When owners of a newly established auto-repair workshop could not get a single client for a couple of weeks, they formed a task force to find out as to why they had not been able to attract customers. After examining many factors, the task force found that the main reason was that the workshop was established at the fourth floor of a building, which may be inconvenient for the clients.
Pakistan’s public-sector experiences such phenomenon every day. A comprehensive compendium on similar accounts in economic policies can help in identifying the policies that have proved to be nonsensical in the long run. But before diving into these policies, we should first understand what economic policies are and their role in economic development.
An economic policy is a course of action that is intended to influence or control the behavior of the economy. Economic policies are typically implemented and administered by the government, and can be divided into two levels. The first is the choice of the economic goal, while the second regards what policies will be used to attain it.
Now, we’ll look at some economic policies which proved to be quite nonsensical for the economy.
Interest Rate Policies: Bad News for Businesses
In the last two decades, we saw alternative phases of low and high interest rates policies. During 2003/08 period, the interest rates were very low. In fact, the bank mark-up reached so low for the first time in decades, encouraging businesses to go for rapid expansion from low-cost loans.
The following period of 2008/13 saw an abrupt increase in interest rates that made it extremely difficult for entrepreneurs to serve their loans taken at a time when interest rates were very low. This resulted in numerous bank defaults and ended up shattering investor confidence levels. From 2013 to 2017, we saw a drop in bank mark-up even more to lower levels than 2008/13, but this time around, the investment remained elusive as investors had learnt their lesson.
Moreover, the federal government being the main borrower of bank loans eventually crowded out private sector credit. In the last two years of this period, the interest rates started to climb up again, more so in the last one year. Investment at the current interest rate is extremely risky for the manufacturing sector therefore, grasping the consequences of interplay between monetary inflation and deflation is crucial for prudent investors.
It has now been established that the long-term consequences of unsustainable low interest rates are disastrous and this economic policy was entirely senseless. Additionally, such rates result in creating real estate and stock market bubbles. We have seen stock market reaching new heights during the low interest regimes of Shaukat Aziz and Nawaz Sharif.
Irrational Tax Policies: Resulting in Economic Plunge
True reforms have not yet been introduced by the government. Prudent reforms make it impossible to increase the expenditure after approval of the budget. In the past several years, we have seen every government presenting supplementary budgets to cover previous additional expenditures of the fiscal year. However, massive increase in tax rates by the government has proved to be counterproductive, hence resulting in an economic plunge.
Moreover, bringing tax evaders in the tax net is a good approach, but penalizing tax compliant sectors with more taxes is irrational. After increase in tax rates, the government needs more growth to service this debt and risk inflation.
Monetization of Debt: Makes People Poorer
The monetization of debt or printing of money by the government has negatively impacted the economy. The more money the government prints, the less the value of the income you receive. This is a direct way of bringing in inflation and making people poorer, yet in the past decades, every government went for monetization of debt as part of their economic policies which proved to be disastrous for the economy.
Hence, after analyzing the above policies we can easily conclude that in the past, governments have taken decisions on the basis of some witless economic policies which were cataclysmic for economic growth and prosperity. Therefore, astute economic policies are cardinal for economic stability and development in the country.
In the words of Tan Teng Boo:
“Successful economic development is a process that takes decades of hard work, sacrifices, dogged determination, smart and wise socio-economic policies, and an obsession with the long-term. There is no short cut.”
Written By Aqsa Rizwan Ali
コメント