Beating the Odds: Growth in Global Recession

Beating the Odds: Growth in Global Recession

A few days into the new year, Pakistan has been faced with lowered growth rate projections for the current fiscal year as well as the next two years according to the World Bank, factoring in tighter monetary policy and fiscal consolidation. Although this projection paints a grim picture, Pakistan does not stand alone in the field of slowing growth and falling trade levels. A global slowdown in trade and industrial activity has been predicted, so in relative terms, Pakistan is not suffering as much as it would seem.

On the contrary, a deeper analysis shows that while industrial growth is falling, the textile sector is in fact operating at its full capacity and receiving additional orders. Pakistan's largest industry share continues to be occupied by textiles, so this is in fact an opportunity for unprecedented GDP growth. With effective policy and appropriate measures to give Pakistan's export sectors the necessary facilitation it requires, it is possible to change the negative projections into positives, and 2020 may finally prove to be the year in which the country's growth potential is realized. This is an opportunity to set a precedent for the coming years, and to streamline the way trade is managed in the country. These necessary measures are what we wish to elaborate upon in this article, and the recommendations that follow are based on sociological research and Modern Monetary Theory (MMT).

MMT research shows that a high government deficit, a trade surplus via imports and/or exports, and to some extent, foreign remittances, have been the most pertinent factors in boosting a country's growth rate and GDP.

Pakistan has a high fiscal multiplier, so even nominal investment in the country provides substantial returns. The fiscal multiplier explains the expected total increase in GDP resulting from additional government spending or a reduction in tax. Thus, a higher fiscal multiplier exponentially impacts the overall domestic output (GDP). Slight increases in government deficit are major drivers of growth. Pakistan's backward linkage multiplier in the textile sector was 7.76 in 2007, and has increased with each consecutive year, showing that a single unit injection into the textile sector yielded over 7.76 units of income in the economy through growth in downstream sectors.

According to the World Bank, 1% growth in garment production is associated with 0.3% to 0.4% increase in employment for both men and women. Investment in human capital is the most essential component of the revised policies and programmes to facilitate Pakistan's economic growth in the coming years.

In terms of regional trade, imports have grown much more than exports in the last two years, as a result of a domestic consumption and investment boom. This resulted in a high import growth of 14.9 percent in 2017 and 15.6 percent in 2018, which is nearly twice as high as the region's export growth. Meanwhile, a World Bank press release from April 2019 posited that exports grew by only 4.6 percent in 2017 and 9.7 percent in 2018. Growth is expected to recover to 4% in FY21 as "structural reforms take effect and macroeconomic conditions improve." Remittance flows are expected to support the current account balance next year. A stabilized external environment will also support a proliferation in economic activity starting from FY21. The trade deficit is projected to remain elevated during FY19, but narrow down in FY20 and FY21 as the effects of domestic demand compression, currency depreciation and other regulatory attempts to curb imports set in.

Each projection has implications that are not initially evident. In particular, foreign remittances boost short-term growth but carry the underlying implication of brain drain and loss of high-skilled labor to other countries. The returns for Pakistan that would have been realized by retaining this skilled labor go untapped, although cash inflows from their foreign jobs do provide a certain degree of support locally. Thus the MMT strategy provides useful indicators for where the focus must lie in moving forward with Pakistan's export-led sectors, but a narrowed down approach with identification of individual areas for development is necessary.

These economic projections provide incentive for the implementation of robust and comprehensive policies that can unleash Pakistan's export potential. In order turn South Asia into the export "powerhouse" that it is destined to be, Hans Timmer, World Bank Chief Economist for the South Asia Region, stated that "efforts should include trade liberalization, spurring entrepreneurship, and equipping citizens with the skills they need to compete on the global market."

This brings us to the textile policy being prepared for Pakistan in 2020 with a view to realising the potential of value addition in each segment of the textile value chain, utilizing the potential of homegrown cotton augmented by Manmade Fibre/Filament to boost value added exports, and the efforts required to become a major player in global textiles. Great emphasis has been placed upon investment in human capital, as if history and competition are to be good indicators, there is a need to build a strong and motivated workforce before other goals can be actualized.

The policy posits that improving worker skills and literacy will allow for increased productivity of workers, wage increases, and a reduced level of waste. This will enable, among other things, the production of higher-quality products, garments and non-garments. It will require a comprehensive vision for skill development, re-skilling the current labor force through greater access to informal training and skill-building, and improving the quality of foundational education.

Implementing international safety standards in Pakistan is highlighted in the new policy as a precondition for sustained export growth. This requires strong and credible government action and a partnership with the private sector, domestic and international. Seriousness of intent on the part of the government has been deemed to play a critical role in trade relations with the European Union and the United States.

The preparation of a safety net and a labor strategy that recognizes possible winners and losers in trade liberalization could help reduce opposition to a neutral trade policy. A key part of this strategy will prioritize finding mechanisms that link poor safety net beneficiaries to more productive employment opportunities, with a particular focus on youth. The swelling youth cohorts offer both opportunities and challenges that the policy aims to cater to. Investment in appropriate skills development to meet global and domestic demand has the potential to harness substantial gains from globalization, whereas training and retraining of workers will help to ensure their resilience to trade shocks.

With a holistic approach to spearheading economic growth and institutionalizing certain international standards, Pakistan can achieve sustained long-term economic growth that makes use of opportunities that were previously neglected. The realization that increased trade in any form, as well as larger government deficits have played a key role in economic growth all along has broader implications for the way in which future policies are to be formulated. Furthermore, acknowledging the human factor at every stage of the process, in terms of worker welfare, skill development, investment in youth and retention of top graduates is bound to ensure great returns and an improved standard of living in Pakistan. By ensuring a continued focus on these mechanisms, Pakistan will be able to disprove the World Bank projections as Textiles are posting much higher export volumes and are also poised to capture additional market share.

Link: Beating the odds: growth in global recession