Persistent economic woes
At this stage, three types of investment are particularly important. These are: developing the human resource, improving the technological base of firms and improving physical infrastructure.
By Shahid Javed Burki
Tuesday, 09 Mar, 2010
PAKISTAN remains in the de pths of economic gloom and des pair while most of the rest of Asia is bouncing back from the slowdown economists call the ‘Great Recession of 2007-09’. Pa kistan’s two giant neighbours are performing particularly well.
China’s rapid recovery has surprised even the most informed observers. In the last quarter of the previous year the economy expanded by 10.7 per cent. The rate of growth in 2010 is expected to be 10 per cent, perhaps even better.
The Indian economy has also begun to recover. The country’s finance minister, while presenting the budget for the year 2010-11, forecast that the rate of growth during the year will be 8.8 per cent. He believes that the country will touch 10 per cent GDP (Gross Domestic Product) increase in a couple of years. Industrial output in the fourth quarter of calendar 2009 increased by 17 per cent. Even Bangladesh is looking forward to a rate of growth of six per cent.
The picture in Pakistan is very different. The rate of increase in GDP in 200910 was about two per cent. It would have come out lower had the government not revised downwards the rate of increase for the previous year. For the current year, even the more optimistic government officials don’t expect the rate of increase to be more than 3.5 per cent. The Planning Commission is currently drafting the 10th five-year plan which will cover the period 2010-15. It would like to see growth pick up, perhaps, to five per cent average for the period. Even if this more optimistic projection is realised, the per capita income gap between India and Pakistan will widen considerably and Bangladesh could soon catch up with Pakistan. What is more worrying is that the impact on the incidence of poverty with this kind of growth rate will not be significant. This has all kinds of nasty implications for social and political stability.
Given this what should the authorities do to revive growth? There are many an swers to these questions. However, instead of listing all the imperatives for economic revival and growth, I will today focus on one contributor: increasing the economy’s productivity. The rate of GDP growth, of course, is a combination of the increase in population and the accompanying increase in the size of the work force and productivity. If the population is increasing at the rate of two per cent — Pakistan’s growth rate is said to be a bit lower than that — and total factor productivity is increasing by three per cent, the GDP will increase by five per cent.
What can be done to increase the rate of productivity of the work force? What can be done to improve the productivity of the capital employed in the economy? What should be done, in other words, to improve the efficiency of the economy?
In the spring of 2006 I had two interesting conversations on this subject with the country’s two top leaders — President Pervez Musharraf and Prime Minister Shaukat Aziz. I challenged the statements the two were making according to which their policies had put the Pakistani economy on the trajectory of high and sustainable rates of economic growth. Both had said that the Pakistani economy was in a position to increase at the rates between seven and eight per cent a year. Aziz had even persuaded the Newsweek about the validity of the story he was telling.
Calling Pakistan a “sleeping giant that was waking up”, the magazine put the Pakistani story in a large spread in one of its issues in March 2007. I told the president that it was highly unlikely that the Pakistani economy could grow at the kind of growth rates he and his prime minister were implying in their speeches. These growth rates would be possible only if the economy was operating with remarkable efficiency.
While I have not seen a recent esti mate of the efficiency of the Pakistani economy my guess is that in the current situation the ICOR (Incremental Capital Output Ratio) is perhaps as high as five to six. This means that the country has to invest five to six per cent of GDP to produce a one per cent increase in GDP.
Several types of investments need to be made in order to lower the ICOR. Of these three are particularly important: developing the human resource, improving the technological base of firms and improving physical infrastructure. In developing the 10th five-year plan the Planning Commission should clearly make provisions for these three types of investments and provide estimates of how they will increase economic efficiency.
The effects on the economy of power and gas shortages, of a poorly function ing railway system, of ports that can’t handle large ships so that cargo bound from or to Pakistan has to be offloaded in places such as Colombo and Dubai and then shipped to Pakistan, of conges tion on the roads, are apparent. What is not easily seen and hence not demanded by the citizenry are actions aimed at increasing the efficiency of the firms. Their improvement has to be the focus of public policy.
The Musharraf government appreciated at least one of these shortcomings. In the Higher Education Commission (HEC) it set up an institutional mechanism that promoted higher learning in technology and science. Much of significance was achieved.
However, as has happened so many times in the country’s history, the successor government discontinued some of the more ambitious and imaginative initiatives the HEC had taken. It is interesting to note that India has now decided to set up an HEC type of body so that the country keeps up with the advances being made in other parts of the world. Perhaps a public debate on the importance of the issues I have identified today as deserving of government attention will lend continuity to the policies once they are adopted. ¦