I have been closely following developments on two economic issues. First is a court hearing on setting the price of milk in Karachi. The government wants the price per kilogram should be Rs. 95 while retailers are demanding Rs. 100 (I just learned today that retailers won this battle when I went out to buy milk). Second is the spike in the price of the dollar from Rupees 111 to 115 within hours. You must be wondering how these two issues are related.
I spend considerable time in USA (I am not a US citizen) so as a politician I am always comparing the state of these two economies. One of my observation is that prices in Pakistan for basic items like milk, bread, and butter are higher in Pakistan than the USA. In the USA a gallon of milk (3.78 liters) is Rs. 331 which translates to Rs. 87 per liter or kg. A gallon of fuel in the USA is Rs. 276 which turns out to Rs. 73 per liter. Keep in mind that taxes on fuel in the USA are much higher than Pakistan. A decent shalwar kameez suit cost Rs. 3500 (US$31.5) while in the USA you can buy a pair of jeans and a t-shirt for as little as US$15 even from a major brand. Price of electricity is almost same as in the USA. Vegetables are still cheaper in Pakistan. Similar is the situation in many other items that are essential for subsistence level living.
So how is this relevant? For that, we have to look at the per capita income in these countries. According to Wikipedia per capita income in the USA is US$ 58000 (Rs. 6,438,000) per annum while in Pakistan it is US$ 5580 (Rs. 619,380). This means that income of a Pakistani is 10 times less than a person in the USA. Conversely, the purchasing power of an American is 10 times more. Now consider that a Pakistani and an American both have to eat and buy clothes. Pakistani pays the same price as an American which means he has to eat less because he can’t afford to have a full meal and use his old clothes for a longer duration of time. This also means that all those that make an income comparable to an American lead a better-quality life. This is a small percentage of people and should be a cause for concern.
One reason for dollarization of prices is that almost all products have some imported component. This means that increase in the price of the dollar will create an inflationary pressure. This will add to the reduction in purchasing power as well as further increase the gulf between the haves and have not.
What is the solution? There is no easy solution. We have to take short and long-term measures to address this issue. The objective should be increased per capita production and income. In the short term, we have to look at our import items and increase tariff on all those items that are unnecessary. Import substitution is very important. Localization of products is critical which will require economies of scale. In the long term, we have to change the structure of our economy from one based on consumption to the one based on export. This can only be achieved if we improve quality of our labor force, develop our infrastructure, reduce red tape in setting industries, improve law & order, revamp justice system. and attract foreign direct investment in industrial development. Most of our FDI has been either in infrastructure or retail sectors which do not help us earn dollars rather increase consumption of it. Investment in infrastructure has to be coupled with industrialization to recoup that investment.
Our work and social ethics have to change as well. Pakistan today is not considered a country that honors its contracts in letter and spirit. Improving credibility of the country in delivering the quality of product that is promised is very important. Made in Pakistan should be a seal of quality just like Made in Japan, South Korea, or China. Research and innovation is another area in which we lack. South Korea, Taiwan, and China learned development of new products by first copying products. I am not suggesting we should violate intellectual property but small changes in design can help us gain a foothold in the market before the complete local design of a product. Attracting investment in contract manufacturing exclusively for export is another way to develop our own products.
Our market penetration is also very low. Most of our exports are to a handful of countries with a major chunk going to EU, USA and Middle East. We have no presence in Russia, Central Asia, Africa, and South America. Trade Development Authority of Pakistan (TDAP) that is mandated to develop exports has been a total failure. It has to be either reorganized or closed down.
Another issue is the inability of foreign buyers and investors to visit Pakistan. Political stability, the continuation of economic policies, tolerance level of the society, and protection of life and property are important conditions for attracting buyers and investors. The number of foreign flights has gone down substantially. Only Middle Eastern airlines are coming to Pakistan and they have done it because they attract investments and labor from Pakistan. As law and order improve it is important that some concerted efforts are made to bring foreign airlines back to the country.
Another issue is an improvement in productivity. Process redesign, automation, and modernization are some of the areas where we lag. Industrialists are not encouraged to work on these since volumes are unreliable and growth is erratic.
Many of our politicians in their speeches mention that Pakistan is endowed with everything including ports, mountains, minerals, and talent so there is no reason we can’t succeed. But they deliberately do not mention that many other countries are endowed with same. This means that good management is a key to success in a competitive environment. Economy and politics are interlinked. Unstable politics means unstable economy. This is one of our key failures. Our politics is unstable and our politicians have shown lack of leadership and statesmanship. Every crisis whether economic, social or judicial raise questions about the continuation of democracy. This should be put to rest and all of us should commit to stabilizing politics which is only possible when political parties are liberated from civilian dictators and talented people are allowed to rise up through party ranks. The era of military dictators has ended but the era of civilian dictators still continues.
By Abdul Quayyum Khan Kundi