Shahid Sattar and Emaan Ahmed
December 24, 2019
Pakistan is unique in many ways and possesses many attributes which should have made it an economic and political powerhouse. We possess immense potential in terms of natural resources, a budding youth population with potential to form an energetic workforce, high quality educational institutes, a highly venerated and nuclear-armed military and a long-standing bureaucracy.
However, the country has failed to capitalize on these capacities and has thus been left far behind its Asian brethren, who just a decade or so ago were at par with it in terms of development. Samuel Huntington in 1993 alluded to Pakistan’s immense potential to project itself as a “natural leader of the Islamic world.” However, we have yet to take off from the starting block in the economic race.
A serious effort was undertaken by the Planning Commission of Pakistan in 2011 to identify why this is so, and these findings from the crux of Pakistan: Framework for Economic Growth (FEG).
Pakistan is now on the brink of the third decade of the 21st century, along with its 8th decade of existence, so it is reasonable to try to assess its standing with respect to economic challenges of decades past and how they have been countered. The FEG outlines a number of crucial economic challenges, and proposes effective strategies for each of them. Although each policy recommendation warrants individual attention, and each aspect of the economy deserves a detailed appraisal, the purpose of this analysis is to provide a holistic overview of the economy with respect to its standpoint a decade ago.
The first challenge identified was a long drawn-out struggle in terms of macroeconomic stabilization; a result of unsustainable policies. During the year of publication of the report, Pakistan’s real GDP had grown by 3.7 percent, as compared with 3.0 percent in FY11. However, the economy underperformed compared with the growth target of 4.2 percent, given the energy shortages, security concerns, and floods in two consecutive years.
Nevertheless, growth was more broad-based compared to FY11, evenly distributed across agriculture, industry and the services sector. On the other hand, investment remained sluggish.
Fast forward to the dawn of a new decade and a look back at a comprehensive growth strategy formulated for Pakistan. In 2018, Pakistan’s economic growth was accelerating but at the cost of widening macroeconomic imbalances – outlining a structural fault in the means of achieving economic growth. The purpose of the 2011 strategy, reiterated multiple times in the report, was to focus on medium to long-term sustainable growth. Yet the means employed in FY19 have primarily revolved around high interest rates, double digit inflation, deterioration of primary and fiscal deficits, continuous private sector losses, cutbacks in investments, large scale unemployment and losses in consumer purchasing power. These can be considered to fall under the unsustainable policies that the report warned against. The graph below shows a decline in real GDP, with the most recent high being 5.83% and the 2019 figure amounting to 3.34%.
A recent assessment of credit ratings by Moody’s Investors Service deems Pakistan’s economic wellbeing to be on the rise, re-categorized from negative to stable, and thus on the road to recovery. Yet this stability is highly conditional upon certain factors, such as a high interest rate, which implies a compromise on long-term economic growth and a drop in investments. Textiles account for the bulk of the country’s exports, and low investment levels are likely to hinder the march towards much needed
rapid growth in exports. With the resulting lack of upgraded technology, our exports and trade deficit will remain bleak in comparison with regional players. There also remains unutilized capacity for immediate expansion in the textile industry, and a policy of rapid growth in exports for economic stabilization can only be applied once the interest rate is suitably set with an aim to facilitate investment.
Apart from high interest rates, there is the issue of double digit inflation which policies aim to target. The hampered process of job creation, low investments, low exports and high imports all are causes as well as outcomes of economic instability.
As pointed out in the FEG, we have historically under-traded with our neighbours and not adopted an appropriate geopolitical approach given our strategic location in South-East Asia. Economic progress has been further hampered by a low level of productive diversification and a weak value-added industry. The country’s position in world trade has barely changed over the past four decades, and has in fact declined recently, despite numerous opportunities to expand exports, particularly manufactured goods, in developed countries.
It’s almost as if the roadmap to economic growth has been read upside down. If the level of trade as a percentage of GDP seemed alarmingly low in 2011, it is lower now, having fallen from about 33% in 2011 to 28% in 2018, following a period of being largely stagnant with and then declining post-2015.
The trajectory of economic policymaking and the ways in which it tends to be unsustainable brings us to another challenge outlined in the FEG, in the form of a legacy of economic distortions. The FEG defines competitive markets as the “starting point towards increasing efficiency and sustained economic growth.” However, Pakistan has faced economic distortions hindering market competition, with the added pressure of high government intervention in business. The role played by the public sector has thus been considered too great, to the extent where it impedes market development. This was the case in 2011, and it is very much still the case today. Government intervention can be quantified by expressing public spending as a proportion of total GDP (Gross Domestic Product). In 2011, this was around 9% and it now stands at roughly 12%. (World Bank).
One effective means of stimulating economic stability and growth is an industrial policy which provides support to exports. Pakistan’s textile exports are currently valued at USD 13.5 billion out of the total exports (23.5 billion), but still account for a very minimal share of 1.7% in the world market for textiles. If we achieve the figure of USD 30 billion in textile exports, we will only have captured only 3% of the market for textiles. For reference, the total trade in textiles as of last year was worth USD 800 billion, so this is not an unrealistic target.
Another factor stifling our intended increase in market share is the illogical level of anti-dumping as well as other duties, rendering the local MMF-based apparel uncompetitive in the world market. Pakistan’s exports should be able to compete in world trade, which is now 70% MMF-dominated. Restricting exports to 30% of the cotton trade is a completely irrational model.
Private sector proliferation can be instrumental in achieving economic growth, as has been the case with Vietnam, a formidable regional competitor which has achieved milestone levels of growth in a short time by giving its textile sector space to flourish through private sector growth and investment. A 2017 resolution in Vietnam allowed for the private sector to be the driving force of Vietnam’s market economy. Given that private businesses experienced volatile growth in Vietnam in the past, this has been a highly effective strategy. Pakistan can achieve similar levels of rapid expansion by following a model of private sector growth and reduced government intervention, so that the textile sector not only attracts higher investments, but is also better equipped to take on the international market. This calls for international market-based pricing for all inputs, notably cotton and energy, in the textile chain.
The FEG also emphasizes pressures of demography. We have a rapidly growing population as well as a youth bulge to address. A large youth component is a very positive aspect, as younger populations have the most potential in terms of innovation, fresh ideas, productivity and entrepreneurship.
With increasing youth comes a greater need to develop our education system, create valuable opportunities for employment, encourage social cohesion and collaboration, and effectively train the youth so that we can unlock their full potential in leading the way to sustainable human development.
Recent developments in the form of the Kamyab Jawaan programme address the youth entrepreneurship factor appropriately. It has reserved a 25% quota for women and also accommodates the transgender community, ensuring the involvement of marginalized and deprived societal groups, and showing progressive thinking in the field of sustainable development.
However, factors which are yet to be structurally addressed include education and industrial employment for youth. Pakistan’s expenditure on education was merely 2.4 percent of the GDP in the fiscal year 2018-2019, whereas neighbouring India allocated 4.6 percent, particularly announcing a 10% increase in the education budget for the year.
Globalization, technological advancements and the development of key industries have created new job opportunities for young people across the globe, while our growing population is continually met with scant opportunities and hampered living conditions. Gone are the days when the state could even think of providing lifelong careers, given the changing economic dynamics of the world. The resulting phenomenon of “brain drain” is defined in the FEG as a loss of high skilled human capital, which is better off migrating to the developed world as there is a dearth of opportunities in Pakistan. We urgently need a policy to retain our educated and skilled youth, with a focus on encouraging entrepreneurial initiatives by fresh graduates.
A majority of the human capital that remains in Pakistan comprises low to medium skilled labor. The largest employer of the country is the textile sector, which accounts for countless jobs at every stage of the textile production process. There exists an array of opportunities where small units of garmenting factories can spring up and capture market share while creating much needed jobs for youth. A small increase in garmenting units can result in an exponential increase in employment, particularly for the unskilled youth that makes up a large proportion of our demography.
Furthermore, skilled workers can be of immense value in ensuring that Pakistan’s textile sector captures the maximum market share globally and achieves a competitive edge. Human resource development must be prioritized, with a specific focus on textile specialization and targeted programs by institutes such as the National Textile University, which can appropriately equip graduates with the initiative to start up their own businesses. Small firms take up minimal capacity and result in higher returns for the economy at large in the form of substantial job creation. These startups can possibly be state-sponsored in order to target rapid employment generation and rapid growth in exports.
There is no other industry or service sector with existing immense potential that the textile sector has to benefit the economy, with a direct impact on foreign currency earnings and new job creation. If synergy is developed amongst different sub sectors and a particular focus is lent to the garmenting industry, economic growth can achieve record heights, as has been the case in the flourishing industries of Vietnam and Bangladesh.
As shown below, Pakistan will have almost 200 million additional people to contend with in 80 years. With a focus on education and creation of job opportunities for youth, these statistics can possibly translate into high productivity and a competitive advantage, rather than a deteriorating standard of living due to scant opportunities and resources.
The FEG sheds light on impacts of external events, including terrorism, political instability and conflicts up until 2011.
It is comforting to see that the wave of terrorism has declined since 2009, as result of military operations conducted by the Pakistan Army. According to South Asian Terrorism Portal Index (SATP), terrorism in Pakistan has declined by 89% in 2017 since its peak years in 2009. Furthermore, action against corruption has been on the rise, and accountability is being given the crucial importance it deserves.
External events and conflicts since the publication of the FEG have included sectarian violence, and clashes with India, particularly in 2019 following unrest in Indian-controlled Kashmir. Such events have a tendency to disrupt economic progress, as priorities need to be reassessed in such cases. An overview of these factors shows that the constraints to economic growth outlined a decade ago still hold true today. The FEG emphasized that the problems in Pakistan related more to software than hardware i.e. there is more hindrance in terms of management and productivity than physical infrastructure. While progress in economic stability and youth engagement is laudable, there remains a need to tackle economic distortions and to formulate effective policies for economic sustainability. This requires a specific focus on supplementing the textile sector’s role in maximizing exports, along with greater efforts to empower, educate and harness the potential of our youth, to encourage investment in human capital and to develop a system whereby external shocks and political instability do not hamper economic progress.