“LORD, we know what we are, but know not what we may be.” Shakespeare alludes to human potential which is always higher than its present condition. Allama Iqbal elaborated on this idea in his famous couplet that translates to ‘elevate yourself so high that even God, before issuing every decree of destiny, should ask you: Tell me, what is your intent?’ Iqbal wanted every person to develop their ‘self’ to realise their individual and collective potential. If only they could invest their time and energies in elevating themselves through continuous struggle.

As a 75-year-old nation, we know how weak our economy is, but are unsure about our economic future. We know that by devoting our collective energies, time and available resources to investment, our economy can be gradually strengthened. But we were unable to overcome our weakness and it seems futile after 75 years to even talk about attaining our economic potential. Is our economy afflicted by the madness of Shakespeare’s Ophelia? No, of course not. Ophelia was suicidal, but our elite is not. Yet, we are afflicted by our elites’ madness, driven as it is by high and borrowed consumption that leads to low savings and investment. While our elite, both political and apolitical, is not suicidal, it is destructive for non-elites, ie, the economy at large.

In the year 1965, we attained our highest gross fixed capital formation as a proportion of GDP at 21.5 per cent. Since then, it has been on a declining trend. Some of our peer countries, including our neighbours, had comparable ratios: China (20.6), Egypt (15.8), Indonesia (6.7), India (17.1), Iran (31.3), Morocco (10.6), Malaysia (18.4) and Sri Lanka (12.9). In 2021, almost 56 years after 1965, due mainly to our bad and destructive policies, our GFCF-to-GDP ratio was only 12.8pc, compared to Bangladesh (31.0), China (42.5), Egypt (12.0), Indonesia (30.8), India (28.3), Iran (28.2), Morocco (27.1), Malaysia (19.3) and Sri Lanka (26.0). There is no method to our policy madness.

Why had we seen rising levels of investment till 1965, which became increasingly insufficient to sustain economic growth to appropriate levels later? This simple question is actually complex, but nevertheless demands answers. There is only one broad macroeconomic cause of our declining trend of investment, several microeconomic causes (encompassing legal and institutional constraints) and only one overarching political cause.

We are afflicted by our elites’ madness, driven as it is by high and borrowed consumption.

Let us describe the first macroeconomic cause. This is the most obvious. It is our policymakers’ inability to maintain macroeconomic stability, which, in turn, depends on many factors. The most important of these factors is the inability to mobilise resources through taxation. Budget after budget has failed to produce cogent taxation plans resulting in declining tax-to-GDP ratios. From FY76 to FY20, our tax-to-GDP ratio varied between only 9.1pc and 14.5pc. The failure to mobilise our rupee resources, together with higher-than-available resource consumption by the government resulted in increased domestic and external borrowings. The domestic source consisted of borrowings from the State Bank, commercial banks and other non-bank sources like the National Saving Schemes. Reliance on the central bank not only constrained savings development, but also fuelled inflation and its expectations. This not only stimulated the government’s domestic consumption, but also promoted public and private imported consumption. Savings were, thus, thwarted leading to a rise in both domestic and external debt.

The original sin of the government eating the non-forbidden apples with borrowed money, led to rising external account deficits like the trade and current account deficits. The havoc wreaked by the overvalued Pak rupee throughout most of our 75-year history on our imports should be obvious. Our consumption in FY22 was almost 100pc of GDP. Since GDP is a sum of consumption, investment and net exports (ie, exports minus imports), the impact of our investment-to-GDP ratio of 15.1pc is fully offset by the negative gap between exports and imports in national income accounts!

The microeconomic causes of investments comprise several legal and institutional hurdles that were described in detail in a special section of the State Bank’s annual report of FY19; they make for a harrowing read, and are almost impossible to summarise. This report states that investment policies read like an ‘attraction document’. When investors want to invest, they find that the laws governing investment are different from the policy documents. For example, the investment policy of 2013 differs in scope, including various rights, requirements, dispute settlement and expropriation, from what is legally available to investors in the Foreign Private Investment Act, 1976, and the Protection of Economic Reform Act, 1992. Hence the actual investment environment not only falls short of the promises given in the policy document, but ‘successful’ investors must brave a myriad of operational hurdles. This is true for both domestic and international investors.

In case of foreign direct investment, bilateral treaties form a crucial agreement that establishes the terms and conditions of investment. These treaties are also not in full conformity with domestic laws and regulations. The result is that the dispute settlement mechanism is weak and the risk of expropriation, currency inconvertibility and political violence is highest in Pakistan among Bangladesh, India, Sri Lanka, Malaysia and Vietnam. A few high-profile cases of international investment disputes in the London Court of International Arbitration have made the environment in Pakistan less conducive for FDI.

This is just a glimpse of the various hurdles to investment, along with policy uncertainty, described in detail in the report cited. The overarching constraint to investment is the complex political environment in our country, fluctuating as it does between pseudo democracy and dictatorships. Pseudo democracies are democracies known for being tainted by the establishment, making it difficult to establish who is really in charge of the government. In this respect, it can be argued that pseudo democracies are inferior to dictatorships. In this political scenario, priorities are unlikely to be favourable to investment, growth and development. Nevertheless, any set-up can easily bring conformity between domestic laws, investment policies and bilateral treaties. Doing only this will go a long way in increasing our investment and economic potential.

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

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Published in Dawn, September 8th, 2022

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