First and foremost, US and EU face different issues with their economies. To understand, let us take example of someone who earns $100,000 a year and his income is on a decline each year (negative growth) and there are no options in sight that he could improve on his earnings. Now will a bank be willing to give him $200,000 in debt, most likely no. This is Europe. A continent which actually has become a lot poorer than how it is living and so sane lenders will cut lending to it to finance the new rich in town, East Asia. The Europe will have to actually start living poorer than it does and the decline of Europe is the inevitable outcome of this financial crisis.

US on the other hand has a strong growth base. It is leading the world in cutting edge technologies like ICT, bio-tech, pharmaceutical, medical equipment, fuel cells etc. More importantly, all major brands that emerged in past three decades have, almost all, been American. From IBM to Microsoft to Google to Apple to Facebook, US has led the corporate charts all those decades. So for US, 100% debt/GDP ratio itself is not a problem. Problem is that industries where US has competitive advantage and growth, do not have enough skilled workers and most of US’s work force is trained around industries where US has lost the competitive advantage and has become either non-competitive or is competing through subsidies and protectionism. These sectors have no room for growth. So US, in the words of President Obama, has entered an economic phase where the corporate earnings, in general, will remain strong but the economy will have to bear with a high unemployment rate. This unemployment rate is a direct result of structural creep that we have talked about. So for US to achieve its full growth potential, it needs to solve this employment issue. If unsolved, the economy will keep growing but it will not attain the full potential. Also, the social and political implications of this unemployment could lead US into a destructive spiral. Most important of all, the growing social security and medicare liabilities as a result of aging of baby boomers requires an economy growing at its full potential and having bulk of the population productive to provide for committed social welfare for baby boomers.

President Obama is pushing for a jobs plan that commits massive spending in infrastructure to employee some of the unemployed. This will solve the problem to an extent. However, the bigger issue of employing the workforce or training it to fit in the competitive sectors will remain the real challenge. Training and transformation will not happen short-term. So US labor force will undergo transformations in more than one ways.

It is highly likely that many US workers will migrate to Canada and even Australia. Both countries offer opportunities in sectors for which US’s manufacturing/construction workforce is trained and offer least cultural shock in migration. Nations, too, follow a variant of Product Life Cycle theory and move up the ladder of value chain and become noncompetitive for lower-end economic activity. US workforce is feeling the pinch of this move up. The bulk of its manufacturing workforce trained for activity suitable for previous phase of competitiveness will fit well with the economic phase which Canada and Australia are going through. The demand for workers in manufacturing, mining and construction is high in Canada and Australia and the supply for now is not meeting the demand. Even for Canada and Australia having American workers will make sense for the reason of ease of integration.

Also, to absorb many of baby boomers into work force post-retirement, US Govt. will likely penalize outsourcing of low-end services jobs abroad in short-term. However, reliance of high-end US technology on international markets will limit the hand of US Govt. in this regard.

One employment sector that has the potential to thrive in US is the low-end services sector like retail, civic services etc. For these sectors to pick up, it is important that US works at its full potential in its competitive high-end areas. To achieve this, and to achieve high growth, US will have to make her immigration policies more relaxed for high-skilled workers from abroad. It will not only have to attract the high-skilled workers in the fields of technology, management, energy and biotech but will also have to make sure that it retains the talent that is heading back Asia and South America after graduating from top US schools. This is the only way US can remain productive at full potential and can sustain its competitive advantage in high-end industries.

Perhaps the most important thing US needs to do is to realize that its problems are separate from European problems. Just when the Europe offers the biggest market for US goods outside North America, the shifting patterns of wealth require exploring potential in South America and Asia and to lower reliance on Europe slowly but gradually. US will have to choose between policies that are driven by cultural ties with the continent and the policies that are needed to survive and thrive in emerging economic reality.

The competitive environment US has entered is an extremely productive one. On this road, fewer and fewer workers are required to produce the same amount of output as the time goes by. More so, the environment is suitable for only the especially trained/educated workforce. The bulk of activity of this high-tech economic environment, for now, is centered in West Coast and East Coast. Expanding it to the heartland or fusing it with heartland economies will be the challenge US needs to overcome if it wants to survive as a Union in quarter to half a century from now. Also, though immigration offers a good short-term solution to expand and consolidate the competitive advantage, with emerging Asia and aging Europe, it might not be the long-term solution. So focusing on education and training of indigenous population will be the key to sustainable advantage in high-end production sector.

The route to global economic recovery will be much smoother if US focuses on attaining its full growth potential and lead the world into a transition at the end of which the balance of wealth will shift from Europe to East Asia. Viewing problems and opportunities from prism of past will not only increase economic pain of the world but will also pose serious social, economic and political threats to US. Will the nation of Ameri-cans act in time is the question in whose answer we all have stakes in.

With a significant share of black and gray economy in the overall economy and a booming young population, Pakistan might not see a textbook stagflation but the current situation is the closest variant of stagflation the country could observe and unless some interventionist measures are taken in macro-economic domain, this combination of high inflation and stagnant growth is likely to persist for the foreseeable future.

The history of stagflation tells us that inflation should be a key concern rather than stagnation. Because of supply shocks to capital, energy and other factors of production and a persistent price instability hampering the investments, inflation in part is the reason for economic stagnation. Current inflation is caused by multiple factors. The rise in food prices around 2006-07 along with the rise in fuel prices is one of the reasons of this inflation. Inflation, like investments, is a perceptive macro phenomenon. Post food and oil price rise, the inflation has started to get built into the prices. Also, gone are the days when the oil would trade around $20 and this is impacting prices all over. Second reason of inflation is the supply shocks particularly in the domain of energy. Shocks are hitting businesses decreasing their productivity leading to higher unit fixed costs.

Third and fourth reasons for inflation in Pakistan are often overlooked. Since the activation of free-trade regime in 1990s, we have been heading an age where consumers will have to pay a price closely linked with the international and regional market prices and government’s ability to control prices of commodities is seriously curtailed. Rather than preparing for the inevitable and gradually making a transfer to the global prices, the governments and the society resisted the change through subsidies and protectionism till all mechanisms seem to have totally collapsed. Purchase Power Parity advantage that once was an asset has become a liability. Rather than preparing ourselves for a globalized world by competing in sectors in which we were competitive and increasing productivity and per-capita income, we resorted to old-fashioned policies of subsidies and protectionism for non-competitive sectors like automobiles and textiles. This has left us unprepared for the time we are in. The global prices are here to stay and the sooner the society and the government comes to terms with them, the lesser the long-term pain will be.

Forth reason, overlooked, is the impact of real estate bubble. Between 2002 and 2006, Pakistan saw two booms which turned into bubbles. One was in the stock market and the other was in the real estate market. In economic collapse, the stock market corrected itself because of the higher liquidity of the stocks and the leverage present. However, looking at the data, the real estate sector has not corrected fully. Between 2001 and 2005, the residential real estate prices jumped 300% in Lahore and 167% in Karachi. Compared to that the rental yields decreased from 5% to 3% in Lahore and from 8% to 4% in Karachi. At the start of the economic meltdown, the residential rental yields stood at the lowest in a long period. Story for retail and commercial real estate is not much different. Real estate markets usually take longer to correct. In case of Pakistan, the correction will be even slower because of lack of leverage. The investors usually will hold on to their all equity real estate positions till the prices recover. This puts inflationary pressure on the prices of other items to gain equilibrium with the real estate prices. The rental yields, salaries and other prices will increase to readjust to the higher real estate prices. So after the initial decline in real estate prices around 2008, the rest of correction will come from an increase in the prices of other items rather than a significant further decrease in the real estate prices.

To break this new normal, curbing inflation remains an essential. State Bank has taken a right step in increasing the discount rate twice and further increase in the discount rate is likely. However because of the last two reasons mentioned coupled with regional rise in food prices, it is unlikely that inflation will be lowered significantly in the short-term.

Inflation will also be hard to tackle because of the need to stimulate the economy. Investment like Inflation is a perceptive macro phenomenon. For now because of the overall stagnant environment, lack of price stability and security situation hinders investment. To tackle this, massive influx of government spending is needed on large scale infrastructure projects. Also, in an environment of high inflation, the government will need to transfer money directly to the poorest of the poor to tame the social backlash. Just when cutting waste is never undesirable, for now what is needed to stimulate economy is ever greater spending by the government on infrastructure and directed subsidies.

Capital will be hard to come by for such spending. Because of the geostrategic concerns, we can expect some of the gap to be bridged by international donors. Increasing taxes is also a way to raise this capital. Just when a tax to GDP ratio of around 15 is essential for a sustainable long-term growth, increased taxation is not a complete solution for short-term requirements.

To raise capital for massive infrastructure spending aimed at stimulating the economy and building the foundations of a sustainable long-term growth requires selling and leasing of vital public sector assets. In a world post financial meltdown, the valuations will be lower than the ones that could have been obtained in an ideal economic environment.  However, the choice before Pakistan is to be hungry now and risk a starved death or sell some of the national assets to finance economic revival. A serious review needs to take place in strategic, economic and financial domains of all national assets to prioritize them for their readiness for sale.

Another challenge in sale of assets will be the fact that post Steel Mill verdict; the privatization activity in Pakistan has taken a serious hit. To revive this will require extensive marketing campaign aimed at strategic buyers and capital markets and definition of a transparent mechanism for privatization.  Privatization and sale of national assets is the only way that can generate ample investment for stimulation of economy through public sector spending. With lack of private sector investments, massive public sector infrastructure spending seems the most viable investment route for the near future. More so, this infrastructure spending is also needed as Pakistan needs to build communication and energy conduits to become the cornerstone for economic activity in the region in the years to come.

The way forward is to tame inflation through discount rate hikes and spend money to stimulate economy in the mid-term. For short-term, the money needs to be diverted to the poor in the form of direct subsidies. Middle term investments to stimulate the economy require a tax hike and selective selling of public assets. Keeping in view the economic crunch that faces us and the opportunities that surround us, we need to move that route and the journey should begin now.