Jo Banain Gai Khain Gai (We will eat what we make)

The main focus of our economic policy should be efficient production of exportable goods and agricultural products. Our standard of living faces a collapse due to a lack of industrial and agricultural production

Jo Banain Gai Khain Gai. That is the idea that needs to be on every Pakistani’s mind if we are to have a chance to make our economy grow. People of most countries realize the importance of locally produced goods, so much so that even in the richest country in the world, the USA, great emphasis is placed on the competitiveness of their industrial sector.

The simple fact is that in the absence of borrowing, what we produce as a Nation is what we consume. So let’s look at this process. Our manufacturing sector and our agricultural sector produce the goods that we can consume. What we need in terms of imports we pay for by foreign exchange earned by exporting the surplus goods we produce (in effect we barter exports for imports). The services sector does not manufacture anything but rather takes a cut from the productive sectors. In countries such as the USA, the services sector is so good that they can actually export services (e.g. investment banking, consulting). Unfortunately in the case of Pakistan our services sector is not capable of exporting and our exports are real goods produced by our industrial or agricultural sector. 

We Pakistanis have been living way beyond our means. We consume more than we produce. We make up the difference between our imports and exports by external borrowing or by foreign exchange remittances from our workers from abroad. The problem is that we have borrowed for decades. Our level of debt is so much that our net new borrowing ability is being diminished. At the same time our foreign exchange liabilities are increasing. This loss in new borrowing ability is the reason that we are worried about a GOP default for the first time. As a result it’s becoming more and more important that we live within our means. We have to balance our budget and trade deficits. 

The solution seems simple: increase your production of industries and agriculture and cut down on your imports. In the past the means for achieving this was by placing tariff barriers and protecting your industries and controlling imports also through import barriers. The new trend seems to be towards freer trade under the WTO. In such a situation the solution is supposed to be to devalue and make your nation poor enough so that they are competitive in the world. Inefficient industries should shut down and people of a country should compete in avenues where they can be competitive in the world. 

One reason for our excessive trade deficit is perhaps a lack of understanding of what is happening. As Pakistanis we don’t realize the implications of buying imported goods to such a large extent. When you import so much more than your exports there is a larger demand for foreign exchange than for the rupee. The net result is a devaluation pressure on the rupee. The devaluing of the Rupee makes the consumer poorer. Most Pakistani’s must realize this. When I buy an imported product, I am worsening the trade deficit and the net result of doing that over decades is that I have lost a lot of my buying power and I am becoming poorer. 

In effect I am saying that I don’t produce good enough goods. Here’s the paradox. If I don’t produce good enough goods as a nation the implication is that I don’t deserve to get paid for my work either. Thus I am saying I am not able to make good enough goods and I should not be paid much for my work either and that I should be a poor person. This is the problem. This is what is happening to us. I, as a Pakistani, am getting poorer. I am not making enough exportable goods. The net result is I eat more than I make. I borrow to meet the gap. Borrowing becomes difficult. I get poorer. This is the key fact, in the absence of exportable services, we have to export more real goods or we cause devaluation and inflation. Every one in Pakistan must understand this aspect of reasoning. True, buying local products is not necessary in the short run when debt levels in the country are not so great and the borrowing ability of the country is still significant. The same holds true if you are from a rich country. However, this is not the case for Pakistan.

Every Pakistani in the services sector — be he a doctor in Peshawar or a civil servant in Islamabad or a journalist in Karachi or a military officer on the border, or an accountant in Lahore or a banker in a Village or a teacher — gets poorer whenever an industry shuts down in some other place in Pakistan. A reduction in production in Pakistan directly hits the services sector employee in terms of greater inflation (and the associated depreciation of the rupee). The buying power of the rupee goes down, however wages of the services sector don’t go up to compensate for the inflation. This is completely logical because the services sector employee is getting a cut from the real sector. If the real sector shrinks, the services sector is in trouble. This is the reason why people feel that their buying power has been steadily declining. This is exactly the reason that the same doctor get hundreds of thousands of dollars in the USA but only a fraction in Pakistan. The same is true for any services sector employee in Pakistan when compared to an employee in the USA. Thus the industrial sector and the services sector people get directly affected by a reduction in industrial production. The city folk who are primarily in the services sector, have the most to lose by a production decline.

If the current industrial crisis deepens (in our opinion it is possible that thousands more industries may well shut down) the cities may face severe problems. It is concerning that the services sector is the next in line for a severe shrinkage. A lack of industrial productivity if not supplemented with new borrowing from abroad could trigger a services sector shrinkage. The problem is that if the industrial sector collapse is bad enough it is possible that the services sector collapse may be very severe. This would impact the city populations tremendously as they depend on income primarily from the services sector. 

Some very dangerous thinking has been seen in the past few years, people involved in the manufacturing sector seeing the death of the manufacturing sector seem to have tried to move money into real estate and also tried to move into the trading and services sector. This is extremely dangerous. This may give a temporary real estate boost and may get some short turn money but this kind of thinking will sink the economy and real estate and the services sector with it in the long term. 

For now it is just important to say that the agriculturists have a tremendous amount to gain by increasing the industrial productivity of the nation. The same is the case for low agricultural production. UP until now this has mostly been about the industrial sector because it is in very serious trouble. 

We must educate our people. Education is not only literacy. Perhaps as important is to explain simple facts to them which would help us achieve our aim as a nation. If we can get ideas like jo banain gai khain gai into the mainstream Pakistani thinking we may have successfully managed to change our nations perspective for the better. Without this perspective there is little hope for the future of the country.

Osman Niazi
Osman Niazi is a graduate of the Wharton School of Business and a former associate at Goldman Sachs

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