Pakistan stands today at a conjunctural moment
in its economic history. After a decade of slow GDP growth, rapidly rising
poverty and acute fiscal constraints, the emergence of a substantial fiscal
space has now set the stage for facing the strategic economic challenge
that could bring a better future for the people. The challenge is to launch
Pakistan on a new growth path characterized by a sustained high GDP growth
of 7 to 9 percent combined with a change in the composition of growth
to ensure rapid poverty reduction. Addressing this policy challenge requires
new policy thinking. I will begin with a brief assessment of Pakistan's
recent economic performance, as a prelude to identifying the structural
constraints to sustainable growth and then conclude by outlining a strategy
for accelerating and simultaneously restructuring economic growth for
poverty reduction.
I. RECENT GROWTH PERFORMANCE: AN ASSESSMENT
Let us begin with an assessment of the increase in the GDP growth observed
during the last two years (2002-03 and 2003-04), to see whether it is
adequate for poverty reduction and whether it is sustainable. GDP growth,
which averaged at 3.85 percent during the decade of the 1990s increased
to 5.1 percent for the first time in 12 years during the year 2002-03.
This year (2003-04) GDP growth is expected to increase further and reach
about 6 percent. The question is whether this two-year performance signifies
a change in the underlying trend, or is it transient. In this regard it
is important to note that without a new and appropriate policy intervention
the observed increase in GDP growth is neither adequate for poverty reduction
nor sustainable. Consider. The strategic variables that sustain GDP growth
continue to remain insufficient: The total investment rate, which was
18.7 percent in the 1980s and needs to be 20 percent even for sustaining
growth at 6 percent, continues to remain at less than 16 percent. (Investment
as a percentage of GDP was 15.5 percent in the year 2002-03). The fact
that there is a continued constraint to private sector investment in terms
of future expectations rather than available savings is indicated by the
fact that the total national savings as a percentage of GDP is significantly
higher (17.1 percent) than the total investment rate.
Clearly the government instead of getting carried away by its own rhetoric
that it has achieved an "economic take off ", needs to ponder
on the fact that its assumption of fiscal stabilization by itself leading
to higher investment has not proven valid. Recent research comparing South
Asian and South East Asian investment rates (Ali Cheema and Faisal Bari)
has demonstrated the well-known fact that the level of infrastructure,
the quality of governance and law enforcement are important determinants
of investment behaviour. Therefore the government needs to rid itself
of the misconception that reduced budget deficits and increased State
Bank reserves in themselves will lead to higher investment and growth.
They need instead to focus on rectifying the problem of the woefully inadequate
infrastructure, poor governance institutions and the alarming law and
order situation, if investment is to increase substantially and a higher
GDP growth made sustainable.
The increase in GDP growth achieved during the last two years has essentially
been due to three factors none of which signify sustainability: (i) better
harvests in the major crop sector, (ii) improved capacity utilization
of a small group of industries consisting of automobiles, textiles and
cement, (iii) a boom in the wholesale and retail trade sector fueled by
increased availability of bank credit, which has gone into consumer credit
rather than into substantially increased productive capacity in industry.
It appears that the increase in the GDP growth observed in the last two
years may not be sustainable. However, even if a 6 percent growth rate
could be sustained, it is inadequate for achieving poverty reduction.
I have argued in my published work during the last two years that given
the inequality in the distribution of income in Pakistan, a GDP growth
rate of at least 7.5 percent is required to make a dent into poverty.
The most direct evidence of my proposition is that it is precisely in
the last two years when GDP growth is supposed to have increased, that
poverty has also increased.
II. STRUCTURAL CONSTRAINTS TO SUSTAINABLE GROWTH
Institutional factors in agriculture, industry and functioning of markets
in Pakistan underlie the structural propensity for slow and unstable growth
on the one hand and growing poverty on the other. Let us consider each
in turn:
- Structural Constraints to Crop Sector Growth: In agriculture
the average annual growth rate of major crops has declined from 3.34%
during 1980s to 2.38% in 1990s. At the same time, the frequency of negative
growth years in some of the major crops has increased. The slow down
in growth and increased instability of output in major crops has resulted
in sharply increased rural poverty on the one hand and a slow down in
the export growth on the other. Underlying this phenomenon are four
major institutional constraints:
- Reduced water availability at the farm gate due to poor maintenance
of the irrigation system and low irrigation efficiencies of about
37%. While the availability of irrigation water has been reduced,
the requirement of water at the farm level has increased due to
increased deposits of salts on the top soil and the consequent need
for leaching. For example, according to the government about 33
million tons of salts are annually brought into the Indus Basin
Irrigation System, out of which 24 million tons are being retained.
- What makes improved efficiency of irrigation even more important
is that the extensive margin of irrigated acreage has been reached,
so that future agricultural growth will have to rely on improving
the efficiency of water use and other inputs. Thus the rehabilitation
of Pakistan's irrigation system for improving irrigation efficiency
has become a crucial policy challenge for sustainable agriculture
growth.
- It is well known that high yielding varieties of seeds gradually
lose their potency through re-use, changing micro structure of soils,
and changing ecology of micro organisms in the top soil. Therefore,
breeding of more vigorous seed varieties adapted to local environmental
conditions and their diffusion amongst farmers through an effective
research and extension programme is necessary to accelerate and
sustain agriculture growth.
- One of the most important constraints to sustainable growth in
the crop sector is the degradation of soils, resulting from improper
agricultural practices such as: (i) lack of crop rotation and the
resultant loss of humus in the top soil; (ii) stripping of top soil
and resultant loss of fertility associated with over grazing; (iii)
water erosion along hill sides and river banks due to cutting down
of trees and depletion of natural vegetation. According to one estimate,
over 11 million hectares have been affected by water erosion and
5 million hectares by wind erosion.
- Structural Constraints to Industrial Growth: The large scale
manufacturing sector which historically was growing at 7 to 11% per
annum is now growing at less than 3%. The factors underlying this dramatic
decline include the following:
- A fundamental structural constraint to industrial growth as indeed
the underlying factor in slow export growth, is the failure to diversify
exports. The large scale manufacturing sector, particularly exports
are concentrated in the traditional low value added end of textiles.
- A changed pattern of global demand for industrial products with
a shift towards higher value added and knowledge intensive products.
Pakistan’s industrial structure was not positioned to respond
quickly to these changed market conditions.
- An erosion of the domestic framework within which investment
and growth is sustained. This includes: (i) A continued threat to
the life and property of citizens due to a continued poor law and
order situation. (ii) High electricity tariffs, relatively high
interest rates (though these have fallen this year), (iii) Lack
of trained professionals especially in the high skill sector, (iv)
An inadequate technological base through which industry can respond
in a flexible way to changing patterns of demand, (v) A continuing
arbitrary and corrupt use of regulatory controls by a whole range
of officials at the lower echelons in departments such as income
tax, sales tax and customs who create strong disincentives for investment,
efficiency and export diversification in industry. (vi) Dumping
of smuggled, poor quality and extremely low priced imported goods
which are in many cases counterfeit copies of branded Pakistani
manufactured goods.
- Asymmetric Markets, Power and Poverty: In designing a pro
poor growth strategy it is necessary to address structural factors not
only at the macro level but also at the local level. Poverty occurs
when the individual is isolated from the community and is locked into
a nexus of power that deprives him of his actual and potential income.
My research for the Pakistan National Human Development Report shows
that the poor face a structure of markets, State and institutions, which
discriminate against their access over resources, public services and
government decision-making.
In this context overcoming poverty means empowering the poor at the
local level. The challenge of pro-poor growth therefore is to re-orient
both the structure of the economy as well as the local structures of
power in favour of the poor.
III. RESTRUCTURING GROWTH FOR POVERTY REDUCTION
To achieve sustainable growth the structural factors identified above
need to be addressed. The elements of a faster and more equitable growth
may be outlined in a four-pronged strategy as follows:
- Improving the Supply of Irrigation Water: The first prong of the
growth strategy should be a national campaign on a war footing to build
new dams and at the same time to rehabilitate Pakistan's irrigation
system, which is currently in a state of acute disrepair due to decades
of poor maintenance. Such a campaign being inherently labour intensive
would not only generate employment rapidly but also help to improve
water availability and yields per acre at the farm level.
- Infrastructure Development: Additional labour intensive infrastructure
projects should also be undertaken to simultaneously generate employment
and stimulate aggregate demand in the economy. Such projects could be
the building of farm to market roads, national high ways and ports,
upgrading the railway system and enlarging its transport capacity for
bulk cargo together with an improved communication system and increased
production of cheaper energy through gas fired turbines rather than
through imported furnace oil.
- Milk, Marine Fisheries and High Value Added Agriculture Products:
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.
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.
Marine Fisheries, also provide a significant potential for improving
foreign exchange earnings and increasing the incomes of the poor. Currently
there are large losses and failure to achieve significant exports due
to the fact that the storage conditions of fish during transportation
are both unscientific and unhygienic by international quality standards.
Increasing the production of fruits, vegetables and flowers for exports
and for increasing incomes of small farmers would require institutional
support for marketing, and improved grading packaging, and refrigerated
transport right up to the cargo terminals for air freight to the export
market.
- Rapid Growth of Small Scale Enterprises: The fourth prong of the
strategy would be to provide the institutional support necessary for
the rapid growth of small scale enterprises. These SSEs. include high
value added units in light engineering automotive parts, moulds, dyes,
machine tools and electronics and computer software. The details of
the institutional framework for accelerating the growth of SSEs are
contained in my work for the Pakistan National Human Development Report,
UNDP 2003. The strategic issue in accelerating the growth of SSEs is
that it would simultaneously accelerate GDP growth with relatively lower
investment, increase employment generation and improve the distribution
of income.
CONCLUSION
I have argued in this article that even though there
has been a significant increase in GDP growth in the last two years, this
is neither sustainable nor adequate for poverty reduction. This brings
us to a new moment in our policy thinking. The government’s economic
managers have so far focused on the financial sector. The challenge now
is to achieve a break through in the real economy. In this regard, I have
identified some of the structural weaknesses of the real economy as the
basis of an economic strategy for accelerating and restructuring the growth
process to enable rapid poverty reduction. |