What is economic development?

Nobody can disagree with the emphasis of the government on accelerating economic development both in its official documents and in public statements by leaders. But there is a major problem with the definition and scope of economic development used by the government and the policies that are being pursued to achieve it.

The government defines economic development in traditional terms of the rate of growth of the Gross National Product (GDP) but as Amartya Sen, a well-known economist of Indian origin, had pointed out long time ago “economic growth is one aspect of the process of economic development”. The World Bank uses several indicators to evaluate economic development in a country, including distributional aspects of income growth, level of education, healthcare facilities, access to clean water and several other aspects of economic and social lives of the people.

Similarly, the government mentions its allocation of budgetary resources for development as an indicator of its commitment to economic development. But the level of development expenditure is only one of the determinants of the rate of economic growth. The composition of expenditure and efficiency of its use are of equal importance for the quality and quantity of economic development. Viewed in this broader perspective, the vision and performance of the PML-N government is not very encouraging.

The prime minister talks about mega infrastructure projects in the public sector as symbols of economic development. But excessive allocation of scarce resources to prestige projects like modern airports, multi-lane motorways, bullet trains and western-style transportation systems to the neglect of education, health and skill development of the people does not represent or promote economic development.

Even if expenditure on mega projects shows up in the calculation of the GDP, and accelerates its growth, it is of no relevance to the majority of the people. The motorways that will connect Lahore to Karachi and Gwadar to China may become symbols of progress for the government, and showpieces for the rest of the world, but will not help the majority of the people improve their economic and social lives. The same resources could be put to a much better use for the uplift of the masses.

Similarly, the government is right in stating that an increase in private sector investment is an important factor for economic development. However, it is equally important how this investment is brought about. The government’s preoccupation with pampering the business community with tax concessions, provision of cheap credit, maintenance of an overvalued nominal exchange rate and introduction of schemes for whitening the black money through tax amnesty is in fact counterproductive for a broadly-defined process of economic development.

The government cannot pull the country out of its present recession in output growth and inflation in prices without adopting a broad-based strategy of economic development that involves commodity-producing sectors all over the country and benefits all segments of the population. Moreover, economic development should be gauged not by GDP growth or per capita income but by the economic and social indicators affecting the lives of the majority of the people.

The majority of the population is living at or close to the poverty line and suffering from high unemployment, rising inflation and inadequate public sector expenditure for provision of food, shelter, health, education, clean water and cheap transportation. In this context, the government’s decision to set aside a large amount of expenditure for mega projects is economically wrong, socially harmful and politically indefensible, and refutes the government’s commitment to economic development in its broad sense.

The real developmental task of the government is to find ways to scale back hunger, disease, child malnutrition, illiteracy and poverty. This cannot be done without shifting the priorities of public sector expenditure away from unproductive activities and revenue-guzzling mega projects to those areas that give the highest rate of social return.

There is a consensus among economists that the social rate of return from expenditure on education, health and other social services that benefit the vast majority of the population is much higher than that on mega projects that either cater to the needs of the rich and powerful or satisfy the imperial instincts of the rulers.

Moving from the expenditure to the financing side, the means of financing of public sector expenditure are equally important for sustained economic development. At present the government is using three sources of expenditure financing. Those consist of direct and indirect taxes collected mostly from the poor, printing of excessive currency notes which fuels inflation and hurts the poor most and external borrowing that would be serviced and repaid by taxing the poor. All of them individually and collectively impede the process of economic development.

The government has shown no awareness of the fact that taxation policy plays a key role in economic development. It is of fundamental importance to rely on a fair and progress tax system that generates tax revenue according to the ability to pay of the people. It needs to adhere to the principles of horizontal and vertical equity taught in public finance classes in all institutions of learning in the world. Such a taxation policy requires a professional – and not an administrative or political – approach to taxation and needs to be handled by fiscal experts rather than by accountants and tax collectors.

Horizontal equity means that all citizens earning income from whatever source at a given level must be taxed equally; vertical equity means that the marginal effective tax rate should be higher at higher incomes. The incidence of taxes, both direct and indirect, must fall according to the ability to pay. But at present the incidence of taxes is falling mainly on the poor and salaried lower middle class who have the least ability to bear it and their living standards are being eroded further by its heavy burden.

Superimposed on the regressive incidence of taxation is the burden of inflation that is a hidden tax on the poor and the lower middle class. There is a general consensus that inflation hurts the poor and low income groups most and printing excessive money to meet government expenditure generates inflation. It not only implicitly taxes the poor and lower income groups and subsidises the rich, but also promotes misallocation of resources and creates social and political conditions that are not conducive to economic development and good governance.

In Pakistan, every government has avoided taxing the rich and powerful and used ‘inflation tax’ as a substitute for a fair and comprehensive tax system. Inflation promotes income inequalities and retards economic development. But the PML-N government is sustaining inflation in double digits – even if they do not show it in official price statistics – by borrowing excessively from the domestic banking system with all its adverse consequences for economic development.

Finally, the use of direct foreign investment and selective foreign borrowing determined by the repayment capacity of the government can help accelerate the process of investment and economic development. But indiscriminate and excessive foreign borrowing not only make the balance of payments vulnerable, which stands in the way of economic development, but also limit the future capacity of the country to maintain a reasonable rate of economic development. By now, Pakistan has reached a stage in foreign borrowing where it impedes rather than facilitates economic development.


In view of the heavy burden of external debt, the PML-N had made a commitment during elections to reduce dependence on foreign begging and borrowing. So far it has moved in the opposite direction, adding to the complexity of economic management and to the burden of external debt.

The prime minister recently pointed out in a public address that his government was engaged in two wars – one against terrorism and the other against economic difficulties. His government has authorised the professional army to eradicate terrorism from the country. It is to be hoped that he will also adopt a professional approach to economic management in order to achieve economic development in its broad sense on a sustained basis.

The writer is a former governor of the State Bank of Pakistan. Email: doctoryaqub@hotmail.com