With the recent downgrading of US credit rating on Friday, it was only natural for me to be alarmed and wonder what lessons we can learn from the mistakes made by the US legislators and the impact this US economic crisis might have on already volatile relationship between US and Pakistan.
According to an article published by Gulf Times, even though the rating downgrade created serious concern in the market and among the economists, there will be no significant and immediate impact on Pakistan’s exchange rate for the time being which is a relief but, we have to consider the reasons why Standard & Poor’s downgraded the credit ratings in the first place and may be try to learn from their mistakes.
Just to clarify and put things in perspective, here is the press release from Standard & Poor’s published in The Wall Street Journal
Please note the following passage from this press release:
“– More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
“– Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.”
“– Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.”
So what can easily be deduced from above is that the reason why S&P downgraded the credit rating from AAA to AA+ was not because of economic reasons but because of uncertainty in D.C, between the legislators to carry out policies. As mentioned from the press release above, fiscal policy was a key element surmounting to the instability between the two political parties. This was the basis for S&P deciding to downgrade the credit rating because they were unable to see a clear path that lead to the consolidation of debt.
Now, as explained by Warren Buffet, United States is the worlds richest nation, has a gross domestic product of about $48,000 per person, and the country won’t have trouble paying off its long-term debt obligations. But what we have to learn from all this is that constant bickering between political parties, blocking resolutions, putting personal agendas on top of national interests etc and similar things will only do us harm as a nation and serve as an obstacle to economic progress.
Prime Minister Yusuf Raza Gilani emphasized on the same thing and said that Pakistan was facing numerous challenges at various fronts. He also said these challenges included the country’s war against militancy and terrorism, the impact of the global recession, high international prices of petroleum products, and the massive damages of up to US 10 billion dollars caused by the floods last year.
However, he said the national economy was resilient and was braving these challenges by pursuing a vigorous reform agenda.
There is no doubt in my mind that economic prosperity cannot be achieved without political stability. Disagreements are present in every discussion but for achieving political stability we need to let go of our collective egos and differences on national issues. That is the lesson we can learn from the US economy today.