Improving governance to produce growth
By Shahid Javed Burki
Monday, 28 March, 2011
PAKISTAN’s economy has currently settled on a low-growth path. The average rate of GDP increase from the time the country become independent to the present – a period of almost 64 years – was five per cent a year. As a result, the economy is 19 times larger than the size with which it was born.
Since the population during the same period increased at an average rate of 2.6 per cent per annum, income per head of the population grew by a 2.4 per cent a year.This was a respectable rate of increase in personal income which allowed the country to keep a much smaller proportion of a considerably larger population out of poverty.
There are no reliable estimates of the number of people who were absolutely poor in 1947 when the country was born. What is known though is that the areas that currently make up the Pakistani state were much poorer compared to those that became independent India. Then, the proportion of the poor in the population of British India was estimated by economists at 40 per cent.
It was in fact, this number that led to the expression “the bottom 40 per cent” to refer to the society’s poor. Given these estimates, it would not be seen as an exaggeration to suggest that at the time of its birth some 55 to 60 per cent of the population of 30 million – or 17 to 18 million people were absolutely poor at the time of the country’s birth.
A number of estimates are available for the current level of poverty in the country. If we settle for a proportion of 35 per cent of a population of 180 million in 2011, the size of the pool of poverty can be said to be 66 million. In other words, the population since independence has increased six-fold while the pool of poverty has grown four-fold. Therefore, in broad historical terms, Pakistan’s economic performance if viewed in the context of its impact on poverty can be viewed as satisfactory – but not outstanding.
Growth is essential for the alleviation of poverty. Empirical work done at the World Bank indicates that the rates of increase in GDP need to be twice as high as the rate of increase in population for the proportion of the poor to remain about the same. It could be a bit higher if the distribution of income is more skewed than is normal for developing countries. It could be lower if the national income is more evenly distributed.
For a significant charge in the incidence of poverty to occur, the rate of increase in GDP has to be at least three times the rate of growth in population. Applying these ratios to Pakistan’s case, a GDP increase of four per cent a year (about twice the increase in the rate of population) could keep its incidence of poverty at about the same level as it in today – about 35 per cent. Anything lower would increase the incidence, anything higher would result in its reduction.
An urgent task before the policymakers, therefore, is to reverse the current trend and get growth going again.
What are the determinants of growth has been and continues to be a subject of central interest for those who are pursuing the disciplines of growth and development economics. In Pakistan’s case it is well understood that the economy must save more and invest more in order to get sustained growth embedded in the economic system. It is also now realised that by improving the quality of human capital it is possible to get more growth out of the same amount of investment.
It is possible to lower the incremental capital out ratio (ICOR) – the percentage of national income that needs to be invested to produce one percentage point of increase in gross domestic product – by introducing efficiency into the production system. The production system becomes more efficient if transaction costs are reduced, by allowing inefficient firms to exit and by allowing new firms to enter. It is also important to improve the technological base of the economy.
For that to happen the state must invest more in education and also provide resources for activities that go under the name of research and development. Finally, there is a positive relationship between the ratio of trade to gross domestic product and the rate of increase in national income.These are all some of the elements in growth economics. When the state promotes all of them simultaneously the result can be very rewarding. It is the emphasis on these factors in the production function that produced some of the many miracles in East Asia.
However, somewhat less understood is the relationship between the quality of governance on the one side and growth and poverty alleviation on the other. That good governance is essential for promoting growth, alleviation of poverty and improving income distribution is a realisation that has come only recently to development economists.
Numerous indices (developed by the World Bank) into which the term governance has been divided, can be assembled into essentially three categories of activities: responsibility, deliverability and accountability. The extent of the state’s responsibility for delivering services differs, determined by tradition, history and how effective are people in exercising their influence on policymakers.
Generally the failure of nonstate institutions to deliver what people desire leads to an extension in the reach of the state. The reverse is also true as the failure of the state to provide what were once regarded as its core functions were taken over by non-government institutions.
In most of mainland South Asia - but in Pakistan in particular - the private sector has stepped in to provide quality education to the segments of the population that have the means to pay for it. Where such means were not available, religious schools-generally going by the name of “madrasses” have become active.
Consequently Pakistan now has a segmented educational sector with the public sector catering for the needs of three-fourth of the school-going population, privatesector schools serving a fifth of the population and religious seminaries taking care of the remaining five per cent. This division of responsibilities will have serious social, political and economic consequences. Some of these have already begun to manifest themselves.
Currently Pakistan is poorly governed. A strategy aimed at improving growth performance of the economy must direct its attention to improving these three dimensions of governance. Failing to do that would mean that the resources of the state would be largely wasted, the rate of growth will remain sluggish and incremental income would continue to be distributed inequitably. If this happens over an extended period of time the result can be the types of revolutions we have seen erupting on the Arab streets.