Growth sans development: A perspective on Pakistan

Impact or results of a policy in turn require political will and a strengthened process of democratic decision-making.

Does growth automatically bring about development? This is a question that has boggled social scientists for ages. While growth has been termed a necessary condition for poverty reduction and human capital accumulation, there are instances in economic history where growth has failed to bring about poverty reduction. Also important are cases where improved human capital has not led to an increase in national income. Historically, the incidence of poverty has tended to decline most when economic growth was high and increase when economic growth was low.

In Pakistan, every episode of high growth was followed by a significant decline in poverty, while the low growth incidences subsequently translated into a rise in poverty headcount. The slowdown in economic growth since 2008 to 20011 has percentile impact on the poverty situation. Though latest estimates on poverty are not available, anecdotal evidence suggests substantial increase in poverty over the last three years. The latest data points out that real per capita income during 2011 compared with 2010 has stagnated, which, combined with a high food inflation rate of 18.2 per cent, indicates deterioration in the incidence of poverty. Thus, the nexus between poverty and growth is quite clear (i.e. the higher the growth, the lower the poverty and vice versa).

Growth in Pakistan’s economy has historically been driven by the level of public investments. Volatility in GDP growth also marred the provision of quality social services. Since the poor are strongly reliant on public social services, this has particularly adverse impacts on the poor. Indeed, the most vulnerable sections were the poor.

While higher growth is a necessary condition for substantial poverty reduction, in low-income countries, it is not always sufficient. The absence of economic growth is almost certain to result in large public budget deficits, a reduction in the basis for investment in health and education, and increased dependence on development assistance. However, poverty reduction requires a pattern of growth that enhances the ability of the poor to contribute to and benefit from the growth process. Economic growth has to be broad based if it is to result in poverty reduction and a fair distribution of resources. The need now is to: Improve the functioning of the domestic markets by reducing distortions; create space for entrepreneurs; and empower youth and communities by enhancing social capital and connectivity. Such a framework encourages inclusive growth by offering a competitive and less regulated environment to create opportunities for businesses and hence employment. Thus to provide job opportunities to the masses, there is a dire need to put the economy on the path of sustained and broad-based growth that depends on improvement in factor productivity and not on mere factor accumulation alone.

Unlike the previous growth regimes which were complimented by incentives for specific sectors and distorted market interventions that eluded poverty alleviation, the new framework should focus on market-based and inclusive growth that is sustainable over the long run. Likewise, it should address the issue of fiscal discipline by suggesting that the government’s footprint be minimised. The recent wave of inflation that has pushed many poor households below the poverty line is the consequence of government borrowing for providing subsidies, bailing out public sector enterprises and carrying out projects (many of which could be carried out by the private sector). The high growth during 2002-2007 that was the result of relatively high consumption had resulted in deteriorating both the external and internal account. Therefore, to put the economy on a sustained path of high growth requires structural changes. To achieve this end, Pakistan needs to implement a growth strategy that relies on improvement in investment and exports. This would require export diversification and a move from the existing low-value added exports to high-value added products for which income elasticity of demand in the world market is increasing.

Finally, whatever strategy for inclusive growth is selected, one has to bear in mind that formulating the strategy and subsequent policies do not guarantee impact. The impact or results depend on the manner with which such policies are implemented and carried out. This in turn requires political will and a strengthened process of democratic decision-making.





Published in The Express Tribune, June 26^th, 2011.