Last week, BR Research showed how Pakistan’s GDP contraction could be worse than projected, that is if historical biases towards overestimation, especially in a time of crisis, are any guide. What then is the solution? (Read BR Research’s ‘GDP contraction: worse than projected?’ May 6, 2020)

The history of economic forecasts has been rather humbling. About a century ago, the famous American economist Irving Fisher had publicly proclaimed – just days before the great crash of 1929 - that the markets had reached a ‘permanently high plateau’.

A few decades later, MIT economist Rudigar Dornbush matched that bravado like conviction with his 1998 announcement that the US economy will not see a recession for years to come, and that the then current US economic expansion ‘would continue forever’. The dot-com bubble emerged just two years after, and the Great Recession in a decade. So much for forever!

In part this humility has been forced upon by the limitations of macroeconomic models and grand assumptions of rational agent expectations that are theoretically unable to deal with complex systems that an economy is.

This is precisely why in his speech to a global audience of central bankers in 2010, the chief of European Central Bank Jean Claude Trichet spoke about the limitations of macroeconomic models to predict the crisis, and incapable of explaining “what was happening to the economy in a convincing manner”. He also called for experts of physics, engineering, psychology, biology to be brought together with economists and central bankers to draw inspiration for analysing complex systems.

While Trichet’s suggestions may not be applicable a great deal in Pakistan where work on theoretical framework of economy is not being done a great deal, if at all. But economists’ community in Pakistan would do well to at least engage with each other, make their models public, generate a debate, coordinate and above all be transparent about it. (Read also BR Research’s ‘Academic silos’, Oct 31, 2019)

Isn’t it strange that in Pakistan there is no institution that produces independent forecasts – aside from the projections by the SBP and growth targets (read wish list) released by the government? Random single-page one-off reports (that lacks details) by think tanks or brokerage house reports should not count!

Isn’t it also strange that despite all the quants heavy positive economists that Pakistan has, the country does not have annual galas on macroeconomic modelling where economists may debate about annual growth forecasts and of course other topical affairs? There was one held in 2016 on “Macro Models for Policy and Planning” whose useful findings were published late last week by Dr Asad Zaman at PIDE’s blog. But such reports and conferences are a one-off, once-in-a-few-years events, whereas business decisions are made all throughout the year. Hopefully, the challenge of this pandemic will bring forth the much-needed change.