National Dialogue Forum

Crimes against logic

The mainstream economic prescriptions for Pakistan, such as market liberalization and export-oriented industrialization, are not sustainable or equitable. The author proposes an alternative programme of structural change, which would involve delinking from global markets and reorienting investment and industrialization towards national needs. This would require a shift in the coalition of class forces in power and a fundamentally different role for the state.

In August 1985, at a conference in Havana, Fidel Castro laid out the facts and figures and indeed the mathematical impossibility of the Third World ever being able to repay its external debts ($335 billion at the time, close to $11.1 trillion today).

Today, compounding interest and debt servicing payments combined with the mechanisms of unequal exchange and the peripheral economic structure of most Third World countries, ensure that for every dollar Western countries give to smaller nations (as ‘aid’ and investment), more than three actually goes out through interest payments, profit repatriation, and multinationals’ accounting gymnastics.

It is in light of these facts then, that Castro advocated for the cancellation of Third World debt by building an inter-national united front of popular classes. An audacious aim no doubt, but one based in a very sober realisation of the intractability of the debt problem within the current architecture of the world economy.

Whatever one may think of Castro or the ideal of Third World unity, one need only cast a cursory glance over the commentary sparked by the IMF programme renewal in Pakistan to be struck by the general poverty of imagination in our own economic discourse. For the most part, we have the usual chorus of voices advocating for a further liberalization of markets (an antidote apparently to breaking up ‘cartels’), easing the pathways of ‘Foreign Direct Investment’ (FDI), and promoting export-oriented industrialisation as a means of shoring up foreign reserves and solving perennial balance-of-payments issues. In short, the aim is to shift the economy from one that is import-dependent and consumption-focussed to that which is export-oriented and production-focussed.

There are some important proposals here, of course – not least the demand to increase the state’s woeful revenue generation through increased taxation, incentivizing investment in productive sectors, and taming the perennially-expanding security behemoth. Additionally, the IMF have burnished their pro-poor credentials, by advocating for targeted subsidies for the poor while increasing taxes on the rich.

Needless to say, subsidies to the poor do not alter the basic architecture of IMF prescriptions. And there is hardly a commentator in the mainstream, a couple of honourable exceptions notwithstanding, who – even while advocating a velvet touch to the iron fist of market reforms – have questioned the programme’s basic prescriptions. Here, evidence is trumped by dogma and, as Yanis Varoufakis evocatively put it, “crimes against logic” are perpetuated by the high mandarins of global financial management and neoclassical economics with their advocacy of liberalization and marketization.

Take, for example, the advocacy by all and sundry of promoting FDI and export-focussed industrialisation. Assuming that FDI will lead to greater industrialisation (which is not guaranteed), what is not considered here is the form this is likely to take. In most developing countries, FDI has created ‘enclave economies’: pockets of ‘development’ and industry, often in un-taxed and scarcely regulated “special economic zones” (SEZs), which have little upstream and downstream linkages with the wider regional or national economy. Geared towards global value chains and markets, firms in such enclaves are subject to global measures of profit and competition, and therefore bank on the ‘comparative advantage’ of unemployed/underemployed workers in smaller countries. Inevitably, this is a further incentive for local employers, intermediaries, and the state that facilitates them to indulge in a veritable ‘race to the bottom’ when it comes to wages and labour standards.

Such restricted forms of development and industry form no productivity-enhancing linkages between different sectors of the local economy while competing at the global level through ‘labour arbitrage’: a regime whereby the free flow of capital leads to workers being forced to compete with each other across a global wage divide.

FDI-induced and export-focused industrialization also often lead to capital-intensive forms of industrialisation, which are geared towards reducing labour costs. This is even while the production of technology and ownership of patents remains firmly ensconced in core countries. While such capital-intensive forms of industrialization (and associated services sector) can absorb a layer of skilled and semi-skilled labour, it does not lead to broad-based and sustainable labour absorption – a key requirement for a country like Pakistan with massive levels of un- and under-employment.

The case of India is instructive: its share of labour-intensive (versus capital-intensive) merchandise exports has fallen by almost half in the last two decades while issues of low-aggregate investment, insufficient demand and employment continue to persist in the general economy. Thus, capital-intensive forms of industrialization and investment further exacerbate the problem of enclavisation. They lead to extroverted and disarticulated economies – those geared towards fulfilling the needs of the global market (with all its fluctuations and pressures), while resulting in narrow forms of development nationally; few linkages between different sectors such as local agriculture, industry, and services; and large surplus populations.

Narrow forms of development thus neither solve the issue of decent employment for broad masses of labour, nor are they particularly sustainable or equitable. The travails of Bangladesh, a much-touted ‘success story’ of export-oriented development, are a case in point. Its labour standards led to the biggest industrial disaster in history (Rana Plaza), while an economy exposed to the vagaries of global fluctuations has led this poster child of neoliberal success to yet another IMF programme last year.

Similar pitfalls may be highlighted with respect to the mainstream advocacy of privatization of state-owned enterprises and liberalization of currently “closed” markets (such as in agricultural goods and trading). What is, of course, not accounted for here is Pakistan’s already disastrous experience with privatisation. From national banks and development institutions to energy and the telecom sector, firesale privatization and liberalization has only ended up diversifying the portfolios of local and international conglomerates. The much-touted ‘gains’ of privatization and liberalization, such as greater and more efficient allocation of capital to productive sectors, have not materialized. Indeed, contrary to the predictions of privatization advocates, the share of ‘unproductive’ government securities in the total investment of privatized banks has increased three-fold, and at more than twice the interest rates compared to the pre-privatization era, while the dire straits of the energy sector are obvious for all to experience (and sweat out) daily.

The problem, of course, is not of judicial ownership of the state versus the market, but of the social coalitions and classes which are dominant in a sector or society generally – and which in turn determines who can take advantage of situations of state support or, conversely, of marketisation. The advocacy of liberalization and privatization thus runs aground on the same issues as that of export-oriented industrialization – the structural imbalances and contradictions embedded in local, national, and global political economies.

Subsidies for the poor and cuts in defence expenditure notwithstanding, economic liberalization and tighter integration into global markets – especially on terms dictated by reigning elites and free-floating international capital – are thus not the panacea promised by our economic wizards. An alternative programme, seldom mentioned, much less discussed, is one of a structural change very different from that advocated by the IMF and neoclassical consensus.

At a basic level, this would involve what critical political economist Samir Amin has termed “delinking”: not a programme of autarky disconnected from the outside world, but one of internally focussed development whereby capital (including foreign capital) is subject to nationally-defined needs and demands through state control/direction, rather than the whims of global value benchmarks. This would entail a concerted programme of building linkages between our agricultural and industrial sectors, again with a view to serving national needs first and foremost – such as ensuring food security/sovereignty and creating broad-based forms of employment and labour absorption as opposed to enclavised ones. Such a programme of building inter-sectoral linkages, sustainable labour absorption, and nationally geared agricultural and industrial productivity is itself predicated on raising effective demand at home. This in turn entails, at minimum, a programme of effective land reforms (along with democratisation of other factors of production) both in rural and urban areas.

Most crucially, these extensive changes are based on fundamentally different aims and premises from the mainstream advocacy of liberalization and export-oriented development. In its advocacy of raising effective demand at home, land reforms and re-focussing investment and industrialization away from global markets to national needs, such a programme requires a shift in the coalition of class forces in power and a fundamentally different role for the state itself.

It is here too that the needs of the Pakistani economy and its toiling masses run into a structural contradiction with the prescriptions of international financial institutions and the mainstream commentariat: fixes along the lines of markets versus the state, monetary manipulation, and export-orientation giving way to a far more deep-rooted and audacious programme of economic and, most importantly, social and political change.

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Dr. Ayyaz Malik
Dr. Ayyaz Malik

Non-Resident Fellow NDF.

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