January 26 , 2018
Pakistan’s Economy on a Roll
Pakistan’s economy is starting to boom. A decade after Musharraf’s regime ended with a new PPP government, economic growth has finally accelerated back to about 6% per year. There is a palpable sense of rising living standards and a rapidly expanding middle class. Pakistan may finally have reached a level of “economic takeoff” where it can expect a long stretch, perhaps a couple of decades, of rapid growth.
Pakistan has had an up and down economic record. For the most part,the economy did well under military governments, such as in the 1960’s and 1980’s and 2000’s, and poorly under the socialism of Zulfikar Ali Bhutto in the 1970’s and the kleptocracy of the politicians in the 1990’s. After a nice stretch of growth in the prior decade, the economy slowed again this decade under the PPP government, with electricity shortages, sluggish industrial growth, and high inflation. With the PML-N coming to power in 2013, there were still problems, but they were gradually brought under control, and growth has accelerated from as little as 1.6% in 2010 to now almost 6%.
In the recent 6 months all indicators are pointing to a surging economy. Tax revenues in the first 6 months of Fiscal 2018 (from July to December 2017) are up about 15% from last year. Industrial production is rising at 10% annual rate. Cement sales, which are a proxy for construction, are rising 15% per year. Car sales are up 20%, to over 200,000 per year. Car sales boomed under Musharraf, rising from 40,000 annual sales in 2000 to 200,000 in 2007, but under the PPP government, the economy turned downward and car sales got hit hard, dropping to 100,000 in 2009 before slowly rising back. Currently, auto sales are rising 20% per year, and new auto makers are planning to open factories in Pakistan.
Motorcycles are also booming, and they give families of modest means access to personal transportation that is life-changing for them. Motorcycle sales rose under Musharraf from 86,000 in 2000 to 660,000 in 2008. Sales dropped under the PPP but not as much, and had risen to 800,000 by 2013. Since then they have exploded, with sales reaching 1.6 million last year, and will go over 2.5 million this year.
Poverty has been dropping rapidly in the last 20 years. Extreme poverty, based on the international standard of less than 2 dollars per person per day in income (adjusted for local purchasing power), has almost disappeared in Pakistan. It dropped from 57% of the population in 2001 to less than 10% in 2014. The share that have high living standards, meaning over 10 dollars per day per person, went from 1% to 7%, and is continuing to climb. By 2030 extreme poverty should be less than 5% of the country, while 15% are expected to have high living standards and the rest in the middle-class.
Statistics on household ownership of consumer goods also confirms these numbers. Car ownership by households was 7% in 2014, compared with only 1% in 2001. Motorcycles went from 7% to 41%, refrigerators from 16% to 47%, washing machines from 25% to 48%, and computers from 1% to 12%. Now smart phones are rapidly replacing older cell phones, giving millions of Pakistanis access to the internet.
There are four factors that explain the improving economy. The first is a dramatic improvement in the security situation. This process started in 2013 when the Pakistani Rangers were sent in to restore order in Karachi. The army’s campaign against the Pakistani Taliban in the last few years has also furthered this. Safety has been restored in Pakistan’s major cities, making it possible for business to flourish. The second factor has been the improved electricity situation. For a decade Pakistan’s economy has suffered crippling power shortages which shaved 2% per year off economic growth, but that has now been overcome, particularly with the help of Chinese investments in power plants through CPEC. The third factor is declining inflation, with the State Bank of Pakistan now able to cut interest rates making it cheaper for businesses and consumers to borrow. Finally, there has been overall better economic policies with PML-N government than there was under the PPP.
Pakistan has done a good job of ensuring that economic growth helps the entire country. This cannot be said of India, where rapid growth in the last 20 years has not reduced poverty as much or boosted the middle class as strongly. The reason is that India has much greater social inequality, and as a result much greater inequality of wealth and income. In short, most of the growth in India has benefited a narrow elite. 1 in 6 Indians is an Untouchable, and another 1 in 6 is Muslim, combined this results in a third of Indians who suffer major social and economic discrimination. This inequality shows up in the statistics when we compare the average wealth of Indians and Pakistanis to the median wealth (the wealth level of the 50th percentile in the nation, the person in the middle). For India in 2016, according to a report by Credit Suisse, the richest 1% own 58% of the wealth, the highest concentration in the world outside of Russia. Average wealth per adult in India is 3,800 dollars, but median is only 600, while in Pakistan the average is 4,600 and the median is 1,800.
Pakistan has not followed the East Asian strategy of development, which was export-led growth. Exports have risen over the last 10 years but at a sluggish pace. Pakistan instead has an economy led by domestic consumption. This has some downsides. Poor export growth means the country has to run a trade deficit, which can be difficult to finance and results in the government having to get IMF bailouts, which happened under the PPP government 9 years ago. In addition, high levels of domestic consumption mean that domestic savings rates are lower, which could reduce needed investments. In India, because the rich are getting so rich, they can afford to save at a high rate. Pakistanis on the other hand, are mostly middle-class and spend their money, resulting in a lower savings rate. India’s savings rates are much higher than Pakistan.
Pakistan has funded its huge trade deficit with the massive flow of remittances from overseas Pakistanis. Remittances are over 20 billion dollars per year, and this provides the needed foreign exchange to fund imports. But Pakistan really should improve its export performance and not rely on remittances forever. The single biggest impediment for exporters currently is the overvalued rupee. The rupee has not declined against the dollar as much as it should have, given the inflation over the last 10 years. The government has been holding up the value of the rupee primarily to keep consumers happy. An overvalued currency, while it hurts exporters, makes imports cheaper than they should be, which consumers prefer. The government is not going to allow a major devaluation with elections in a few months. But after the elections this year, expect the rupee to drop to 125 to the dollar so that it gets back to fair value.
Pakistan has had a very up and down economic record since independence. But even for all that volatility, the economy has averaged 5% growth per year. This doesn’t seem like a lot, but it adds up over time. The US became a 20 trillion-dollar economy by growing 3% per year for 2 centuries. Despite a quadrupling of population since 1950, the average income of Pakistanis rose from 1,200 dollars to about 7,000 dollars now, in PPP terms. If the economy were to keep growing 5% per year for another 70 years, average income would be over 125,000 dollars, or double the current US figure. It’s unlikely that Pakistan can maintain 5% growth for 70 years; once a nation becomes rich its growth rate slows down (something that happened in Japan in the 1980’s, and has already started happening in China). But with good policies Pakistan can enjoy at least another 20 years of rapid growth, and likely can do 7% or more. If it does that, incomes will rise to 20,000 dollars, similar to where Turkey is today or the US was in 1960 and reach the threshold of a developed country.
