The Great Depression: The Great Depression was one of the longest depressions in history. What made this stand out from the rest was its endurance and geographical spread. It lasted for more than three years.
It originated in the United States but engulfed many countries. Most of them lost up to 15 per cent of their Gross Domestic Product. In the United States, particularly, interest rates dropped to low levels. A depression directly or indirectly affects all walks of society. The unemployment rose to 25 per cent. Wages for workers who still had jobs fell and the US GDP fell to a half. This led to global financial distress that had significant geopolitical ramifications.
Times like these require strong leadership. The world needed a hero. Franklin D Roosevelt tried to become one. The most important skill required of leaders during times like this is effective communication and a capacity to sell hope. This is because a recession is exacerbated and triggered by a loss of confidence in the economy. Roosevelt knew the strategy, which his predecessor didn’t. He literally talked the United States out of this crisis. He started a series of radio talks where he addressed several problems of the economy. Roosevelt gave people hope and strategy to fight this depression. In addition to moral support, he created jobs, provided unemployment insurance, and allowed unionization. These programmes have survived.
Malaysia
Malaysia is one of the most successful non-Western countries to achieve a relatively smooth transition to modern economic growth over the past decade. Malaysia is a major supplier of primary products to the industrialized countries such as tin, timber, rubber, liquefied natural gas, and palm oil. The Malaysian economy advanced 4.5 per cent in the first quarter of 2019. Malaysia had a financial crisis in 1997 where their ringgit exchange rate fell from RM 2.42 to 4.88 to the US dollar. This resulted in a heavy outflow of foreign capital. The government imposed strict regulations and tried to curb the outflow of capital. The Ringgit was curbed to 3.80 against the US dollar after depreciation. Malaysia, in its moment of crisis, understood the importance of effective bankruptcy laws. The government managed to create additional courts and made regulations to restructure firms’ financials. As a result of this, companies were able to reorganize their assets. This proved very fruitful and within two years financial distress of the firms was resolved.
Additionally, the government stopped the operation of illegal share markets. Instead of having a lot of shares registered in the name of a handful of nominee companies, the stock exchange made it mandatory to register the shares in the names of beneficiary owners. A recovery in the stock markets followed immediately.
China
The Chinese economy advanced 6.4 per cent in the first quarter of 2019. China had to face the brunt of the global financial crisis of 2008. The US and Europe were forced to cut back on consumption and the demand for Chinese goods plunged. To overcome the financial crisis, China took the simplest of steps. First, they stimulated the domestic demand by enhancing public expenditure by introducing a stimulus package of 4 trillion yuan. The government reduced taxes, pushed VAT reforms, business tax cuts, and raised the threshold of individual income taxes. Rigorous steps were taken that involved cutting down the interest rates and quota control on lending by commercial banks was removed. The bank reserve requirement ratios were lowered and China managed to inject a huge amount of liquidity to the banking system.
We understand that the economic crisis in Pakistan is bad but the world has seen worse and gotten it
What needs to be done?
First and foremost, an increase in direct taxation is the key as opposed to increasing the General Sale tax. This will help alleviate the inflationary pressure on the general public without affecting tax collection. The government should turn its focus on improving quality control units so that people buy local products as opposed to products from multi-national companies. This will avoid foreign exchange leakage and promote local industries. A country cannot buy success from outside, it has to be developed internally.
Secondly, the government should strengthen the financial and regulatory authorities through the appointment of competent leadership and minimize all sorts of political interference. The State Bank of Pakistan must be given functional autonomy. There are several benefits to having an independent and competent regulator.
Thirdly, the government should modernize the financial system to combat tax evasion and money laundering. The high fiscal deficit in Pakistan is due to low tax collection rates. Black markets have taken over and continue to siphon off wealth abroad. These markets are responsible for creating an imbalance between the supply and demand for dollars.
Lastly, the government should spend more on education rather than cutting the annual budget for it. Pakistan lacks scientists and academics. Business-friendly policies should be formed to encourage people to invest in Pakistan.
Pakistan has great potential. The government needs to convince the market to harness that potential. Once it has done that, the rupee will be on the run and our balance-of-payment worries will end.
The writer is head of sales in Bima Mobile Pakistan (Limited)