The impact of global recession is more visible in Pakistan compared with neighboring Asian countries such as China, India, Bangladesh, Sri Lanka, etc. The real GDP growth of these countries is on average above the growth in industrialised countries and the world.
Why Pakistan is lagging behind in terms of higher real GDP growth is a pertinent question. What are the genuine impediments to achieve and sustain higher growth? And finally, what is the growth strategy for the economy that is under performing despite having substantial growth potential?
It is surprising for many in Pakistan that growth indicators in the last 40 years have never been worst despite having multiple crises. In the decades of 1970s, 1980s, 1990s, the average real GDP growth was 4.8 percent, 6.5 percent and 4.6 percent respectively. In the new millennium, the average GDP growth was 5.0 percent from 2001-2008 that has declined to 0.4 percent in 2009 and the economy has continued to reel between 3.0 percent to 4.0 percent growth rate. Is Pakistan following the growth patterns of the major economies and showing greater connectivity with them or there are internal problems with the proposed growth strategy?
Both Pakistan Peoples’ Party (PPP) and Pakistan Muslim League-Nawaz governments developed growth strategies to steer the economy on the higher productivity path. The growth strategy of the PPP government was based on the private sector led growth with supply side interventions of creative cities, quality governance, vibrant markets, and energetic youth and communities. This growth model was compatible with the ‘free market economy’ philosophy that emphasised on general equilibrium through market perfection.
The critical feature of this strategy was the ‘utilisation of youth bulge’ in the manufacturing and services sectors. Unfortunately, the PPP government was unable to retain power after the general elections in 2013, and the newly elected PML-N government has developed its own vision for the country.
The Vision 2025 is based on export-led growth by developing and harnessing the latent potential of human capital through knowledge-based economy and connectivity.
The seven pillars of the growth strategy also address the international development goals ie MDGs and SDGs. The fundamental difference between two strategies is the reliance of external and internal demand. Private sector led growth stimulates the domestic market demand through supply of durable and non-durable goods.
The growth strategy of the PPP government had failed to provide desirable results due to shorter implementation timeframe, as the strategy was approved by the National Economic Council (NEC) in May 2011 and the general election was held in May 2013. Another reason was sluggish growth in private consumption expenditures in 2012 and 2013 (11.4 percent and 9.5 percent respectively). Government was unable to control the increasing food inflation that also slows down the growth in private consumption expenditures.
The export-led growth strategy of the PML-N government has its own limitations, as the growth of demand from developed countries is dependent on the overall economic growth, including higher investment spending and creation of jobs. Secondly, Pakistan should have that productive surplus which should not create scarcity in the domestic markets. Finally, alternative demand-side policy intervention such as stimulation in domestic demand is desirable, knowing the fact that global recession tendencies are not over after the financial crisis of 2007-08.
In the current budget 2016/17, the people of Pakistan were expecting the roadmap of 7.0 percent real GDP growth in 2018/19 as proclaimed by federal finance minister in his budget speech. The GDP growth target was not achieved in 2015/16. It was restricted to 4.7 percent (accepted by many with suspicion) and the next year’s growth target is 5.7 percent. It means from 2016/17 to 2018/19, the economy will require additional growth of 1.3 percent and if compared with the growth of 2015-16, it will be additional 2.3 percent growth.
Keeping in view the dismal agriculture performance – 0.2 percent growth in 2010 to (-) 0.16 percent in 2015-16 – the real GDP growth prospects decline considerably from the agriculture sector. The agriculture package in this regard may reduce the cost of agricultural production but cannot increase the productivity that required certain incentives for the production.
Though the industrial sector has shown some revival in the last three years from 2013/14 to 2015/16 with 4.5 percent, 4.8 percent and 6.8 percent growth respectively, the unstable international oil prices and increasing demand of energy may hamper the growth in coming years. The net addition in the total national grid system is highly contentious as it has been argued that most of the energy plants are not producing electricity or operating at the lowest minimum output. The government has not provided alternatives of higher international oil prices for industrial sector production and how the gap of increasing demand of energy will be met in the absence of net addition in the national grid.
The growth strategy outlined in the Vision 2025 document has enormous potential to steer the economy in the higher GDP growth ranking. However, in the short-run, the export-led growth strategy in the depressing international commodity prices seems inappropriate for the country with respect to higher GDP growth.
The productive capacity enhancement in agriculture and industrial sectors is the best option that will stimulate the domestic demand. Agriculture is the back-bone of the economy as 65 percent of the population is directly or indirectly affected from its performance. The government needs to expedite the process of agriculture loans to the small farmers, ensure stable agriculture input prices and water availability.
More focus on the agriculture sector can revive the economy in a more cost effective way compared with industrial sector that required sustained energy supplies. The industrial sector on the other hand needed simplified rules and regulations and ease of doing business. Certain incentives are offered to boost the growth in industrial sector but without revamping structural deficiencies, the gains of policy incentives cannot be achieved.
The services sector which accounts to 60.0 percent of the GDP is dependent on the growth performance of the agriculture and industrial sectors. Wholesale and retail trade and transport and communication are half of the (32 percent) of the services sector.
It is evident that the growth in industrial and services sector is dependent on the performance of the agriculture sector. The growth strategy that looks outwards (demand in other countries) instead of looking inwards (boosting domestic demand) will not give desirable results in the short-run. So, the real GDP growth target of 7.0 percent can only be achieved with aggressive agriculture policies and increase in domestic demand not from exports of Pakistani goods.
The writer is the Principal Economist at the SPDC