A macro image of a twenty rupee bank note from Pakistan close up with an American one hundred dollar bill. Image: iStock

Every aspiring economist can dream of winning a Nobel Prize for discovering a permanent solution to global poverty. If only the task were that simple. When the problem lacks complexity, the solution is usually obvious, so there is no need to resort to sophisticated methodology. With increased difficulty, in turn, it is crucial to have a solid understanding of what is causing the problem.

However, even econometric analysis of data is frequently found to be wrong or misleading. For example, many people erroneously believe that economic development goes hand in hand with a temperate climate, such as Europe’s. Conversely, most of the poorest countries in the world are concentrated in the steamy tropics of Africa.

Nevertheless, correlation is not causation. In order to prove this statement with a direct argument, let’s compare two neighboring countries and try to understand why they differ so much in economic indicators.

The gap keeps growing

If we compare the Pakistani rupee and Indian rupee, we will clearly see that since January, Pakistan’s currency weakened by more than 15%, while India’s strengthened by more than 1.6%.

The difference was mainly due to Pakistan’s widening trade deficit and the bailout agreement it reached with the International Monetary Fund. The Pakistan rupee has been the worst-performing Asian currency, losing more than 50% in the last two and a half years. It has already become obvious that the central bank is unable to support the rupee as its reserves are on the decline because of debt payments. It is worth mentioning that this marked the 13th time the IMF has bailed out Pakistan.

According to researchers, the reasons for the different economic outcomes for the two neighbors lie in the fact that India started its independent journey with an advantage by inheriting public institutions set up by the British during their rule pre-1947. It also had a bigger share of the urban population, industry, and transportation infrastructure. Pakistan, on the other hand, had the upper hand in agriculture, as the nation’s territory includes a huge tract of alluvial, irrigated land in Punjab.

In addition, India can boast of having more inclusive and better-quality institutions. In Pakistan’s case, the country’s image is weak and negative, mainly because of political and security risks. The rise of sectarian conflict and the emergence of religious political parties were compounded by the proliferation of extremist ideologies and violence emanating from Pakistan’s involvement in the Afghan War. These factors, too, had a negative effect on the Pakistani economy and people’s well-being.

And none of this has anything to do with how hot it is outside.

Igor Kuchma

Igor Kuchma is a financial adviser who is passionate about economy and the capital markets in general. He has experience working with Russian, Spanish and American financial institutions. He helped to compile a course for the Series 7 exam, while some companies he has prepared investment portfolios and macro and microeconomic models in Excel, and has studied trends and historical data.

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