August 07, 2020
Pakistan’s Uneven Development
Where does Pakistan stand on the ladder of development roughly 70 years after independence? Has the economy made any progress, and are average people enjoying a higher living standard than their parents or grandparents? And how has Pakistan done relative to its other large South Asian neighbors, India and Bangladesh?
This is a hard question to answer, because there are many methods one can use to compare economies. The best, and broadest, is the value of the entire economy as measured through a lens called Gross Domestic Product, or GDP. This system was first developed in the 1930’s, and relies on a set of specific techniques to value the output of the economy. It has a number of limitations, and can sometimes give rather skewed results if the underlying data is flawed. For example, some measures of GDP in the late 1970’s suggested that communist East Germany had a living standard equal to Great Britain, but that was nonsense, and readily obvious.
One big problem in comparing one country to another is the issue of currency. Each country has its own money, so how can we convert the two GDP’s into a common currency of measurement? One way is to use the market exchange rate with the dollar and convert every country’s value to dollars. But this leads to a distortion, as non-tradeable goods and services can cost much less in poor countries than rich ones. A haircut in New York can cost 20 dollars, but no one pays 3,200 rupees for a haircut in Karachi. The price of a housekeeper or a tutor or music teacher in the two countries is also widely different, even though the actual service is the same.
The World Bank has a technique to get around this, which is to compare the price level for a vast array of goods and services in every nation, and then use that to adjust the market exchange to reflect the actual prices. This value is the GDP at purchasing power parity or PPP. The World Bank does this complex exercise every 6 years or so, the previous one provided data for the state of the world in 2011, and just recently the World Bank released numbers based on the 2017 economic data.
The US remains among the richest nations, with a PPP GDP per capita of 60,000 dollars, up from 54,000 in 2011 (I’ve adjusted all the 2011 numbers for inflation to compare them to 2017). These compare with Germany in 2017 at 53,000, France at 44,000, UK at 46,000, and Russia at 26,000. Turkey has actually reached 28,000. In Asia, Japan and South Korea are both at 41,000, Malaysia at 25,000 and China at 14,000. Vietnam is at 7,100.
In South Asia, India rose from 4,900 in 2011 to 6,150 in 2017, Bangladesh from 3,050 to 4,400, and Pakistan from 4,700 to 5,000. Clearly, Pakistani performance in the last decade of civilian rule, after a spectacular growth spurt in the previous decade, appears to have been abysmal.
But GDP is not the whole story. Another metric that better defines the material living standards of a population is actual individual consumption. The World Bank looks at that too, and there the numbers show some divergence. For example, GDP per capita for Ireland is actually spectacularly high, at 78,000, but it’s actual consumption levels are lower than the US and a bit less than the UK. Looking at PPP consumption per capita in 2017, the US is at 44,000, while Ireland is at 27,000, which clearly reflects that American living standards are still much higher. Consumption in Germany is at 34,000 while the UK is at 32,000. Turkey is at 19,000. In Asia, Australia is at 34,000, Japan at 27,000, South Korea at 22,000, and China is 7,000, just a bit above Indonesia at 6,700. In South Asia, Bangladesh is at 3370, India is at 4170, and Pakistan is surprisingly still above both at 4,600. Pakistan’s material standard of living for its citizens remains statistically better than India, and much better than Bangladesh. But how do we square this with the fact that India’s GDP is higher than Pakistan’s?
What is the difference between GDP and AIC (actual individual consumption)? We all in the end work to consume. That is the purpose of an economy. But sometimes we don’t consume all we make, we save seed for the next planting, and save money for retirement, or invest in new ventures. Trade can also boost consumption or detract, as we either run a trade deficit, boosting consumption, or a trade surplus, which sends production out of the country removing it from consumption. Much of the difference in the numbers is due to the level of investments, and Pakistan has had much lower levels of investment than India for decades. Some of this is due to much less income inequality in Pakistan. In a poor country, only the rich can afford to save, and if incomes are relatively even such as in Pakistan, there is just not as much massive wealth accumulation that can generate high savings. India on the other hand, has massive wealth inequality, which is why their extreme poverty rate remains much higher than Pakistan, but also why they can save and invest more. Those billionaires are good for something.
Another factor is the efficiency of investment. Countries with distorted economies can often create GDP growth through a brute force method of massive coerced investment. There are many ways to do this, sometimes called “financial repression” in which households have limited opportunities for consumption and are forced to save. The old Soviet-style command economies relied on this method. China continued to use this even as it moved to a quasi-capitalist structure, which is why Chinese investment rates are astoundingly high (China invests 45% of GDP per year, compared to 20% or less in Western nations). This brute force method works to an extent, but it is horribly inefficient, and even the Chinese have been confronting the limits of this approach in the last decade as growth rates have been steadily declining. But this massive investment explains the giant gap between China’s 14,000 dollar GDP per capita, and its 7,000 dollars of actual consumption per capita. What this also means is that China could have very little GDP growth for the next decade, and yet still sharply raise living standards by moving investment to consumption.
Pakistan clearly underinvests, which is why CPEC has been such a godsend to the nation. The Chinese strategic investments have ended power shortages and upgraded critical infrastructure. The misallocation of capital that vexed the economy due to a massively overvalued rupee for the last 10 years has also been painfully corrected, while inflation has finally been tamed. Once the COVID-19 pandemic is contained with a vaccine, the economy should return to sustained real growth.
There is one other important distortion in the GDP numbers for Pakistan that need to be taken into account. Measuring GDP is not a simple process, and one of its critical foundations is creating a model of the economy you are trying to measure. For example, GDP measures of the US do not need to include the value of money spent on witch doctors, as Americans don’t use them. Nor would one need to have a technique to calculate the value of pork production in Pakistan. These are trivial examples, but this gets much more complicated. This process of creating a model of the economy is calling “basing” the GDP. The model needs constant updating, or “rebasing” as the economy changes. For example, the rebasing in Pakistan done in 1980 had no measurement of cell phone sales, and so the expansion of cell phones in the 2000’s would not be captured by a GDP model that used the 1981 base year. Advanced economies are so interested in accurate data that they rebase their GDP calculations every year. Emerging economies are advised to rebase every five years. When performed, rebasing usually results in an upward revision of the GDP, as new industries and sectors are captured that were not under the prior base.
Pakistan has a long history of very poor statistical infrastructure. Rebasing has been done very rarely. In the last 40 years, it was done once in 1980, then twice under Musharraf in 2000 and 2006. The 2000 to 2006 revision resulted in a modest upward revision of the GDP, as there had not been massive structural changes in the 6 years. But the 2000 rebasing showed the GDP to be 20% higher than when measured using the old 1980 base. This also meant that items such as trade or budget deficit or defense spending as share of GDP was lower than expected, as was tax revenue and development spending. The Nawaz Sharif government stated they were going to rebase GDP in 2017, but never completed the task. It may not get rebased till 2022, given the other priorities of the current government.
What this does mean though is that Pakistan’s GDP is almost certainly dramatically underestimated. Just as the 2000 rebasing showed that GDP was 20% higher than previous technique measured, it is estimated by analysts that if properly rebased the current GDP is also 20-25% higher than measured. If true, Pakistan’s GDP per capita is really over 6,000 dollars, essentially the same as India.
So going back to the original question, has Pakistan made progress? The answer is clearly yes. GDP per capita in 1950 was less than 1,000 dollars, it is now likely around 6,000, accounting for rebasing. But living standards have soared much more than merely six-fold. One must also take into account the vast range of goods and services that a Pakistani can buy today that could not be bought with any amount of money in 1950. Smart phones and cheap motorcycles and international jet travel and cheap solar power and antibiotics and a vast array of medical treatments and vaccines and all sorts of entertainment and education. How to value that? How much money would compensate for giving up 70 years of new products and services that even a Pakistani of modest means can currently enjoy? I wouldn’t take double my income in exchange for having to return to the society of 1980 in the US, much less Pakistan.
Pakistan remains a poor country. But there are many places in the world far poorer. Much of sub-Saharan Africa has GDP per capita less than 2,000 dollars. Crawling out of deep poverty can take decades. But once you get to 7,000 dollars and two doublings you are a reasonably developed nation, like Malaysia or Turkey. Pakistan can do that in the next generation, if it invests in basics like universal education, good health care, and infrastructure, and if it follows sound economic policies that encourage competition and growth and are supported by the rule of law and enforcement of contracts. Pakistan must avoid at all costs a return to the useless kleptocracy of the Bhutto/Zardari/Sharif years. Their thirty years of failure should relegate them to the dustbin of history.
