Economic instability: the administrative options

Recently, the SBP Governor addressed the FPCCI primarily (it seems) to explain the SBP's role in the galloping inflation and financial instability, characterising Pak economy. A commendable aspect of his address was that the SBP finally accepted the limitations of discount rate hikes in checking inflation, but proposed little in terms of other corrective measures, especially the hitherto ignored administrative options.
As expected, it was a mild critique of the grossly flawed state policies pursued since July 2007, but highlighted the cumulative effects of changes in the already known indicators - a view often ignored by analysts. Besides this, it blamed the role of declining resource productivity (reflecting on the managerial abilities of FPCCI members) as a key driver of inflation.
The only clear reference to bad state governance was the hike in prices of agricultural commodities that pushed up inflation. For instance, during June 2007-10, price of a 10-kilogram bag of wheat rose to Rs 260; cumulative rise of 120 percent in 3 years during which the international price of wheat rose by only 22 percent. During the same period, sugar price also went up by 184 percent - another 'first-ever' in our history.
Voicing a widely held view, he said that the driver of these price hikes wasn't a productivity collapse; "we all know that the government increased the support prices" and so the price hike can't be blamed on a "supply shock". Impliedly, it reflected state concern for the macro impact an astronomical rise in its borrowing for its 'commodity operations' at these prices (that primarily rewarded the landlords) will have.
Courtesy this profile of its policies, the state's borrowing for financing its commodity operations is now Rs 382 billion, priced at just under 3 percentage points above KIBOR; this huge premium reflects the perception of sovereign risk that was traditionally considered zero. Given such perception of risk, the inflated interest rates that the private sector now pays should be understandable though condemnable.
He blamed the rising cost of doing business on continuing energy and power shortages, high prices of agricultural produce, rising losses of the PSEs, and the high fiscal borrowing as their cumulative after effect. However, he offered no remedies either for these governance failures, or for the managerial incapacities in businesses that add to inflation significantly.
Indeed managerial calibre in our businesses isn't often commensurate with the demands, but it is unlikely to improve quickly. The state (with an 'elected' regime in power) has the dual obligation of speedily mending this flaw, and during the transitory period, not creating higher demands on managerial capacities by escalating the cost of doing business through tactless policy measures, eg imposing RGST.
It is hard to recall an instance wherein the ministries of agriculture, commerce, trade, finance and technology engaged in a comprehensive dialogue with the FPCCI to address the managerial incapacities of its members, and the overly lose self-regulatory codes of its constituent trade bodies for stabilising prices despite recent instances of blatant price manipulation.
Ironically, the SBP Governor did not point to these yawing governance and regulatory gaps. Surely, he can't disclose the advice he has been offering to the regime about shunning exuberance, cutting PSE losses, checking resource waste, and arresting the ongoing corruption in state offices. But what he certainly could dwell upon, more so while addressing the FPCCI, was the need to strengthen and impose self-regulation.
Economic stability is imperative for nurturing a positive investment sentiment. Pakistan must continually attract investment to add to its productive capacity, expand its physical infrastructure and create jobs for its growing youth population (over half the total now) to avoid self-damaging brain drain, dissent and crime; by ignoring these realities and its market stabilizing role, the state is pushing the country towards anarchy.
Recently, the US President and the prime ministers of Britain, France and China visited India, and the Russian premier is due shortly. They too carried begging bowls, but sought greater freedom to export more to India to cut jobless numbers at home - not just because India is the second largest market but also because, despite ongoing freedom struggle in Occupied Kashmir and Nagaland, business-wise, they find India a better administered economy.
Consequences of over-reliance on markets' ability to self-regulate and stabilise trends therein were bad even for the 'evolved' US and European markets; they were twice as bad in Pakistan. Ignoring the criticality of impressing this aspect upon the trade associations could prove lethal if the state and these outfits went on denying their roles in stabilising markets.
In hastily over-deregulated developing economies, craving for stability - the trampled value - may last until economic wizards again find it an obstruction to free (for all?) enterprise. But, given the fact that, despite their miserable failure, these wizards still defend volatile exchange and interest rates, the route to economic stability in resource-starved states is strategic buying and credible regulation to dampen market volatility.
The state must develop the above capacity to realistically fix food prices - the drivers of inflation and instability - based on credible demand-supply forecasts. But with the integrity of this state capacity in doubt courtesy the fully exposed vested interests therein, the state just goes on fixing prices and ignoring their being blatantly disregarded by the market players.
Yet, the state doesn't require trade associations to draft strict codes of conduct for their members, and enforce them strictly by black-balling the violators. Given the gross shortage of law enforcers and zero concern there for, state's ability to enforce market discipline also remains a myth. This is a horrible mix as compared to India that imposes fairly strict market disciplines and punishments for not observing them.
Reason: state and trade associations take their obligations seriously, and the media exposes their misconduct. In Pakistan, while the media is fairly powerful, it isn't as focused on checking market malpractices as it ought to be. And denying their moral obligations, trade associations remain focused on obtaining tax reliefs. But if the state doesn't push them into fulfilling their role in totality, why should they? Aren't we all equally blind?