Economy

Pakistan's Economic Potential and Ways to Uplift the Economy

Pakistan’s economic performance in the first 60 years since independence was respectable, with the GDP growth averaging 5% per annum. Per capita income grew during this period by 2% per annum, this is because the population growth had offset more than half of the economic growth. High growth for a long period shows resilience of the economy and entrepreneurs that indeed are critical for sustaining a growth momentum.
After several decades of relatively rapid growth, the signs of economic decay are now quite visible. For instance, the large scale manufacturing industries recorded a decline in their annual growth rate from 8.7% in FY08 to -2.06% in FY19, while agricultural growth rate in the same period fell from 4.7% to 0.85%. Slow or negative growth caused a decline in the share of manufacturing industries in the GDP from 19.1% in FY08 to 13.0% in FY19 and of the agricultural sector from 21.9% in FY08 to 18.5% in FY19. Moreover, the share of manufactured exports in total exports has declined from 77% in FY08 to 70% in FY19. Pakistan is now exporting much less than its imports, mainly due to deterioration of export competitiveness, lack of exportable surplus owing to low productivity, rise in the cost-of-doing business, high trade cost, high interest rate, slow payment of tax refunds, and market sentiments created by the introduction of haphazard structural reforms such as documentation of the economy, widening of the tax base, and sharp adjustment in the misaligned exchange rate, etc. 


Sustained growth is certainly the most desirable option for Pakistan to harness its massive untapped economic potential. It is, therefore, essential to make industrial and agricultural development the top priority in the overall economic growth strategy. This strategy should be a blend of expansion of exports and creation of domestic demand.


At the same time, restricted access to foreign markets for exports and falling domestic demand owing to rising inflation are precluding possibilities for higher growth. It is pertinent to note that whereas global output increased by 3.5% in 2018, global trade increased only by 2.6%. Similarly, the world’s merchandise trade as a ratio of GDP has declined from 50.2% in 2011 to 46.1% in 2018. These trends clearly indicate that global trade growth has lost its momentum, particularly in the wake of trade tensions among major world economic players. The countries of the world have started concentrating more on their domestic markets for stimulating growth by using inward-looking policies. On the other hand, the private consumption growth in the country decelerated from 6.8% in FY18 to 4.1% in FY19.
The prevailing situation has impeded investment in Pakistan, investment contracted by 8.9% between FY18 and FY19, which in turn is adversely affecting the economic growth. Thus, this downturn in economic performance is not merely the trough of a business cycle, but rather a slow-growth trap that can only be broken through a careful major policy shift. 
Fortunately, Pakistan holds some vital natural endowments and advantages that can be utilized to realize its untapped growth potential. Pakistan is one of the Next Eleven (N-11) countries, identified by Jim O’Neill, a former UK Treasury Minister, in a study, as having a high potential of becoming one of the world's largest economies during this century. 
Pakistan is endowed with the 10th largest workforce in the world, with a large proportion of bright youth (i.e., 60 percent of the population), which has the potential to drive the economy towards a high growth path while creating a demographic dividend. Pakistani workers are hardworking and are preferred over other nationalities in the world labor markets. Growing urbanization and sizeable (80 million) middle-class consumers’ market, with international tastes, are the new sources of attraction for domestic and foreign investment. 
Pakistan has the additional advantage of a large diaspora residing abroad, some of them may return if conducive work and living environments are created in the country. Diasporas carry an added advantage of working with foreign workers and multinational companies. They can play a decisive role in providing expertise, know-how and investments for a growth initiative.
The recent advances made in the information technology and telecom apparatus, communications, genome and biotechnology, medical sciences, defense products and space technology have put Pakistan in a distinctive club of nations. This opportunity needs to be successfully harnessed and expanded. Besides, Pakistan is located in an economically dynamic neighborhood. This very location should enable it to uplift its economic growth to high levels.
Scope of Economic Potential
Economic potential is the total capacity of a country to produce goods and services that leads to economic growth by creating surplus value. Economic potential is available when existing resources are not fully utilized because of the non-availability of adequate skills, technology, and hard and soft infrastructures as well as markets to sell produced goods and services. To determine how much the economy ‘should’ be producing, economists use a metric called the potential GDP. In this regard, following are the estimates available for short-and-long-run economic growth possibilities in Pakistan.
First, the short-run. In its latest report “2020 Global Economic Prospects” the World Bank forecast that the GDP will grow by 2.4% in FY20, its size will become about $291 billion. Growth is expected to recover to 3% in FY21 and 3.9% in FY21 when ongoing structural reforms will start taking effect and macroeconomic conditions improve further. A more stable external account will also support the uplift of economic activities in FY21. The trade deficit thus is projected to narrow in FY20 and FY21 as the impacts of currency depreciation, domestic demand compression amid monetary tightening and credit tightening, and other regulatory measures to curb imports settle in.
According to a World Bank report, with sustained reforms, Pakistan could be a $2 trillion economy when it will turn 100 in the next 27 years. It means graduating to an upper-middle-income economy category where per capita income will be $5,702, provided Pakistan halves its current population growth rate to 1.2% by 2047. This implies a persistent annual growth rate of 7.3%, which is nearly 50% higher than the historical average annual growth rate of 5% – a formidable task in the present scenario. Making 7.3% growth rate a reality would require a persistent concerted effort from all the stakeholders of the economy. Otherwise, the country will remain in the category of lower-middle-income economies. Notwithstanding above, just by formalizing the informal economy (that has a size of over 90% of the GDP) Pakistan can nearly double its formal GDP and per capita income. 
Reasons Behind the Failure to Realize Economic Potential
Pakistan needs to harness its untapped economic potential to create a brighter economic and social future for its people. The relevant question is, why could it not tap its economic potential so far? Following are the main reasons:
•   Safeguards in terms of government revenues are not sufficiently created to tap the economic potential. A large part of the budget is either comprised of non-discretionary spending (i.e., interest payments on large debt) or subsidies to non-targeted groups (energy subsidies, loss-making state-owned enterprises, etc.). Consequently, resources available for discretionary investment in infrastructure, health and education are met through creating debt. This is restricting the sustainability of economic growth. The outcome of low growth is high unemployment, high rates of inflation, and currency crisis. 
• Low private investment, weak institutions, low-quality human resources, shallow tooling skills of workers due to lack of depth in vocational expertise, lack of modern technology, high business and trade costs, excessive industrial and agricultural wastage, illegal trade, lax enforcement of intellectual property rights, and low quality hard and soft infrastructure, etc., have been restricting the realization of economic potential.
•    Private industries create low demand for innovation as they produce basic goods rather than higher-end products, while the institutional capability to supply technology is generally weak. Therefore, the future challenge for the policymakers is to create demand for innovations and technology up-grading by private enterprises and public sector institutions.
•    Export-oriented firms face a host of constraints to their competitiveness: restricted access to global markets, high energy cost, lack of enforcement of international standards, anti-export bias in policies, delays in payment of tax refunds, unfavorable customs procedures, insufficient skills and rising labor costs.
•    Export growth opportunities are becoming limited in the international market, therefore, the need of the hour is to look inward to generate domestic demand for those goods that cannot be sold in the international market. But the monetary tightening has caused a sharp slowdown not only in fixed investment but more so in private consumption.
•   Rent-seeking activities have been creating policy uncertainty and a lack of trust in policy implementation that adversely affects firms’ reactions to reforms. Ironically, the outcome of such activities is that the effectiveness of even well-designed policies and reform measures is too often compromised.
•  Investors are expressing cautious optimism on realizing the growth potential of the economy mainly due to lack of progress on documentation of economy, high interest rates, sharp depreciation of the currency, rising tax burden, dumping, import under-invoicing, smuggling, counterfeiting, slow payment of tax refunds and circular debt. They are also concerned over lengthy timeline in contract enforcement as it takes very long in resolving commercial disputes.
•   Policies of the past such as tariff protection, local content requirements for foreign firms and export subsidies are no longer allowed to be practiced due to World Trade Organization (WTO) agreements’ obligations. Similarly, the practice of ‘reverse engineering’ for technology acquisition is prohibited by the TRIPS agreement of WTO. Besides, technical barriers to trade and contingent protection are adversely affecting exports and are increasingly restricting foreign market access. All these developments require reforming of local institutions and rebuilding of relationships with major trading partners.
Harnessing the Economic Potential
Global experience suggests that the export-led growth strategy has reached its limit. Competition among countries on the basis of low unit labor costs and tax incentives is now creating little gain for growth. Concomitantly, the growth of demand from developed countries is weakening, these limits have reached earlier than anticipated. As a result, many countries are now pursuing a mix of inward and outward-looking strategies. Therefore, a rebalancing of the growth strategy with a greater weight to domestic demand appears to be a viable policy option for Pakistan to harness its growth potential at least in the short to medium run. In this context, domestic demand should be boosted by raising incomes in manufacturing and agriculture sectors rather than increasing debt-based purchasing power. All in all, given the prevailing situation the growth potential needs to be harnessed through a balanced growth strategy comprising trade expansion and domestic demand stimulation initiatives.
Countries that were lagging behind Pakistan have fast surpassed it by timely adjusting their policies in the wake of new developments in the global arena. Pakistan needs to undergo fast transformation to catch up with the fast movers otherwise growth prospects will remain elusive in the foreseeable future. The building blocks for sustaining high growth over the long term and for reaching the status of an upper-middle-income country are:
•   Creation of macroeconomic stability; a necessary condition that gives confidence to investors and consumers. This needs to be achieved through persistent fiscal discipline, improving current account balance and lowering inflation. 
•   Fast improvement in ease-of-doing business and reduction in cost-of-doing business are extremely important to attract domestic and foreign investment for industrial growth. The government needs to act on war-footing in this context. 
•  Development of skills to improve proficiency of workers to work on modern machines. Readiness of workers is a decisive prerequisite for transfer of technology and its absorption. Incentivize firms for imparting on-the-job training.
•     Adoption of modern technology to spur innovation and entrepreneurship, especially by encouraging educated youth. Establish science and technology industrial parks (first of its kind has been recently established by NUST) to satisfy the technology needs of existing firms and startups.
•   Invest heavily in modern physical infrastructures for reliable, cost-effective and efficient provision of services, especially in the energy and communication sectors.
•   Revitalize the existing agricultural and industrial complex towards value-added growth by relying on new technology applications to meet globalized tastes of domestic and international consumers.
•   Incentivize domestic producers of industrial and agricultural inputs to improve productivity and quality of their production, and make their supply more reliable through modern management practices. Improve logistic infrastructures to timely ship the required inputs to firms producing finished products.
•     Actively engage with exporting firms and liberalize imports to make imported inputs cheaper for export firms. 
•  Treat export-orientation and domestic demand stimulation as a platform for industrial and agricultural growth, creation of productive durable jobs, transfer of technology, development of entrepreneurship, improved business environment, local, regional and global connectivity, etc. 
•   Encourage the diaspora to invest in Pakistan by assuring safety of their investments. Issue investment bonds exclusively for them, who would, in turn, become shareholders or partners in the local enterprises.
• Dynamic and efficient small and medium enterprises (SMEs) should play an important role in the new growth strategy. Ensure access to finance for SMEs through banking channels which normally prefer large scale firms. The State Bank of Pakistan (SBP) offers export refinancing facility and long term financing facility to large firms. The SBP needs to devise a mechanism to extend these facilities to SME firms.
•    Effectively enforce rules and regulations related to technical standards, intellectual property rights, sanitary and phytosanitary measures, etc., that are demanded by investors and traders.
•   Build strong and effective institutions to remove bottlenecks in good governance for creating private sector’s trust in reforms and policies. The government’s role should be limited to providing an enabling business environment and developing foundations to effectively implement a dynamic growth strategy. Mistrust in policies and resistance to reform measures by the private sector should be offset with a strong partnership between private and public sectors. This would induce the private sector to accept even tougher reform measures.
At this juncture, Pakistan is committed towards a paradigm shift to bring back manufacturing and agriculture sector’s lost weightage in the GDP. Sustained growth is certainly the most desirable option for Pakistan to harness its massive untapped economic potential. It is, therefore, essential to make industrial and agricultural development the top priority in the overall economic growth strategy. This strategy should be a blend of expansion of exports and creation of domestic demand. It needs committed and sincere applications of policy measures to realize the economic potential for economic prosperity and to emerge as one of the fast growing and promising global economies.


The writer is a Professor of Economics at the School of Social Sciences and Humanities at NUST, Islamabad. 
E-mail: [email protected]
 

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