Recently, this writer attended a talk by Asim Khawaja where he raised a point that micro level frictions are hindering our economic progression. Next day he read an opinion piece by Faisal Bari, a noted economist, in which poor contract enforcement - a micro issue - is narrated as a friction to attain scale in successful entrepreneurship ventures. We always talk about macro abyss and try to come with macro solutions to come out of crisis temporarily; but to sustainably grow, the micro level impediments require more attention.
Granular data analysis by Asim Khawaja and Atif Mian, a couple of decades back, make these geniuses realize that there is no dearth of capital and labour in Pakistan. The problem is in the mixing of two; as productivity is a function of labour and capital. The lower productivity of Pakistan could be linked to sub-optimal utilisation of given resources.
Every now and then, we go to the old friends, the IMF and other multilateral agencies, to bail us out. The economic recovery is perceived to be hinged upon foreign capital flowing into the country - every flow that comes in - be it debt or investment, will eventually go out. The solution is not sustainable; and with every crisis, the recovery requires higher quantum of flows; and a day will come, when the flows coming in will be merely for funding outflows - that day is not far.
The utmost need is to look inward and try to reduce the frictions. Khawaja motivated the crowd having representation of researchers, businesses persons and journalists that we all need to work on crossing the hurdles (frictions) around us. We may not be able to smoothen all, but even partial success, will move individuals up the ladder. And macro is nothing but building up of micro blocks.
A couple of days back, this writer was sitting with Shehzad Saleem - who in the 1990s was running a successful textile business but his expansion plans hit a road block, as he did not have access to long term loans. He somehow got the break in late 90s, and did not look back, and over decades, multiplied his production. Shehzad stuck to his job and worked on overcoming the friction he was facing, but not everyone has a similar zest.
The mindset in Pakistan is becoming increasingly negative; and that is adding to the list of frictions. People usually pass on the blame of their failure, or lack of success, to others such as corrupt and inefficient government, moronic bosses, incapable teachers, absence of capital, dearth of good human resource and so on.
This writer asked Khawaja during the talk, how to inculcate a culture where individuals and firms focus their energies on reducing the frictions around them. How to motivate people that working on a set of problems, directly linked to them, will help them excel. And how to make everyone realize that when majority starts thinking on these lines, economies progress.
The problem is identified; and there is no one-line solution or there is no mathematical or scientific method to start working on it. The need is to generate a debate to consider micro level issues at the highest level. For the past few governments, there is a trend of forming economic advisory council where economists advise federal government or at times provincial government economic teams on resolving macro woes. The debate of EAC in the current regime was all about going to the IMF or not. Now, we are in an IMF programme, the EAC is no more in action.
We need to rethink the model of advisory council; and it should not be confined to economists. The problem is productivity. Economists can tell about the right mix of capital and labour; but that is a long shot. In the meantime, the need is to work on motivating people to reduce micro level frictions, and to work on reducing the trust deficit between government and tax payers - prerequisite for sustainably increase tax to GDP ratio.
Such councils should have social scientists and philosophers in addition to economists. The solution is in social engineering - changing the mindset of people. No one has a clear path on how to proceed; but it is a friction at macro level; and governments at all level, should work on reducing the trust deficit, and improving the moral of employees, employers and more importantly the youth.