New economic model for growth
June 03, 2011
Pakistan’s average GDP growth rate was around 7% in early 1960s but, over time, it decreased to an average of just over 4% in the first decade of the new century. In contrast to this unstable, fluctuating and declining trend, Pakistan’s regional competitors – Bangladesh, India and Sri Lanka – have shown signs of decreasing instability and increasing trend in their GDP growth rates over the last 50 years. Bangladesh’s average GDP growth rate increased from around 2% in the early 1970s to over 5% in the last 10 years; Sri Lanka’s average growth rate increased from 4% in the early 1960s to 5% in 2010, while India’s average growth rate hiked from 5 to 6% for the same period. These figures vividly highlight the state and direction of Pakistan’s economic growth since the 1960s.
A question may arise here ‘why do nations need economic growth?’ Nations need economic growth to offset and balance the effects of population increase and the change in age structures of population. With nearly 50% of population below the age of 20, Pakistani is heading toward a window where if right steps are taken it can head towards success, and if corrective measures are not taken the nation can head towards disaster. Availing this window of opportunity is called a demographic dividend and failure to exploit it is referred to as a demographic disaster.
As Pakistan’s population increases and age structures change, dependency ratios, i.e. number of people economically dependent on others, also changes. According to Planning Commission, by 2030, Pakistan’s dependency ratio will reach its lowest point, meaning the number of people in the working group will far exceed the number of people dependent upon others for survival. If by that time it is unable to provide suitable jobs for those people, unemployment will rise sharply, increasing poverty, crime and fuelling extremism. To avoid such a “disastrous” scenario, Pakistan needs a continuous growth in economy so that it can provide economic opportunities to youth tomorrow.
Cognisant of this fact, Pakistan’s planning wizards have mulled a new growth strategy that envisages a paradigm shift by focusing more on software of growth (incentives, institutions, markets, communities and governance) instead of relying on hardware of growth (physical investment in buildings and equipment), as the old model of growth remained unable to achieve higher growth on sustained basis. The new growth strategy aims to increase long-term growth figure in two phases: In the first phase, emphasis will be on raising growth from its current 2.3% to the trend rate of 5% by minimising under-utilized capacity of industry. In this phase, focus will be on strengthening the energy sector, budget reforms to mobilise additional revenues, more effective use of public expenditures, and stabilizing the economy.
In the second phase, efforts will be geared to increasing the growth rate from the trend level of 5% to sustaining a higher level of 7% growth for at least the next decade in order to provide employment opportunities for the youth of tomorrow. This phase will focus on sectoral interventions, i.e. strengthening the banking sector, deepening capital markets and making them more responsive towards investment needs, and raising productivity through improving sectoral efficiency.
It is envisioned to sustain this growth level by expanded regional trade, human resource development, governance reforms and initiatives taken towards making cities the engines of growth and increasing the overall connectivity in Pakistan. The first and second stages are not substitutes, but the first stage will complement the second as the second phase kicks in.
Pakistan will proceed on implementing the new growth strategy after the country’s Parliament adopts 2011-12 budget, which will be presented before it by Finance Minister Dr. Hafeez Shaikh on June 3. Earlier on May 28, National Economic Council (NEC) approved Rs. 730 billion Public Sector Development Programme (PSDP), with a federal and provincial share of Rs. 300 billion and Rs. 430 billion respectively. With Prime Minister Gilani in chair, the supreme economic body also approved macro-economic framework with a 4.2% GDP growth for 2011-12, envisaging growth of 2% in large-scale manufacturing, 3.4% in agriculture, 5% in services and 13.2% in savings against an inflation of 12%.
After NEC meeting, Planning Commission Deputy Chairman, Dr. Nadeemul Haq told media-men that in 2010-11, there were 1,822 projects with throw forward of Rs. 3.1 trillion that will be decreased to Rs. 2.6 trillion throw forward with 1,152 projects in 2011-2012.The allocation for infrastructure has been earmarked at Rs. 155 billion, for social sector Rs. 122 billion and for others Rs. 123 billion.
Finance Minister Dr. Shaikh said that to fund Rs. 730 billion development programme, Pakistan will have to opt for self-reliance, increase tax to GDP ratio and bring under tax net all sectors of its economy. Under the new growth framework, if Pakistanis wanted permanent progress and job opportunities for youth, then GDP growth needed to be between 6-7% and the government’s role restricted to policy and regulation-making while issues pertaining to business, administration of corporations must be left to the private sector.
In 2010-11, total development budget stood at Rs. 462 billion because it had to be revised downward – federal from Rs. 280 billion to Rs. 180 billion whereas its actual spending stood at Rs. 196 billion and the provincial from Rs. 420 billion to Rs. 266 billion, because of floods, hike in oil price in international markets and increase in security-related expenditure. If compared with the actual federal spending of Rs. 196 billion, the allocation of Rs. 300 billion as federal share for 2011-12 in the development budget is up by 50%, while at Rs. Rs. 430 billion the provincial share in the development budget is up by 58%. The provincial PSDP of Rs. 430 billion includes: Punjab Rs. 200 billion, Balochistan Rs. 30 billion, Sindh Rs. 122 billion and Khyber Pukhtunkhwa Rs. 80 billion.
For 2011-12, NEC focused on allocations to on-going projects nearing completion, to foreign aided projects and to less-developed areas (AJK, Gilgit-Baltistan, Fata and Balochistan) for ensuring balanced development across Pakistan. While Rs. 268 billion has been allocated for completion of ongoing projects, even after 18 Amendment the Centre has provided Rs. 14.5 billion for the vertical programme of health and Rs. 4 billion for population welfare. An allocation of Rs. 8.7 billion has been earmarked for President’s and Prime Minister’s initiatives, Rs. 33 billion for water, Rs. 55 billion for energy, Rs. 60 billion for transport, Rs. 32 billion for Benazir Income Support Programme and Rs. 33 billion for education and health projects, while WAPDA and PEPCO will make an additional investment of Rs. 83 billion.
Meanwhile, it has been reliably learnt that as per budget proposals, except for food, health and education, all commodities will be subjected to sales tax. Tinned and bottled food would be taxed at 5% and other items at a uniform rate of 17%. While retaining existing tax rates, no new tax is being proposed in the budget, which also seeks to increase pay and pensions of employees by 15%.
Till recently, Pakistani authorities have been involved in formulating plans based on a savings-driven and aid-led approach. However, through experience, Planning Commission has reached to the conclusion that the Rostovian model and Harrod-Domar framework, where growth is primarily a function of savings, did not serve Pakistan well. The Commission has identified four major factors that contributed to non-fruition of Pakistan’s development plans. These are: a) Lack of developed markets, which implied that savings were not channelled into most productive uses; b) poor quality of investments, obstructing materialisation of take-off into sustained growth; c) low resource mobilization, impelling continuous reliance on foreign resources; and d) absence of indigenous growth elements of innovation, entrepreneurship and learning.
An unintended consequence of Pakistan’s economic policies resulted in the stifling of internal markets, cities and communities, which play a critical role in fostering productivity, innovation and entrepreneurship and ultimately promote growth, prosperity and development. These factors bring to the fore an imperative need to search for a new model for economic development. To meet this demand, Planning Commission has prepared a draft new growth strategy “Pakistan: Framework for Economic Growth.”
This development framework envisages the markets to be growth-drivers that reward efficiency, innovation and entrepreneurship; while the government would act as a facilitator that protects public interests and rights, provides public goods, enforces laws, punishes exploitative practices, and operates with transparency and accountability. The stated aim of the new development approach is to focus on: a) Rules not Deals: ensuring productivity-led growth by incentivizing innovation and entrepreneurship, b) Reforming markets: improving governance so that markets and commerce can flourish, c) Reconfiguring cities: increasing diversity and resource mobility through inclusive zoning, d) Developing Community Infrastructure: empowering youth and community for improved quality of life.