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What Explains Pakistan's Economic Crisis and How to Solve it?
286 Plays3 years ago
Asim Khwaja walks us through Pakistan's current economic crisis, and why the real solutions lie in long-term productivity increases. In the process, he also tells us what he learnt from a 5th grader during his recent visit to Pakistan, and on the important role that optimism plays both at a personal and structural level.
This episode was recorded before floods started wreaking havoc across the entire country. Here is a list of Pakistan and US-based charities involved in flood relief efforts. Please donate generously.
Asim Khwaja is the Director of the Center for International Development and the Sumitomo-Foundation for Advanced Studies on International Development Professor of International Finance and Development at the Harvard Kennedy School, and co-founder of the Center for Economic Research in Pakistan (CERP).
Some links to what we talked about:
- Atif Mian's and Asim's own Twitter threads on the causes of the economic crisis.
- Asim's Twitter thread about his field trip where he met the budding brain surgeon.
- Asim mentioned my research on what politicians know about citizens. Here is a blog about it and here is the full paper.
- Asim complained that I asked him about everything but his own research. Until I ask him about it in a future episode, you can read about it here.
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Transcript
Podcast Introduction
00:00:05
Speaker
Welcome to the first episode of Unpacking Us, a new podcast in which we unpack the deepest questions facing Pakistani society, politics, and the economy. By talking to the experts who spend their lives working on these questions as researchers, as practitioners, or sometimes both.
Meet Asad Lyakat
00:00:23
Speaker
My name is Asad Lyakat. I've spent more than 10 years doing research on Pakistan's politics and the economy. And in the process, I've gotten to know some very interesting researchers doing incredible research on Pakistan. Many researchers are doing research on other countries that have lessons applicable to Pakistan. I've also met many practitioners in governments, in private corporations, and in nonprofits who have insights that can radically change how you think about these problems.
00:00:51
Speaker
Most of this research and these insights remain in academic papers or in reports or get talked about in small gatherings. And a lot of it never makes it out. In this podcast, my aim is to do exactly that. Talk to the people who work on these hard questions and help bring these ideas and these insights to you.
Guest Introduction: Professor Asim Khwaja
00:01:12
Speaker
My guest today is Asim Khwaja. He's a professor of international finance and development at Harvard Kennedy School.
00:01:20
Speaker
Asim has been a mentor and an inspiration for an entire generation of Pakistani researchers. I've had the privilege, sometimes a painful one, of working with him for more than eight years. He was my boss and then my PhD advisor at Harvard. And even though I constantly annoyed him during the PhD and went down a path that he did not approve of after the PhD, he still keeps in touch and doesn't seem to hate me.
00:01:47
Speaker
Asim has produced groundbreaking economics research in education, finance, education finance, in governance, and in many, many other areas. He has asked difficult policy-relevant questions and has built deep partnerships with governments in Pakistan to answer these questions. He's also an institution builder, being the driving force behind the Center for Economic Research in Pakistan, and he's currently the director of the Center for International Development at Harvard.
Pakistan's Economic Crisis: Causes & Solutions
00:02:16
Speaker
Today, we're going to spend most of our time talking about what are the deep underlying causes of Pakistan's current economic crisis and what can get us out of this crisis. Asim, welcome to Unpacking Us. So thank you for having me and thank you for a very generous introduction. Although I think you're a bit unfair in how I regard you. Despite you not necessarily going on the academic path, I'm still incredibly fond and think very highly of you as well.
00:02:44
Speaker
That's great to hear us and thank you. So I want to start by talking about the premise behind this podcast and what you think about it, right? So a large part of the premise is that a lot of the research and the work that's been done on Pakistan is not always very accessible to a broader audience. So what do you think about accessibility of research? How accessible should it be? And who are the kinds of people who should listen to this podcast and benefit from some of the insights that people like you are bringing?
00:03:14
Speaker
Great. I said, well, just by reveal preference, the fact that I'm here talking to you means that I obviously think highly of this effort. I should say just to put things in perspective, sometimes we tend to particularise Pakistan in ways that I think isn't necessarily healthy. I think this is a problem everywhere. This is a problem even in the US, even in developed countries where there is research which is incredibly helpful and useful, and yet it's not translated or transmitted to
00:03:42
Speaker
the wider public, even the informed public. And I think that's a critique as much on academia as it is on just how the world is. You have to realize for a lot of academics, there is no incentive for us to popularize our work.
00:03:58
Speaker
We try and publish in top journals. We're excited if we get cited by 100 people. This idea of having an audience of 10,000 or 50,000 or a million is just uncharted territory for us. For a lot of us, I think this is an area where we
00:04:18
Speaker
haven't fully explored it. I think we should. I think we now have platforms. I also think it's important to have interlocutors like yourselves who understand both worlds. I mean, look, doing research is a very time consuming process. It's a very laborious process. The kind of skills you build in that are very different from the skills that you would build if you wanted to communicate research. And so for me, more and more, there's space for exactly people like yourselves, podcasts like yourselves.
00:04:47
Speaker
to try and share some of the ideas that we're working on. I should also say, in the Pakistani context, absolutely there is a need for this, but there's a need in two ways. One, there is some pretty amazing research. I've been lucky to have done a bit of that, but there's just phenomenal research coming up, and I'm hoping you will feature a lot of those researchers in the coming weeks and months on your podcast.
00:05:12
Speaker
There is some pretty amazing research happening and so for sure spreading that sharing that is going to be important making it accessible is going to be important but i think there's an even bigger reason to do that which is.
00:05:24
Speaker
You know, we need support for work like this. There is still a lot less research happening on Pakistan than Pakistan needs to guide its policy, to guide its public opinion, to guide its strategy. And we're not going to do that unless there is a lot of support for this kind of work, a lot of appreciation for this kind of work. There's a lot of barriers to be doing research in Pakistan. And I'm hoping that as we popularize this work and we recognize its value,
00:05:52
Speaker
A lot of other players who can often become obstacles to do research in Pakistan will actually turn around and be supportive of work.
00:06:01
Speaker
And so I think there's a bigger fish to fry over here, which is not
Insights from Fieldwork in Pakistan
00:06:04
Speaker
just disseminate work, but in the course of doing so build broader acceptance, which allows more of this work to happen. And also honestly motivates individuals. I became a researcher partly because I had mentors who were researchers. I'd hoped that younger people who are thinking of career choices start realizing that research is a very meaningful, very satisfying
00:06:28
Speaker
impactful career choice. And by listening to podcasts like these, they get to think about career opportunities for themselves. When I think back to how I got into research, you know, a lot of the driving force was meeting people like you, like Tahir and Rabi working with you, you know, going to field visits with you guys and, you know, observing different kind of behavior, meeting different kinds of people and seeing how
00:06:52
Speaker
if we look at those problems analytically, what kind of a difference it can make. So everything you said very much resonates with me. And I'm glad that I have your stamp of approval. Speaking of field visits, I know that you were recently in Pakistan. I haven't met you since then. And I saw a couple of your tweets about your research visits during the trip, which brought up very fond memories of research trips that I took with you during the PhD.
00:07:18
Speaker
What was the highlight of this trip to you, any particular incident that stands out? Actually, yeah, several. You have to realize for a researcher, there's nothing more exciting. People tend to think of us as people who love being in their ivory tower offices, writing some obscure papers or running some obscure analysis. But that's kind of the old style of research, a lot of modern research, especially modern social science research.
00:07:45
Speaker
is very much motivated by questions which come from the field. And when we say field, we mean literally talking to people who are directly the subjects, the objects of your study. And for me, that's always been the highlight in many ways of my research trajectory. It's always when you go and have a conversation, if you're working in education, you have a conversation with a mother or a student.
00:08:09
Speaker
If you're working in tax reform, you have a conversation with a tax collector or a citizen who's unhappy about paying taxes. If you're working in firms or finance, having conversations with bankers, having conversations with small businesses who are trying to raise money, those are by far the most exciting kind of occasions. And so whenever I go to Pakistan, I always try.
00:08:36
Speaker
Sadly, as I've progressed in my career, it becomes harder and harder. I feel like I become a glorified manager, less of a researcher. But I always encourage my RAs, the PhD students, and as much as I can get time to kind of go in the field. And so this time around in Pakistan, it was very much the same. Not to take away anything from the conversations I had, but I talked to
00:09:01
Speaker
you know several senior decision makers in Pakistan from all sorts of parties all sorts of stakeholders.
00:09:08
Speaker
And as much as I liked those conversations, honestly, those were not my highlights. Again, no offense to those individuals who I met. I love Daughton to them as well, but my highlights were, you know, I recently tweeted about this. I think the most memorable conversation to me was Daughton to a fifth grade girl and her brother, who was a third grade boy in a small kind of informal public school outside of Islamabad. And, you know, it's just a,
00:09:37
Speaker
It was morning. We had started our long field trip. Usually my field trips last all day. If you remember, we start early in the morning. We drive two hours to some location. There's some very sweet people who have made time available to talk to us, despite the fact that they have busy lines and a problem about the poor. We tend to think of the poor as people who have excess time. Actually, the rich have excess time.
00:10:04
Speaker
The poor's time is far more valuable than the rich person's time, mostly because they are dealing with really first order issues. And so I'm always very grateful when those individuals make time for me. And so, you know, we showed up to a school.
00:10:18
Speaker
There was a very sweet teacher who welcomed us. You know, I felt terrible because we suddenly had all these people coming in disrupting what would have been a normal school schedule. And while they were talking, I sort of requested her permission to just chat with a couple of kids. I noticed there's always, you know, when you when you scan the room,
00:10:36
Speaker
you always see some children who just have a certain twinkle, a certain spark in their eyes. And I'm always, you know, I'd like to think I was one of those kids. So whenever I see kids like that, I'm always gravitating towards them. I always want to talk to them because, you know, they give me hope. And so so this girl was one of those and she was clearly in charge. She was helping
00:10:59
Speaker
we had come in and she was organizing the other kids. And so I requested the teacher if we could just chat with her. And so we sat down with maybe four or five kids, her, her brother, a couple of other girls, a very sweet boy who was very quiet, but quite thoughtful. And we just sat there and started chatting. And I was so impressed with these kids. Again, look, I understand that when you're facing tough situations, you try and find
00:11:26
Speaker
beauty in everything you see. And sometimes you perhaps see too much beauty, you know. And so, you know, I confess I was looking for that. And I don't see why not. I think we should do that. I think we should search for gems and beauty in every place we find it. Sometimes if it takes a bit of time to squint a bit more and dig a bit deeper, we should do that.
00:11:48
Speaker
And so this girl was like that for me. And of course, I don't want to necessarily rehash the conversation, but in the course of our conversation, she told me she wanted to be a brain doctor, which is interesting. But what I saw in her was, to me, again, I know I'm interpreting this
00:12:07
Speaker
over-interpreting this. But let me just say what I felt, because my feelings were genuine. And I think her feelings were genuine. She was really aspirationally wanting to move out of her situation. Her parents were migrant laborers. They had moved out to the village. She talked about how she liked being in the city, because the city was more progressive. She could go to school when she goes to the village. It's not quite the same. She can't do the kind of things she can do in the city.
00:12:34
Speaker
And in the course of this, she also revealed things like one of her friends says she could never be a doctor because she's not rich enough. Another friend said, well, you don't wear uniforms, so your school can't be that good. And so we had these conversations about what does it mean to have uniforms? How many years of schooling would it take to become a doctor?
00:12:56
Speaker
You know, we joked and I asked her, well, how many years do you think I've studied being a professor? And obviously she didn't think much of me. So she said she thought it took 16 years to become a doctor. And for me, she thought, oh, maybe it's like 12 or 11 years you must have studied. But I told her it's more like 22. She was a bit surprised. But but, you know, it was it was just a fun conversation. And in the course of the conversation, her sibling, her younger brother, who she was making fun of.
00:13:20
Speaker
And he was very good naturedly accepting the fund because he wasn't, she was like, well, I'm good in studies. And she was, like she was reciting lessons to me. You could tell this girl is bright. She's going places, right? But her brother was like sheepishly not reciting any lessons, admitting that he wasn't academically inclined. But in the course of the conversation turned out, he's an entrepreneur.
00:13:40
Speaker
like he takes toys thrown out by other people, recycles them, sells them to his fellow classmates. And they were just like, you know, you look at these, again, these are, I'm sure they're somewhat unusual kids, but they're not terribly unusual kids, right? This wasn't like some competition in Pakistan and the top five kids showed up. This was just some school I went to and these kids were probably a bit more on the top side of that school, but it's just some random school. And so
00:14:06
Speaker
And you know, I joked around with these kids. Sometimes, you know, I use humor to lighten what was a tough situation because she clearly was confronting this fact that she may never become a doctor because she can't afford it.
00:14:18
Speaker
And when you're faced with a kid who's asking a question like that, you can't be silly and say, these kids are mature. They're smart. They understand silly talk like that. So I wanted to take seriously what she was saying. And so I started asking her brother, well, how much money do you make? Turns out he sold a doll to his sister for $30, and he bought it for free. So that's a pretty high margin, right?
00:14:44
Speaker
Yeah, it's an infinite video. Exactly, right. I mean, his dying cost of labor is fine. But you know, so I said, hey, would, you know, as you grow older, I said, you know, something called MBA, you know, you could be a business person. So I tried to make it sound like this career of an entrepreneur and a business person is just as worthy a career as a doctor would be.
00:15:03
Speaker
And so you can just see his smile. The minute I said that, suddenly he got this validation of some guy. I don't know who this guy is, but some guy is validating what he's doing. And it's not just some funny thing about selling dolls to other kids or selling trucks to other kids. And then in the course of the conversation, we started laughing and I said, hey, if you made enough money, would you pay for your sister's education?
00:15:25
Speaker
And he completely beamed. He's like, yeah, like it wasn't even a, he was like, totally. And then I looked at the sister and joke with her and said, Hey, would you, would you treat his kids for free? And she started laughing. So there was this moment of fun we had, but at the same time, I was trying to share with them some idea about there is a look, don't, when you think of something like being a doctor as a fifth grader, it seems very daunting.
00:15:48
Speaker
many more years of education, but just take it step by step, right? Like, you know, smile a bit today, take the next step, go to sixth grade, figure it out, go to seventh grade. And maybe in the course of the way, I realized that your sibling may be a source of support for you, right? Even though he's younger. I don't know whether any of this stuck with them. Maybe all we did well had a fun morning. At least I learned a lot from these kids, but I left
00:16:12
Speaker
feeling slightly lighter and slightly happier. I hope they felt slightly lighter and slightly happier. And at some stage, you know, that's all we can do in life, right? I think sometimes when you look at the problems of Pakistan, it just feels overwhelming. You feel like you're drowning and you can't breathe. And all it takes sometimes is just that little recognition that there's always some brightness, there's some smile, there's some laughter, even in moments of grief or challenge.
00:16:39
Speaker
Why not partake of it, especially if it makes you move that extra step or the next step? I wasn't expecting this when I asked you this question, but you've given me several micro analogies to exactly the deep, overwhelming, and in some ways frightening macro questions that I'm going to ask you.
00:17:01
Speaker
So, what I'm going to move on now is to the current economic crisis, which is, you know, it's become kind of a cliché and an understatement at the same time to say that Pakistan's economy is in deep crisis right now. And the most common symptom of that crisis that people focus on are Pakistan's higher current account deficit.
00:17:20
Speaker
and relatedly on how much value the rupee has lost against the US dollars in recent months, et cetera. But let's start by focusing on the current account deficit. Can you explain what a current account deficit is and why having a current account deficit signals trouble
Understanding Current Account Deficit
00:17:36
Speaker
for an economy? This is funny. I'm a microeconomist, and having to explain macroeconomics is something I never thought I would do. But since you've asked me that question, why not? I did say this podcast is about hard questions, Aasim.
00:17:49
Speaker
Yes, indeed. No, look, so let me first respond to what a current account deficit is, and then talk a bit about this idea of are we in a crisis and stuff. This is something a really dear friend of mine, Atif Mia, recently tweeted about. I subsequently added to that. So something I've thought a bit about, so I'm happy to share some of my thoughts.
00:18:14
Speaker
Look, we can do technical definitions of a current account balance. I will encourage people to just Google it, but let me give you a very simple, very, very basic definition. You think of the current account as, broadly speaking, exports minus imports. The stuff we sell to the outside world,
00:18:36
Speaker
minus the stuff we buy from the outside world. Now, that's not fully there because goods and services are just part of it. There are things like net income transfers, remittances, but by and large, it all stems to when you say, why is a country stronger, healthy? That country is able to sell more of its own stuff to the outside world than it buys.
00:19:01
Speaker
Let me be very careful over here. It's not that running current account surplus is always a brilliant thing, right? The theory of trade says that it's always good for you to trade. And why? It's very simple. And by the way, again, this is a technical point, so I won't explain it much more. But for those of you who are interested, one of the most beautiful objects in trade theory is something called the Edgeworth Box.
00:19:25
Speaker
Just Google it and take some time. And maybe in some future episode, you can have me or someone else who's far better than me explain what trade theory is and what gains from trade are and what the Edgeworth Box is. But the Edgeworth Box is a very simple graphical illustration, which will hopefully convince you why it's always good to trade. So in other words, the reason you export is partly so you can import stuff, right?
00:19:52
Speaker
Export gives you that currency to be able to import stuff. And you want to import stuff because they're people who are better at making certain things than you would be, and you are better at making certain things than they would be. And as long as you exchange, and you can think of this as an individual level, right?
00:20:09
Speaker
I may be talking to someone who's an entrepreneur and I'm a researcher, I may be better at producing research, they may be better at running businesses. It would be terrible if I had to both do research and run a business and then they had to do research and run a business. If they focus on running a business, I focus on doing research, we can exchange with each other these useful products and hopefully they have some appetite for the research I did and so they buy it and I clearly have some appetite for the products they produce and I buy that.
00:20:37
Speaker
Now in an international context that becomes important because if globally we're less effectively selling stuff overtime what starts happening is our currency becomes less valuable so when you think of why this current account.
00:20:56
Speaker
balance has to do with the strength of your currency. Think of the strength of your currency as how more, if your currency is strong, in other words, a rupee can buy you more dollars. Or sadly, these days, probably the right way to think about it is a dollar can buy you less rupees.
00:21:14
Speaker
That means you are stronger in your currency. That is really a function of you being able to sell more outside. So the more you can sell outside relative to what you buy from outside, the stronger your currency gets. It's as simple as that.
00:21:31
Speaker
Sometimes we complicate these things and we complicate them because the simple kind of relationship I gave you, which is your current account situation, is a function of how well you sell outside minus what you buy from outside.
00:21:49
Speaker
is affected by things like we come in and intervene. We come in and try and change the exchange rate. Those are all temporary fixes. We have to recognize that when we blame a minister of finance in a country to say, why aren't you maintaining the exchange rate? It's really a silly thing for us to be doing because everything they are doing is distorting what the truth is. The truth is determined by what we as a people do. It's not a function of a leader. It's not a function of a political party.
00:22:16
Speaker
It's not a function of a minister of finance.
Economic Activities & Currency Strength
00:22:18
Speaker
It's a function of us collectively as individuals in an economy.
00:22:23
Speaker
whether it be service providers or manufacturers or whatever we are, if we are strong enough and the strength being determined by our products are so amazing that not only our friends want to buy them, our fellow countrymen want to buy them, but someone who's our neighbor wants to buy them. That's how good they are. If you think like that, your currency will always be strong. You will end up in a good current account situation. Again, I want to be very clear.
00:22:50
Speaker
You know, most countries which are succeeding are not running current account surpluses, right? Current account is a balance. But Pakistan has a deep current account deficit, right? We've been running deficits. So we may need to run surpluses just to undo the fact that we've been running deficits. But in general, you want to kind of be balanced on these things.
00:23:10
Speaker
Because it's another way of thinking about it. Imagine you're producing so much. What's the point of producing if you can't buy amazing stuff from outside? Because that amazing stuff you buy from outside could actually help you produce better stuff. Because some of the stuff you're buying from outside is machinery, is know-how, is technology which allows you to produce more. Some of it is just taking vacations and consuming stuff. But even that, I mean, that's part of your utility function.
00:23:35
Speaker
We're producing stuff so we can live a better life. And if you're living a better life means importing things that others produce which are useful and help our life. If you can import solar technology in a way that is useful for you to be better producers, of course we want to import things like that. So I want to be clear that people shouldn't leave thinking exports are good and imports are bad. These are necessary things. Imbalance on these things is not good.
00:24:00
Speaker
And right now we're in an imbalance where our imports are not, well, let me put it differently. Our exports are a lot lower than they should be. Our imports are probably fine. It's just that we aren't exporting enough.
00:24:13
Speaker
Right. So the broad lesson that I'm taking away from this is that bans on luxury imports or different kinds of things that distort the kinds of things that people in Pakistan can or cannot consume are probably distortionary things and kind of things that distract away from the main goal, which is how can we produce things that the rest of the world wants? Would that be a fair characterization? It is, except let me be careful over here. So let me give you an analogy of a patient who walks in
00:24:42
Speaker
with some illness. So you walk into a hospital and you're bleeding. Now, what does a doctor immediately do? A doctor before they do anything else will try and stop your
00:24:57
Speaker
Now, your bleeding isn't the deeper problem. Your bleeding is a symptom of something, right? Maybe you've got hit. You had a car accident. Maybe there's no accident, but there's some internal organ damage because of something happening. Maybe you have an ulcer somewhere. Maybe you have a laceration somewhere. So what a doctor will do is first do the immediate response.
00:25:20
Speaker
Because you could die from bleeding. In the course of me trying to solve your deeper problem, like, oh, I don't care about the blood, but I'm just going to figure out what's going on. You need to stop the bleeding. Once you've stopped the bleeding, then you can start thinking about what is the underlying cause. So you should think about our current situation in much the same way. Our current account deficit, the fact that the repeat was dropping so drastically,
00:25:45
Speaker
the fact that we were not getting loans extended. These are all things like the analogy, the analogy being the patient is bleeding, right? And in those situations, it is correct to do what I would call symptomatic treatment. You treat the symptoms
00:26:02
Speaker
Not diagnostic treatment, but symptomatic treatment. That's the immediate thing you have to do. So us renegotiating with the fund, us trying to get money lent to us, us trying to correct the current account deficit by artificially blocking imports. These are all things you kind of have to do. They're not great things to do.
00:26:23
Speaker
But you kind of need an immediate response now again there ways to do the immediate response like is it better if you're going to suppress imports is it better to ban certain inputs or is it better to do demand suppression more naturally. I don't think banning imports is necessarily the best way of doing it is one way of doing it.
00:26:44
Speaker
But you could also do what is called a controlled recession. So you can take an economy. If the economy is buying too much, think of it like you can make people buy less by two ways, by stopping them from buying certain things or by making them feel more poor.
00:27:01
Speaker
Surprisingly enough, making them feel more poor is a slightly less, neither is great, is a less distortionary way of doing so. One common way of doing that is to actually tax people more. And that may actually help the country in other ways as well. In fact, a better way, that's exactly right. A better way of doing this would have been to raise taxes. Now, again, it's not a popular move.
00:27:23
Speaker
but you know look we need to recognize that when you're when the patient is bleeding you have to do so instance another example there which isn't great but let me just keep the analogy going sometimes if a patient is bleeding and the building is excessive let's say your leg is injured an external injury you may put a tourniquet you may bind the leg in a way that you're blocking blood flow to the remainder leg
00:27:45
Speaker
Now, that's a big risk, by the way, because you can get the, like, atrophy, right? You're blocking blood flow to a part of your body, which is a useful part, but you're preventing death, right? So you will do that. Now, you will quickly try and redress that situation. So I'm not saying we should take a part of our economy and just, like, atrophy it, but I am saying that there will be a pain. There will be some amount of cost. There's no
00:28:11
Speaker
Free solution over here there's no easy solution we've got ourselves in a tough spot just like a patient when they go through any treatment there is pain in the tree and we need to recognize that we need to accept that.
00:28:24
Speaker
There will be pain in our treatment, and we've just been delaying it. The question is, can we communally feel the pain? It's always the poor who feel the pain more than the rich. Those are things we need to address. There can't be pain only felt by one segment or the other. There's a political economy, which is another big area over here to kind of get into. But to your point, yes.
00:28:45
Speaker
to address the current account deficit, the very short-term solution of demand suppression, import suppression, unfortunately, is the kind of only immediate thing we can do. That leads to, and that would be maybe for the next several months, maybe a year, maybe two, but then you need to start solving the deeper problem, which is why aren't we exporting more?
00:29:09
Speaker
And that's where you come to export promotion. And the idea is that's really, as you said, the crux of the problem. That's the underlying deeper problem we should be solving. If we keep solving the short-term problem, then the analogy is terrible. Then the patient is bleeding. And all we keep doing is putting band-aids and bandages on the bleeding and just stop there and do nothing. And so often, Pakistan does that, by the way.
00:29:31
Speaker
We've often been in a situation where we do this patient who's coming in. In fact, the analogy in Pakistan is it's not even an emergency patient. This is a chronic illness patient. And we treat the patient only in the ER. We never admit the patient to the ward. We never realize the patient needs a 10, 15, 20 year solution, not like a six month, three month solution. And I think that's been a consistent problem.
00:29:58
Speaker
So I was not aware of your medical expertise. I'll have to do an episode on different medical issues and invite you in that as well. Both my parents are doctors. I use very bad medical analysis. I actually have too. So I understand. But I clearly haven't delved in that enough to be able to give all these medical analogies. But very helpful. Very helpful understanding and problem.
00:30:17
Speaker
I want to think more about the long-term now and kind of ask you to take us a little more systematically through what it would mean for the output of the Pakistani economy in terms of exports to increase. And I know that one tool that many economists find useful for thinking about this is a production function at the macroeconomic level. So can you explain in very simple terms what a production function
Macro-level Production Function Explained
00:30:45
Speaker
means when thought about at the macroeconomic level? Sure. So production function is a fairly straightforward. Again, we tend to complicate things, but these are very straightforward things at a very high level. The complication comes when you're trying to do policy in this world. But as a basic concept, it's very easy. Think of why being the amount an economy can produce. Let's call it why.
00:31:07
Speaker
That is a function of the inputs the economy has. And in the typical kind of production function approach, the simplest form of it, kind of Cobb-Douglas production function it's called, is we think of two inputs as labor and capital. So we think of inputs being, and capital could be land, machinery, wealth, you know, sort of think of a capital as non-human stuff.
00:31:30
Speaker
and labor as human stuff. And by the way, in the more recent theories, labor is thought of as not just labor as a number of people, but human capital as in the effective skill of people. So two countries may have the same number of individuals, same population, but one is highly educated and the other is less educated. The first one, which is highly educated, would have more of the human capital input.
00:32:00
Speaker
And so these are the two key inputs. And then because we have this interesting thing, and by the way, this interesting thing is what won a Nobel Prize from my first advisor in my undergrad institution in the US, a guy called Robert Solow, won a Nobel Prize for this insight, which is you could have different countries with the same level of H, let's call that human capital, and K, physical capital.
00:32:25
Speaker
But some countries were producing more than others. So somehow they were taking the same ingredients and doing more with it. And what Solow's recognition was, there is something called productivity. And productivity is something which takes inputs together.
00:32:42
Speaker
and produces more Y from the same inputs, right? This is a really key concept to say. You know, increasing production by putting more inputs to the problem is typically how we think of things. Hey, if we need to produce more, let's just... You know, things like that. And I think that's a bad analogy because our problem is not... What we want to almost do is...
00:33:07
Speaker
And you know, you feel like that's impossible. How can you possibly do that? You could take really good quality ingredients and put them together and make a crap dish.
00:33:16
Speaker
or you can take some good mediocre ingredients and make some fabulous dish. And you and I have both friends who have done either of the two, right? And so what is different about those good cooks is somehow they can take the ingredients that they have and produce something better. And I think fundamentally what we need to think about in Pakistan is not increase production, but increase productivity. Because increasing production is a costly affair.
00:33:47
Speaker
without increasing productivity. You need to buy more inputs. If our business, if our social sector, if our service sector could do more with what they have, could stretch it further, we can then produce more at a higher margin. In fact, I'll take it a step further. If you're more productive,
00:34:07
Speaker
you're more likely to offer a better deal in the world in what you're producing, which means you can export the thing, right? The people who are exporting stuff are exporting stuff because they're being more productive with what they have. And so when you do things like you do import protection, you have cars manufactured in Pakistan, get a subsidy, you are killing productivity, right? You're increasing production because now the Hondas and Teotas and those guys can sell more cars in Pakistan.
00:34:36
Speaker
But if they're not being productive about it, they're not going to be able to sell those cars to Malaysia. They're not going to be able to sell those cars to Afghanistan. So if there's one thing you want to remember from this podcast is productivity. And, you know, I was trying to figure out, is there even a word in Urdu for it? And I couldn't figure it out. Like, pedavar is production.
00:34:56
Speaker
There's no pedavari, there's no... There's pedavari salahiyat. Pedavari salahiyat. It's a bit of a mouthful. It's a bit of a mouthful. Maybe that's the right word, pedavari salahiyat. But I want us to think about that at a fundamental level and say, if we can raise productivity, that will allow us to make more of what we have. And eventually, that'll also be the pathway to export because we become more and more competitive in the world when we do things like that.
00:35:26
Speaker
So that's a very helpful framework. And I want to push you now to tell us a bit about why it is that we've consistently failed to raise productivity. Is it something to do with
00:35:42
Speaker
how infrastructure prevents people from using the same amount of capital and the same amount of labor to be more productive. Is it something to do with the political economy? Is it something to do with, actually something not to do with the A factor, but with the capital or the labor factor where a lot of the productive labor is moving abroad or a lot of the productive capital is being invested in relatively unproductive uses such as the real estate sector.
00:36:10
Speaker
What do you think is kind of, you know, is productivity really it? Is it human or capital? And why is it that productivity is not being raised?
Challenges in Raising Pakistan's Productivity
00:36:20
Speaker
Look, it's a great question. The honest answer is I don't know. That's really the honest answer. But I can speculate. I have some theories of what could be promising directions to explore. But before I go there, let me say one thing which is much more
00:36:37
Speaker
You know, a lot of these conversations seem very abstract. It's kind of things you have at some dinnertime conversation, at some wedding, or, you know, or sitting with your nai. If your nai was that inclined to talk about these kinds of things, it's any nais often are. You can have some interesting conversations there. I want to make it, and I'm happy to talk about that level of abstraction because I think it's important as well, but I also want to make it very tangible. I want us to ask ourselves, can I, a very simple question, how can I be more productive?
00:37:06
Speaker
in whatever you're doing. And I guarantee if you ask that question, you will see very tangibly the things which are making you less productive versus the things which are making you more productive. We all have our own pet foibles, right? I waste too much time doing this. I could be much more efficient than that.
00:37:25
Speaker
whatever job you're doing, and I don't mean like you're, even if you're a housewife, it doesn't matter, even if you're a student, whatever you're doing, you're a sportsman. In any of these things, you can ask yourself, I have a limited amount of time, I have a limited amount of energy, I have a limited amount of brain power, I have a limited amount of money, can I take those things, can I take the ingredients I control and do more with them? And I would request all of your podcast listeners to ask yourself that question,
00:37:54
Speaker
In whatever you're doing, you could think it's trivial. I don't care. You're playing Candy Crush. Whatever you think you're doing. Ask yourself, am I being fully productive? And I don't want to make this sound like, even though I totally believe in that.
00:38:12
Speaker
I have the same motto in life. I am unaware of that. Yes, you are. I know. But I'm not saying don't have fun, don't enjoy life, because even recreation has a productive aspect to it. I'm not trying to say we should only be working and not enjoying life and all that. I'm just saying whatever you're doing, don't
00:38:34
Speaker
waste resources. Even when you're having fun, do it in a productive way. It's a funny concept to say, how can you have fun productively? But I think you can. You and I are planning a trip somewhere, and we want to go have fun, and we want to go up north in Pakistan. And then what's the less productive way of doing it? You and I and four friends fight over whether we should go to Sawat or
00:38:58
Speaker
or whether we should go to Natyagali, or whether we should go to Mari, or whether we should visit Tata, you know, and we spend weeks farting over this, which is just not, it's not getting anyone anything, right? Versus one of us saying, guys, it doesn't matter. The main thing is for us to be together. Let's just go. Let's pick a place, go. The main point was us to be together. So those are just two silly examples of us having fun, unless we really love just
00:39:24
Speaker
annoying each other. Fine. If you love not agreeing and that is part of your happiness function, sure. But most of us enjoy being together. And so I want to say we should always think about how we as individuals can be more productive. And I honestly think, and this is maybe a nice view, I said that if we all do that in our domain, collectively our country will become more productive.
00:39:51
Speaker
Right? If we just, because each one of us are different domains, right? I mean, my domain as a housewife might simply be how can be more productive in having my kids go to school and cooking and dealing with housework. If you're a CEO of your company, your productivity might be how do I get my company to become a global multinational?
00:40:09
Speaker
If you're a bureaucrat, your productivity might be, how do I use limited government resources and get better service delivery to my citizens? If you're a politician, your productivity may be, how do I spend less and get more votes? And that's fine. That's a more productive use of your resources. All of that is good. So I just wanted to preface this by saying, it's a long preface, but I think it's important because I think we tend to take agency away from ourselves
Linking Personal to Economic Productivity
00:40:33
Speaker
And this weird helplessness we create, I think is silly. I think each one of you listening has no excuse not to be more productive. And if you think you can't, you're just lying to yourself. I'm going to say a strong statement here.
00:40:46
Speaker
I take your point in that when you were giving the example, I was thinking that any of my friends that I would ask that question, they would say, well, I really want to be more productive, but what do I do when the power goes out? I really want to be more productive, but what do I do when the business I want to start just takes months to get the right approvals? What do I do when my competitors get all these benefits that are illicit from some government official?
00:41:11
Speaker
And so they would say all of these things, and from what you're saying, it seems that your answer would be, well, yes, those are constraints, but within those constraints, you can always improve what you're doing. But also, those state actors need to also be more productive in some ways. What would you say to that? That's exactly what people say, and you're spot on in that. So first of all, you predicted my response. I say there's always room, right? Like, if you think of my research, like, I've built my entire research career on doing research in Pakistan.
00:41:42
Speaker
Most of my colleagues thought it was a stupid idea. And I wasn't studying, like, bizarre-ness about Pakistan. Like, I don't have a single paper on terrorism in Pakistan. In fact, I have papers arguing that we shouldn't be thinking about that in education policy. The opposite, right?
00:41:55
Speaker
And Pakistan wasn't a terribly productive environment to do research. It's much easier to do research in the US. It's much easier to get data sets in the US. I just found it interesting. And I've always found that there's always some bureaucrat, some private sector person, some nonprofit person, some politician who is willing to work with you. So I have never in my life in Pakistan been in a situation where there wasn't a way to move forward.
00:42:22
Speaker
And sometimes moving forward, let me be clear, sometimes moving forward means giving up on a particular project. That's also moving forward. You say it's not happening. That's fine. Let me pick something else.
00:42:33
Speaker
But I kept moving forward in my research. And I think, to your point, we can all do it no matter what we're doing. Now, that said, what is also very important is when we hit that roadblock, when we hit that thing that makes us less productive and we can't change it, it is very important that we document it. It is very important that we voice it. I'm like one of those annoying people who would sit on a PIA flight and actually fill the complaint form.
00:43:00
Speaker
And I've done it multiple times. Because I understand that we think people won't listen, but there are occasions when there's opportunities when people will listen. And if we haven't said anything, there's nothing to listen to. And so a lot of progress to me is not forcing progress to happen. It's being prepared for when the progress opportunity comes along to progress.
00:43:29
Speaker
And our tragedy is that on those beautiful moments when we get the right person to the right place, they still can't act, because we don't know what to do, right? We haven't prepared for that opportunity. Look, most development is like that. There are windows of opportunity. Evolution is like that. Now let me even go into worst territories, which is biological evolution. A lot of biological evolution is there are these epochs where sudden big changes happen. And my read of that is,
00:43:55
Speaker
was just the right opportunity. The pre-existing conditions were there, they were ready, and then suddenly a window opens and boom, we take advantage of it. Our tragedy is that we have windows which open, and yet somehow we're not ready for them. So to me, yes, please complain. Please, in a good way, not in a nasty, parochial, personalized way, not like the way talk shows happen in Pakistan, where everyone is insulting each other's families, just unpleasant,
00:44:23
Speaker
you know, bad language. All our leaders do it, by the way. You listen to these leaders and you're like, I don't want my kids to listen to this language. What country are we living in when we can't have our kids listen to our leaders' dialogue? There's something fundamentally problematic there. And unfortunately, a lot of talk shows encourage that because it's sensational, it's cool, it's like cells. You know, those kind of things we need to do. But we need to accumulate these constraints people face and present them in a nonpartisan way.
00:44:50
Speaker
and say, guys, this needs to be addressed. Like if a businessman truly is suffering from not being able to get a loan or open an LC, we need to understand that. There needs to be some government productive agent who will look at that and try and address it. Absolutely. I'm not absolving the government of its responsibility by any means.
00:45:10
Speaker
I'm glad you brought the idea of voice up, because that's fundamentally, I think, to many people, one of the biggest constraints to productivity in Pakistan. And although not exactly from this lens, but I'll be bringing in more guests to talk about elections in Pakistan, talk about local government in Pakistan, how these institutions can serve as... The idea behind these institutions is to represent the voice of the people and to filter that into the decision-making process.
00:45:38
Speaker
And so I will be talking more about that in the podcast as well.
Optimism's Role in Economic Growth
00:45:42
Speaker
The last question I want to ask you is relates to the role of optimism in all of this, right? So you mentioned, you know, your analogy of evolutionary biology in some way said, you know, there will be opportunities that will be presented at some point in time. And if you're not ready, then, you know, you might not be selected, that you might kind of become irrelevant in the long run.
00:46:05
Speaker
And so is the analogy for Pakistanis listening right now that opportunities might be coming and if you're not optimistic, if you're kind of pessimistic frame of mind, then you might miss out on those opportunities. So at the macroeconomic level, what's the role of optimism? Yeah, that's a great question. Let me first
00:46:28
Speaker
Say one thing about your previous comment, the voice comment. So you were too modest to talk about this. I'm a big fan of your work, where you talk about, and I've actually sent this recently to a bunch of politicians, and they were shocked to hear this. And I was like, just read us its paper, which is your work, and I'll remind you and the audience, was trying to figure out whether politicians knew what their own constituents wanted.
00:46:56
Speaker
And what you find is, and correct me if I'm wrong, that politicians have no clue of what their constituents want, basically. They're just as good as guessing randomly.
00:47:06
Speaker
Maybe slightly better, but that's shocking, right? And you'd think politicians should at least, at the very least, be aware of what their constituents want. And it's not because they're not trying. It's just, you know, so it's not that the usual, oh, obviously politicians don't care. No, no, no, the politicians are smart. Most of them care, actually. They're trying to win votes, not care about some deep moral something. They just want to win elections. And that's fine. That's, you know,
00:47:30
Speaker
But the way they're gathering information may be biased, maybe to intermediaries who are not doing a particularly good job. And so this whole idea of how do you accumulate people's voices in ways that can be used by politicians, by bureaucrats, is a very important area of work. And I'm glad you started that area of work. I know others, the young political scientists who are phenomenal, who are Pakistani origin, I think Sara might be working on this.
00:47:57
Speaker
and others may be working on this as well. And so I think this is a huge area of work that needs to happen, absolutely. Now, to your point about hope and aspirations. Look, one, let me just be careful over here. So I, no one who knows me would think I'm an optimistic person, I tend to see the worst in everything.
00:48:21
Speaker
I disagree with that, but go on. OK, fair enough. So maybe this is my own view of myself. But in a funny way, I was going to say, I am optimistic, actually. But I'm optimistic because of two different things. There's something called dreams and aspirations and something called expectations. For me, we should always dream.
00:48:47
Speaker
Dreams are the place you go to do the things that you know are impossible, but you still want to do them. Think of all of our dreams. They're beautiful. I will save the world. I will be the knight in shining armor. I will be the noble laureate. That's okay. Sorry. Perhaps I'm ruining too much of my own. Now we know what you're dreaming about.
00:49:09
Speaker
Or I will change the world. I will be the person who will, you know, you said that I was instrumental in having other researchers, you know, become researchers. And yeah, that's a dream. I would love it if in 20 years or 30 years time someone said, and I understand this is arrogant, but I'll say it.
00:49:29
Speaker
is if someone said, yeah, you know, Asim was one, I don't even need to be the only, was one of those individuals who helped create a research culture in a country of 200 million people. That's amazing. It's a dream. I think people already say that. That's true. To me, it's still a dream, right? So I think dreams should be unchecked, unrealistic, unfettered, inspirational,
00:49:54
Speaker
Whatever. Because they are the things that get us out of the hole that we find ourselves in frequently in life. It's not reality, it's dreams. And so I don't want to check anyone's dreams. I want that girl to not just want to be a doctor, I want that girl to be like the best neurosurgeon in the world. I want her to think that she will invent new technologies and techniques. Like that's the level of dreaming I want us to do.
00:50:20
Speaker
That said, we should also know that expectations need to be more realistic. And so if you live in a dreamland, you will always be disappointed because you'll think you achieve your dreams. You will not recognize that dreams are what they are. They're dreams. They are meant to motivate you.
00:50:38
Speaker
But if you don't achieve your dream, it's okay. Don't be disappointed. Still dream, don't give up that dream, because it'll keep pushing you. It'll get you to a better place than you currently are. That's what dreams do to you. You don't achieve necessarily the dream, but it pushes you forward, it makes you succeed in life. Expectations are what you plan things on. What is realistic for me? What do I need to do this? What do I need to do that? And I think often in Pakistan, we mix the two things up, and I think that's bad.
00:51:06
Speaker
Right? By mixing dreams and expectations, we make our dreams to be less dreamy, less ambitious, and we get disappointed over and over again.
00:51:19
Speaker
Right? Pakistan should have been the best country in the world. Pakistan should be this, you know, we should be the height of Islam. We should be these are all great dreams to have. Right. But if we in the pursuit of these unrealistic dreams and making them expectations, we fail to achieve even the next step. Right. And so for the macro perspective or the individual perspective,
00:51:44
Speaker
That's the kind of balance I would like us to have. And the reason expectations should be a bit more realistic, even if they're kind of moving towards our dreamland, is that those are the things you can take actual actionable items on, right?
00:51:58
Speaker
Um, and you know, I then do, I, my friends used to joke with me as a kid that you would always, I would always come back crying and say, I'd failed an exam. I'd failed an exam when I actually done pretty well. And so, so I would always have low expectations. Uh, I'm not necessarily encouraging people to do that. Uh, that's not healthy either. Um, but, but have expectations where when you don't meet them, it actually sends a signal. Okay. I should have met this expectation. Uh, something went wrong, but if you don't make your dream, it's okay.
00:52:29
Speaker
And so that's the kind of balance I would do between the two. Awesome. Thank you for entertaining my questions about the macro economy, despite your insistence that you're mostly a micro economist. Thank you for entertaining my other questions about optimism and hope and what you've been up to in Pakistan. It's been great having you and I would want to have you back again to talk more about your research related to the education sector, to taxation and other topics. Thank you so much.
00:52:57
Speaker
I'm happy to do so. And I will take you up on that because you made me talk about everything except my own expertise.
Conclusion & Thanks
00:53:05
Speaker
Well, you talked about my research. So I'm very glad that you remembered two years after we last talked about it, you remember my research. You will be happy that I cited your research to a politician who is, I think, a real rising star in local government and a bunch of other politicians. And so I will make sure your work has impact. Thank you for that. Thank you.
00:53:26
Speaker
Great. Thank you. I said it was a real pleasure. Take care. Likewise.
00:53:49
Speaker
You can find some links to what we talked about in this episode and to the recommendations made by our guest today in the show notes of this episode or on unpackingus.com. Don't forget to subscribe on YouTube, Spotify, or wherever you're listening to this episode. Also, I'd love to hear what you like and don't like about the show and if you have any ideas for future episodes. You can email me at asadat unpackingus.com.
00:54:17
Speaker
I can't promise to respond to every email, but I do promise to read and think about every email. Thank you for listening.