The Islamabad Consensus – Journal
SOME positive news about the economy is finally on the horizon. If official figures are to be believed, Pakistan will end the current fiscal year with GDP growth of almost 4%. 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 unique economic challenges, now is the time to forge a new consensus – the Islamabad Consensus, if you will – on policy recommendations for Pakistan.
The old consensus on economic policy, or the Washington Consensus, focused on reducing state participation in economic decision-making, especially for countries in the South. The World Bank and the IMF, institutions that have imposed this consensus throughout the developing world, saw fiscal policy as the problem, while qualifying monetary policy as the only legitimate political tool of economic management. Central bank independence was an extension of this thinking, as it was believed that an autonomous central bank effectively prevented 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, has shattered the Washington consensus.
Covid-19 demolished the old consensus.
As all countries face the biggest global economic recession 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, IMF chief 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 Global South pay particular attention. Recognizing the need for fiscal policy to spur economic growth, Latin American countries are trying to defend themselves against the remnants of the Washington consensus. In the case of Argentina, Vice-President Cristina Kirchner called for the postponement of talks with the IMF. Similar voices are also heard in Mexico under President Andréas Obrador.
Covid-19 has also been an outright economic disaster for Pakistan, especially as it has exacerbated Pakistan’s fundamental economic problems: sluggish economic growth, lack of job creation and rampant incidence of poverty. Pakistani policymakers must come together 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.
One innovative intervention to address key economic issues 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 they spend a much higher share 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 this spending will be much greater as the initial spending moves through the economy. This will not only boost economic growth, but also create more jobs as the economy recovers, while reducing the incidence of poverty, as money goes directly into the pockets of the poor.
Covid-19 demolished the old consensus on economic policy. Countries are increasingly resisting difficult IMF conditions and are pursuing fiscal policies everywhere. It is absolutely necessary to develop a new consensus on economic policy that seeks to resolve Pakistan’s fundamental economic problems such as 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 budget 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