The writer is a Master’s student at The Fletcher School of Law and Diplomacy. He tweets @uzairyounus
The current government in Pakistan made economic growth a central pillar of its agenda. Cabinet ministers, led by the honourable finance minister, argue that the economy is on an uptrend, foreign exchange reserves are recovering, investment is occurring, and that the future is bright for Pakistan. A closer look reveals that the picture is not as rosy. Foreign exchange reserves have improved not because of export growth, but due to re-engagement with the IMF and the sale of external debt instruments. Meanwhile, domestic liabilities and debt of the government hit record highs and have grown by 13 per cent on a yearly basis. According to the State Bank of Pakistan (SBP), the reduction in fiscal deficit to 5.5 per cent of the GDP was mainly due to one-off factors. Furthermore, the government has not paid off the circular debt this year, which now stands at more than Rs200 billion. Exports, which stood at $24.8 billion in 2013, grew by only $400 million to $25.2 billion in 2014. The annual report of the SBP report highlights this problem, arguing that Pakistan “must increase its hard currency earnings” and that Pakistan’s “ability to borrow from abroad … could easily become an FX crisis”.
This is where a robust developmental strategy centered around boosting exports comes in. Countries like South Korea, Bangladesh, India and China have been able to drive their economies on the back of strong export growth. This, in turn, allowed them to accumulate foreign currency reserves, raise tax revenues and further invest in their economic development. In 1990, Pakistan’s exports as a percentage of the GDP stood at 16 per cent, while Bangladesh’s was a paltry six per cent. By 2013, Pakistan continued to remain stagnant with exports equal to 13 per cent of the GDP, while Bangladesh’s exports had soared to 20 per cent of the GDP. This allowed Bangladesh to boost its foreign exchange reserves from almost $600 million in 1990 to $18 billion in 2013. Pakistan was only able to increase its reserves from $1 billion to $8 billion in the same period. A lack of a forward-looking economic strategy has been responsible for this and successive governments, including the current one, have failed to develop a cohesive plan to boost value-added export growth.
When South Korea decided to pursue export-led economic growth, special economic zones were set up to develop clusters of technologically advanced industries. These industries reached economies of scale and earned foreign currency for the country. Subsidies and economic incentives were given, and strong performance-based conditions were set. Companies that failed to meet required targets were allowed to die while those that performed strongly were further aided by the government. The result of this was the development of indigenous corporations like Samsung which are the world’s leading multinationals today. China has followed a similar strategy, fostering local competition amongst export-oriented companies and thereby boosting export earnings and long-term economic growth. The benefit of this strategy is visible today, with companies like Alibaba and Xiaomi emerging as global giants and China becoming an economic superpower.
Growth in value-added exports cannot occur without a well-educated labour force. Pakistan has the world’s second-largest number of children out of school, ranking only behind Nigeria. In an age where developing countries have taken advantage of their demographic dividend, Pakistan is turning a potential dividend into a ticking time bomb. In the next decade, these children will want jobs and unable to be productive, they will become a societal nightmare. Instead of having decent standards of living, they will find themselves unable to perform productive tasks in a globalised world where basic technical skills will be key. Investment in our education system will not only give these children a better future, but it will help Pakistan drive economic growth and boost output of value-added goods and services. A technically sound workforce will not only generate growth in technologically-advanced industries, but it will allow the country to raise revenues to further invest in social and human development of the country. One sees little to no effort on curriculum reform today and we are continuing to focus on rote-learning and other ineffective means of education, which puts our economy’s human resources at a severe disadvantage to the rest of the world.
Sadly, the focus of the government thus far has been on one-off measures that create a false sense of optimism in the country. If one were to take out the positive impact of one-off measures such as the IMF tranches, funds from 3G/4G auctions and privatisations, the picture for Pakistan is rather bleak. Reforms centered on eliminating inefficiencies in our economy, boosting exports, and focusing on sustainable economic development through human resource development are lacking. A focused strategy centered on export-oriented economic growth has not been developed and it seems like the government is content with a growth model that is not sustainable. These one-off measures have bought the government time to implement a sound economic strategy, but there is little evidence that the powers that be have any clue of what Pakistan’s development strategy should be.
If the current policy continues to be followed, then the country will continue to go from one economic crisis to another. This will only elongate the cycle of economic stagnation in the country and will not allow Pakistan to converge with the rest of the world. It is about time that the political elite of this country developed a strong development strategy that allows the country’s economy to stand on its own feet. If they fail to deliver on this, then the best case scenario is economic default, and the worst case scenario is unimaginable.
Published in The Express Tribune, January 19th, 2015.
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The longer a country delays economic reforms, the harder the task of catching up with other nations begins. The export economy has to be based on some real relative competitive advantage. China's was based on low-cost manufacturing which translated into lower prices abroad. Now as labor costs rise and Chinese products become less competitive in many sectors, other lower cost nations are taking advantage, (e.g. Bangladesh and Sri Lanka in textiles). India's advantage has been in the IT area - first in the Y2K area where its low-cost "commodity" programmers helped modify COBOL programs. (Y2K was really no scare after all but helped ease the way.) Now both China and India are trying to move into more added-value products and services. What niches are there for Pakistan to exploit? Let us not forget "country of origin" and other geo-socio-political effects. Rising shipping costs (in relative terms) and rising fatigue with the omnipresent "Made in China" among American consumers, has given rise to the "Made the USA" campaign. Large domestic markets, like Pakistan's, help. But Germany was the largest exporter before China displaced it.
This country's economy depends entirely on IMF bailouts. The west keeps allowing those bailouts so we have no incentive to reform anything. As an article in Dawn points out we have gone through 12 bailouts since independence which is more than all the other regional countries combined!
A very good analysis.
Global economy faces strong headwind despite low oil prices: IMF English.news.cn 2015-01-16 WASHINGTON, Jan. 15 (Xinhua) -- The global economy is facing strong headwind despite the boost from positive factors such as lower oil prices and stronger U.S. economy, Christine Lagarde, Managing Director of the International Monetary Fund (IMF) said Thursday at a forum held by the Washington think tank Council on Foreign Relations. In a speech that previews an IMF report due next week on the global economic outlook, Lagarde said the lower oil prices and U.S. growth are not a cure for deep-seated weaknesses elsewhere, adding too many countries are still weighed down by the legacies of the financial crisis, including high debt and high unemployment. According to the IMF chief, among developed economies, the U.S. and U.K. will continue promising recovery, but growth remains very low in the euro zone and Japan. Emerging economies, including China, are also slowing down. Lagarde said the already low global recovery is still in face of significant risks. Emerging economies could face a triple hit of strengthening U.S. dollar, higher global interest rates, and more volatile capital flows; euro area and Japan remain at risk of settling into a long period of weak growth and low inflation; and there are increased geopolitical risks. Beyond being a boost for consumers' purchasing power, lower oil prices could provide an opportunity for countries to cut energy subsidies and use the savings for more targeted transfers to protect the poor, said Lagarde. In the euro area, the low oil prices will further weigh down already low price level and increase deflation risk, thus additional monetary stimulus is needed, she said. In order to energize growth, the IMF chief called for further structural reforms to remove distortions in labor and product markets, boost infrastructure investment, unleash the economic power of women, push forward trade liberalization, and enhance financial regulation.
"Countries like South Korea, Bangladesh, India and China have been able to drive their economies on the back of strong export growth. This, in turn, allowed them to accumulate foreign currency reserves, raise tax revenues and further invest in their economic development"
Cannot speak for other countries but India's growth was primarily led by its domestic economy and not export led growth. Infact the reducing contribution of manufacturing to Indian economy is something hat the present PM is trying to reverse through the Make in India program. Secondly increased exports do not result in proportionately increased revenues at least in India due to huge tax exemptions given to exporters.
"If the current policy continues to be followed, then the country will continue to go from one economic crisis to another"
This is true. But that policy is overallocation of resources to just one sector i.e. defense thereby starving other sectors including education, health, power generation etc. In India tax to GDP ratio is 16% of GDP and defense allocation is 1.7% of GDP. Thus about 10.6% of tax revenue is spent on defense. In Pakistan tax to GDP ratio is 8.5% and defense allocation is 3.5% GDP. Thus about 41.17% of tax revenue is allocated to defense.
I order to preserve this high allocation to defense, all peace attempts are saotaged by heating up the LOC. So by all means blame Nawaz Sharif, but also give a thought to his namesake.
hats off writer, you hit the nail on head, Govt is playing havoc with the peoples by quoting fudged figures, so called, self-made economists trying to inculcate superficial economic development in the minds of the peoples to deceive the masses with the objective to protect the stipulated Govt tenure and furnish their vested interests with political elite, thank you for wakeup call
Good article but for that to do you have to declare Pakistan a secular state, implement freedom of speech and expression and women rights. But the current government and Pakistani oppose vehemently against freedom of speech even though one of the reason for partition was that Jinnah wanted absolute freedom of speech. Many Pakistani knows and understand pakistan problem but find very difficult to bring change through political system.
A mirror for Ishaq Dar (whose sole qualification is blood relationship with Sharif family).