Instability and Economy

There exists overwhelming empirical evidence across countries and across time that political instability is negatively related with economic growth and performance. Political instability lowers private investment, slows economic growth, and gives rise to unemployment and poverty. Political instability breeds corruption, mis-governance, shortens policy-makers’ horizon, inconsistency in policies, and creates volatility in economic performance.

Pakistan is witnessing a prolonged period of political instability (almost five years) and as such its adverse consequences for the economy are quite visible. Despite a free, fair and relatively peaceful election of Feb 2008 and smooth transfer of power, the present government failed to find its feet on the ground and continued to lurch from one crisis to another. Political instability persisted throughout with a heavy toll on economy.

The government found itself clueless in addressing socio-economic problems in general and external shocks in particular. For a protracted period there were no finance, commerce, petroleum and natural resources and health ministers. It gave the impression of having little sense of direction and purpose. The government continued to change its economic team frequently and continued to appoint weak and frivolous economic teams with serious consequences for the economy.

It is strange that the current government, claiming to have a strong majority in the parliament, failed to generate political stability in the country. People within and outside the country had a lot of expectations about political stability, strengthening of democracy, rule of law, and respect for judiciary. The present coalition government thoroughly disappointed the friends of democracy within and outside the country. Print and electronic media continued to highlight the stories of corruption and bad governance which certainly have weakened the government and the writ of the state.

A series of events over the last four years followed by their inept handling contributed to the persistence and acceleration of political instability in the country. The refusal to restore judges of various courts including the Supreme Court, the widespread criticism from almost every walk of life against the insulting language and the conditionalities attached with the Kerry-Lugar Bill, the judgment of the Supreme Court on the National Reconciliation Ordinance, the Abbottabad incidence and the Memogate to name a few, continued to weaken the government and breaded political instability.

Why political instability is bad for the economy? Because it weakens governance as the government continues to strive for its survival with economy getting the least attention. Political instability shortens the horizon of the government, disrupting long-term economic policies conducive to a better economic performance. The government is forced to take short-term but populist measures to win the heart and mind of the people. Such short-term populist measures never improve economic performance and hence, economy continues to suffer.

Political instability is associated with greater uncertainty regarding future economic policy, it certainly affects investment adversely, slows economic growth, increases unemployment and poverty, which in turn, further fuels political instability by giving rise to violence, civil unrest, and strikes. A higher degree of political instability is associated with lower productivity growth, lower physical and human capital accumulation thus weakening the foundation of long-term economic growth and prosperity.

Pakistan’s current state of the economy is the mirror image of the adverse consequences of political instability. Over the last four years, Pakistan witnessed its investment rate decelerating, economic growth slowing, unemployment rising, millions slipping below the poverty line, women and children dying in stampedes for a few kilogrammes of wheat, inflation persisting at double digits for 50 months in a row, public debt doubling and exchange rate depreciating and fuelling inflation and contributing to the surge in public debt.

Pakistan also saw its relations with international financial institutions deteriorating, the Friends of Pakistan showing reluctance in providing financial support and hence overall balance of payments turning negative, foreign investors losing confidence on Pakistan’s economy and on its economic managers with consequent nosediving of foreign investment. In short, a relatively stable and resurgent economy has been destroyed in the last four years owing mainly to mis-governance breaded by political instability.

Pakistan’s current state of the economy and political instability raises many questions. When a strong coalition government like the present one fails to bring political stability, what is the guarantee that a new government (most probably a coalition one) would bring political stability in the country after the elections? Given the nature of politics in Pakistan which has evolved over the years, it appears that political stability would continue to be a distant dream for the people of Pakistan. With political stability not in sight even after the election, what would happen to the already fragile economy? Is there anything wrong with the structure of our political parties or political system? Do we need wide-ranging political reform along with economic reform?

The political parties must sign a Charter of Economy before going for election. They must agree on certain economic policies and reform agenda for the future of economic growth and prosperity of the people of Pakistan. In particular, they must agree on widening of the tax base, bringing every sector and every person earning above the threshold level under the tax net, rationalising and prioritising of expenditure bringing the budget deficit down to 3 percent of the GDP in the next three years, making the NFC Award work for fiscal stability, privatising the bleeding PSE, handling of power sector reform, addressing energy issues, to name a few.

No political party alone can undertake these reforms. It requires commitment from all the major political parties under the Charter of Economy. They must remember that economic stability and political stability are deeply interconnected. No amount of foreign assistance will propel growth unless conditions like a stable and honest government, market-oriented policies, and willingness to undertake reforms are in place. Aid that goes into poor policy environment does not work. Instead, it contributes to debt and restrains future economic growth.