Yet another half decade lost-- A Must Read.

Invincible · #1 Tuesday, May 29, 2012

By: Dr Ashfaque H Khan

Some economists in Pakistan have referred to the 1990s as a lost decade for the country. In recent years, Pakistan has lost yet another half decade (2007/08-2011/12). While many developing countries took policy initiatives to address the challenges that emerged after the onslaught of global financial turmoil and unprecedented surge in food and fuel prices, Pakistan continued to lurch from one crisis to another, largely of its own making.

Consequently, the country has seen its economic growth slowing, investment rate plummeting to a new low, domestic saving rate and foreign investment vanishing, industrial growth stagnating at almost nil growth, fiscal indiscipline escalating, public debt more than doubling, inflation persisting at double-digit, and the rupee losing more than one third of its value. Additionally, poverty and unemployment have risen, and the PSEs are continuing to bleed and consume large amounts of tax-payers’ money. Most importantly, people are losing faith, professionals are migrating and businessmen are relocating their business abroad.

Yet another half decade is lost. Pakistan’s neighbours are progressing by leaps and bounds. And the economic growth of Pakistan’s neighbours has averaged in the range of 5.5 percent (Maldives) to 9.3 percent (Bhutan) with Bangladesh, India and Sri Lanka growing at the rates of 6.2 percent, 7.8 percent and 6.5 percent respectively during the last five years. Pakistan, on the other hand, has grown at an average rate of 3.0 percent per annum over the same period. As a result of the loss of half a decade of economic potential and enterprise, Pakistan has become a sick man of South Asia.

What has gone wrong over the last five years? How did Pakistan reach such a pathetic economic condition? How did a country growing at an average rate of almost 7.0 percent per annum during the previous five years, regarded as one of the four fastest growing economies in the Asian region, and joining the club of the ‘next-eleven’ lose growth momentum at an unprecedented pace?

It is true that the present government took charge of the state of affairs in a difficult external environment, which included the unprecedented surge in food and fuel prices and the onset of global economic meltdown. Such an environment was common to all the developing countries including the neighbours of Pakistan. Most of the developing countries witnessed their economic growth slowing in 2008-09, but experienced a V-shaped recovery in 2009-10.

One thing that differentiated Pakistan from other developing countries is that it also experienced multi-dimensional challenges, most of which were of its own making, besides an inhospitable external environment. These challenges included the intensification of war on terror, deteriorating security environment, persisting political instability, worsening of energy crisis, instability in the economic team, fiscal indiscipline, deteriorating governance, a weak and frivolous economic team, and little or no interaction of the government with the private sector.

Fiscal indiscipline, energy crisis and a weak economic team appear, amongst other factors, to be the root cause of Pakistan’s economic meltdown. Consequently, investment rate decelerated sharply from 22.5 percent of GDP in 2006-07 to 12.5 percent in 2011-12 – a loss of 10.0 percentage point in five years. At 12.5 percent, investment is the lowest in the last 60 years. Real fixed investment has been registering a negative growth for the last four years in a row. It has declined at an average rate of 6.1 percent per annum in the last five years. Private and public sector investment registered negative growth to the tune of 5.3 percent and 11.7 percent; indeed, respectively.

Investment is critical to economic growth. A rapid decline in investment is bound to decelerate economic growth. Real GDP, as expected, grew by an average rate of 3.0 percent per annum over the period of half a decade. The two important components of GDP that is agriculture and manufacturing grew by 2.2 percent and 2.7 percent per annum, respectively. In fact large-scale manufacturing grew at an average rate of 0.7 percent. Construction and finance insurance registered negative growth of 0.2 percent and 0.7 percent, respectively.

What is interesting to note is the growing contribution of social services in GDP. It has ‘mysteriously’ grown at an average rate of 8.0 percent per annum, and has accordingly emerged as the fourth largest component of GDP after agriculture, manufacturing and wholesale and retail trade. This sector is now greater than transport, storage and communication, finance and insurance, and public administration and defence. Surprisingly, the share of social services in GDP has surpassed the contribution of large-scale manufacturing. I would urge the Pakistan Bureau of Statistics to look into the measurement issue, lest it totally distort the national accounts of Pakistan. If we adjust the contribution of social and community services, Pakistan’s real GDP has grown at an annual average rate of 2.4 percent during the last five years – almost equal to the country’s population growth rate.

Declining investment and slower economic growth for half a decade are bound to create less jobs, thus giving rise to unemployment and poverty. The government has neither released the poverty numbers nor the basic data in fear of being castigated by the people. Given the sharp decline in investment and poor economic growth, even a layperson would acknowledge the rise of unemployment and poverty. Another outcome of declining investment rate and slower economic growth is the sharp decline in domestic saving rate (5.8% of GDP) – the lowest in the history of the country.

The route to the revival of economic growth passes through fiscal discipline and resolution of energy crisis. A strong economic team injecting financial discipline and addressing the energy crisis with political support can revive economic growth in the medium-term. Up till today, the country has lost half a decade. We must not allow another precious five years to be lost in the same way.

The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan @nbs.edu.pk

http://www.thenews.com.pk/Todays-New...lf-decade-lost

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