Pakistan’s Economy seems to be trapped in an eternal cycle: Economic Prosperity => High Imports => BOP Crisis: Shortage of Dollars => Borrow from IMF => Stringent Conditions Imposed => Lower Imports, Higher Taxes, Destruction of Domestic Production => Slow and Painful Recovery => Economic Prosperity. I have published several articles which deal with various aspects of this cycle and provide some insights and solutions. Some of these are listed and summarized below.
The articles below all deal with exchange rate and monetary policy issues in the context of Pakistan. They explain why the elites have preferred an overvalued Rupee, and created a consumer economy based on borrowing, even though domestic growth and development requires the opposite: An undervalued Rupee and a producer economy which favors cheap and low quality domestic products over expensive high quality imports. The final article traces the roots of these problems to the legacy of colonialism, with an an economy built to exploit and extract surplus from the population, rather than to create growth.
A Lopsided System: This article focuses on the global trading system and the role of money in it. The current system, which is centered around the US dollar, originated at the Bretton-Woods conference in 1944 as a result of the power of the United States, who rejected John Maynard Keynes’ proposal for a symmetric trading system. The article argues that this system has led to the financial colonization of the world, as other countries must strive to increase exports and earn dollars to back up their own currencies, while the US can simply print dollars. The US debt, which is $21 trillion, is a rough measure of how much tribute has been extracted. The author believes that with the emergence of China and the European Union as major players, the time is ripe for a transition to a more equitable global trading system that balances exports and imports and places the burden of adjustment equally on countries with excess exports and those with excess imports. See also: Dollar Hegemony: Causes & Consequences
Fear of Floating: The article discusses the concept of fixed vs floating exchange rate regimes in the context of modern monetary theory (MMT). It argues that floating exchange rates have benefits such as stability and protection from macroeconomic crises, but also presents the challenges of adjusting to a new economic environment. SUMMARY: The article explores the debate between fixed versus floating exchange rate regimes from the perspective of modern monetary theory (MMT). In a floating exchange rate regime, the central bank allows the supply and demand for currencies to determine the exchange rate, which can lead to sharp and erratic movements due to speculation and manipulation. The ‘fear of floating’ refers to central bank efforts to stabilize exchange rates, which ensures that movements are smooth and predictable, making foreign trade easier for exporters and importers. Most developing countries post-World War II preferred to peg their soft currency to the dollar, a ‘managed float’ or ‘dirty float’ regime, because it gives foreign investors confidence, helps traders make plans and is seen as a symbol of national pride. MMT recommends that governments avoid acquiring liabilities in foreign currencies and suggests that the world needs to create a consensus on a new method for global trade. The article concludes that free floating the currency shifts exchange rate risk from the government to the private sector, insulates the economy from macroeconomic crises and allows infant industries to grow.
Modern Money and Inflation: This article critiques Milton Friedman’s view that inflation is always a monetary phenomenon. Recent high inflation across the globe is not due to loose monetary policy following the Global Financial Crisis. Rather, cost factors such as the collapse of global supply chains, trade wars, energy prices, and natural disasters play a significant role in creating inflation in the recent past. On a more general and theoretical note, the Keynesian view that money flow into the economy will lead to increased production rather than inflation has strong empirical support. Modern Monetary Theory (MMT) sharpens Keynesian insight and recommends a Job Guarantee Program, where money is targeted towards unemployment, to prevent inflation. The most important challenge for policymakers in Pakistan is to apply MMT to provide productive jobs for the country’s valuable resource, its youth. See also: MMT for Pakistan.
Burning Billions: How an over-valued Rupee harms our economy – even though the opposite is widely believed. SUMMARY: The government of Pakistan subsidizes imports of luxuries by keeping the price of the dollar low, leading to a pattern of consistent overvaluation of the rupee. This results in a phenomenon known as Dutch disease, where the availability of cheap imports prevents the development of local industry, causing deindustrialization, declining exports, and a boom in the services sector. The influx of dollars from the US and Russia during the proxy war in Afghanistan and remittances from abroad created favourable conditions for Dutch disease in Pakistan. The country has fallen into a trap of building a consumer-oriented economy based on cheap imports, which is not sustainable in the long run. To create productivity in the domestic economy, the government must undertake structural transformation, which faces several obstacles, including the opposition from powerful and privileged classes who have been extracting revenues from the subsidy. The challenge for the government is to manage the transition in a way that minimizes disturbance and provides social support to those in need.
Rupee Over-Valuation: The same theme as previous article, with somewhat different explanations and empirical evidence for the thesis. SUMMARY: The article argues that the popular demand to control the devaluation of the Pakistani rupee ignores the fundamental economic realities. The equilibrium rate of the currency is arrived at naturally by the market and the only way for the government to maintain a value above the equilibrium rate is to sell dollars at a cheaper rate, which artificially adds to the supply of dollars and lowers the price. This policy of overvaluation of the rupee is equivalent to an across-the-board subsidy on all imports, which has negative effects on the domestic economy, such as preventing valuable industries from coming into existence. The article concludes that the long-term health and prosperity of the economy requires either fair or undervalued currency exchange policies, as the present policy of overvaluation cannot be sustained in the long run. Useful Historical BACKGROUND for the terrible policy of over-valuation is in the article: The Rupee is Falling: Let It Crash.
The Debt-Trap and Self-Reliance: This explains how perpetual excess of imports over exports creates a debt-trap. When we are forced to borrow foreign exchange for essential imports then we must agree to the terms of the lenders, which are extremely harmful for the domestic economy. To get out of the debt-trap, we must develop a self-reliant economy, which is never forced to borrow in foreign exchange.
Finally, a more general article explains the colonial mindset which has produced this situation. The English-speaking elites are running the country exactly like the colonizers used to – they are concerned with extracting surplus from the country, rather than creating growth and development which will reduce their power.
Impact of Colonial Heritage on Economic Policy in Pakistan: The article reflects on the failure of research-backed plans and good organizations serving the public interest in Pakistan. The problem is rooted in the legacy of colonialism, which resulted in the creation of two Pakistans – the upper class elites and the majority of the population. The educational system, which is designed to create respect for the British colonizers, has contributed to a distorted view of history, making it difficult for people to understand their place within it. The institutional structures of colonialism, such as bureaucracy, judiciary, police, and military, were not designed to serve the people but to maintain imperial order and extract resources. Today, the nature of these institutions remains the same, with bureaucrats being rulers of the country and having a mindset focused on extraction of revenue from an oppressed public.
What they don't teach in Economics Textbooks: This article explains some insights from Micheal Hudson. One is that debts are given to the poor countries to enslave them, not for economic benefits. Two is about how the unbacked fiat currency system allows USA to make any amount of money, without inflationary consequences. Three is that the financiers make fake calculations to show that benefits will occur by taking certain kind of loans, when the real picture is drastically different. This is a special case of the big picture provided in the book: The New Confessions of An Economic Hit-Man by John Perkins