Pleasant fiction By Sakib Sherani - Friday 8th April 2011

TWO carefully constructed myths regarding Pakistan`s economic performance post-9/11 need to be examined and de-constructed, so that policy lessons can be learnt for the future.
The most pervasive of the received wisdoms pertains to Pakistan`s `miraculous` growth rates between 2003 and 2007, which supposedly ushered in an unprecedented era (if four short years can constitute that) of prosperity.
The facts, unfortunately, portray a very different picture of the economy. Pakistan experienced four years of above-trend economic growth in this period (2004 to 2007). Of this, some remarkable accounting innovations inflated the growth rate in at least one year (2006), in which the country`s livestock population was shown to grow at an astounding 16 per cent rate.
This was remarkable not just because the long-term average growth rate (over 60 years) was around three per cent a year, but equally for the fact that this spurt in the livestock population coincided with the spread of avian flu, following which over 20 per cent of Pakistan`s poultry stock was culled. Adjusted for this slight inconvenience, the growth rate for the year normalises to 4.3 per cent, instead of the 5.8 per cent reported for the year.
When viewed in a historical context, however, this period of a few years of high growth is unremarkable in that it fits neatly into a pattern of a `boom-bust` cycle which Pakistan`s economy has experienced since birth. Unlike China, India, Vietnam or the Newly Industrialised Countries (NICs) before, which have grown in excess of seven per cent a year for over two decades in a virtually unbroken stretch, why did Pakistan`s `miracle` period last only a lame three years? additional
If Pakistan was indeed experiencing a booming economy not based on massive inflows of foreign assistance alone (which included debt write-off and restructuring, enhanced market access for exports, $600m grants a year for budgetary assistance from the US, $500m a year monies from the World Bank), or of private capital (reverse capital flight, foreign direct investment and inflows of `hot` money), what explains the sudden meltdown of the economy in 2008? Surely an economy built on firmer and surer foundations could have withstood external shocks — or internal mismanagement — for longer?
The answer lies in the growth `formula` relied upon by managers of the economy in those years to extract short-term growth, rather than achieve a structural transformation of the economy through deeper and broader processes. Hence, the share of the manufacturing sector in GDP or investment or employment did not exhibit a structural breakthrough. On the external side, import growth (mainly of consumer goods, which also included an overstating of capital goods imports) outstripped exports 2:1 due to a persistent overvaluation of the exchange rate. Hence, towards the end of this period, Pakistan`s exports were financing only 44 per cent of its imports, with the rest financed from other sources, including portfolio investment inflows (which had risen to over $3bn). declined
Further evidence of a historic opportunity squandered by the economic managers to make the economy structurally sound: despite the growth in the economy, the tax-to-GDP to less than 10 per cent. This negligence has cost the economy heavily. To get a measure of how Pakistan`s public debt worries date to the incompetent and myopic handling of the economy between 2003 and 2007, consider: if Pakistan`s tax-to-GDP ratio had been increased to merely 13 per cent by broadening the tax base by 2005, the country`s debt burden would have been nearly 15 per cent of GDP lower today (at around 55 per cent of GDP).
Most remarkably, the period between 2003 and 2007 produced muted employment creation in the economy, as evidenced by the creation of only a few hundred thousand jobs in over four years in the biggest growth drivers of the economy: banking, telecoms, oil and gas and the auto industry (by virtue of being capital-intensive). To suppress this uncomfortable fact, headline job growth in the economy was contrived by showing a large absorption of employment under `unpaid family help`.
So compelling was the need for creating some kind of legitimacy for the government through a portrayal of high economic growth, that a needless hype was created about the stock market as a barometer of economic development, which drew in hundreds of thousands of financially uninitiated households, with no previous exposure to investing in stocks. Not surprisingly, two of the worst-ever stock market crashes ensued, with billions of dollars of market capitalisation, and savings of urban middle class households, wiped out, requiring a massive injection of public funds.
Not surprisingly, with rising inflation (stoked by an incomprehensible borrowing binge from the central bank, inexcusable for an `over-financed` government) muted job creation and extremely skewed income gains, the economic condition of a large part of the population — those without access to consumer credit — had begun to worsen. Remarkably, this fact had begun to be depicted by a variety of surveys, including official ones. As an example, the IRI survey conducted in February 2008 found 86 per cent of the respondents reporting a `worsening` of their individual economic condition, or `no change` over the previous year — a surprisingly high percentage for an economy supposedly experiencing a `miracle`.
To be sure, a number of important policy measures were taken successfully in terms of opening up different sectors to private investment (telecoms and the financial sector, for example). In addition, steps were initiated for the Iran-Pakistan-India gas pipeline and LNG importation. However, by and large, economic management of that period failed the nation. Beyond accounting sleights of hand, equally serious charges pertain to the lack of sustainability, equity, or perhaps even desirability of the growth model followed. There are important lessons to be learnt, so that Pakistan can follow a more inclusive, less external inflows-dependent, and a more private investment-driven approach to growth in future.
Of recent, another myth regarding Pakistan`s public debt is being peddled, not surprisingly by those with the most to answer. This will be taken up subsequently.
The writer heads a firm providing economic research.

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