The Economics of Stateless Nations: Sovereign Debt and Popular

Practical men who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist. Keynes (1936, p. 383) The high and growing debt burden is the major source of the sharp slowdown in Pakistan’s economic growth … and the consequent increase in poverty incidence. …Pakistan is…caught in the vicious circle of high debt payments leading to stagnation in investment and growth, and low growth in turn limiting the capacity to service debt and reduce the debt burden. Pakistan (March, 2001, p. xvii) The Government of Pakistan believes that “high and growing ” indebtedness of the government is reflected in falling investment and growth rates of the economy, leading to growing poverty of the people. This paper examines how this came to be, and whether the connections implicit in this assessment do in fact exist? On this basis, the paper also comments on the efficacy of some current policy proposals. 1. INSTITUTIONAL PERSPECTIVE The conventional wisdom is that “persistent fiscal and balance of payments deficits are a fundamental source of Pakistan’s high debt burden ” [Pakistan (2001), p. xv)].1 The State Bank of Pakistan (2001, p. 117) goes further: “This…public debt is the result of structural weaknesses in the domestic economy and the external account. Excessive government expenditures, stagnant tax revenues, high returns on government securities and inappropriate sequencing of financial reforms, led to a bludgeoning (sic.) domestic debt profile. On the external front, large current account deficits, stagnant export revenues and declining worker (sic.) remittances, effectively forced Pakistan into an unsustainable situation”. All this is true, but hardly exhaustive. Arshad Zaman is Managing Director at Arshad Zaman Associates (Pvt.), Ltd., Karachi. 1This is echoed in the Economic Survey, which ascribes “the accumulation of external debt” mainly to “(i) persistently large current account deficit; (ii) imprudent use of borrowed resources… ” and “(iii) …stagnant exports and rising real cost of external borrowing ” [Pakistan (2001), p. 137]