Ali G Profile picture
4 May, 11 tweets, 3 min read
Thread: How PMLN govt managed to keep the GDP growth rate high

Every time I debate economy with a PMLN supporter I get 2 arguments:
1. $ 100 ka tha
2. GDP growth 5.8% thi

I address point no.1 in the thread below and now I'm trying to address point no.2
To begin the discussion we first need to understand the multiplier effect.

Multiplier effect basically says that if money is injected in to an economy from a source (govt in this case) that money is multiplied in the economy.
Lets look at an example of how that money is multiplied.

Lets say that the govt starts a mega project that temporarily employs thousands of workers and when all those workers get paid, they all decide to go buy cars.
The demand for cars increases and the manufacturer now needs to employ more people to increase production to keep up with the demand. Now when all these new workers at the car factory get paid, they all go buy furniture and demand for furniture increases.
This chain reaction keeps going on and more and more demand is created in the economy and consumption goes up and businesses start making money and the whole economy starts running.
This is what PMLN did and at first it sounds like a good way to keep things going but there a few issues with this.

First of all consumption driven growth strategy is used when we see that we have unused production capacity and we need to give the economy a push. Image
Second is that since PKR was overvalued, the demand created was for imported goods and not for local goods, since it was cheaper to import rather than buy local goods. Below is an example from Bloomberg that shows that local industry was not benefiting from this strategy. Image
Third reason also explains what I said in the first reason. We were spending borrowed money on projects that needed more money to run and at some point we had to stop spending money we don't have.
We saw that in 2019 and all the economic activity was killed at its source since it was unsustainable to keep spending at the same rate, all the temporary jobs that were created were lost and all the unsustainable economic activity was killed.
This is also one of the points raised by IMF in Pakistan's review in 2018 where they reffered to this "high growth" as "weak and unbalanced" Image
"Khata hai toe lagata bhi hai"
Is mein laganay tak baat theek hai per aukaat se ziada toe na lgaein na.

This thread presents one of the reasons y we call the high growth in PMLN time "unsustainable"

I might add more to this thread as I do more research and get input from others

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More from @Ali_Ghaznavi

2 May
Thread: An attempt at explaining Pakistan's Economic Woes

Let's start the discussion by looking at the exchange rate . We always hear people saying that Ishaq Dar kept the rupee at an over valued rate which created difficulties for the incoming PTI Govt in 2018.
Lets look at the REER (real effective exchange rate).

Let me first explain REER. In simple words REER shows the buying power of a currency at home vs abroad compared to a base year.

In the graph below 2010 is set as the base year. Image
Now if the index goes above 100 that means PKR's buying power abroad is more than buying power at home, in other words the currency is over valued and its cheaper to import products rather than buying local made products. The opposite if true if the index goes below 100.
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