Moving out of the slump

I have long held the view that the economic circumstances of a country — the problem it faces, its future prospects and the public policy choices leadership groups are likely to make — cannot be understood without developing a good appreciation of the structure of the society and the operating political system. Most under-performing economies have a lot of slack in the system. This can lead to better economic performance if the capital that has already been invested in the economy is put to more efficient use and if the workers that are engaged in low productivity activities are able to move to those that have higher personal as well as societal rates of returns. Once the economy begins to recover, the pace of growth can be sustained for a long period of time.

That was the experience of India. Following the reforms instituted in 1991, the Indian economy left the path of what the country’s own economists called “the Hindu rate of growth”. The country quickly climbed on to a new growth trajectory that produced an average rate of increase in national output that was twice the Hindu rate of growth. In the 44-year period from 1947 to 1991, the average rate of increase in national income was 3.5 per cent a year. Since then, it has averaged 7.3 percent per annum. Several Latin American countries went through the same kind of experience, quickly recovering from slumps once the right set of policies ware put in place.

Pakistan also had periods of growth spurts that took the economic rate of growth close to 7 percent a year. This happened during the first half of the rule by President Ayub Khan; it happened again in 1982-89 when the country was governed by General Ziaul Haq; and it happened for the third time in 2001-07 during the presidency of General Pervez Musharraf. But it is important to understand that these were essentially deviations from the trend line; they were not the consequence of structural changes that could sustain high rates of growth over the long-run.

The Ayub model — in contrast to the one India had followed — gave considerable space to private enterprise. The government’s role was limited to providing encouragement, access to capital and investment in creating supporting infrastructure. It was during this period that a multibillion dollar investment programme was completed that included the building of two large dams. These works improved the already well-developed irrigation system and significantly increased hydro-power generation.

What should be the content of the policies to be adopted in order to move the economy on to a growth path much higher than the one it is on at this time? At this point, and once again relying on my work experience, I would make three observations. The first relates to the restoration of confidence in the country’s future among different segments of the population. Economies generally respond to the signals the policymakers give. At this time, the signal is that of indifference to the economy. There is anecdotal evidence of considerable amount of capital flight from the country because of the growing belief that Pakistan is not a safe place in which to keep money.

However, there will be a positive response if a different signal were to go out. Some of the capital that has left the country will come back if an impression was created that those who hold the reins of power would not spare any effort to put the economy back on track. More capital would be kept at home rather than taken outside the country. This could increase the rate of domestic investment by as much as two percentage points a year, resulting in adding half a percentage point to GDP growth rate.

The needed policy framework should be divided in two parts; one for the near-term, say the next three years and the other for the medium-term, say the next three to eight years. The programme for the near-term should focus on institutional reform aimed, to begin with, at three areas. The first and by far the most urgent is reform of the fiscal system by levying a consumption tax, incorporating the taxes on incomes that are outside the reach of the taxman, and improving the system of collection. How all this could be done has been detailed in a number of studies various individuals and development institutions have carried out for the government over the last several years. The second area would be to reform the system of accountability by giving its leadership autonomy and protection. The third part of the immediate effort should be to reform the civil service system. Again, this is an area of reform into which a great deal of thinking has already gone. These efforts should result in increasing investments and adding 2.5 percentage points to the growth rate bringing it to 6.5 percent by 2016.

For the longer term impact, four more areas will need to receive attention. They include easing the shortage of energy, both electricity and gas; improving the security situation; increasing trade with India; and incorporating six ‘positives’ in a grand development strategy. My list of positives is: agriculture, an engineering industry made up of thousands of small and medium enterprises; the demographic dividend; devolution of power from the centre to the provinces; arrival of one million well educated and trained women in into the work force; and the presence of large Pakistan diasporas in three continents. Such initiatives could increase the rate of economic growth to eight per cent by 2020, adding another 1.5 percentage points.

Published in The Express Tribune, September 3^rd, 2012.