Jun 25, 2021Liked by Noah Smith

This post is a great example of why I love political economy but merely like economics.

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Jun 25, 2021Liked by Noah Smith

Good read. Would be interesting to see your take on India’s economy at least in medium term. Complete the trifecta if you will.

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Nicely done! Glad to see a popular economist taking interest in these countries that rarely get mainstream attention other than US foreign policy.

The contrast between Pakistan, India, and Bangladesh should be studied more given it is a true "natural experiment" with the arbitrary lines drawn by the British. Similar governments, resource endowments, and cultures.

The instability point is interesting. It's easy to engage in buck-passing and blaming the last guy which is certainly the case.

From what I've seen, Pakistan's TFR has also remained elevated above its neighbors' which I imagine would drive up consumption, especially in the absence of any investment in its people, and drive down GDP per capita.

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Jun 25, 2021Liked by Noah Smith

The potential for Bangladesh-envy is a great read of the situation, because it really has worked this way in this country in the past. Once narratives about how more immediate neighbors are overtaking us start to dominate, course corrective actions may be near.

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Jun 25, 2021Liked by Noah Smith

Dear Noah, nice piece. As an economist, I contribute to leading newspapers in Pakistan on this issue. You may be interested in reading this piece to understanding a bit more about the failure of economic policies in Pakistan https://www.dawn.com/news/1571735/pakistans-economic-policies Cheers

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Sounds like it would be an interesting compare and contrast with Argentina.

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A lot of European growth was driven by the rising cost and complexity of warfare. Gunpowder made technology and organization more important with cannons, then muskets and then automatic weapons. Throw in the railroads and steamships and war is less and less about personal bravery and more and more about technology, training and logistics. All of that required a more educated populace. One reason the tsar freed the serfs was because serfs made lousy soldiers.

Nuclear weapons turned this on its head. The weapons are so powerful that any attack can be met with an incredibly deadly counterattack making civilian populations hostages. If you could get nuclear weapons, all that other stuff, technology, training and logistics become less important. It's like the "family atomics" in Herbert's book "Dune". No one in the book seemed to have the technological base to build them any more than they could reasonably build starships, but there they were as a last resort and still a defining element of the political scene.

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Interesting you mentioned that Pakistan behaves like a natural resource exporter when its not. There was a paper by Ehtisham Ahmad and Azizali Mohammed titled: Pakistan, the United States and the IMF: Great game or a curious case of Dutch Disease without the oil? Interesting read!

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An update to this with the current IMF bailout and complete currency collapse would be good to read if you write one.

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Long-term civil rulership is the only option here we have. Policies should not be changed despite political differences. Produce the more home consumed products in large scale, encourage little investments and returns.

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Nice article, but it muddles the reason in citing political "incentives". These incentives were always there.

There is also something that people overlook. Religion, culture and macro-habits of the populace also play a significant role in further developing the nation in the direction of advanced industrialization. Seeing God in everything is okay, but if that becomes part of the national identity, the motivation to get to the point of materialising every macro-habit of individuals gets beaten to pulp by the factors such as culture and/or religion. There is a need firstly for a social reform. The encouragement of scientific temper among the populace is higher in urban India whereas Pakistan and Bangladesh do not simply have this.

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Noah I'm curious - why haven't you written a piece on the development of India/China yet? Would be super cool to get a deep dive into the developmental trajectories of these goliaths and see where they currently stand

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The million dollar question is that how Optics and Fundamentals of economy has been better during military dictatorships in Pakistan.. Middle Class growth has been maximum during the era of Ayub Khan and Musharraf.. Zia's era though source of all miseries..like religious fundamentalism etc.. but economically it wasn't bad..

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Hi Noah

Great article comparing Bangladesh and Pakistan. I have one question on the data that I seem not to be able to collaborate with yours. What series do you use for Household Expenditure per capita in 2011 $. In the World Bank data the only series I see is household consumption per capita in 2010 $. but the data are so different from yours. For example, in 2019, the number for Bangladesh is $858 and for Pakistan $1,015. Your numbers are way bigger than these. I might be missing something but cannot figure what? Any help?

thanks, Ram

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COVID is STILL the opportunity for Pakistan !

Pakistan EXIM units have to raise USD capital for working capital finance in the COVID doom

Anyone can raise capital in USD today - irrespective of central bank caveats.2 years ago,it was unviable and difficult. Today, it is VIABLE and EASY - all due to COVID.

Pakistan has staged a miraculous COVID turnaround and this is the next turn - ULTRA LOW COST FINANCE.dindooohindoo

Case 1

Take the US LIBOR (6 months BBA) at 30 BP in August 2020,id.est 0.30 %

Assuming a spread of,say 50 BPs for a bank like Habib Bank - a 1st Class Scheduled Bank (as it gets the LOC or Borrowing on the strength of its Balance sheet)

Habib will onlend it to Pakistan SMEs at say a spread of 150-250 BP

Aggregate USD lending rate will be 1.8 to 2.8%

If the borrower is an exporter,and is raising Packing credit,which will liquidate in 3 or 6 months - he keeps an open exposure on the USD loans,qnd offsets it with the USD export collections

It SOUNDS good - but it is not a CERTAIN gain,as there CAN BE an OPPORTUNITY loss

If PKR falls by 5 % in 6 months and if Export Packing Credit is available in PKR at,say 9%,then post the PKR rupee loss,the NET COST of the Packing Credit,in PKR = Minus 100 BP.

But still there are people who do not want to take any view on the PKR/INR markets - and so,they want to borrow in USD so that they have outsourced their FX nominal risk,to a neutered FX exposure

SO HOW SHOULD PAKISTANI ENTITIES,RAISE USD LOANS ? It is fairly simple ! There are 3 Options

Option 1

1st Take the Export Packing Credit loan in PKR,at say,750-1000 BPs of say 500 Million PKR (as banks do not want to lend in USD,as then,no one will take PKR loans !)

Assume this is a 6 months credit,and so,exports are expected at 1 Billion PKR in 1 year

For 50% of the borrowing,and assuming exports as above,the borrower should short the dollar (forwards only) and get a premium of say between 500 - 900 BPs,at various points of time

So on a Net basis,you have a USD borrowing of 50% of 500 Million PKR,at 250 - 100 BP,and it is on TAP,as the entity will drawdown the Packing credit,when it wants,and short the USD,when it wants

On the Date of the liquidation of the Forward contract,he has to get the USD "FROM SOMEWHERE".Even if there is a War,the borrower will MANAGE to get the USD from somewhere

Option 2

If the prospective borrower is an exporter,then he should import duty free on duty free licences.

For that he will need to import,and so,will need to import,on Import Usance LCs or Buyer LCs

In a LC,the overseas supplier,is taking a risk on Habib Bank (who opens the LC) and the UCP Rules

With 6 Months US Libor at 0.30%,the supplier can give a 6 months LC credit at Nil interest rates (subject to his exposure norms)

Some suppliers and overseas banks,MIGHT not accept Habib Bank LCs,and so the LCs will need to be confirmed (with confirmation charges)

A Pakistani exporter with a 200 Million USD Top line,should be able to open LCs on an annualised cost of 125- 150 BPs

A Pakistani exporter with a 500 Million USD Top line,should be able to open LCs on a FIXED advalorem cost of say 100 USD per LC - which will make the annualised cost close to ZERO %

But if such an exporter needs to pay a % fees,then he should enter into clean credit discounting arrangement or a factoring/forfaiting deal,with some international bankers in London/Singapore etc or use the discounting limits of the suppliet.

For those exporters who cannot open LCs - they can use 3 rd party financiers to open the LCs,and convert their finance cost,into USD,And then, the LCs can be Rolled on and on and on - until the SBP calls up the borrower

So,in import finance,if the LC costs are lowered or converted into a fixed value,and LC confirmation is waived by the foreign supplier or his bank - a Pakistani exporter can easily raise working capital finance at ZERO % cost,IN USD (and set off the LC retirement, with the foreign remittances).

This all excludes LC engineering like Transferable/Diviisble LCs etc.

But the cost can be made NEGATIVE easily, if the imports are on Duty Free Licences,from a Front company,in say,Dubai.

So if the importer overstates the LC amount - he raises an ECB at Zero % cost or Near Zero Cost - and the extra funds,are parked with the Front company for rotation.The PKR hedged

cost of that extra fund,will be less than the Habib Bank PLR

Option 3

Even for Pakistani entities who have no exports,their imports can be financed at 100-200BP per annum,on LCs or on Clean Credit (for regular importers)

Even after loading the FX premiums the loaded cost should be 6-8%,which will be much lower than the CP or CD rates in Pakistan

For Regular importers with perfect payment history,the suppliers can do recourse and non-recourse financing, by discounting the drafts on the Pakistani importers,or holding the bills to maturity (obviating the LC)

Better still,the overseas suppliers can discount the drafts on Pakistani importers,with Pakistani Billionaires in London - who are parking their cash in the call market at 0.10%.They can be offered 100 BPs !

In some cases,the Pakistani Importer and the Pakistani Billionaires,might be the same person,but with different legal entities

The Problem

The Problem is that Pakistani Banks find "not so creative" tools,to make USD financing unviable,for Pakistani entities - by loading ad valorem % charges,which on an annualised basis,make the transaction unviable

Hence,at least for imports (unlike exports,where an exporter can short the USD to swap the PKR loan into a USD Loan),the Pakistani entities have to use supplier financing,and tie up with banks,in London etc., to discount,negotiate,factor and forfait their bills/drafts.

Basically,it is the Country Risk of Pakistan (created by Indian Vilification) which causes the chain of confirming,advising and other charges,which make the LC transaction unviable, from Pakistani Banks.

Many Pakistani exporters will have a payment rating and credit rating - HIGHER THAN THE PAKISTAN SOVERIGN and also,that of HABIB bank (as Habib is exposed to the economic and credit risk,of Pakistan and its Banking system)

Hence,the time has come for some Pakistani Millionaires and Billionaires to use their surplus cash parked in T-Bills etc., to open a EXIM bank in London or Dubai,to use creative exim financing options ONLY for Pakistani Exporters and Importers (beyond a certain size).That will slash the costs of Pakistani EXIM units,and also,the said EXIM bank,can be used to offer innovative credit default options,on clean credit exports,by Pakistani exporters,to Africa and other nations.

If the Pakistani Millionaires put in,say USD 50 million,in equity and raise USD 200 in debt,then in one year,their primary discounting and financing business,assuming a 3 months tenor,will be a Billion USD,and if they start offloading and re-discounting the bills,with other bankers and financiers - the aggregate financing turnover,should be 10-15 Billion USD - on a seed of USD 50 Million.There is no way,the millionaires will earn that kind of yield,in any Junk Bond in the world

Only a Pakistani can appraise the credit and intent of a Pakistani borrower,and also,have the ability to make the borrower PAY.

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Post COVID - if manufacturing has to relocate - it has to be Pakistan ! It is Make in Pakistan - but with Chinese Capital and Infra.

Other options in other nations,are not viable or PRC will not be comfortable investing there

Vietnam - The entire manufacturing is 10-100 kms on the sea coast line.Sea levels are rising and land is eroding.There is no space for industrial land.Land in the interiors has no infra - and will take billions and time to build.Secondly,there is the issue of skilling. Viet education and culture is suited to low end manufacturing - which has shifted to Vietnam,as the cost curve has risen in PRC.Thirdly the time has come for Vietnam to pay for the costs of pollution due to low cost manufacturing - in terms of health care costs. Fourthly,Vietnam will NOT allow SEZ in Vietnam owned,run and STAFFED BY 100% Chinese. Fifthly,the young population of Vietnam - as time passes,will move into the axis of the USA -as they have a mortal fear of the PRC.This will make for Political Risk for the PRC investments in Vietnam.Sixthly, PRC SEZs have their own ports and power plants.Vietnam has a naval axis with India and will soon fall in the lap of the USA - so the integrated strategy of the PRC in SEZs is not viable in Vietnam,Lastly,there is the problem of the Dong !

So Vietnam is NOT an option

Indonasseah - Everything that works in that country is due to the Chinese - as owners or managers or bureaucrats.Which is Y no Indonesian likes them.Then there is the Chinese treatment of Uighurs.Then there is the issue of resources.The fact is that the Indonasseans do not like the idea of foreigners selling their resources (like the Dutch did with Tin and Nickel).But between the PRC and the US/EU,they will choose PRC.However,manufacturing investments from PRC will not flow into Indonasseah - as there is a severe shortage of skilled labour and managers.

However,given a choice between an Indian and a Chinese - the Indonasseans would jump for the Chinese.If they had their way they would shut down IndoRama - run by an Indian Marwari

Pinos - This nation is an Option as it has an abundance of highly skilled and literate staff and managers,good infra and a solid and stable currency.However,after Duterte leaves the Pinos will be back in the lap of the USA.This makes for political risk for Chinese investments.MOST IMPOFRTANTLY,IT IS NOT A LDC !

Malaysia is too expensive.dindooohindoo

So the only option,is the Islamic Republic of Pakistan.

With COVID,if manufacturing requires a 10 foot distance,at the shop floor,then manufacturing from EU/USA will have to shit to Pakistan - as it has the best COVID

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