As the financial year 2000-2001 comes to a close Pakistan
stands in the cusp of history between the reality of economic recession
and hope of economic revival. Never before in Pakistan has there been
such a deep and protracted economic recession, such a sharp increase in
poverty and such a critical debt servicing burden. For example: (a) GDP
growth declined from 6.1% during the 1980s to 4.4% during the 1990s; (b)
Growth of the large scale manufacturing sector declined from 8.2% during
the 1980s to 4.4% during the 1990s; (c) The percentage of population below
the poverty line increased from 18% in 1987 to 34% today. (d) Debt servicing
as a percentage of foreign exchange earnings has increased from about
18% in 1980 to about 40% in the year 2000.
The crisis in the economy is integrally linked with
the crisis of the state, the decay of institutions and the emergence of
armed militant groups which undermine state authority. Therefore any strategy
of economic revival must necessarily be predicated on concrete measures
to overcome the crisis of state and civil society. In this brief presentation
I will attempt to indicate first that the present growth strategy of the
government is too modest to constitute a strategy of economic revival
and second that Pakistan's economic revival is linked with two crucial
factors in the sphere of politics and foreign policy: (i) Re-establishing
the writ of the State as a pre-condition for investment. (ii) Winning
the whole hearted support of the international community as a pre-requisite
for acquiring the necessary fiscal space to embark upon a credible high
growth revival strategy.
The target GDP growth specified by the government
in its growth strategy aims to increase GDP growth from 4.5% in the year
2000-01 to an average of only 5% during the period 2001-04. This rather
timid target of GDP growth is associated with only a marginal increase
in investment rate from 15.5% to-day to an average of 16.5% over the next
four years. The problem with such a growth strategy is that it will place
Pakistan's economy not on the path of economic revival but on the knife
edge of good harvests. Given the sensitivity of Pakistan's over all GDP
growth to the crop sector, a single bad harvest, God forbid, during the
next four years would change all the numbers and push average GDP growth
over the next four years to an even lower level than what it is today.
A more credible GDP growth target that could sustain
us on the path of economic revival would be 6.5% to 7% which has been
the historical trend rate before the recession hit us in the 1990s. However,
this GDP growth target would have to be based on a much higher growth
rate of the large scale manufacturing sector (9% compared to the envisaged
growth of 5.9% ). Yet in all fairness to our economic planners these extremely
low GDP growth targets have been specified because of financial limitations
imposed by a high debt servicing burden on the one hand and a low domestic
savings rate on the other. Thus the basic constraint to a high growth
strategy of economic revival is the fact that under present conditions
of state and society prevailing in Pakistan, large foreign capital inflows
cannot be expected.
The irony is that at a time when Pakistan is sacrificing
the economic well being of its people because of low investment and tight
financial constraints, a historically unprecedented volume of international
private capital is now available and it can flow into developing countries
at a hitherto unimaginable speed as Table 1 shows. While net official
capital flows have declined during the period 1981 to 1996, net private
capital flows by contrast have grown at phenomenal rate from 76 billion
US $ in 1981-85 to 212 billion $ in 1996:
Two significant developments underlie the huge increase
in foreign capital flows:
(i) After the Reagan-Thatcher rehabilitation of the
ideology of the free market, the State has signaled a gradual withdrawal
from the provision of welfare and social security to its citizens.
(ii) As a result of both improved life expectancy
and declining fertility rates, an aging of the population is occurring
in the advanced industrial countries.
Consequently enormous amounts of savings have been
drawn into institutions such as pension funds, mutual funds and other
fund management organizations (See Table 2). As much as US $ 1.5 trillion
are crossing international borders every day looking for better returns.
Therefore those developing countries which can successfully
position themselves to attract such private capital flows can grow rapidly,
while those that cannot will descend quickly into poverty. Since they
will not have the cushion of foreign grants, the rapid increase in their
debt servicing burden can throw their economy and environmental resource
base into rapid decline.
The question that now arises is what can Pakistan
do in the sphere of politics and foreign policy to position itself to
successfully achieve a rapid improvement in the material well being of
its people within the new rule based global economy. In order to achieve
this objective the following hard decisions would have to be taken in
the sphere of governance:
(i) Establish the writ of the State within its geographic domain i.e.
achieve law and order and provide security of life and property to its
(ii) Establish sustainable peace along its borders and build confidence
amongst the international community with respect to the issue of nuclear
(iii) Allow freedom of thought and diversity of cultures within its borders
to become part of the global community.
(iv) Establish an efficient and transparent form of democratic governance
which involves the participation of various regions, communities and institutions
of civil society. This would be in accordance with internationally agreed
norms of behaviour by which all states and their citizens are expected
to live in the contemporary world.
Once the political and social environment has been created for attracting
both domestic and foreign private investment the following key economic
measures may be required to position Pakistan for large private capital
inflows and economic revival:
1. Establish the sanctity of contracts.
2. Careful Management of exchange rate stability.
3. Reform the Banking System by strengthening banking
4. Strengthen transparency requirements of banks and financial institutions.
They should be required to provide accurate and timely data on reserve
levels, short term borrowing and exposure to exchange rate and interest
5. Attracting long term foreign investment requires the following institutional
measures in the economy:
(i) A sound legal system including enforceable bankruptcy laws that allow
exit of poorly performing companies.
(ii) A sound system of government finance.
(iii) Well developed human capital including institutions that produce
people with high quality modern skills.
(iv) Domestic capital and labour markets that function without unnecessary
I have tried to argue that the economic crisis in Pakistan is integrally
linked with the issues of law and order, peace on our borders and with
winning the support of the international community. While a growth strategy
predicated on a narrow fiscal space is too slow for comfort, yet economic
revival and high growth would require perhaps equally uncomfortable decisions
in the realm of governance. There are no easy economic solutions left
any more. Economic revival now depends on the vision and courageous action
of political leadership. To quote from the great Punjabi poet, Najm Hussain
"Gullan, Gullan vich tere kol aaven de khunj gaye vaille"
"Gone are the times my beloved when I could reach you through mere
NET CAPITAL FLOWS TO EMERGING MARKETS
(BILLIONS OF US$)
|Net Official Capital Flows
|Total Net Pvt K Flows
|-- Net FDI
|-- Net portfolio investment
|-- Bank loans and other
SOURCES: IMF - International Capital Markets 1999
WORLD BANK, 1991, World Debt Tables
NOTE: *ANNUAL AVERAGE
FUNDS CONTROLLED BY INSTITUTIONAL INVESTORS
|US $ 2 Trillion
||US $ 20 Trillion