Inflation and politics go together
Political uncertainty is amongst the few certainties in Pakistan. More than six decades since its independence, the country has ever seen only two prime ministers who could complete their tenures; both under military regimes and civilian governments have seen fewer days in power than men in uniform. Does this lack of stability on the political front have any ramifications on inflation and development of the private sector in the country? A recently released document entitled "Power, Profits and Inflation: A study of inflation and influence in Pakistan" from the SBP Working Paper Series asserts there is a strong link between political uncertainty and persistent inflation. Drawing on concepts introduced by renowned economists Jonathan Nitzan and Thorstein Veblen, the paper identifies a "core" group of industrialists as those stakeholders who maintain control over a substantial proportion of productive assets in the economy and command considerable market share. This core typically utilises two regimes; breadth and depth, to maintain profits above and beyond the average profits earned by other firms in their respective industries. Put simply, the breadth regime entails acquiring new factors of production either from the existing pool (internal breadth) or from untapped economic segments (external breadth), to increase production and thus, profits. The depth regime involves raising prices to maintain relatively higher profits. "Breadth is only pursued by the core if the socio-political conditions are stable and conducive for new investment. Depth regimes are pursued if breadth is not an option because of unstable political conditions and fluctuating economic policies", explains the working paper. The depth regime entails raising prices of products to prop up profits. Eventually, price increases start to manifest in the form of higher inflation; in turn necessitating further price hikes by the core that attempts to maintain its higher profits. An analysis of sugar, cement, manufacturing and banking sectors shows that the core has not invested in increasing capacity significantly more than the overall economy and focuses on maintaining higher profits. In all, this research has identified four different regimes of breadth and depth. The first breadth regime initiated by the privatisation in the LSM sector, the second was a depth regime during the Bhutto/Sharif eras which were marked by extreme political uncertainty. The third was a breadth era under the second wave of privatisation in the early Musharraf years while the fourth was a depth era which began as the Musharraf regime encountered turmoil. Although Veblens theory has received a lukewarm response from economists worldwide, the paper doesn challenge conventional views of inflation and instead focuses on providing an alternative model based on political economic theory-one which seems to explain the inflation in Pakistan quite well. Whether inflation in the country "has been a means to an end for a group of influential producers or a natural consequence of producers reaction to sustaining relative profits"; it appears evident from the literature that "the socio-economic impact of a depth regime is immense". This working paper highlights that such a state of affairs is unsustainable in the long run and its ultimate consequence "is a restructuring of the economy and society". The process of restructuring and renegotiating a new social contract may have already begun in Pakistan.