Chip on the shoulder economics

"Prejudice" is the hallmark of much of our thinking. Upon first
impression, we like to slot people into 'biradris', sects,
socio-economic classes, ethnic classes and according to their
orientation towards the West. Thereafter, whatever that person might
say will be regarded as stemming from the thinking that we feel
represents his or her particular background. In fact, we presume that
the background tells us everything that the individual could
think. There's no need to listen to that person once we know where
that person is coming from. Each of us is then reduced to speaking
with this huge "chip on the shoulder."

This strong prejudice-based thinking permeates much of the debate and
thinking in the country. It destroys academic discourse, misinforms
society and is possibly one of leading determinants of distortionary
policy. Thus for example, frequently we observe a class war being
conducted in an academic seminar with each participant accusing the
other of representing his or her class interests. Little attention is
paid to the issue at hand while impassioned accusations are being
made.

Prejudice-based thinking also allows people to protect their turf or
to win an argument that otherwise cannot be won. For example, a while
ago, agricultural economists maintained that in order to practice
their art well, you had to come from a rural background. Those from
urban backgrounds were therefore prohibited from doing serious work in
agricultural economics. When they did do so, they were the subjects of
considerable derision.

Similarly, to make an argument for market-based solutions which
minimized the role of government, was to risk the accusation that you
belonged to the upper class and had no concern for the poor. And yes,
let us also not forget the battle that those of differing middle class
backgrounds are waging against each other. Those from slightly humbler
origins, probably having spent their first few years in Urdu medium
schools, will never forgive those who had a slight advantage in their
youth even though the tables may have been turned completely in the
present.

A prominent Pakistani economist working for the Asian multilateral
read an earlier version of this article and had this to add "I agree
with your "chip on shoulder" theory which could be broadened from your
"class based" differences to "locational - expatriate vs. local -
institutional affiliation. For example, if you work for a multilateral
development institution - MDI - you are only their mouth-piece, and
since all MDI's are run by the US, you are just their agent."

An interesting example of how this prejudice-based thinking adversely
affects policy and decision-making is the recent episode of the
freezing of the foreign currency deposits. To cover up financial
mismanagement which led to the freezing of the FCD's, many
prejudice-based arguments were freely used by the very people who
should have been held responsible for the problem. Accusations were
hurled at the holders of the deposits ranging from them being
criminals to speculators and profiteers. Suddenly the managers of
monetary policy became socialists or at least the champions of social
justice. Through this act of defaulting on an obligation, the
guardians of monetary integrity were protecting the interests of the
poor, enforcing that compliance and otherwise promoting egalitarian
policies. After all, "chip on the shoulder" economics does tell you
that the preponderance of these FCD-holders are tax-evaders,
money-launderers, cheats and criminals of various hues. Surely their
money is not a fiduciary responsibility and can be taken away.
Moreover, these people have also made a handsome profit given that
they accumulated these FCDs at an average rate of Rs. 35 to the dollar
and the government was offering them Rs 46 to the dollar. Surely
profit beyond this was unreasonable, even if the market rate was
higher than what the government was offering. The "freezers" were
reinforced in their "chip on the shoulder" thinking when they noticed
that only about one percent of the population held these
deposits. Surely, that had to be the insignificant wealthy class that
does not pay its taxes and this is one way of collecting from them. It
did not matter to these people that the figures showed that the
FCD-holders represented about 3-4 percent of all families and were in
all likelihood from the middle class.

The "freezers" were further reinforced in their thinking when they
noticed that the middle class, when hurt, can articulate its feelings
and will do so through the press. In a poor illiterate country, the
holding of the FCD's and the ability to write (in many cases in
English) clearly defined what category these people belonged
to. Surely, these be the tax evaders, the wealthy who need such
taxation!

When approached from this "chip on the shoulder" viewpoint, everything
is crystal clear. Freezing at a rate that taxes the depositors and
does not give them too high a profit is really clearly the answer. It
is so easy for the right-thinking managers of our financial
system. There's no need for them to stress over alternative solutions
when they have the right answer.

So preoccupied with freezing were these people that they did not even
consider other options such as bonds, increasing interest rates, or
foreign alternative exchange arrangement. With the passage of time,
more alternatives did become available for those who could think
beyond their prejudices. Once such plausible exit option from the FCD
freeze presented itself when the difference between the open market
exchange rate and the official exchange rate narrowed considerably
recently. This presented the SBP with the opportunity of unifying the
exchange rate while allowing the FCD-holders to exit at the unified
rate but in Pak-rupees. In order to do so, monetary policy would have
to accommodate an increase in liquidity amounting to that which would
be required to pay out the FCDs beyond the current conversion rate of
Rs 46. Back-of-the-envelope calculations suggest that this would lead
to an increase in money supply of about two percent. Base money would
in all probability increase by about 10 percent. It seems to me that a
combination of fiscal action, interest rate increases and development
of newer more attractive instruments will allow some of the money to
be kept out of the transactions to mitigate the inflationary
impact. It is lucky that inflation rate is running at about six
percent per annum, which means that some of this monetary injection
can be absorbed.

Before the "chip on the shoulder" economists start attacking me, let
me say that I am making no hard recommendations. Nor have I worked out
all the numbers. In fact, I am presenting only ideas and very crude
calculations only to illustrate that there are options that our policy
makers and their advisors should be examining rather than only
reacting with the usual blinkers. I am only asking for a hard and
objective analysis with a view to preserving government credibility.
The gains to credibility of the government from a fair and speedy exit
from the freeze far outweigh the relatively small increase in
inflation.

The government could then truly claim that the freeze was temporary,
as originally claimed. It could then shout from the rooftops that it
had taken the first opportunity that it could for a just exit from the
FCD freeze.

Such an exit would allow people to adjust their portfolios to the
currently available rates of return in the economy, instead of the
current situation of speculating on the policy that the government
would use to exit the freeze. The current uncertainty and the
atmosphere of antagonism between the regulator and the investor would
then end to allow energy to be directed towards high-return
activities. The markets and the economy would be helped.

But obviously, this cannot happen, for then faith in hard core "chip
on the shoulder" economics would have to be given up.