INTERNATIONAL financial institutions and independent economists have, for long, not only highlighted various aspects of the economic situation but also made specific policy recommendations for its improvement.

Their proposals have fallen on deaf ears and the economy continues its downward slide due to mismanagement.

It would be of interest to identify, in historical perspective, the main factors responsible for the negligence of almost all recent governments in managing the economy, leading to huge deficits between saving and investment, public revenue and expenditure and external receipts and payments.

The first point to be noted is that, after the passing away of the country’s founder, a lot of rulers surfaced, including some from the army. But no one was a statesman of standing to undertake politically difficult economic policy decisions in the larger interests of the country.

In the 1950s and 1960s, a competent civil service provided the necessary institutional stability and leadership in economic matters. During that period, the country recorded a high rate of economic growth within the framework of relative price stability. Thereafter, with the gradual decay of the civil services and increased complexity of economic problems, and in the absence of a sincere and stable political leadership, economic mismanagement, corruption and pilferage became pervasive.

Second, in the initial period, monetisation of a large non-monetised sector provided some scope for absorption of the expansion in money supply in excess of the growth in output without generating demand-pull inflation. Similarly, the initial absence of the stock of government debt provided scope for borrowing without focusing on the immediate burden of its servicing. In particular, given the soft loans of the World Bank and bilateral grants, the country became addicted to foreign assistance.

That addiction continued even after the drying up of bilateral grants and multilateral soft loans. Successive governments substituted the low debt-creating external inflows of the past with high debt-creating loans rather than taking measures to increase domestic savings and exports or to introduce fiscal reforms for resource mobilisation.

Governments continued to rely on the easy way of domestic note-printing on the one hand and foreign loans on the other to finance the budget and the balance of payments deficit, and to cover the saving-investment gap. The cumulative impact was to steadily drown the economy in a sea of inflation and debt burden.

Third, with nationalisation of major industries, banks and insurance companies in the 1970s, the public sector became a dominant producer and financier of economic activities, creating enormous opportunities for corruption. Resultantly, the main game in the government became personal enrichment. Even subsequent privatisation decisions involved commissions, kickbacks, favouritism and nepotism and therefore did not produce the desired results.

Fourth, by the late 1980s, the economy was trapped in a vicious circle of structural imbalances requiring a major overhaul of economic management. Unfortunately, during the rule of Zia, Musharraf and now Gilani, the conflicts in Afghanistan provided some oxygen in the form of foreign loans to keep the sick economy breathing. In between, the Nawaz Sharif and Benazir Bhutto governments changed hands more than once and the consequent political instability inhibited the process of economic reforms.

Fifth, with a few exceptions, the political leaders developed no real understanding of the economic issues. At the same time, the economic problems became so complex and the political system so corrupt, that no government could move bravely to address the deepening economic problems. The emergence of vested interest groups and their lobbying power tied the government’s hands and complicated decision-making. Successive governments continued to rely on an easy patchwork for the budget based on internal and external borrowing.

Several self-styled experts emerged to provide wrong but politically attractive advice. To give just one example, a banker gave a high-profile presentation on how easy it was to solve the unemployment problem through the ‘multiplier effect’ by opening up the flood-gates of bank credit at cheap rates for self-employment. Such advice was not adopted but it, and other similar bits of advice, stood in the way of acceptance by the governments of politically unpopular but professionally sound solutions.

Sixth, most professionals in the government, local or imported, did not play their proper role. Instead of objectively briefing the political leadership on the state of the economy and insisting on the adoption of sound solutions, they succumbed to the trappings of power and began to fudge figures and dress up political decisions with economic justification just to mark time and stay in their positions.

Seventh, no political leader emerged with a strong personal standing and a commitment to good governance. A leader of stature could explain to the people the state of the economy and take difficult decisions ensuring that the cost of reforms was distributed according to the ability to bear. If such a leader was there, people may have an accepted honest assessment.

Given the above background, it is clear that the resolution of economic problems would require, in addition to good governance, internal security and the rule of law, a credible and stable political leadership backed by a dedicated professional team that understands the real economic issues and adopts and implements on a sustained basis a bold long-term economic policy programme for overdue structural economic reforms. At present, the prospects for the emergence of such a set-up are not very bright.

The writer is a former governor of the State Bank of Pakistan.