‘New’ growth strategy - Dr Ashfaque H Khan - Tuesday, March 29, 2011

Source : http://thenews.com.pk/TodaysPrintDetail.aspx?ID=38779&Cat=9

The Planning Commission prepared a “new” growth strategy and released it in January 2011. The president, prime minister and other political leaders have been eulogising this growth strategy. The latter has stemmed from dissatisfaction with the “old” growth model that relied on investment, particularly public investment. In other words, the Planning Commission claims that public investment has been the main driver of growth in Pakistan. The new strategy proposes a growth model in which the private sector should be the growth driver, with major emphasis on efficiency, innovation and entrepreneurship. The role of the government would be limited to a facilitator that protects public interest.

The document discusses a variety of issues, at times disjointed with each other. It appears that the Planning Commission had commissioned various studies on different topics. The staff at the Planning Commission tried to put together these different studies under one report and as such, the topics covered are fairly disjointed.

The document analyses the historical developments pertaining to growth, savings and investment, and claims that the period of high economic growth in Pakistan coincides with massive injection of foreign flows. The report did not provide any supporting table for this assertion. In the same paragraph, the report argues that foreign aid in Pakistan was negatively associated with long-term growth. These two assertions are contradictory. Either growth has spiked with inflow of foreign resources, or it has contributed negatively to long-term growth in Pakistan. Both assertions cannot be true.

The document discusses demographic dividend with no link to the report. The report analyses a demographic transition currently taking place in Pakistan as a result of decline in fertility rate. The report rightly points out that the journey from demographic transition to demographic dividend will not be automatic. The dividend has to be earned. Unfortunately, this report is silent on how to transform transition into dividend. Or how can we earn dividend?

The report further analyses the reasons for low growth in Pakistan, attempts to identify various constraints to growth, highlights the salient features of the new growth strategy, talks about improving productivity through market reforms, creative cities, connectivity (the role of Information and Communication Technology (ICT)) and engaging youth in nation building. The new growth strategy, therefore, centers on productivity improvement, development of mega cities, the role of ICT and engaging youth in nation development.

The report is technically weak, lacks cohesion, and some parts are based on incorrect facts. But the most important comment on this new growth strategy is: What is “new” in this strategy? Or is it a recycling of earlier government reports? It will be difficult to provide answers to these queries in the remaining space. The readers will have to wait till next week to get detailed answers to these questions.

What I can say in this column is that there is nothing “new” in this growth strategy. It is nothing but old wine in a new bottle. The Report is a recycle of earlier government reports with marginal addition. Millions of rupees have been doled out to local and foreign consultants for the purpose of recycling earlier reports. Additional resources in foreign exchange have been sought from various donors to undertake more studies. Proof of the above claims will be provided next week.

While discussing the reasons for low growth in Pakistan, the report points out that the “old” model of growth practiced in Pakistan relied on investment and that too on public investment as a driver of growth. Firstly, there is nothing wrong with investment-led growth. Many countries in the Asia-Pacific region have relied on investment for sustaining higher economic growth.

For example, India’s investment-to-GDP ratio hovered around 30 to 37 percent of GDP in the decade of 2000s. Similarly, China sustained an investment rate in the range of 40 to 44 percent, Vietnam in the range of 30 to 42 percent, Kazakhstan in the range of 27 to 32 percent during the same decade. Pakistan’s investment rate, on the other hand, ranged from 17 to 22.5 percent in the decade of 2000s. Pakistan needs to increase its investment rate to sustain higher economic growth as others have in the region.

Secondly, the new growth strategy argues that public sector investment has dominated in Pakistan and as such served as major driver of growth. This statement is factually incorrect. The share of public investment in total investment has been on the decline since the 1970s. The share of public investment has been 60 percent in the 1970s (the number is high because all the industries and financial sector were nationalised in the 1970s and as such investment in erstwhile private sector entities were reported under public investment), declined to 49 percent in the 1980s, 41 percent in the 1990s, and 25 percent in the 2000s.

Can we say that public sector investment dominated in Pakistan when we see a sharp declining trend? I leave it to the deputy chairman of the Planning Commission to clarify. Furthermore, the 25 percent contribution to overall investment is directed towards infrastructural development which is the primary responsibility of the government.

The private sector has always played a dominant role in Pakistan’s economy. It employs 90 percent of the workforce, over 80 percent of the GDP originates from private sector activities, over 75 percent investment is undertaken by the private sector and almost all the foreign trade is handled by it.

Should we still claim that the “old” growth model was driven by public sector investment? Have the consultants done their job properly in declaring the old growth model redundant? The readers will have to wait till next week to get an answer. What is required, however, is to make the private sector more efficient by removing irritants through structural reforms.

The writer is principal and dean at NUST Business School Islamabad. Email: ahkhan @nbs.edu.pk

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