The 100 million reasons why Pakistan will never progress

This is not out of cynicism. This is in fact out of cold, hard analytics. Pakistan will never become a middle income country (let alone a high income one) as it continues to under rate and under prioritize investment in its human capital. It is a tired and jaded slogan but it is as true today as it was 6 decades ago - only sustained and quality education of the masses will break GDP growth out towards the double digit level and keep it there. Otherwise, the economy will remain beholden to local/global liquidity cycles where periods of fast growth will be followed by periods of stagflation/stagnation.

Currently Pakistan invests the least in its human capital in the entire South Asia - a group that is not, even as a collective, very high on any scale of global economic development. So we are the worst of the worst. But the other South Asian nations are well ahead in recognizing the need to invest and develop human capital. Already countries like Bangladesh and Sri Lanka are defying the twists and turns in the global liquidity cycle to post sustainable break out in the production possibility frontier. Indias literacy rates are well known - with rising wage costs in China, India might finally be able to bring, in a big way, its 1.2bn people into the global supply chain.

Unfortunately, in Pakistan, despite higher enrollment rates in each subsequent year, the quality of education continues to deteriorate and leaves much to be desired. Even if the average kid makes it out of the horror that is the public secondary and high school system, the higher education institutions available to them have inadequate facilities, poor teachers and terrible learning environments. Many private universities have sprung up but they are only a drop in the ocean. And how big is this ocean? As per estimates, 64 million Pakistanis are below the age of 14. Another 42mn sit in the age 15 to 24 age bracket. That is more than 100mn that will be requiring or are acquiring education over the next 10 years.

100mn. That is more than the population of Germany, Egypt or Israel. It is almost 1/3 the population of the USA. One can easily say there are more young Pakistanis than Germans, Egyptians or Israelis in the world.

These young Pakistanis, unfortunately, are not just Pakistan’s problem anymore. Nicholas Kristoff in a recent op-ed in the NYT said it right (and I summarize) - the wahabi sunnis are well advanced in their strategy of disseminating their constrictive ideology than developed countries; these sunnis are spending money at the primary and secondary level through madrassah systems of the Islamic world, to create a formidable formation of indoctrinated youth. In contrast, advanced countries are well behind in ensuring that the precious aid that they do provide the developing world is used to for providing a more modern and more centric education.

Poor labor education and training leads to lower total factor productivity. Inadvertently, in a highly competitive world, Pakistani manufacturing has struggled to compete. The country has been moved upstream (that is non-value add) on almost all exports supply chains that it used to significantly contribute to. Short term palliatives like high protection to import substitution industries, substantial subsidies to export sectors and favorable monetary/FX policies have allowed manufacturing to come up for breath. However as its share of the global pie shrinks or stagnates every year, capital moves towards short term trading opportunities (commodities, asset markets, etc) rather than investments that create jobs, income, wealth and, eventually, social mobility. Labors vicious cycle gets that much more vicious. With falling to stagnant incomes, social and communal instability increases leading to poor security, bad democracies and terrible politics.

In a gist - welcome to Pakistan: current, past and future.

 

The unbearable lightness of the economic being - I

Let's face it. French economist Thomas Pikettys 'Capital in the Twenty-First Century' told us what we kind of knew - the rich have started getting rich again while the poor, well, remain the same. In fact, the book explains, the 2 world wars, it seems, were the anomaly that reduced income inequality and ensured a more broader distribution of economic wealth. However, the last few decades have seen a return to the 'patrimonial capitalism' that Marx was worried about.

And here, in my humble opinion, is why modern economics is contributing towards the ossification of the fissures between the haves and the have not’s: too much of modern economic policy making is centered on monetary policy over and above any other forms of public policy. And given the increasing conservative bent in recent times towards government size (smaller the better mantra), monetary policy carrys a disproportionate burden for a countries economic management.

There is no doubt effective (and better understood) monetary policies are one of the key reasons behind global post-ww2 prosperity. However, its importance has trumpeted all other forms of economic policy making - especially fiscal policy. Controlling and managing inflation is necessary for sustainable economic development – that’s the 11 commandment. Low inflation, amongst many things, keep inequality in check and labor, as not just a factor of production, is able to sustain a lifestyle. Low inflation, as it should, also protects owners of capital. High inflation destroys debt; what you lend/invest is worth lot less over time. By keeping inflation in check, monetary policy has ensured the value of credit AND allowed credit markets to flourish.  

However, in todays world, monetary policy exists to protect the interest of capital rather than labor . That is because the monetary transmission mechanism is flawed. How? At the end of the monetary transmission spigot are the banks and other financial intermediaries and these intermediaries do not easily lend to the poor. For the poor (labor) to recieve loans, there needs to be a strong business case. Unless the poor pay a steep premium (anyone remember sub-prime?) over and above what other borrowers are paying, they are not considered \good credit. In fact, even if they pay steeper premiums, they still not considered good credit (anyone remember the shorting of subprime?).

So hence....

....the modern private financial system, inadvertently, suffers from a moral blind spot as poverty alleviation is not a business goal

....despite the best intentions of central banks (and they actually do have noble intentions), financial intermediaries make monetary policy an ineffective tool to improve the livelihood of labor (poor)
 

... Picketys conclusion is quite logical - the main beneficiaries of prosperity has been owners of capital and not labor. And this will remain so, as all policy making is skewered towards protecting the interest of the former over the latter.