Bailouts and elections

To go or not to go to the IMF has been a big dilemma for the PTI government since it came to power in August 2018. Anti-IMF gurus came up with a yet to be empirically tested causality that going to IMF would cost the incumbents the next elections; this seemed to take the wind out of the new government’s sails.The performance and irrelevance of the highest law-making body in the country in the last six months leaves little to the imagination of where the commitment to much-needed structural and administrative reforms will end up in the next three years. It is not surprising that the IMF with this actual real-life on-going ‘War on Corruption (WoC)’ insists on front-loading the programme rather than the government’s wish to back-load it. It may even come up with stricter ‘conditionalities’ or monitoring compared to the package we would have had if we had gone to it earlier.Coming back to the main topic, it is safe to assert that there is no unambiguous cross-country or time-series evidence in support of the above relationship between IMF programmes and electoral victory. This assumed anecdotal relationship is too simplistic and tenuous to be taken seriously for political and economic decisions in case of Pakistan.First, five years is too long a time to accurately predict the results of an election anywhere in the world – leave alone Pakistan, whose election dynamics are more complex and traditional than many countries. Forecasting the growth rates of Pakistan’s economy five years down the road may be more reliable. Usually, it is easier to predict election results in the last 6-8 months of the election year.In Pakistan, the last two elections were mainly won on the non-IMF narratives given to the public in the last one to two years of the political cycle. In 2013, the PML-N came into power, because of the ‘Mr 10 percent factor’, electricity shortages, the war on terror etc. The 36-month, $7.6 billion IMF programme signed by the PPP in November, 2008 ended prematurely in 24 months. Unfortunately, the PML-N government could not withstand the narrative built in the last two years of its rule around corruption and money-laundering due to the Panama Leaks. It lost the 2018 elections, with the PTI perceived as the new messiah on the block, forgetting the pain of the IMF programme that had ended successfully two years earlier.The simple link between the IMF programme and elections is hinged on the fact that IMF programmes lead to unnecessary belt tightening in terms of reduction in government expenditures (both development and current), and that causes the incumbents to looe elections. In the above two anecdotes, once the IMF leash was withdrawn, both the governments went on a spending spree and left the winners with no alternative but to go for bailouts. Even the five-year spending on removing energy shortages at the cost of increasing debt, poor governance and suppressed inflation did not win the PML-N the elections.So the extrapolated reasoning is that as 2-3 years spending spree is not enough to win elections, the present government should be on a populist spending spree from day one or not take/be forced to take a U-turn from its populist agenda from day one, in order to win the next elections.Anti-IMF gurus may cite higher expenditure on education for the PTI leading to an increase in their margin of victory in Khyber Pakhtunkhwa. The sustained victory was the result of combining educational spending with ‘good governance’ (eg, police reforms). Extending the provincial success to all of Pakistan would be committing ‘fallacy of composition’. Besides, at a provincial level, the issue is only of effective spending as opposed to in the centre, where it is also effective resource mobilization. In the on-going WoC, the PTI faces an uphill task to restore the revenue side of the equation.The economic implication from the above simple causality is also worrisome. Should governments in power continue with a sustained populist agenda and live beyond their means just to win elections? Historically, with regard to sequencing of reforms, we committed two grave mistakes as attested by economic gurus. The first was by liberalizing the tariff regime before strengthening and broad-basing the income tax regime. And secondly, opening the capital account without stringent documentation of foreign exchange transactions. In the former case, we are back to zero with the regime of regulatory duties; the latter has left us with the FATF sword hanging on our neck. Now spending beyond our means is leading us to a ‘death trap’.Is winning the next elections a matter of life of death for the PTI or for the people of Pakistan? It may be for the PTI, but definitely not for the people of Pakistan. Fighting any kind of war has its costs and therefore it is naïve to expect that the WoC will be an exception. In the last six months, the costs are apparent as the important institutions are in ‘suspended animation’ due to the WoC. The longer the WoC lasts, the higher will be the costs.In terms of the IMF programme, it will add to a backlog of meaningful structural reforms. The history of the world is replete with examples that true, competent and genuine reformers don’t worry about ephemeral popularity. They sacrifice themselves on the altar of bringing about a lasting change in the mindset of society and that is single point agenda on which the PTI came into power.The writer is a freelance contributor.

from The News International - Opinion http://bit.ly/2ImD5g9