Section VI

Economic prospects in the medium term:

As the full fledged operation of a true Islamic economic system in any of the Muslim Countries and particularly Pakistan is far from realization in the near future, only gradual and slow changes will take place. Thus, the burning issues of poverty, income distribution and unemployment will remain to preoccupy the attention of economic managers and policy makers - as the remedies available under the Islamic economic system to resolve them are unlikely to be applied. Under this scenario what does the future hold for the Pakistan economy and what are the prospects for addressing these issues?
Empirical evidence from the past history of Pakistan suggests that there is a direct relationship between rapid economic growth and poverty reduction. After the annual economic growth rate crosses the threshold of 6 percent or more on a sustained basis there is a strong probability that the incidence of poverty will begin to decline.

and more provided structural reforms are continued and further deepened, productivity gains in agriculture sector are achieved and a set of non economic factors including governance are put in place. This will not only reduce the incidence of poverty but also unemployment and to some extent regional disparities. It is also projected that the inflation rate will remain contained within the 6-8 per cent range provided appropriate monetary and fiscal policies are followed. The latter is geared to bring the budgetary deficit down to 3 per cent of GDP in the next three years; increasing the Tax-GDP ratio to over 15 per cent, containing the growth in non-development expenditure but raising the share of social and poverty-oriented programmes.
What is the agenda for getting back on this trajectory? The realization of the projections outlined above will depend upon the interplay of evolution in political and social developments, economic policies to be pursued, the quality of governance and institutions, external environment and most important, investment in human development. It has become quite obvious from both Pakistan's own history and the experience of other developing countries that sustained economic growth and poverty reduction cannot take place merely on the strength of good economic policies. Political stability, social cohesion, supporting institutions, and good governance are equally important ingredients coupled with a benign external environment for achieving economic success. The economy will suffer from temporary shocks, both domestic and externally induced, but will develop resilience to tolerate these shocks with minimum disruption and dislocation if these ingredients are present. So what do essential ingredients for transforming Pakistani economy entail? What are the pillars on which the foundations of Pakistan’s rapid economic development will be built in the future?

Pakistan's chequered and uneven record on political instability and lack of democracy has deprived the country of a long-term vision, direction and continuity of economic policies. The rapid turnover of governments and the actual and imminent threat of the dismissal of governments through extra constitutional means have certainly proved to be an inhibitor to investment, innovation and institutional development. Democracy in Pakistan is still interpreted in a fairly narrow sense, i.e. holding general elections and allowing political parties to compete. While this is necessary, other pre-requisites of a well functioning democracy, i.e. rule of law, civil liberties, freedom of expression, checks and balances on the powers of different organs of state and religious and ethnic tolerance have not yet taken root. Parliamentary elections are not meant to provide licence to those elected to rise above the law and do whatever pleases them. Separation between executive and legislature, with the latter exercising effective controls on the former, is still missing due to the entrustment of executive powers to the ruling party in the legislature. As there is no other countervailing mechanism, excesses committed by the executive have only been corrected by dismissals or extra-constitutional measures. These extraordinary steps create uncertainty and unpredictability, which are inimical to long-term economic growth. Thus an effective watchdog legislature and a vigilant judiciaryenforcing rule of law including enforcement of contracts and protection of private property will obviate the need for frequent changes in the government. Political parties themselves have to shift the emphasis on dialogue to broad-based strong growth rather than narrow-minded slangs and personality-oriented cults. A stable and orderly political system ingrained and practicing all the elements of democracy is the first pillar for transforming the economy.

Although democracy does mediate between different ethnic, religious and regional groups, Pakistan has witnessed growing polarization and division along sectarian, ethnic, linguistic, and cultural lines in the decade of 1990s particularly after the defeat of the Soviet forces in Afghanistan. Social capital, which is a glue for fostering economic development has been depleting. Although Islam teaches us tolerance and harmony, the violent sectarian killings and the consequential law and order problems need to be curbed effectively. Social cohesion, trust and tolerance and inter-provincial harmony on the back of a true participatory and well functioning democracy, a vibrant civil society and a shared sense of fair play in allocation of national resources are the second pillar for robust economic transformation.
Recent empirical evidence and common sense strongly suggest that sound economic policies cannot make any difference to the lives of the common citizens if the country does not have strong institutions to implement those policies. Pakistan had inherited a strong civil service, judiciary, and police, which could meet the demands of thirty million people. But as population expanded, and the nature of problems became more complex, the capacity of these institutions did not keep pace with the emerging demands of the economy. On the contrary, these institutions were politicized and captured by a small elite group to serve their own narrow interests and those of their masters. The consideration of common good was replaced by self-aggrandizement and the process of institutional decay crept in and gradually eroded the foundations of most of these institutions. These dysfunctional institutions were unable to deliver the basic services to ordinary citizen.
Crude estimates suggest that if institutions and legal system were working well Pakistan's GDP would grow at least by two percentage points faster e.g. if the land titles were clear, actively traded, mortgaged and exchanged without much hassle; if tax assessment, tax code and tax collection methods were simplified, made less arbitrary and free from discretion of tax officials, the tax base would be much wider and Tax-GDP ratio much higher; if the court system is unclogged the enforcement of contracts would be quicker and reduce transaction costs substantially.

The fourth pillar is good governance. There is an overlap between the other three pillars described above and good governance. Rule of law, transparency, predictability are the essential elements of good governance. Authoritarian governments have relatively better record of governance in Pakistan, but these gains have proved to be short lived. Only democratic governments with clear rules of transition and strong functioning institutions can provide the platform for embedding good governance in the work ethic. It has to be demonstrated during the next five years that democracy and good governance are not mutually incompatible and that a democratically elected government can also serve collective interests in contrast to their personal interests, and that the quality of governance can be better. The interplay of voice and accountability, civil liberties and free media, which form the core of democracy reinforce the quality of governance.

Three recent steps, devolution of powers to local governments, National Anti-Corruption Strategy and National Accountability Bureau and encouragement of private-public-community partnerships, will fill in the missing gaps in effective implementation of governance.


Table I Long-terms structural change and growth


Population
In million
33
60
146

Income
GDP(current m.p.) Rs.bln
58
151
3,231
GDP (US $)billion
3.8
10.8
72.3
Per Capita Income (Constant Rs.)
1,638
2,541
5,383
Per Capita Income (US $)
85
170
495
Per Capita Income (Current Rs.)
405
809
28,980


Agriculture
Production Index
100
219
530
Fiber Production Index
100
172
921
Water Availability (MAF)
55
76
97
Wheat Production (m. tons)
3.3
7.3
19.2
Rice Production (m. tons)
0.7
2.4
4.8
Cotton Production (m. bales)
1.1
3.0
10.4
Fertilizer per ha. Crop (kg)
0
23
212


Industry
Manufacturing Production Index
100
2346
12,633
Steel Production (000 tons)
0
0
2203
Cement Production (000 tons)
292
2656
11,000
Chemical Production (000 tons)
0
130
445
Sugar Production (000 tons)
10
610
3686
Veg. Ghee Production (000 tons)
2
126
743
Cloth Production (000 Sq. meter)
29,581
60,544
576,000


Infrastructure
Per Capita Electricity Generation (Index)
1000
1950
10,160
Per Capita Electricity (kwh)
6
63
520
Road Length (km)
50,367
72,153
249,959
Area under Canal Irrigation(mill. ha)
7.9
18.0


Consumption
Natural Gas billion cu. Meters
0
2.9
26.1
Road Vehicles per 1,000 Persons
1
3
30
Phone Connections per 1,000 Persons
0.4
2.5
28.6
TV Sets per 1,000 Persons
0
1.5
26.3

Social indicators
Primary Enrolment Rate
5
22
74
Population per Doctor
23,897
4,231
1,484
Population per Nurse
369,318
13,141
3,560
Literacy Rate
11
20
51
Infant Mortality Rate
N.A.
117
84
Total Fertility Rate
N.A.
6,3
4,7
Population with Access to Safe Water
N.A.
25
85
Under Five Mortality Rate
N.A.
191
109


The devolution of powers to local governments since 2001 is undergoing a phase of consolidation and is facing some teething problems. But this devolution has an in-built capacity to respond to the demands of the common man for obtaining basic services such as security, education, health, water supply, sanitation, etc. This system is facing fierce resistance from all those groups who had vested interests in the old centralized, highly personalized top-down system of Administration. The system needs to be carefully nurtured, monitored, its structural and operational deficiencies and weaknesses removed, but any attempt to dislodge it or make it impotent will adversely affect the access of the poor and disenfranchised to public expenditures and public goods.

Finally, most important among all the factors that will impinge upon the future shape of Pakistan’s economy is accelerated investment in human development. In fact, this underdevelopment of human capital is the most daunting challenge facing Pakistan. High population growth - one of the fastest in the world - has given rise to a young dependent population and increased unemployment among the youth. One half of the population is illiterate making it more difficult to impart new skills to the ever-burgeoning labour force. The average years of schooling remains quite low. Investment in higher education, science and research has been almost insignificant and has hurt the competitiveness of Pakistani firms in world market. Low level of female education and literacy have made one half of the population less than adequately prepared to participate in the domestic labor markets and deprived the country of many externalities that arise from a literate female population.

A comprehensive package of educational sector reforms, a medium term health strategy, fiscal restructuring and devolution of administrative and financial powers to local government, public-private partnership in delivery of social services, community involvement and participation are some of the ways that need to be put in practice with full commitment.

The above survey of Pakistan’s past, present and future should reassure the Western Community that if and when Islamization of the economy takes place it will not pose a threat to Pakistan’s journey towards stability, growth and poverty reduction. Along with good policies, good governance and good luck it will create conditions that are conducive for growth and poverty reduction Pakistan is very much and will remain integrated into the world economy and fully utilize the opportunities thrown open by globalization to benefit its population.


Table II Changes in key macronomic indicators


GDP growth rate
4.2%
5.3%
Positive

Inflation
5.7%
3.3%
Positive

Fiscal deficit/GDP-6.1%
-4.0%
Positive

Current account/GDP-3.2%
+5.0%
Positive

Domestic Debt/GDP
52.0%
43.4%
Positive

External Debt
$ 38 billion
$ 35 billion
Positive

Remittances
$ 88 million per month
$ 300 million per month
Positive

Exports
$ 7.8 billion
$ 12 billion
Positive

Tax Revenues
Rs. 391 billion
Rs. 510 billion
Positive

Rupee-Dollar Parity
Depreciating
Appreciating
Positive

Foreign Direct Investment
$ 472 million
$ 500 million
Positive

Foreign Exchange Reserves
$ 1.6 billion
$ 12.0 billion
Positive

Poverty Incidence
33%
Data not available but perhaps rising
Negative

Poverty related expenditure
Rs. 133 billion
Rs. 161 billion
Positive

Unemployment
6%
8%
Negative

Written by Ishrat Husain


Allah Nagheban,

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