The Islamabad Consensus – Journal
SOME positive news on the economy is finally visible on the horizon. If official figures are to be believed, Pakistan will end the current fiscal year with GDP growth of nearly four percent. Economic decision-makers deserve a pat on the back for causing minimal economic growth despite the severe global economic recession following the Covid-19 pandemic. Yet the pandemic has fundamentally transformed economic thinking around the world. In order to capitalize on these positive economic figures and address Pakistan’s specific economic challenges, now is the time to develop a new consensus – the Islamabad Consensus, if you will – on Pakistan’s economic policy recommendations.
The old consensus on economic policy, or Washington Consensus, focused on reducing state involvement in economic decision-making, especially for countries in the South. The World Bank and the IMF, the institutions that imposed this consensus on the developing world, saw fiscal policy as the problem, while calling monetary policy the only legitimate political tool for economic management. Central bank independence was an extension of this thinking, as an autonomous central bank was supposed to effectively prevent a state from injecting fiscal stimulus. For this reason, from the 1990s there was a general movement towards monetary policy tools and greater autonomy for central banks all over the world. The global economic slowdown due to the Covid-19 pandemic, however, shattered the Washington Consensus.
The Covid-19 demolished the old consensus.
As all countries face the biggest global economic downturn since the Great Depression, fiscal policy is back in force. Recently, Jerome Powell, Chairman of the Federal Reserve, spoke about the effectiveness of using monetary and fiscal measures for economic management. Andrew Bailey, Governor of the Bank of England, called for “very close and sensible coordination” between monetary and fiscal policies. Even Kristalina Georgieva, the boss of the IMF and true guardian of the Washington Consensus, called for more fiscal action. Globally, more than $ 16 trillion has been injected from the budget side to support economies.
The countries of the South pay particular attention. Recognizing the need for fiscal policy to promote economic growth, Latin American countries are trying to push back the remnants of the Washington Consensus. In the case of Argentina, Vice-President Cristina Kirchner called for the postponement of negotiations with the IMF. Similar voices are also being raised in Mexico under President Andréas Obrador.
Covid-19 has also been an unmitigated economic disaster for Pakistan, especially as it has exacerbated Pakistan’s main economic problems: sluggish economic growth, lack of job creation, and rampant incidence of poverty. Pakistani policymakers must unite to abandon the Washington Consensus and develop a new consensus that seeks to resolve Pakistan’s fundamental economic problems through fiscal policy. In doing so, Pakistani policymakers will need to find new ways to use fiscal tools to boost economic growth, create jobs and reduce poverty.
An innovative intervention whereby major economic problems can be solved is to dramatically increase spending on social protection initiatives from around Rs 416 billion in the current fiscal year to something like Rs 800 billion in the next. budget. The poor have a higher marginal propensity to consume, which means that they spend a much higher fraction of their extra income on consumption, thereby putting the extra money back into the economy. In addition, thanks to the multiplier effect, the final impact of these expenses will be much greater as the initial expenses flow through the economy. This will not only boost economic growth, but will also create more jobs as the economy recovers, while reducing the incidence of poverty as money goes directly into the pockets of the poor.
The Covid-19 demolished the old consensus on economic policy. Countries are now increasingly resisting difficult IMF conditions and employing fiscal policy everywhere. There is an urgent need to develop a new consensus on economic policy that seeks to address Pakistan’s fundamental economic problems like sluggish economic growth, lack of job creation and persistent poverty through fiscal policy. One innovative way in which economic policymakers in Pakistan can tackle these fundamental economic issues is to substantially increase tax spending on social protection initiatives in the next budget. Let there be consensus!
The writer completed his doctorate on a Fulbright scholarship. He teaches economics and public policy at Habib University in Karachi.
Posted in Dawn on May 30, 2021