Economic Crisis or Information Failure? New Evaluation Techniques for Pakistan

Recent news headlines like these have led American politicians to worry about the stability of a Pakistan equipped with nuclear arms:

Squandering US$10 billion from precious reserves in less than 10 months, the country goes begging for $10 billion more… Standard and Poors downgrades the country’s credit rating to junk… Double digit inflation shoots by 25% within an economic quarter… Real estate values are depleted by 20 to 30 percent and foreign exchange reserves are reduced by more than half…

As Pakistan’s conflict with religious extremism grew post-September 11, foreign involvement grew. Now that economic instability grows, the world’s anxiety grows too. Consequently, American president-elect Barrack Obama has claimed that, “we have to support their [Pakistani] efforts to democratize. This does not just mean providing military aid; it means helping them to provide concrete solutions to the poverty and lack of education that exists in Pakistan. So I want to increase non-military aid to Pakistan.”

Donors and organizations like the United States and the International Monetary Fund (IMF) understand the urgent necessity of improving the economic situation of the region. However, they do not understand the erroneous fiscal priorities that have historically resulted in the inefficient channeling of foreign aid supplied to Pakistan. Donor organizations have long emphasized the need for fiscal measures like increasing discount rates, devaluing the economy and stringently collecting taxes. What they have forgotten to emphasize, and government leaders have failed to consider adequately, is the need of a policy for credible economic assessment of the country in the first place!

If the country hovers at the brink of bankruptcy, the people at the threshold of starvation, and the women at the verge of joining the work force (which is a social taboo), one must be puzzled by the absence of the social and political unrest that should theoretically have been instigated months ago. This is a clear sign that, despite the horrific economic picture portrayed by the Pakistani government, informal observation of economic resilience indicates a distinctly more positive picture.

The retail sector, considered a valuable indicator of the strength of household economy, has not shrunk as corresponds to the economic crunch in Pakistan. A business report by Dawn, the country’s leading national newspaper, claims that “the growth of the retail sector has been recorded as 11 percent officially and 20 percent unofficially.” Foreign retail chains Makro (Dutch), Metro (German) and Carrefour (French) have recently opened new stores in urban Pakistan or are in the process of moving into the Pakistani market. Meanwhile, the telecommunication sector has also boomed, despite the skyrocketing inflation in food prices.

Sale reports of leading consumer products’ companies share a similar optimistic story. The aggregate turnover for the two Unilever companies in Pakistan – Unilever Pakistan Limited and Unilever Pakistan Foods Limited – was 23 billion Pakistani rupees in 2006 and 25.7 billion in 2007. From January to September 2008, these numbers continued to grow. Similarly, according to Colgate Palmolive Pakistan Limited’s annual report in 2008, sales have surged by 21 percent to 9 billion rupees in 2007 and 2008 as compared to 7.4 billion rupees in 2006 and 2007. All of this market growth is occurring despite political unrest, inflationary pressure, rising prices and surging input costs.

Meanwhile, the government estimated the official rate of capital formation at 20.4 percent in 2007, a number which is indeed too low to have sustained 160 million individuals. Bank reserves are also a poor indicator of financial wealth of the citizens of the country. According to the State Bank of Pakistan, only 15 percent of the population uses banks and only 1 percent invests in securities. It is little wonder, then, that the financial sector cannot reflect on the economic health of the general public.

This conflict between consumption patterns and government projections of buying power leads to one conclusion: the government may not be accurately collecting data to estimate the country’s true economic condition.

People’s sources of income demonstrate that the strength of the economy is heavily based on intangible factors like the strong survival instincts of petty farmers and homemakers, artisans and craftsmen, the self-employed and self-trained technicians whose productivity contributes to informal capital formation but is not recorded in measurements of the formal economy. Similarly, personal charity, money transfers from abroad (through channels other than banks) and ill-gotten wealth from smuggling goes unrecorded. One study put charitable exchanges at an estimated 700 billion rupees 10 years ago, and they are projected to have more than doubled over the past decade.

The unrecorded economy explains the puzzle that, despite per capita income being $1,000, per capita spending power is $2,500. The obvious resilience of this sector should compel the government to actively try to evaluate its economic contributions.

While the government admits and accepts that data collecting tools and evaluation methods are outdated, few promises have been made to treat this issue as a priority. If the government does not want foreign aid because of the “unpalatable” strings attached to aid packages, it should formulate a policy for improving the economic data collection system.

Once the government realizes the unrecorded earning potential of the country, only then may it truly assess the extent of a real financial crisis in the country and develop appropriate policy solutions for resolving Pakistan’s economic problems.

Sameen Siddiqi completed a bachelor’s degree in economics from the Lahore University of Management Sciences in Pakistan in June 2008. She is currently pursuing a master’s degree in public affairs from the LBJ School at the University of Texas at Austin.