September 18 , 2009
Pak Economy Needs Growth
After seven fat years of strong economic growth and rising living standards, the Pak economy has stagnated. For fiscal 2008-2009, growth was essentially zero (the government fudged the numbers and “borrowed” 2% of the growth in the previous year so that they could claim some growth in 08-09). Given that the population continues to expand 2% per year, this means that on average Pakistanis got a bit poorer. This slow growth was accompanied by very rapid inflation, peaking at over 20%, and a corresponding fall in the exchange rate. The rupee, which had held at about 60 per dollar for most of the last decade, fell to 80 per dollar.
It is imperative that economic policies be put in place so that growth resumes, and returns to the brisk levels (7% per year) that we saw during Musharraf’s era. Only that rate of growth will seriously dent poverty and raise living standards across the board. Pakistan needs to grow at that rate if it wants to keep up with India. 20 years ago, Pakistan had a substantially higher living standard than India, but India’s economic performance in the last two decades has been better, and that gap has closed. By some measures, per capita income in India is now higher than Pakistan, but broad scale measures of well-being, such as cell phone ownership, percentage with Internet access, extreme poverty rates, childhood malnutrition, and other parameters suggest that Pakistanis on average still live a bit better than the Indians. Some of this is due to the extreme inequality in the Indian economy, with pockets of tremendous wealth contrasting with millions living on sidewalks, and grinding rural poverty that has not been dented in the least by India’s economic growth.
There are some apologists for the slow growth of Pakistan’s economy who claim that we should accept slower growth if it is “pro-poor”, rather than seek faster growth that is not “pro-poor”. What constitutes “pro-poor” growth is never rigorously defined, and is mainly a rationalization for economic incompetence.
Understanding how an economy works is not that complicated. There are three essential parameters that determine how prosperous a society is. The first, and most important, is production of goods and services. An economy that produces more of these will have a higher standard of living than one that makes less. This total production, known as the GDP, is what governments seek to “grow” and make bigger every year. The bigger the pie, the more there is for everyone to share.
The second element of economic activity is distribution of the production. Who gets to own what is produced? Businesses, workers, investors, and the government through taxation all get a share. By adjusting tax policy and the relationship between workers and businesses, governments can affect how the GDP gets distributed and who gets what share. But policies that sharply redistribute the GDP can have the unintended consequence of dampening or stopping economic growth, just look at the failure of communism. So government policy must balance social equity concerns with the need to maximize long-term growth.
The final element is consumption versus investment. All those who get a share of the GDP must then decide whether they will consume their portion or invest some of it. Investment is what drives economic growth, and governments should pursue policies that encourage a healthy balance of investment and consumption. It is possible to over-invest, which leads to bubbles and waste, so it is wrong to conclude that all investment is good and all consumption is bad. Consumption is in fact the end purpose of all economic activity, and investment occurs only because those that invest plan on being able to consume even more in the future as a result of a successful investment.
When we look at this basic overview, we come back to the first principle: the economy needs to grow. The reason Pakistan is poor is not due to a mal-distribution of wealth, it is due to insufficient production. Raising the GDP should be the first priority of the government. It is only growth that will provide jobs, create new industries, and generate the demand for skilled labor that will allow Pakistanis to reach First World living standards. A growing economy generates more taxes, which allows the government to spend more on social services such as health, education, roads, and electricity.
It was due to the rapid growth of the Musharraf era that the social spending component of the government budget soared from 90 billion rupees to over 500 billion rupees. That needs to go up even higher to put every child through 10 years of proper education. The government must get the economy growing again.
