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Pak Economy: Rethinking economic policies to take-off

By Dr. Noor Fatima

In the aftermath of the economic performance revealed recently; the biggest concern raised is on lower Gross Domestic Product (GDP) which will slow to 2.37 per cent after decades in Pakistan. The point is how much the GDP growth is relevant in domestic productivity? When this question is raised, it means that our command over resources in the world is measured by our real income, not by GDP. Increasing GDP rates has long been the measurement of economics development, but, in the wider sense, does GDP matter? The short term answer is yes. But with greater limitations, the actual development depends on distribution of GDP not just on increased ratio. For instance if 90 per cent of GDP is possessed by few powerful groups then the real productivity will be low and it would not make any difference what numerical figures says, of 2 per cent or 8 per cent GDP. Rather high GDP can underestimate economic development as we witness in last one decade with high GDP and low economic development.


It is only economic development which reduces the gap between rich and poor and generates economic activity, lowers the inflation rates and raises the living standards. If higher GDP was the criterion then it would have been the best assessment of infrastructure development in the country for the last one decade as a determinant of development. But it was not the case. GDP would definitely show how and where the money is spent but how it is going to transform into development, may not have much relevance unless national out put actually show improved people living standards. What matter most is do we have improve terms of trade, cheaper imports and import substitutions which raises the real income and does it have any impact on our productivity or output? Then there will hardly be difference between a cosmetic picture of high and very low GDP. The real question is what the goal of economic policy should be? Instead looking forward to the fascinating projected goals, just changes in real income would reveal the whole story of general living standards.

Nevertheless, such an statistical results does have good source of policy analysis’s for international development policy, their programs and scope which is increasingly becoming more complex, just considering the ambitious restructuring of the economy, sectoral reforms and austerity measure for stability would not have simple ‘yes’ or ‘no’ answer. IMF’s target of fiscal deficit of 4.2 per cent from 7.5 per cent of GDP was unrealistic keeping in view the fact that we have 2.2 million register tax payers in 160 million population and having lowest saving rates in the whole region. According to the conditionality this target would be achieved through gradually reducing subsidy, tightening of monetary policy, increased interest rates and tax policy reforms.

The past one year economic data shows that mostly bleak performance is the result of misguided policies. On the one side we are asked to follow the austerity measures through limiting the economic activity and on the other, to improve tax to GDP ratio. If we are going to contain the growth from 5 per cent to 2 per cent, will it not bring fall in tax revenue, having impact on growth? However, ‘stability’ not necessarily brings growth, as we witness now.

The manufacturing sector contracted by 3.3 per cent as compared to 4.8 per cent last year and target of 6.1 per cent. One must comprehend that in the past few years the major investment was in consumer services which led the demand increased for foreign exchange, therefore created more foreign exchange liability whereas it did not generate adequate funds of foreign exchange revenue as it could not develop capacity for export, which is ultimately source of foreign exchange. No doubt as a result of these policies economic growth decelerated last year.

The economy is simply not able to “take off” and equitable resource distribution. Now probably we know more about what William Easterly, an eminent economist has said that Pakistan has “growth without development”. No doubt we have a distortive economic picture but considering the fact that Pakistan’s economic policy can’t be independent of mounting burden of high debt servicing, so on given low performance one must not wonder. Nevertheless, this brings the country to the point where it is compelled to address the economic structural issues in coming financial year. 

The IMF’s loan supports has two key objectives: (i) restoring macroeconomic stability and confidence in the economy through a significant tightening of macroeconomic policies, and (ii) ensuring social stability and adequate support for the poor. Recent analysis of economic performance shows that tightening of policy did not show result as FBR could only secure 9 per cent tax to GDP ratio. Similarly there is a decline from last year’s growth of 22 per cent in overall investment. The Survey revealed that “gross fixed capital formation could not maintain its strong growth momentum and real fixed investment growth contracted by 6.9 per cent.” Similarly private investment is decelerating to 13.2 per cent in 2008-09 from 15 per cent, Public sector investment to GDP ratio which was on raise from 4.0 per cent in 2002-03 to 5.6 per cent in 2006-07, declined to 4.9 per cent in 2008-09.

It goes without saying that present economic assistance did help in country’s economic illness and took it out of crises situation but fact remains that recovery is and stability needs rethinking of economic policy issues. The experience of Pakistan’s failed ‘take-offs’ in the past show that the solution of economic puzzle is not in aid and consumer financing but mobilisation of domestic resources through progressive taxation ,manufacturing for import substitution and export of high value added goods, in order to achieve sustainable development.

But international community needs to comprehend that the best solution is not giving more aid and financial assistance to Pakistan but to put our people to work through productive activity. The liberalising trade under loan conditions hurts more than it helps. The industrialists keep on increasing import bills while tariffs on local goods are much higher than many other countries even in America. Consequently with enormous increases in fiscal deficits, the government is left with no option but to opt for financial assistance. The government needs “trade first” not ‘aid first” along with tariff consideration for it to have access on international markets. A road map focusing on Small and Medium, Scale Enterprises (SMEs) in next financial year is crucial, it would help in domestic resource mobilisation. Given the fact that the private sector needs to be encouraged for investment in the present economic scenario of Pakistan. The SME sector has the potential if supported with soft credits with low interest rates to give a boost to encourage the private sector investment.

Unfortunately, the loan and foreign assistance is not for capital intensive activity, therefore, no investment has been made in heavy industry so far for the last 50 years, except for the steel mill. SMEs will generate a local market for heavy industry and can play role in import substitution for raw material of heavy industry.

From this standpoint, the growth figures have been faster then the development standards for last one decade in Pakistan. How much more GDP is needed? The numerical estimates may not necessarily an accurate measure of productivity. Perhaps a more realistic standard of estimation is the standard of living of average citizens, in order to know, how valuable is the increase in GDP? The answer the government would find in the analysis that this modern economic growth measurement has taken it off the scale of standard of living and productivity. This is the time to be realistic about the concluding thought that the country needs to get away from rule-of-thumb economics when practicing policy advice. Unless the government mobilises our domestic financial resources, no structural reforms for liberalisation, market economy and openness of trade would produce economic growth and sustainable economic development. Pakistan needs to take economic measurement more seriously for a well sound policy analysis in development.

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