Article: Towards sustained growth


Long-term GDP growth should be at the core of Pakistan’s economic policy. Though not an ideal measure of wellbeing, GDP at least shows a country’s scale of economic progress. Nothing gets done without it. But sustained GDP growth needs key inputs that policymakers have ignored for many years. So, as the government deals with the many inherited crises, it is important also to keep an eye on the long term. To begin with, growth needs investment, which, in turn, depends on savings. In Pakistan, both indicators have been abysmally low, in fact one of the lowest among all economies. Furthermore, they have been in decline. These low rates are at the centre of our economic travails. Even a cursory look at periods of high growth shows that they mostly correspond to years of major aid inflows. So, one of the key goals for policymakers is to develop the financial sector to increase investment, and growth. The domestic savings rate was about 15 percent of GDP during 2000-10. It is now less than nine percent. Even at 15 percent, it was well below other South Asian economies. Moreover, less than half of what is saved does not get invested. In some years, this rate was about 20 percent. Real estate, capital flight, and the gray economy take a hefty slice. Much has been done lately to correct the distortions, though these efforts need constant vigil. Going forward, it is important to make returns on savings attractive and create easy-to-use products to include new small savers. According to the SBP, only 11 percent of Pakistani adults use the banking sector, compared to 35 percent in India and a South Asian average of 33 percent. Experiments show that more bank accounts translate to higher savings. New financial instruments are needed in other areas. In order to convert foreign remittances to investment, the government will soon introduce special products for overseas Pakistanis. Similarly, we need new instruments to revive DFIs so that they again stimulate industry with fixed-rate project finance. The IMF recently issued its Regional Economic Outlook for Middle East and Central Asia; the region includes Pakistan. Based on data across many periods and countries, the report recommends that in addition to access to capital, investment will grow with targeted public spending on infrastructure and skills development. It also recommends enhancing government effectiveness and advises “investment in education” and “human capital”. Referring to Pakistan among others, the IMF asserts that “political instability has not been conducive” to investment. Clearly, despite timely elections, frequent violence and protests have hurt business confidence. We also need stronger economic fundamentals. Increase in government revenue will reduce borrowing and make more credit available to the private sector. SBP data shows close correlation between increase in government borrowing and decline in private credit. We must also end wasteful expenditure. Some of the spending in recent times has been whimsical. The PSDP must target projects that directly stimulate business or build human capital. Despite past attempts at reform, government bureaucracy, regulations, and corruption continue to hinder businesses. Pakistan ranks 107th of 140 countries in the World Economic Forum’s Competitiveness Index. In the World Bank’s Doing Business Index, it ranks 136th of 190 economies. Our ranking on both indices has fallen drastically in the last ten years. In some criteria, we are among the worst performing economies. Moreover, Pakistan has missed out on trade opportunity offered by the growing Saarc market. To truly change the economic framework, we must improve the quality of GDP growth. New investment must go to industries which create jobs, are higher up the value chain and boost exports. How much and what we export is a good test of our industry’s competitiveness. Pakistan’s exports products have not changed in decades. And they need continued incentives to survive. Even in years when the power supply was abundant, foreign aid plentiful and global powers favourably inclined, the type of goods exported did not change. Nor did generous capital inflows translate into major growth in investment. Despite every incentive for decades, our exporters are no more competitive now than they were before. We must inquire why Pakistani businesses have not kept pace with competitors in raising and diversifying domestic production capacity or exports. At present, a large part of investment goes to sectors with special government incentives or to industries protected from competition. Private power production and the auto industry are examples. Such support exacts a high cost on the economy. Our single focus now should be to expand domestic production capacity and move up the value chain. Critics would say that implementing the above IMF recommendation would take a long time. It would be fair to ask: how has focusing on the short term helped so far? Research informs us that with rigorous effort, governance could improve within a couple of years. Even education starts to show results within five years. Implementation of recommendations would empower more people to become entrepreneurs or enter the workforce with better skills. New business entrants will bring innovation and efficiency. This is especially necessary as private-sector capacity is a concern. There are few examples of new product development, establishing a brand, or meeting standards achieved by other countries. Future incentives, therefore, must be linked to value addition and excellence. Also, we have ignored SMEs, which have practically no access to credit and because they lack influence, face major bureaucratic hurdles. Lastly, extremism in Pakistan has insulated the country. We are unable to attract Pakistani talent from abroad. Foreign experts hesitate to visit our educational and research institutions. The extremist discourse has also diminished critical thinking and rational analysis in Pakistan. Our insulation from the world has especially affected education. In verbal and math skills, Pakistani students are far behind their peers from other countries. If Pakistan must realise its potential as a nation, state institutions must come together for bold and decisive action. The writer was commerce minister from 2002 till 2007. He is chair and CEO of the Institute for Policy Reforms.
12/13/2018 12:00:00 AM