid back one way or the other? Let’s tackle it with the second eventuality where the government itself builds large-scale infrastructure projects. Irrefutably, every time government spends, it would have to be either out of collected tax, or borrowing, or printing more money. Since our tax collections today are only sufficient to meet our existing debt-servicing requirements and defence spending, and I kid you not, the government can either print more money or borrow. As far as printing (an unknown tax) is concerned, the State Bank of Pakistan has been increasing money supply by an average of 13 percent for the past few years, and this is perhaps the upper limit to printing money. Too much rupees in circulation would result in hyper-inflation and serious devaluation of the rupee, which contrary to what the exporters might say would have serious repercussions for Pakistan, which is a net importer.

Accordingly, government can only borrow to spend money, which, unfortunately, again can only be paid from future taxes. In a nutshell, every time the government spends, it is out of taxes current or future, and taxes are money taken from the private sector, which is the key point here. Any time the government takes taxes from the private sector, the latter has less money to spend; in essence it’s the same amount of money, except that now the government spends the money rather than the private sector. There is a hot debate that all State Owned Enterprises should be privatised since the government can’t run businesses; so how can government do a better job of spending on infrastructure that run into billions? Hence, would it not be better to let the private sector spend its own money under market principles compared with government doing what it is not good at?

The problem is that in all cases the private sector will not invest in any unprofitable venture. Probably all of government development projects will be shelved; and even if they are built they will be built on standalone basis, which means charging commercial rather than subsidised rates for usage. Since the private sector will invest only in profitable ventures, that by default is expected to tackle the corruption problem as well. Another advantage is that contrary to government stimulus spending where jobs are created for the short term and are mostly for unskilled labour, investments by the private sector are long term and include investment in human skills.

Obviously, vociferous opposition against the notion that government should refrain from spending on infrastructure is expected, but then these very quarters should refrain from loudly supporting privatisation, for these two positions are contradictory. If you believe that government can build infrastructure worth billions, than why cannot it run a steel mill?

One hopes the fallacy of building for growth now stands explained. Spending on loss making projects from borrowed money is perhaps counterproductive. And if the Chinese are not gifting us the infrastructure that they are building, those projects will fall under the same criteria.

Admittedly, there are certain projects that are unprofitable, but may have to be built purely for social reasons; however, that was tackled in a previous article where the suggestion was to involve independent private sector experts to review the selection and related budget for such projects.

The writer is a chartered accountant based in Islamabad, and can be reached at syed.bakhtiyarkazmi@gmail.com