How can the economy get off the rollercoaster ride?
By Shahid Javed Burki
Monday, 03 August, 2009
THE economy has been on a rollercoaster ride ever since the country gained independence more than six decades ago. At this time it is going through one of its periodic downturns. This one is more severe than many experienced in the past. The reason is not hard to understand.
The country is passing through a perfect storm; dealing simultaneously with a number of crises. All of these are not related to economics; some have their origin in politics, some in the structure of the society and some in the rise of Islamic extremism.
The questions the policymakers must address are obvious. One, how to pull the country out of its present economic mess? Two, how to ensure that it gets off the rollercoaster and gets on to a path that would take it towards higher and sustainable rates of economic growth and social development?
There are several answers to these two questions. The most tempting one the policymakers have always given is to suggest that the country needs a larger flow of external capital to augment the pitifully low rates of domestic savings and tax- to- GDP ratio. Whenever the geopolitical situation was conducive, Pakistan managed to obtain large doses of foreign money.
Given the ongoing struggle with Islamic extremists in which Pakistan now has taken a decisive position, Islamabad will manage to receive a significant infusion of capital. This will come mostly from official sources and will go largely to the government in support of the budget and of the various programmes and policies favoured by the donors.
Private capital flows needed by the entrepreneurial classes will only become available when the country becomes an attractive destination for the investors. For that to happen, the government will need to do a great deal of hard work. Some of this is needed to make the economy more competitive.
Last week, I used the latest report issued by the Islamabad-based Competitive Support Fund to point out the numerous weaknesses in the current structure of the economy. These had resulted in Pakistan slipping by nine places in the ranking of the countries on the competitive scale by the World Economic Forum. These weaknesses need to be removed in order to place the economy on a higher plane of growth and development.
One way of doing this is to bring to the economy the capacity to innovate. This is largely absent at the moment although, as the report points out, there are inherent advantages present which include a very young population . The median age of Pakistan’s population is 18.2 years – which means that tens of millions of young people are entering the workforce every year. Properly equipped with education and appropriate skills, they could lend enormous dynamism to the economy. Left alone to their devices they will only swell the ranks of the disgruntled.
The other advantage Pakistan has is the capacity to adapt new technologies and new ways of doing things when conditions are right. This was amply demonstrated in the late ‘sixties and the early ‘seventies when the farming community – in particular the medium sized farmers – quickly adopted the technology associated with high-yielding seeds developed in Mexico (wheat) and rice (the Philippines).
The government headed by President Ayub Khan had a great deal to do in facilitating the arrival of what came to be called the “green revolution”. The government – a different one – also had a great deal to do with the failure to bring another revolution which changed the agricultural economy of India. While New Delhi facilitated the adoption of biologically engineered cotton, the Bt, Islamabad discouraged it. The result was that India went from a cotton importing to a cotton exporting country while Pakistan moved in the opposite direction.
The importance economists have begun to place on innovation as a driver of growth and development is of relatively recent vintage. Development economics began its life as a separate discipline by suggesting that by the transfer of low productivity labour from the countryside to industry and modern commerce personal incomes would increase, markets would expand, and new opportunities would become available. All this would increase the rate of economic growth.
But the development of the modern sector needed more than the transfer of labour from less to more productive part of the economy. It also needed capital. This led to the development of production functions in which labour and capital were the two variables. It is only recently that economic model builders have introduced knowledge – and hence innovation – as a direct determinant of growth. This represents an enormous change in thinking which has not been fully factored in the work of economic policymakers. At this critical time in its history, the country certainly needs a lot of foreign capital. But to move towards an economic structure that will sustain high levels of growth, it also needs an economy that can innovate.
I will conclude with a quotation from The State of Pakistan’s Competitiveness Report, 2009, that very well summarises what the government could do to increase the rate of economic growth by focusing on innovation as an important contributor of change.
“Building a national innovation ecosystem for Pakistan is a complex and nuanced process containing many components. These include tax policies, government procurement, and protection of intellectual property rights.They include building the infrastructure for innovation and industry-university linkages. They include supporting entrepreneurs and businesses in general and in their technology identification and acquisition efforts. They include specialised support, such as business incubators and tech parks. They include strengthening education at all levels to encourage innovation and strengthening the ability of the financial sector to support commercially viable innovation. They include policies as straightforward as support for those wishing to file patents to more complex initiatives such as changing cultural attitudes towards risk.” This is a long and comprehensive list for what the government needs to do. However, as in so many other things it is not the dearth of advice that has prevented Pakistan from adopting the right course. It is the government’s poor capacity to implement what are the right sets of policies and initiatives. Whenever the United States government needs to take urgent and comprehensive action it appoints a “czar” to coordinate. More often than not this strategy has worked, most recently in restructuring the auto industry. The man given the responsibility did his job and has announced his intention to leave the government. Pakistan could perhaps do something similar in the area of innovation.