- Aggregate demand must be allowed to collapse because of the pandemic
The pandemic has left the overall global economy in deep recession; negatively impacting in turn both aggregate demand and aggregate supply. This has led to many countries providing stimulus, especially during the time of lockdowns. The second wave of Covid has already started to set in with the first signs of winters, as the number of cases has seen a rise; albeit in most countries the wave is still of lesser magnitude than the first one. For this reason many policymakers expect a ‘W’ shaped economic recovery, with ups and downs following the waves of Covid, until a vaccine is successfully formulated and administered globally.
This means, and as the International Monetary Fund (IMF) has also recommended, that countries must continue with both stimulus in terms of both welfare funds, and also public investment. Such investments in health, education, and labour intensive infrastructure are important also because many survivors of the pandemic continue to suffer for a significant time afterwards, as highlighted in a recent article ‘The threat of long economic Covid looms’ by Martin Wolf as ‘Covid-19 has left many patients with debilitating symptoms after the initial infection has cleared. This is “long Covid”. What is true of health is likely to be true of the economy, too. The pandemic is likely to give the world not just a deep recession, but years of debility. To meet the threat of a “long economic Covid”, policymakers must avoid repeating the mistake of withdrawing support too soon, as they did after the 2008 financial crisis.’
Pakistan could take this crisis as an opportunity and in turn fix economic public institutions on an emergency basis, so that chronic issue of high level of inefficiency and pilferage in public expenditures could be minimized to the minimum
Hence, meaningful public investments need to remain an important ingredient for supporting aggregate demand and supply, and in turn will be helpful in bringing down unemployment rates, and in enhancing economic growth prospects. While in developed countries, with strong economic institutions and regulatory frameworks, the level of efficiency of public investment or expenditure is quite high, and therefore bears a significant impact on economic growth in general, on the other hand, developing countries including Pakistan have a high level of pilferage and inefficiency in public expenditure due to weak economic institutional quality, and underdeveloped markets.
The pandemic has also impacted the economy severely in Pakistan, where according to the October 2020 World Economic Outlook (WEO), te economic growth rate for 2020 is expected to be -0.4 percent, while even a very optimistic view of the pandemic may only allow the country to grow at a paltry 1 percent in 2021. Given a high level of uncertainty and the diminished capacity of private investment in the wake of the pandemic, it would therefore require that a high level of public expenditure is made to boost economic recovery.
While raising the level of domestic resource mobilization– especially from sectors, which have done well during the pandemic, for instance the technological sector and stock exchanges, and working towards an enhanced debt relief effort are important to support the needed level of public investment, it is also very important to enhance the impact of public investment on the economy through increasing its efficiency. A recent report by IMF titled ‘Well spent: how strong infrastructure governance can end waste in public investment’ highlights an important policy prescription in this regard. Here, the Report defines efficiency in public investment as ‘…the ability to improve the volume and quality of infrastructure assets for a given level of spending.’
The report highlights for instance ‘Losses and waste in public investment are often systemic. On average, more than one-third of the resources spent on creating and maintaining public infrastructure are lost because of inefficiencies. These inefficiencies are closely linked to poor infrastructure governance– defined as the institutions and frameworks for planning, allocating, and implementing infrastructure investment spending. Estimates suggest that, on average, better infrastructure governance could make up more than half of the observed efficiency losses. In the wake of Great Lockdown and the COVID-19 pandemic, more infrastructure investment and strong infrastructure governance are likely to become even more important.’ Hence, it is all the more important to take adequate measures to fix this issue in a more urgent way given the severe damage being caused during the pandemic.
What it means is that Pakistan could take this crisis as an opportunity and in turn fix economic public institutions on an emergency basis, so that chronic issue of high level of inefficiency and pilferage in public expenditures could be minimized to the minimum. For this, the government should look to improve the underlying governance and incentive structures of institutions, so that they provide the right kind of environment for organizations and markets to function in an optimal way. This would in turn also allow the government to effectively reach correct prices in markets for goods and services, including the labour market, and to sustainably implement them.
With particular regard to emerging Asia, and the need for enhancing efficiency of public expenditure here, the Report points out that ‘Public investment has been higher in Asia than in other regions over the past 25 years. Government investment as a share of GDP in emerging and developing Asia (even when excluding China) was higher than all other regions during the 1990s and has always been above the average of emerging and developing Europe and Latin America and the Caribbean… However, infrastructure outcomes in emerging and developing Asia are still lagging. According to survey-based measures, the infrastructure quality score in emerging and developing Asia is below emerging and developing Europe and the Middle East and North Africa… Therefore, emerging and developing Asia would need to improve the infrastructure outcomes of public investment spending.’
