Economic growth - lessons for Pakistan

KARACHI:

Economic growth is the primary goal of economic managers. All other economic objectives, ie, inflation control, unemployment reduction and balance of payments management are just consequences of achieving or not achieving the economic growth.

Since economic growth is the primary determinant of standards of living of the population, it has a direct impact on the lives of people.

Pakistan as a nation has been facing the economic growth question since decades and sadly it is yet to find a sustainable solution. We have followed the quick fix of consumerism-led growth at least twice in the last 25 years but its results were not sustainable. Consumerism in Pakistan was not only superficial, ie, cars and personal loans-driven, it was also almost completely fueled by imports. The primary problem with this model is that whenever the real gross domestic product (GDP) growth goes north of 4%, the balance of payments crisis erupts, which leads to a quagmire of issues.

Imports shoot through the roof to fuel this growth and this leads to unsustainable levels of current account deficit (CAD). Due to this, the country experiences a steep decline in foreign exchange reserves.

Following the rapid fall in reserves, we rush to the counters of global lenders, primarily the International Monetary Fund (IMF) and the World Bank, who ask for steep currency depreciation in order to make imports expensive and exports competitive.

This depreciation leads to a vicious cycle of inflation as we are an import-dependent economy. Interest rates are raised to curb demand pressures and hence investment and consumption are compromised and growth stalls.

Keeping this background in view, we must learn from some growth examples. The Chinese model is often referred to in literature. The major factor behind their growth model is the availability of cheap labour and the Chinese leveraged it well.

Pakistan also has ample cheap labour, the only problem with its labour is that the skills level is not up to the mark. So, as a long-term policy measure, we need to invest in labour and improve their skills.

Apart from cheap labour, the second factor that contributed to China’s growth was a solid credit base and a robust financial system. As per established research in the case of China, the strength of the financial system and economic growth are not only correlated variables, but they have a bilateral causality, ie, both variables supplement each other.

So, the Chinese growth story went like this. The strong labour base generated economic growth, which led to a rise in per capita income. This additional income enhanced the deposit base of the country, leading to the widening of credit base. This broadening of credit base resulted in further economic growth through investment and export channels.

In our case, we have a robust financial system, which is adequately capitalised, as praised by the IMF in the Standby Arrangement (SBA) document. However, crowding out is the major problem as most of the credit doesn’t end up with the private sector. We need to remove the hurdles in this regard and provide credit impetus to the private sector, especially the small and medium enterprises (SMEs) primarily related to IT to generate this growth.

The IT impetus is emphasised because it will also be a support to the balance of payments as it will generate precious foreign exchange for the country. Secondly, tourism is a very important avenue for Pakistan as we have one of the most diverse landscapes. We have the highest frozen peaks in the north with green pastures second to none in the world.

We have lush plains in the centre and amazing deserts in the form of Cholistan and Thar. Along with these, we also have a beautiful coastline in the south, stretching from Karachi to Gwadar.

So, we can offer tourists beautiful sandy beaches and frozen mountains and these two are only separated by a couple of hours’ flight between Karachi and Gilgit. This, I believe, might be a rarity. Religious tourism for Sikhs and Buddhists is an added benefit.

Europe has rightly leveraged its tourism industry for economic growth. Especially in southern Europe, empirical evidence suggests that with a 1% increase in tourism revenues, per capita income rises by 0.03%.

Not only does tourism contribute to economic growth but its impact is much more equitable. The fruit of this growth goes to the lower echelons of society, and this is a very important observation for Pakistan because income inequality is a serious issue here.

Some evidence of this can be seen from how tourism has positively impacted the lives of people living in Hunza and adjoining areas.

We need to learn from these examples and establish a solid growth story for our country.

The writer is a banker and teaches economics

 

Published in The Express Tribune, October 9^th, 2023.

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