Our growth diagnostics

[VetDoctor]

Our growth diagnostics
Jamil Nasir

"Happy families are all alike; every unhappy family is unhappy in its own way." Leo Tolstoy’s novel Anna Karenina opens with this line. This dictum holds true not only for unhappy families; it also squarely applies to poor and developing countries which may be poor due to a variety of reasons, and such reasons may differ from country-to-country. One country may be posting low growth due to high cost of finance while another may be stuck in the low-growth trap due to low human-capital formation or poor institutional quality. It implies that uniform policy packages do not translate uniformly into growth across countries and country-specific strategies are required to address the binding constraints to economic growth. It was in this context that Prof Ricardo Hausmann, et al, of Harvard University developed a framework for identifying the binding constraints faced by a country in igniting economic growth.
Their growth diagnostics framework recognises that developing countries which have grown successfully in the past have followed some rules of good economic behaviour: like maintenance of macroeconomic stability, enforcement of property rights, improvement of human resources or of infrastructure. Moreover, neither is the one-size-fits-all strategy desirable nor is a big laundry list of policy reforms required. Instead, each country needs to identify the most binding constraints and formulate growth policies to alleviate such binding constraints. Thus, the growth diagnostics framework shows disenchantment from the “Washington Consensus” policy prescriptions, which were uniform for all the developing counties. But they worked in some cases and failed badly in others.
The growth diagnostics framework is premised on the assumption that economic growth is mainly driven by private investment. Private investment in a country may be low either due to high cost of capital or low returns to economic activity. High cost of finance is basically due to low savings. It means that either your domestic savings are low or your financial institutions lack the capacity to mobilise these savings (ie, poor intermediation) or you are not integrated with the external financial markets. But the question is: how can we determine that savings have become so low that the low level of savings has become a binding constraint to economic growth in Pakistan?
According to literature on the issue, low or high levels of savings can be determined from indicators like foreign debt, current account deficit and real interest rates. If these variables are high, then low savings are a potential candidate to become the binding constraint to growth. The foreign currency debt in terms of GDP has decreased from 46.9 percent in 1996-97 to 22.8 percent of GDP in 2011, according to the Debt Policy Statement, though overall public debt has registered a huge increase, which is estimated at 61.5 percent of GDP in 2011-12.
The current account deficit during the last ten years was not that bad except for the years 2006-7 to 2008-09 when imports were considerably high than exports. Rather, during 2001-02, 2002-03, 2003-04 and 2010-11 it was in surplus. Real interest rate in Pakistan has remained in the negative due to double-digit inflation. Foreign remittances have gradually increased despite global recession. Judged against such parameters, low savings do not seem to be the binding constraint to growth.
If low savings are not the binding constraint to economic growth, then low returns to economic activity should be the reason for lack of private investment, which is either due to low social returns or low appropriability in accordance with the diagnostic framework. Low social returns may be due to poor geography, low human capital or bad infrastructure, and low private appropriability is due to market failures or government failures – ie, governance issues. Let us analyse these factors.
Out of poor geography, low human capital or bad infrastructure, poor geography is certainly not a binding constraint. Pakistan is endowed with good soil and many natural resources and it is connected with the world through the sea as well as roads. However, regional disparities exist and different regions and provinces of the country have evolved differently in terms of growth and poverty due to ethno-linguistic fragmentations and -power structures.
As regards human capital, the literacy rate is low in Pakistan. The quality of educational institutions, especially in the public sector, leaves a lot to be desired. Returns to education in Pakistan are low, which is evident from the huge brain drain that has been taking place in the last two decades in Pakistan. Our institutions produced professionals like engineers and doctors in the past, but a large number of them migrated to the EU countries, Canada and the Middle East. In the last one decade or so, private institutions have sprung up in almost every city. New universities have been set up both in the private and the public sector. Number of scholars has been trained in the local as well as in foreign universities. Thus, low human capital is not a binding constraint now in Pakistan.
Development through infrastructure is now well recognised in development literature. Pakistan has a vast network of roads, railways, ports and dry ports. Pakistan has witnessed remarkable progress in the field of telephony in the last decade and is one of the world’s top fastest-growing telecommunication markets. Even labourers, domestic servants, shopkeepers, slum-dwellers, rickshaw drivers have cell phones. Mobile phone consumers in Pakistan are estimated at over 119 million.
“The Global Competitiveness Report, 2012-13,” has ranked the quality of roads, quality of railroad infrastructure, quality of port infrastructure and quality of transport infrastructure at positions 73, 66, 60 and 78, respectively, among a total of 144 countries ranked by the report. Power and gas outrages are certainly causing problems in industrial growth, but the key question is: is the power issue an infrastructural issue or a governance issue? It is surely a governance issue. The point is that Pakistan does not lag behind other countries of similar income and its neighbours as far as quality and quantity of infrastructure is concerned. So infrastructure cannot be construed as a binding constraint in Pakistan.
So we are now left with low appropriability of returns, which could arise due to governance and institutional failures or market failures. According to Enterprise Surveys Data of the World Bank, 2007 (updated data not available), 48 percent of firms are expected to give gifts to public officials to get things done. This figure is 37.3 percent in the case of South Asia, while for the world it is 25.3 percent. Similarly, 58.8 percent of firms are expected to give gifts in meetings with tax officials against 31.3 percent for South Asia and 15.6 percent for the rest of the world. Similar is the case with getting water and electricity connections. About 59.3 percent of firms in Pakistan identify corruption as a major constraint, according to “Enterprises Surveys of the World Bank.”
What other international reports say on this issue? “The Cost of Doing Business Report, 2013,” ranks Pakistan at 107 among a total of 185 countries. In getting electricity connections Pakistan is ranked at 171 and the average time for getting electricity connection is 206 days. In enforcing contracts, Pakistan’s rank is 155. For registering property, the report ranks Pakistan at 126.
The “Global Competitiveness Report, 2012-13,” has identified corruption and inefficient government bureaucracy as the top problematic factors for doing business. Among a total of 144 countries ranked by the “Global Competitiveness Report,” against indicators of “irregular payments and bribes” and “favouritism in decisions of government officials,” Pakistan is at positions 119 and 129, respectively. The “Transparency International Perceptions Report, 2012,” has ranked Pakistan with Kenya, Nigeria and Nepal, with a very low score of 27 on the perceptions index.
Corruption, thus, emerges as the biggest problematic area in our case. Corruption is symptomatic of poor governance and institutional failures. Poor law and order situation, extortions, kidnappings for ransom, bribery and ineffective public service delivery clearly show that institutions have become ineffective. Poor governance, rent-seeking, corruption and lack of adherence to the rule of law are a result of institutional failures. Basically, it is institutional failure that has become the binding constraint to economic growth in our case. Thus, improving governance through controlling corruption, reducing rent-seeking and reforming the public institutions should become our priority area for addressing the binding constraints arising from the institutional failures.
The writer is a graduate of Columbia University with a degree in economic policy management.
Email: jamilnasir1969@gmail.com