Pakistan's economy continues to be in the throes of
recession which can now be termed as the most protracted economic decline
in the country's history. The growth rate of GDP has declined sharply
falling from an average of 6.3% in the 1980s to an average of 4.2% in
the 1990s. During the last two years the average growth rate has fallen
even further to about 3.5%. At the same time over the last decade poverty
has increased at a pace unprecedented in Pakistan's history. In terms
of the calorific norm the percentage of population below the poverty line
has increased from about 17% in 1987 to about 33% in 1999. My research
during the last two years has shown that the declining trend in GDP growth
has been accompanied by three adverse structural features of economic
growth in the 1990s which may have not only accentuated poverty but also
increased Pakistan's financial fragility with respect to the balance of
payments deficit: (i) Increased instability of GDP growth, fuelled primarily
by a much greater amplitude of fluctuations in the out put of the crop
sector. In a situation of slow export growth increased instability of
growth imparts a fragility to the balance of payments. (ii) Declining
employment elasticities of output in both industry and agriculture, thereby
reducing the employment generation capability of the economy for given
GDP growth rates. (iii) Declining labour productivity in both agriculture
and industry leading to the observed decline in real wages of casual workers,
which is the predominant form of hired labour in Pakistan.
While an adverse change in the level and structure
of economic growth were crucial factors in increasing poverty, equally
important was the deterioration in the institutions of governance. Due
to poor economic management by successive governments in the 1990s, both
the level of development expenditure and the efficiency of its use declined,
resulting in acute shortage of basic services to the poor, such as health
In designing and implementing a strategy of economic
revival it is important to understand that interventions merely in the
financial sphere (such as budgetary allocations and interest rate manipulation)
while they may have been useful in the 1960s will be inadequate to-day.
Given the depth of the economic crisis, it is clear that rapid and decisive
initiatives will have to be undertaken to change the structure of the
real economy as well as institutions of governance itself.
Let us now indicate the revival strategy that could
be undertaken, to lay the basis for a sustainable growth rate of GDP in
the medium term future. Such a strategy should be designed to optimize
four parameters: (a) Achieve higher GDP growth with a relatively lower
investment. (b) Generate higher employment for given growth rates of GDP.
(c) Achieve greater poverty reduction and (d) Generate higher exports.
In November 1999 I had proposed to the government a four pronged revival
strategy to take account of the four parameters specified above. (Also
published in the daily Dawn, November 25, 1999). The government has adopted
most of these and it may be useful to review progress in each case:
1. The first initiative should be to launch a national
campaign for poverty alleviation. The objective of this campaign should
be to facilitate rapidly and cost effectively the establishment of autonomous
organizations of the poor. Through these organizations the poor can identify
income generating projects at the household level, acquire skill training
from governmental sources, private sector, NGOs and donors; and access
credit for micro enterprise projects. In this regard the government has
established the Khushali Bank and also supported the Pakistan Poverty
Alleviation Fund. These are commendable actions but unfortunately grossly
inadequate. The credit for micro enterprises being dispersed by both institutions
to genuinely autonomous organizations of the poor on an annual basis is
less than half a million dollars which is a small fraction of the micro
credit actually required. Moreover micro credit in itself is not enough.
It has to be combined with the rapid development of organizations of the
poor, skill training and marketing support. In addition it would be necessary
to establish an institutional link between autonomous organizations of
the poor and various tiers of the local government structure.
2. The second prong of the revival strategy should
be a national campaign on a war footing to rehabilitate Pakistan's irrigation
system. The availability of water to the farmers has declined sharply,
due to inadequate desilting, canal seepage and breaches of canal banks.
Consequently of the 93 million acre feet of water annually diverted into
the irrigation system only 40% reaches the root zone of crops. A campaign
to build medium and small dams, combined with desilting of canals, improving
water courses and finally on farm water management would help to bring
more water to the farmers and at the same time generate more employment.
The government has undertaken a series of promising projects in this regard.
These include creation of additional storage capacity through the following
projects: Gomalzam and Meerani dams, and new irrigation systems like Ranie,
Thar and Kachi canals as well as lining of water courses and improving
on farm water management. A new medium term plan for the water sector
has been prepared with a planned expenditure of Rs.86.1 billion. This
is an important new initiative by the government. The challenge is to
implement quickly. There is no time to lose.
3. The third prong of the revival strategy is to rapidly
develop export led production capacity for milk, fisheries and high value
added agricultural products such as fruits, vegetables and flowers. Let
us illustrate this initiative by using the example of milk. At the moment
Pakistan is producing approximately 177 billion rupees worth of milk annually
for domestic consumption. This makes milk the largest agricultural product.
By comparison, wheat, Pakistan's largest crop has an annual production
value of approximately 111 billion rupees. Unlike wheat however, the output
of milk can be accelerated sharply within a couple of years. Currently
Pakistan's milch cattle have a yield per animal which is one-fifth of
the European average. Demonstrable experience in the field has shown that
the milk yields per animal in Pakistan can be doubled within two years
through scientific feeding, breeding and marketing. If the institutional
framework could be established for training the farmers in scientific
feeding and breeding and if the logistics could be set up to collect milk
from the farm door by means of refrigerated transport, milk output in
Pakistan could be doubled. This would have a dramatic impact not only
on the incomes of poor peasants, but also on exports and overall GDP growth.
In view of the fact that Pakistan lies at the hub of milk deficit regions
such as Central Asia, West Asia and South East Asia, if milk out put in
Pakistan could be doubled our exports earnings could increase by US $
4 billion annually. Keeping in mind that Pakistan's balance of trade deficit
is about US $ 1.5 billion an additional four billion US $ of foreign exchange
earnings from milk exports would resolve Pakistan's balance of payments
problem. Such an initiative therefore can lead to accelerated exports,
higher GDP growth and improved income distribution in Pakistan.
Marine Fisheries, also provide a significant potential for improving foreign
exchange earnings although not as large as the potential for milk. Here
again what is required is improved institutional support and better management
rather than huge investments by the Government.
An important element in increasing high value added production and export
in the agricultural sector would be to facilitate the production of fruits,
vegetables and flowers for exports. This would require institutional support
for improved quality of output, improved grading packaging, and refrigerated
transport right up to the cargo terminals for air freight to the export
market. There appears to be little progress on this issue.
4. The fourth prong of the strategy would be to establish industry specific
training institutions combined with institutional support for credit and
marketing to the small-scale industrial sector in Pakistan. Large-scale
training of software experts for example could quickly result in significant
software exports from Pakistan. India with its 200,000 computer specialists,
exports about 5 billion US$ worth of software and has a target of 20 billion
software exports in the next five years. There is no reason why Pakistan
cannot build a pool of software experts for a large increase in its export
earnings. This would of course require a pro-active government to establish
joint ventures between large software companies in the U.S. and private
sector firms in Pakistan.
In this article, medium term policy initiatives have
been identified for both a more equitable and an export led acceleration
in GDP growth. Achieving this strategic objective involves two challenges.
The first is to win the support of the international community to provide
the necessary breathing space on the fiscal front. Second, to build the
institutions and implementation mechanisms through which the four initiatives
can be brought to fruition.