Joining G-20 by 2030
The realisation of this potential depends on transformation of the economic structure
The writer is director general of the Trade Dispute Resolution Organisation at the Commerce Ministry
Pakistan is likely to become the world’s 20th largest economy by 2030, outpacing Thailand, Australia, Malaysia, Poland, South Africa and the Netherlands. This has been predicted by the international management consultancy PricewaterhouseCoopers (PwC) in its report titled ‘The World in 2050’. The finance minister in his budget speech 2017-18 underscored the “need to redouble our efforts to join the top 20 global economies even earlier than already predicted 2030.”
The PwC lists Nigeria, Vietnam and Pakistan as fast-movers over the next 35 years but with the caveat that the “projections should be seen as indicating the potential for growth, rather than a guarantee that this potential will be realised.” In Pakistan’s context, many of such projections have eluded us in the past due to the failure to harness the potential with a clearly charted road map and a coherent strategy to nestle the growth.
The World Economic Forum divides national economies into three successive stages of economic development — factor-driven, efficiency-driven and innovation-driven. At the first stage of economic development, ie, factor-driven, the economies compete primarily on factor endowments — labour and natural resources — and the enterprises compete on price because they trade basic commodities. At the efficiency-driven stage, the competitive advantage is characterised by efficiency in production processes and increased product quality. The economies focus on manufacturing and are susceptible to external demand shocks. At the innovation-driven stage, the most dominant source of competitive advantage is the ability to produce innovative products and services, the clusters become the engines of productivity, the institutions and incentives support innovation and the enterprises compete on the basis of advanced skills, latest technologies and innovative capacity.
Global Competitiveness Report classifies Pakistan as a factor-driven economy, featuring at rank 122 out of 138 economies in the Global Competitiveness Index (GCI). Pakistan’s entry to the G-20 club vitally depends on transition from the factor-driven stage to efficiency-driven and eventually innovation-driven. The transition, in turn, is contingent upon the ability to organise reforms at three levels — structural, institutional and enterprise level.
At the structural level, the critical reforms required are fiscal consolidation, higher savings and investments, and export-led growth. The fiscal consolidation is essential to stop the annual loss of Rs3.3 trillion in tax revenues. The IMF estimates a potential of 22.3% tax-to-GDP ratio, from its current level of 12.6% through reforms. The dual trap of low saving-investment and investment-GDP ratios needs to be broken as it seriously hinders the growth potential — low savings reduce the availability of investible capital and low investment makes the growth unsustainable. Pakistan with 15.78% investment-to-GDP rate is at rank 150 out of 173 economies and at 123 out of 170 economies in savings-to-GDP ratio.
Similarly, exports, currently an outlier in the economic growth, need to take the centre stage of the economic growth model. Since 2003, Pakistan’s share in global market has declined by 18%, whereas that of India and Bangladesh has more than doubled. The exports-to-GDP ratio has decreased from 16.72% to 10.59%, the lowest in three decades. The realisation of the target of 12% exports-to-GDP, as mentioned in the budget speech, depends on addressing the short-term issues of competitiveness of the incumbent export sectors but requires long-term structural reforms to transition from the factor-driven sunset sectors to efficiency-driven and innovation-driven sunrise sectors.
At the institutional level, the reform of the institutions — political, economic, legal and social — is crucial for creating an ‘enabling environment’ which incentivises efficiencies, innovation and entrepreneurship. A symbiotic relationship between the public and private sector institutions is critical for boosting productivity. “If you want to predict the prosperity of a country, just look at its institutions,” underlines the World Economic Forum. Pakistan’s ranking on institutional pillar of GCI has drastically declined from 79th in 2006 to 111th in 2016, signifying the institutional decay during the last decade. Out of the 138 economies, the comparative ranking of Pakistan’s institutions leaves a lot to be desired — Intellectual Property Organisation (109), Auditor General of Pakistan (121), National Electric Power Regulatory Authority (121), Higher Education Commission (115), Competition Commission of Pakistan (96), Customs (113), State Bank of Pakistan (101), Securities and Exchange Commission of Pakistan (106) and Trade Development Authority of Pakistan (135).
The third level of reform, ie, enterprise level is a sine qua non for a sustainable and inclusive economic growth as the private enterprises are the main instruments of job creation and poverty eradication. The private sector in Pakistan is not known for its vitality to compete in the international market. An institutionally-feeble environment has developed a private sector that is unable to compete on the basis of efficiency and productivity, and thrives on policy capture, state handouts, competition-eroding state interventions and excessive protection. The development of a pro-growth competitive private sector requires a conducive environment which encourages the entry of new firms, supports increased entrepreneurial capacity-building and promotes efficiency and productivity through competition. The architecture for such enabling environment is provided by an integrated policy regime which encompasses industrial, agricultural and competition policies, legal and regulatory framework, investment climate and good governance.
The projection of Pakistan becoming the 20th largest economy by 2030 only underlines the inherent economic potential of the country. The realisation of this potential depends on transformation of the economic structure from factor-driven to innovation-driven economy which in turn depends on the ability to create an environment conducive to development of a competitive private sector, the strengthening of institutional framework and structural reforms.
Published in The Express Tribune, July 19th, 2017.
The PwC lists Nigeria, Vietnam and Pakistan as fast-movers over the next 35 years but with the caveat that the “projections should be seen as indicating the potential for growth, rather than a guarantee that this potential will be realised.” In Pakistan’s context, many of such projections have eluded us in the past due to the failure to harness the potential with a clearly charted road map and a coherent strategy to nestle the growth.
The World Economic Forum divides national economies into three successive stages of economic development — factor-driven, efficiency-driven and innovation-driven. At the first stage of economic development, ie, factor-driven, the economies compete primarily on factor endowments — labour and natural resources — and the enterprises compete on price because they trade basic commodities. At the efficiency-driven stage, the competitive advantage is characterised by efficiency in production processes and increased product quality. The economies focus on manufacturing and are susceptible to external demand shocks. At the innovation-driven stage, the most dominant source of competitive advantage is the ability to produce innovative products and services, the clusters become the engines of productivity, the institutions and incentives support innovation and the enterprises compete on the basis of advanced skills, latest technologies and innovative capacity.
Global Competitiveness Report classifies Pakistan as a factor-driven economy, featuring at rank 122 out of 138 economies in the Global Competitiveness Index (GCI). Pakistan’s entry to the G-20 club vitally depends on transition from the factor-driven stage to efficiency-driven and eventually innovation-driven. The transition, in turn, is contingent upon the ability to organise reforms at three levels — structural, institutional and enterprise level.
At the structural level, the critical reforms required are fiscal consolidation, higher savings and investments, and export-led growth. The fiscal consolidation is essential to stop the annual loss of Rs3.3 trillion in tax revenues. The IMF estimates a potential of 22.3% tax-to-GDP ratio, from its current level of 12.6% through reforms. The dual trap of low saving-investment and investment-GDP ratios needs to be broken as it seriously hinders the growth potential — low savings reduce the availability of investible capital and low investment makes the growth unsustainable. Pakistan with 15.78% investment-to-GDP rate is at rank 150 out of 173 economies and at 123 out of 170 economies in savings-to-GDP ratio.
Similarly, exports, currently an outlier in the economic growth, need to take the centre stage of the economic growth model. Since 2003, Pakistan’s share in global market has declined by 18%, whereas that of India and Bangladesh has more than doubled. The exports-to-GDP ratio has decreased from 16.72% to 10.59%, the lowest in three decades. The realisation of the target of 12% exports-to-GDP, as mentioned in the budget speech, depends on addressing the short-term issues of competitiveness of the incumbent export sectors but requires long-term structural reforms to transition from the factor-driven sunset sectors to efficiency-driven and innovation-driven sunrise sectors.
At the institutional level, the reform of the institutions — political, economic, legal and social — is crucial for creating an ‘enabling environment’ which incentivises efficiencies, innovation and entrepreneurship. A symbiotic relationship between the public and private sector institutions is critical for boosting productivity. “If you want to predict the prosperity of a country, just look at its institutions,” underlines the World Economic Forum. Pakistan’s ranking on institutional pillar of GCI has drastically declined from 79th in 2006 to 111th in 2016, signifying the institutional decay during the last decade. Out of the 138 economies, the comparative ranking of Pakistan’s institutions leaves a lot to be desired — Intellectual Property Organisation (109), Auditor General of Pakistan (121), National Electric Power Regulatory Authority (121), Higher Education Commission (115), Competition Commission of Pakistan (96), Customs (113), State Bank of Pakistan (101), Securities and Exchange Commission of Pakistan (106) and Trade Development Authority of Pakistan (135).
The third level of reform, ie, enterprise level is a sine qua non for a sustainable and inclusive economic growth as the private enterprises are the main instruments of job creation and poverty eradication. The private sector in Pakistan is not known for its vitality to compete in the international market. An institutionally-feeble environment has developed a private sector that is unable to compete on the basis of efficiency and productivity, and thrives on policy capture, state handouts, competition-eroding state interventions and excessive protection. The development of a pro-growth competitive private sector requires a conducive environment which encourages the entry of new firms, supports increased entrepreneurial capacity-building and promotes efficiency and productivity through competition. The architecture for such enabling environment is provided by an integrated policy regime which encompasses industrial, agricultural and competition policies, legal and regulatory framework, investment climate and good governance.
The projection of Pakistan becoming the 20th largest economy by 2030 only underlines the inherent economic potential of the country. The realisation of this potential depends on transformation of the economic structure from factor-driven to innovation-driven economy which in turn depends on the ability to create an environment conducive to development of a competitive private sector, the strengthening of institutional framework and structural reforms.
Published in The Express Tribune, July 19th, 2017.