The recovery from the economic shock of Covid-19 appears to be faster and stronger than most expected eighteen months ago. The pace of recovery varies by region of the world, with countries’ distress or optimism defined by their own unique circumstances.
The recovery so far has been primarily defined by two key factors: one, the stimulus in terms of inflated public spending coupled with the quantitative easing policies of central banks – in layman’s terms, printed money; second, the development and mass production of more than one vaccine for Covid-19 – a notable scientific achievement indeed.
However, the vaccination campaign reminded us of an astonishing reality: the impact of our nationality on our lives. High-income countries have been able to fully immunize about 60 percent of their population so far. Emerging economies are around 40 percent close. As booster shots begin to be given in some developed countries, an overwhelming majority of people in low-income countries are still looking for their first dose of life-saving vaccines. In addition, inequitable access to vaccines and health facilities continues to be at the heart of economic disparities. Note that the Covid-19 pandemic is still there with the emergence of new variants.
New concerns and challenges have arisen with the ongoing economic recovery. In such difficult times, the world is overwhelmed by the specter of rising prices. The debate remains open as to whether the current inflationary phenomenon is transitory or more permanent. Prices continue to rise, especially for food, medicine and petroleum. A global rise in energy prices is inflicting financial hardship on the less fortunate and hampering the nascent recovery. Currently, oil prices are hovering around a seven-year high. As heating costs, especially gas, have skyrocketed, it looks like winter will be tough for everyone. The significant increase in energy prices is also inflationary. Inflationary trends, in turn, limit a government’s ability to continue to stimulate the economy.
The picture that emerges is somewhat similar to that of the 1970s, when oil prices rose following supply cuts by the Organization of the Petroleum Exporting Countries (OPEC), pushing inflation up. This configuration has led to a slowdown in global growth. In such a situation, rising interest rates rarely help to increase supply. Price pressures may not be easy to correct, as they result from a scarcity of resources and supply constraints raising the prices of everything from energy to logistics. On the other hand, pent-up demand is emerging with the reopening of the global economy amid the pandemic.
From an emerging perspective clouded by uncertainty, prudent policy decisions will determine the extent to which citizens are shielded from the difficulties of an uneven and limited recovery on the supply side. We know better that if we increase the money supply rapidly beyond the rate of economic growth and improvements in productivity, the result will inevitably be inflation. The other problem is just as worrying. Investments in fossil fuels have fallen 40% since 2015. It is simply not possible to increase the supply of wind turbines and solar panels quickly enough to offset the decline in fossil fuel capacity – the result is the unusual increase in energy prices in recent weeks. .
For Pakistan, beyond the fervor of sticking to an IMF program and fighting fires, willful ignorance of the underlying problems of the economy cannot remain unresolved. Pakistan has considerable potential to increase agricultural productivity and shift from traditional crops to cash or export crops. Increase crop yields, reduce overall wastage by 33%, and save about 46% of irrigation water that seeps into the soil before reaching farms, besides getting us into the game of l precision farming are just some of the things we need to do.
But even with more productive agriculture, young people entering the labor market will continue to leave rural areas to enjoy the urban lifestyle. Many of them will be employed in informal enterprises, micro and small enterprises in low productivity activities with poor prospects for expansion. The need of the hour is a forward-looking growth strategy that will target these micro and small businesses and find ways to increase their productivity levels.
By offering a range of “back-up” services like technology, business plans, easier regulations, training, etc., it may be possible to unleash the growth potential of the more enterprising of them. This framework has the potential to increase the livelihoods of low-income urban people and increase productivity in labor-intensive sectors of the economy.
The key is to apply a different mindset. The ideal social protection is the reduction of poverty and the strengthening of economic security by creating productive and better jobs for unskilled workers. Government-backed financial assistance must go beyond simply distributing cash to households and focus on supporting businesses as much, if not more, than households. Productivity growth is the result of many things: affordable access to finance; access to technology; and continuing education – it is imperative to gradually climb the ladder from micro to small and small to medium and beyond.
Pakistan’s growth strategy, if any, should focus on improving the productivity of the existing workforce, as well as the workforce that will enter the future. In addition, strong qualitative emphasis must be placed on improving economic opportunities and increasing overall productivity – through sweeping macroeconomic, trade, legal and regulatory reforms.
The emerging economic situation for the coming months is indeed difficult. In the court of public opinion, the combination of rising prices and poor job availability is unlikely to win praise. It is therefore crucial to orient a well-orchestrated policy response by thinking beyond macroeconomic fundamentals with a strong bias towards the underlying flaws in the economy.
Countries that implement DIY measures will always be the winners. For Pakistan, this means a real focus on the problems of increasing the productive capacity of a rural and urban market economy. It could be very beneficial to devote more effort to promoting an entrepreneurial culture and improving productivity.
The author is a former advisor to the Ministry of Finance of the Government of Pakistan.
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