May 07, 2019 Dr. Niaz Murtaza Comments Off on Pakistan at 100
Pakistan at 100
Dr. Niaz Murtaza
In a recent report entitled “Pakistan@100: Shaping the future”, the World Bank raises the mouth-watering prospect that with policy reforms in just five areas, Pakistan can increase its per capita income five-folds to achieve upper-middle income status by the time it celebrates its centenary anniversary in 2047. The five areas are human capital (fertility and early childhood development), economic transformation (enhancing the business environment and trade openness), tax revenue increase, water management and governance (transparency and accountability).
Dr. Nadeem ul Haque, ex-Head of Planning Commission, was perhaps the first one to think ahead in a book about the reforms Pakistan must adopt to become an Asian Tiger by the time it turns hundred. But the report doesn’t mention his work at all. It gives no calculations to show how such reforms will increase per capita income five times. Oddly, our per capita income did increase more than four-folds in both the last two 30-year periods even sans most such reforms. It’s also unclear why other policy reforms aren’t suggested, e.g., the active state industrial policies used by the Asian Tigers to achieve rapid growth.
Also, those it includes have already been mentioned in many earlier reports. So it’s unclear what value is added by merely repeating them. The report would have added value had it delved into the structural constraints that have stopped Pakistani rulers from adopting these oft-repeated policies. But the report decontextualizes things by laying them out as easy policy targets whose adoption can unleash rapid growth. By grossly simplifying things, the report could strengthen the hands of those who portray corrupt elected leadership as the only thing standing between Pakistan and high progress and who then suggest undemocratic options as the way forward.
Pakistan’s history is marked by the three failures to achieve political stability, prolonged economic growth and equitable social progress. A review of our current economic and social indicators reflects the results of these failures. They show a state with a low per capita GDP of around $1500 whose average GDP growth has been less than 5% for decades. PML-N’s attempt to increase it towards the 7% growth needed to absorb new labor resulted in major fiscal and external deficits quickly and a sharp decline in the growth rate. The GDP quality is low too. So private consumption is 75% of GDP but investment is only around 15%; services sector is nearly 60% but the job-creating industrial sector is only 20%. The informal economy may be around 50% of the formal one.
We struggle to collect enough taxes to cover even its highly inadequate expenditures on infrastructure, social sectors and salaries heads. Around 60% of the taxes come from indirect sources and we run a hefty budget deficit every year, with provincial revenues covering less than 20% of their expenses. Our current account often runs large negative balances and our exports mostly consist of low-end goods. These fiscal and current account deficits have caused our debt levels to increase from around 50% in 2002 to nearly 75% of GDP today.
These indicators reflect a state trapped in low growth and low-quality outputs, unable to earn enough tax or exports revenues to cover its expenditures and imports and consequently becoming more indebted rapidly. This in turn reflects an economy where the rich focus on short-term gains by producing low-end outputs where high profits are made by breaking tax and other laws and without investing enough in the future for productivity or innovation. They then ensure that they get the type of poor governance that supports such an economy, one that allows all sorts of breaking of rules and rent-seeking in return for sleaze. In such a well-entrenched political economy, “good” policies will likely undermine elite interests and it is naïve to think that they will be followed easily.
Good policies emerge from strong institutions which emerge from egalitarian societies where economic and political opportunities are easily accessible for most. Any prescription that starts from good policies or at most from institutional reform, without looking at the nature of the society from which these institutions emerge, will most likely fail.
A more useful approach would be to start with the current political economy, especially that of the informal economy, and then identify incremental policy changes. But it is difficult for large international institutions to abandon their standard global frameworks and attempt to do a fine-grained analysis that starts with local realities based on local research. Unfortunately, even our local research institutes are intellectually and financially dependent on global prescriptions and rarely do original research suited for local conditions. Thus, both national and international institutions seem destined to keep churning out advice that falls on deaf ears.
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