(Roughly) Daily

“A great sound is given forth from the empty vessel”*…

Pakistan’s economy appears to be in pretty bad shape. Riffing on a provocative thread from Atif Mian, the redoubtable Noah Smith compares the economic condition of Indian’s nuclear-armed antagonist with its island neighbor (and current basket case) Sri Lanka…

Many of the particular root causes of Pakistan’s situation are different than in Sri Lanka — they didn’t ban synthetic fertilizer or engage in sweeping tax cuts. The political situations of the two countries, though both dysfunctional, are also different (here is a primer on Pakistan’s troubles). But there are enough similarities at the macroeconomic level that I think it’s worth comparing and contrasting the two.

In my post about Sri Lanka, I made a checklist of eight features that made that country’s crisis so “textbook”:

• An import-dependent country

• A persistent trade deficit

• A pegged exchange rate

• Lots of foreign-currency borrowing

• Capital flight

• An exchange rate crash (balance-of-payments crisis)

• A sovereign default

• Accelerating inflation

[He then examines each as it pertains to Pakistan]

… Pakistan shares a lot in common with Sri Lanka. It doesn’t have a pegged exchange rate, it’s not as dependent on imported food, and it doesn’t have quite as much foreign-currency debt. But the basic ingredients for a slightly more drawn-out version of the classic emerging-markets crisis are there, and there are some indications that the crisis has already begun.

Because Pakistan didn’t peg its exchange rate and didn’t borrow quite as much in foreign currencies as Sri Lanka, it made fewer macroeconomic mistakes than its island counterpart. But in terms of long-term economic mismanagement, it has done much worse than Sri Lanka. No, it didn’t ban synthetic fertilizers — that was an especially bizarre and boneheaded move. But one glance at the income levels of Sri Lanka and Pakistan clearly shows how much the development of the latter has lagged:

Pakistan went from 3/4 as rich as Sri Lanka in 1990 to only about 1/3 as rich today. That’s an incredibly bad performance on Pakistan’s part…

Another emerging-market crisis looms: “Pakistan is in big trouble,” from @Noahpinion.

Oh, and the weather’s not helping either.

For a consideration of the interesting (that’s to say, challenging) questions that Pakistan’s predicament (and the travails of other debtor nations) pose for China, which is an increasingly large lender across the developing world, see the first set of items here.

* Pakistani proverb


As we batten the hatches, we might spare a thought for Fazlur Rahman Malik; he died on this date in 1988. A scholar and philosopher, he was a prominent reformer in Pakistan, who devoted himself to educational reform and the revival of independent reasoning (ijtihad). While his work was widely-respected by other reformers, it drew strong criticism from conservative forces– who eventually forced him into exile. He left Pakistan in 1968 for the United States where he taught at the University of California, Los Angeles and the University of Chicago.


Written by (Roughly) Daily

July 26, 2022 at 1:00 am

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