Move towards a new development paradigm

By Shahid Javed Burki
Monday, 14 Feb, 2011

PAKISTAN’s earlier five year development plans were based on development thinking of those times. What has generally been regarded as the most successful plan of the series — the Second Five Year Plan, 196065 — used capital accumulation as the driver of growth.
Even more, the plan put emphasis on the development of the public sector, the resources for which came not from domestic savings but from foreign capital flows.

Foreign funds were provided by a number of bilateral and multilateral development agencies, in particular the World Bank. While the plan was being implemented the bank set up a new agency, the International Development Agency (IDA), which provided funding to poor countries such as Pakistan on concessional terms. In other words, Pakistan received financial flows it required for meeting the investment targets of the Second Plan as cheap money.

The Second Plan set three traditions which remained the backbone of planning for several decades. These were emphasis on capital accumulation, development of the public sector and reliance on cheap foreign money to provide for investment. The short-term consequences of this approach were impressive. The GDP growth during the plan period more than doubled compared to the first decade after independence. This quickening in the pace of growth caught the attention of the global development community.

For some time - in the late 1960s, to be precise - Pakistan was lauded as the model of development that the developing world could and should follow. Several conferences were held outside Pakistan to communicate to the developing world the country’s extraordinary growth experience.

Pakistan’s performance was compared favourably with that of India which was then caught in the grip of what the Indian economists themselves called the “Hindu rate of growth”. While Pakistan’s GDP during the plan period had increased by an impressive 6.7 per cent a year, India was stuck at 3.5 per cent per annum rate of growth. The word about Pakistan’s success spread far and wide. A team of economists and planners from South Korea visited Islamabad to learn from Pakistan’s experience.

However all this excitement died quickly essentially for two reasons. The September 1965 war with India suddenly bought to an end the availability of cheap foreign capital for Pakistan. The Americans in particular punished Pakistan for going to war with its neighbour by holding back economic and military assistance. The country had now to fall back on its own resources which unfortunately were not plentiful.

Domestic resource generation could not meet the gap between savings and investment. The investment binge that had fueled economic growth in the first half of the ‘sixties could not be maintained. The second problem was the increasing growth and income disparities between the two wings of the country. East Pakistan (today’s Bangladesh) was left behind by the western wing. This bred enormous resentment among the citizens of that province. This resentment provoked a movement to gain autonomy for East Pakistan which ultimately led to a civil war and the birth of Bangladesh as an independent state.

It should be noted that today the rate of growth of the Bangladeshi economy is twice as high as that of Pakistan and it is well on its way to meeting the social de velopment objectives prescribed as Millennium Development Goals (MDGs). These were accepted in 2000 by Pakistan and other developing countries. Pakistan is not likely to meet these goals any time soon. The growth slump has now persisted for more than three years. The question is whether renewed development planning can reverse the process.

The answer from the new leadership in the Planning Commission is that it is possible to place Pakistan on the trajectory of growth that can be sustained over time. However for that to happen, the country will have to subscribe to a new development paradigm entirely different from the one that produced the short-term success achieved by the Second Five Year Plan. The new team of planners wants to adopt an entirely dif ferent approach.

In moving towards the new paradigm the planners have the support of economic theory. Development and growth economists have now moved away from the emphasis on capital accumulation and on moving workers from low productivity to high productivity jobs. Instead there is emphasis on improving the quality of human resource, on improving the technological base of the economy, on placing the private sector on the commanding heights of the economy, and on rewriting the role of the state in economic management. These four attributes of the new paradigm will require a massive shift in government priorities.

“Pakistan: A New Growth Framework”, the document issued by the Planning Commission last month asks for concentrating on what it calls the “soft” determinate of growth rather than those that it defines as “hard”. By soft the commission means policies that will channel savings into most productive uses thereby improving the quality of investments. There is also the belief that elements such as innovation, creativity and learning will yield higher and more sustainable growth than public sector investment. By hard the commission implies investment in bricks and mortar.

The table accompanying table provides some indication on how fast Pakistan has fallen in terms of some of the more important determinants of growth on which the new growth theory has began to place emphasis. The coun try is by far the worst performer when we examine in a comparative framework indices of innovation and quality of education. On the innovation index Pakistan is in the 79th place out of 132 countries on which data were collected by a group of researchers. On the quality of education the country ranks even lower. India, on the other hand, is on another scale altogether. Its position is closer to that of China. In fact, it scores better than China on the quality of education scale.

The conclusions that one draws from these numbers is obvious. The pay-off in terms of accelerating growth would be considerably higher were the country to invest in these areas than in a large number of “bricks and mortar” activities. In the Planning Commission’s above cited paper it is estimated that the government has 2000 projects that have been under implementation for years if not for decades. They continue to be on the books since they provide privileges such as cars, staff, and telephones – sometimes also housing – to project managers.

The amount of money that needs to be spent in order to complete these projects is of the order of Rs3,000 billion. Reappraising these projects, canceling those that are redundant or are too far from completion could save a significant amount of resource which could be redeployed in the “soft” part of the economy. Such an approach would have high dividends. I think it is right for the Planning Commission to put forward this paradigm to get the economy moving again.