New economic model needed for sustainable development in Pakistan

By Dr. Noor Fatima

 Our growth strategy has failed, it is a fact, but do we require another serious crisis to grasp this piece of information?  In the prevailing economic scenario, it becomes mandatory for one to be fully aware of what went wrong historically in the country’s economic planning. In reality there is a lack of consensus about the nature of economic development that is required in this state, though all the political parties and economic managers share the basic assumption that economic growth should be a long term, continues process and for a country to be able to survive in the global economy, a competitive edge in the international market is vital.  

Pakistan’s long history demonstrates our disregard for economic institutionalization of this country. We are aware that institutions matter the most to have an impact on the global market, but how do we develop these institutions? We comprehend that ‘opening of markets’ is significant to expand trade, however we tend to be lost when it comes to the kind of markets that need to be functioning.

The economic minds for the last several decades in all their economic theories have tried to address the question of what determines economic development and growth. David Ricardo based his theory on the law of diminishing returns, which explains that when increased quantities of a variable factor are added to a fixed factor, then each additional output that is produced becomes continually lower. Karl Marx, a revolutionary philosopher believed in the concept of change. He believed in the transition of the working class society from capitalism, where proletarians as a progressive class take over from bourgeoisie. W. W. Rostowis was of the opinion that economic modernization occur in five different stages; the traditional society, preconditions for takeoff, the take off, the drive to maturity and age of high mass consumption. Furtadois basic thesis was that underdevelopment does not mean traditional or non- modern economic, political and social institutions, but subjection to the colonial rule and imperial domination of foreign powers. The Harrod-Domar model suggests that the economy’s growth rate depends on the level of saving and the productivity of investment (i.e. capital-output ratio). It concluded that the economic growth depends on the amount of labour and capital. Since least developed countries (LDCs) often have an abundant supply of labour, it is a lack of physical capital that holds back economic growth and development. More physical capital generates economic growth.

Lewis also proposed his dual sector development model based on the assumption that many LDCs have dual economies, with both a traditional agricultural sector and a modern industrial sector. He argued that economic growth requires structural change in the economy, whereby surplus labour in traditional agricultural sector with a low marginal product migrate to the modern industrial sector with high rising marginal product. In the 1970s, dependence theories were developed on the basis that obstacles to development were primarily external in nature, rather than internal. The developing countries were viewed as politically and economically dependent on the most developed countries and the responsibility for lack of development within the least developed ones rests with the developed nations. Last but not the least, the Neoclassical theory emphasizes corruption, inefficiency, and a lack of economic incentives within developing countries as being responsible for the lack of development. It maintains that economic growth is caused by an increase in the labour quantity, improvements in the quality of labour through training and education, increase in capital (through higher savings and investment) and improvements in technology. However, this theory promotes unrealistic assumptions, such as that the creation of a free market and a private enterprise culture is possible and desirable. The existence of market failure, such as externalities associated with economic growth are ignored along with the problem of uneven income distribution.

In the case of Pakistan, it shows that no specific economic theory has been strictly followed to create an economic vision and a developmental model. Thus, Pakistan has suffered on fiscal and monetary accounts, throughout its economic history. Despite this, the economists in the 1960s tried to develop an economic framework in the absence of local economic professionals and they gave an idea of an economic model which was mainly based on the important roles of the government, donors and external experts in development planning.  

It was an extension of Keynesian’s post-war economic doctrine and was followed by the dependency theory. Whether it was a ‘big push’ for development or a ‘trickledown theory’, it could not prove to make better Pakistan’s economic conditions, in the absence of affluent economic resources and economic activity. The expansion of the government sector worked as non-development expenditure increased, in addition to the size of foreign debt. However, grants were substantially reduced by the 1970s and 1980s. The openness of the economic borders and markets in the 1990s following the agenda of the Washington consensus required a dynamic and vibrant private sector to generate economic activity.

It is well known that markets by themselves cannot provide an economic plan. There was a dire need to develop the country’s competencies, resources and effectively formulating the economic priorities. The manner by which the economic policiesí objectives could be met remained a disengaged factor of the countryís economic planning.

Economic planning considers the relationship between economic development and quality of life. A successful planning should be well articulated with a shared vision of where we want to be in future. Our development plans lack this vision. To be successful, economic development must function as a part of the whole socio-economic environment which is not static and is evolving in the globalized world. However, the core purpose of planning can be based on enhancing all the factors of production’s capacity. Resource mobilization can be a source of creating wealth, but economic development is a practice through which extensive emphasis is laid on the process only.

Therefore, confusion should not prevail between these two distinct applications. The economic planning and development process focuses on certain issues, such as where we are at the precise moment in time, where we want to be and just how do we get there? Effective economic planning needs to be cognizant of the economic changes around the world and should state clearly the opportunities and threats. It should be based on well thought and researched ideas and a countryís economic institutions can be a part of the planning and decision making process. They can also provide input on the solution for development within a nation, as it should not to be left  to the bureaucratic structure only.  

Our existing bureaucratic structure has become so preoccupied in maintaining their own sphere of influence that their level of interaction tends to be minimal. How the budget, planning reports, strategies and economic plans at the national level is prepared with coordinating efforts and thorough discussion with other related departments and stakeholders, will explain the depth of the economic planning. The result is a deeply divided and tedious planning structure.

Thus, disconnected planning makes it difficult to devise an economic policy and even more complex to implement it. Take for example, the tax department produces new policies in close discussion with the international financial institutions (IFIs), but rarely have these policies benefited the economic activity of the country. The development planning is largely influenced by the political vested interests and is not consistent with the national output of the economy.

Even after more then 6 decades of independence, we remain caught up  on the kind of economic system and planning we should or should not have. This is the reason why we are facing a large fiscal deficit, imbalance in the tax-to-GDP ratio and a debt problem. Will it take a miracle to improve the present situation? It is true that all the determinants of economic growth are interdependent and an essential part of economic planning, whether it is human capital development, innovation, private sector development etc. requires institutions. It is not something new that the economic model requires a broad-based restructuring.

A new economic model must unambiguously address the fundamentals of growth and development and the IFIs are unlikely to address the economyís structural problems. We need to develop an alternative strategy to promote an equitable society and we have to eliminate the inequality of resources and opportunities, which have already crossed a high limit in our society.

http://jang.com.pk/thenews/jan2010-weekly/busrev-18-01-2010/p8.htm

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