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Econmoic growth studies


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Econmoic growth studies

  1. 1. 2629535-275590<br />projecT:<br /> “ECONOMIC GROWTH”<br />SUBMITTED By: <br /> EAGLE GROUP<br />NameRoll No M.Kashif Ashraf 11310 Rana Binyamin 11306 Saad ullah khan 11318 Zahid mustafa 11301 Nabiha Munir 11312<br />CLASS: M.SC (ECONOMICS)<br />SESSION: 2010-2012 <br />SUBMITTED TO:<br /> SIR. ILYAS SAB<br />Date: 17th October 2011. <br />HISTORY OF ECONOMIC GROWTH STUDIES<br />“Economic growth refers to a rise in national or per capita income and product. If a production of goods and services in a country rises, by weather means and along with it average income increases, the country has achieved economic growth”.<br />There is a clear reversal of fortune between the poor and wealthy countries, which is evident when comparing the method of colonialism in a region. Geography and endowments of natural resources are not the sole determinants of GDP. In fact, those that were blessed with good factor endowments experienced colonial extraction which only provided limited rapid growth; whereas, countries that were less fortunate in their original endowments experienced European settlement, relative equality, and demand for rule of law. These initially poor colonies end up developing an open franchise, equality, and broad public education, which helps them experience greater economic growth than the colonies that had exploited their economies of scale.<br />Since the Industrial Revolution, a major factor of productivity was the substitution of energy for human and animal labor and water and wind power, and since that replacement, the great expansion of total power, which was driven by continuous improvements in energy conversion efficiency. Other major historical sources of productivity were mechanization, transportation infrastructures (canals, railroads, and highways),[7] new materials (steel) and power, which includes steam and internal combustion engines and electricity. Other productivity improvements included mechanized agriculture and scientific agriculture including chemical fertilizers and livestock and poultry management, and the Green Revolution. Interchangeable parts made with machine tools powered by electric motors evolved into mass production, which is universally used today.<br />Great sources of productivity improvement in the late 19th century were the railroads, steam ships, horse-pulled reapers and combine harvesters, and steam-powered factories. The invention of processes for making cheap steel were important for many forms of mechanization and transportation. By the late 19th century, power and machinery were creating overproduction, which eventually caused a reduction of the hourly work week. Prices fell because less labor, materials, and energy were required to produce and transport goods; however, workers real pay rose, allowing workers to improve their diet and buy consumer goods and better housing.[8]<br />Mass production of the 1920s created overproduction, which was arguably one of several causes of the Great Depression of the 1930s.[9]Following the Great Depression, economic growth resumed, aided in part by demand for entirely new goods and services, such as household electricity, telephones, radio, television, automobiles, and household appliances, air conditioning, and commercial aviation (after 1950), creating enough new demand to stabilize the work week.[10] Building of highway infrastructures also contributed to post World War II growth, as did capital investments in manufacturing and chemical industries. The post World War II economy also benefited from the discovery of vast amounts of oil around the world, particularly in the Middle East.<br />Economic growth in Western nations slowed after 1973, but growth in Asia has been strong since then, starting with Japan and spreading to Korea, China, the Indian subcontinent and other parts of Asia. The Japanese economy has been growing very slowly since about 1990.<br />In 1377, the Arabian economic thinker Ibn Khaldun provided one of the earliest descriptions of economic growth in his Muqaddimah (known as Prolegomena in the Western world):<br />"When civilization [population] increases, the available labor again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase. Crafts are created to obtain luxury products. The value realized from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before. And so it goes with the second and third increase. All the additional labor serves luxury and wealth, in contrast to the original labor that served the necessity of life.<br />In the early modern period, some people in Western European nations developed the idea that economies could "grow", that is, produce a greater economic surplus, which could be expended on something other than mere subsistence. This surplus could then be used for consumption, warfare, or civic and religious projects. The previous view was that only increasing either population or tax rates could generate more surplus money for the Crown or country.<br />Later, it was theorized that economic growth also corresponds to a process of continual rapid replacement and reorganization of human activities facilitated by investment motivated to maximize returns. This exponential evolution of our self-organized life-support and cultural systems is remarkably creative and flexible, but highly unpredictable in many ways. As there are difficulties in modelling complex self-organizing systems, various efforts to model the long term evolution of economies have produced mixed results.<br />During much of the "Mercantilist" period, growth was seen as involving an increase in the total amount of specie, that is circulating medium such as silver and gold, under the control of the state. This "Bullionist" theory led to policies to force trade through a particular state, the acquisition of colonies to supply cheaper raw materials, which could then be manufactured and sold.<br />Later, such trade policies were justified instead simply in terms of promoting domestic trade and industry. The post-Balloonist insight that it was the increasing capability of manufacturing, which led to policies in the 18th century to encourage manufacturing in itself, and the formula of importing raw materials and exporting finished goods. Under this system, high tariffs were erected to allow manufacturers to establish "factories". Local markets would then pay the fixed costs of capital growth, and then allow them to export abroad, undercutting the prices of manufactured goods.<br />Under this theory of growth, to foster growth was to grant monopolies, which would give an incentive for an individual to exploit a market or resource, confident that he would make all of the profits when all other extra-national competitors were driven out of business. The "Dutch East India company" and the "British East India company" were examples of such state-granted trade monopolies.<br />In this period, the view was that growth was gained through "advantageous" trade in which specie would flow into the country, but to trade with other nations on equal terms was disadvantageous. It should be stressed that Mercantilism was not simply a matter of restricting trade. Within a country, it often meant breaking down trade barriers, building new roads, and abolishing local toll booths, all of which expanded markets. This corresponded to the centralization of power in the hands of the Crown (or "Absolutism"). This process helped produce the modern nation-state in Western Europe.<br />Traditional Factors of economic growth studies<br />There were 4 factors that influence economic growth within a country<br /><ul><li>Investment in Human Capital
  2. 2. Natural Resources available
  3. 3. Entrepreneurship</li></ul>1. Investment in Human Capital:<br /> The concept of Human capital has relatively more importance in labour-surplus countries. These countries are naturally endowed with more of labour due to high birth rate under the given climatic conditions. The surplus labour in these countries is the human resource available in more abundance than the tangible capital resource.<br /> This human resource can be transformed into Human capital with effective inputs of education, health and moral values. The transformation of raw human resource into highly productive human resource with these inputs is the process of human capital formation. The problem of scarcity of tangible capital in the labour surplus countries can be resolved by accelerating the rate of human capital formation with both private and public investment in education and health sectors of their National economies. The tangible financial capital is an effective instrument of promoting economic growth of the nation. The intangible human capital, on the other hand, is an instrument of promoting comprehensive development of the nation because human capital is directly related to human development, and when there is human development, the qualitative and quantitative progress of the nation is inevitable.<br />. This importance of human capital is explicit in the changed approach of United Nations [towards comparative evaluation of economic development of different nations in the World economy. United Nations publishes Human Development Report on human development in different nations with the objective of evaluating the rate of human capital formation in these nations. " The Life expectancy index reveals the standard of health of the population in the country; education index reveals the educational standard and the literacy ratio of the population; and the income index reveals the standard of living of the population. If all these indices have the rising trend over a long period of time, it is reflected into rising trend in HDI. The Human Capital is developed by health, education and quality of Standard of living.. HDI is indicator of positive correlation between human capital formation and economic development. If HDI increases, there is higher rate of human capital formation in response to higher standard of education and health. Similarly, if HDI increases, per capita income of the nation also increases. Implicitly, HDI reveals that higher the human capital formation due to good standard of health and education, higher is the per capita income of the nation. This process of human development is the strong foundation of a continuous process of economic development of the nation for a long period of time. This significance of the concept of Human capital in generating long-term economic development of the nation cannot be neglected. It is expected that the Macroeconomic policies of all the nations are focused towards promotion of human development and subsequently economic development. Human Capital is the backbone of Human Development and economic development in every nation.<br />2. Natural Resources Influence Economic Growth.<br />There are five main channels through which natural resource dependence seem to influence growth. <br />First, countries that are rich in natural resources experience booms and busts, not only due to commodity price fluctuations in world markets but also due to resource discoveries that typically create intermittent upswings in export earnings that cause the national currency to appreciate in real terms to the detriment of other export industries. This phenomenon is known as the “Dutch disease.” It is what happened in the Netherlands in the early 1960s following the discovery of large reserves of natural gas within Dutch jurisdiction in the North Sea. The Dutch got over this ailment pretty quickly, so the Dutch disease is a misnomer, but the name stuck. In Iceland for example, exports of goods and services have been stagnant since 1870 (this is not a misprint!), hovering around a third of GDP all this time<br /> <br />In second place, according to Resource Abundance and Economic Development (Auty, Richard M. [ed.]) countries that are rich in natural resources tend to be marred by rent seeking on the part of producers who thus divert resources away from more socially fruitful economic activity. The combination of abundant natural resource rents, ill-defined property rights, imperfect or missing markets, and lax legal structures may have quite destructive consequences. In extreme cases, civil wars break out – such as Africa’s diamond wars – which not only divert factors of production from socially productive uses but also destroy societal institutions and the rule of law.<br /> Third Natural capital may crowd out human capital as well as social capital by hurting education. Specifically, natural resource abundance or intensity may reduce private and public incentives to accumulate human capital. Awash in cash, natural-resource-rich nations may be tempted to underestimate the long-run value of education. Of course, the rent stream from abundant natural resources may enable nations to give a high priority to education – as in Botswana, for instance, where government expenditure on education relative to national income is among the highest in the world. Even so, empirical evidence shows that, across countries, school enrolment at all levels is inversely related to natural resource abundance or intensity. There is also evidence that, across countries, public expenditures on education relative to national income, expected years of schooling, and school enrolment are all inversely related to natural resource abundance. This matters because more and better education is good for growth.<br /> <br />Fourth, natural resource abundance may blunt private and public incentives to save and invest and thereby impede economic growth. Specifically, when the share of output that accrues to the owners of natural resources rises, the demand for capital falls, and this leads to lower real interest rates and less rapid growth. In other words, natural capital may crowd out real capital as well as human and social capital. Moreover, if mature institutions are conducive to an efficient use of resources, including natural resources, and if poorly developed institutions are not, then natural resource abundance may also retard the development of financial institutions in particular and hence discourage saving, investment and economic growth through that channel as well. As in the case of education, it is not solely the volume of investment that counts because quality – i.e., efficiency – is also of great importance. Unproductive investments – white elephants! – may seem unproblematic to governments or individuals who are flush with cash thanks to nature’s bounty.<br /> <br />Fifth and last, natural resource abundance may reduce openness by discouraging exports and capital inflows. The Dutch disease manifests itself through reduced incentives to produce non-primary goods and services for export which the overvalued currency of the resource abundant country renders uncompetitive at world market prices. Hence the reduction in trade. Rent seeking appears in many guises, including demands by domestic producers for protection against foreign competition, for example in the form of restrictions against foreign direct investment. Natural capital may thus crowd out foreign capital. This form of the Dutch disease – from natural resource riches to foreign capital controls – needs closer scrutiny in future empirical research.<br /> <br />There are several ways to measure natural resource abundance. The share of primary exports in total exports of goods and services or GDP is one measure. The share of primary production in employment or the labor force is another. A third is the share of natural capital (i.e., oil reserves, mineral deposits, forests, agricultural land, etc.) in national wealth, defined as the sum of natural capital as described above, real capital accumulated through investment in machinery and equipment, and human capital built up through education and training. All three measures are inversely related to economic growth across countries. Here I will resort to using the share of agriculture in GDP as a proxy for natural resource abundance. A small or at least declining share of agriculture in GDP is a sign of successful diversification, industrialization, and the development of services. <br />3. Entrepreneurship<br />It has assumed super importance for accelerating economic growth both in developed and developing countries. It promotes capital formation and creates wealth in country. It is hope and dreams of millions of individuals around the world. It reduces unemployment and poverty and it is a pathway to prosper. Entrepreneurship is the process of exploring the opportunities in the market place and arranging resources required to exploit these opportunities for long term gain. It is the process of planning, organizing, opportunities and assuming. Thus it is a risk of business enterprise. It may be distinguished as an ability to take risk independently to make utmost earnings in the market.<br />Present trend of economic growth Studies<br />Trend Economic Growth<br />Trend economic growth refers to the smooth path of long run output. Measuring the trend requires a very long-run series of macroeconomic data in order to identify the different stages of the cycle and derive average growth rates from peak to peak or trough to trough. The Treasury has undertaken several studies of the underlying rate of growth for the British economy in part so that they can base their projections for government spending and tax revenues so that government finances do not swing wildly out of line with what can be afforded.<br />This summary statement provides an overview of the Treasury’s latest research on underlying growth<br />Many factors influence the rate of economic growth. Some factors, such as changes in consumer and business confidence, aggregate demand conditions in the UK’s trading partners, and the stance of monetary and fiscal policy, tend to have a mainly temporary effect on growth. Other factors, such as the rates of population and productivity growth, have more enduring effects, and help to determine the economy's average growth rate over long periods of time.<br />The long-run sustainable rate of growth depends on improvements in the supply-side of the economy. Supply-side factors, such as capital investment, education and training and technological change are likely to determine the underlying trend rate of economic growth in the long run. The trend rate of growth is determined by the supply-side capacity of a country – i.e. the extent to which LRAS increases year-on-year to meet a higher level of aggregate demand.<br />Potential output in the long run depends on the following factors<br />• The trend growth of the working population i.e. the size of the active labor supply (e.g. those people able available and willing to find paid employment)• The growth of the nation’s stock of capital – driven by the level of investment• The trend rate of growth of factor productivity <br />• Technological improvements which reduce the real costs of supplying goods and services and which lead to an outward shift in a country’s production possibility frontier<br />Long Run Aggregate Supply and the Trend Rate of Growth<br />The effects of an increase in long run aggregate supply are traced in the diagram below. An increase in LRAS allows the economy to operate at a higher level of aggregate demand – leading to sustained increases in real national output.<br />A lot of economic research has gone into analyzing the economic conditions under which a country might raise its trend growth rate. Fundamentally, annual increases in potential output are driven by higher labour and capital productivity and by an increase in the stock of capital and the available supply of labour. Over the last twenty years, government of different political persuasions, have put in place policies which they expect will be successful in raising investment, encouraging entrepreneurship and improving incentives to work.<br />Potential output in the long run depends on the following factors<br />(1) The trend growth of the working population i.e. the size of the active labor supply (e.g. those people able available and willing to find paid employment). If the government can successfully increase the number of people of working age willing and able to actively seek paid employment, then the employment rate can rise and the total stock of labor available to produce an output of goods and services can increase. The Government has invested heavily in a number of special employment schemes designed to raise employment potential in the economy (including New Deal and the Working Families Tax Credit). Other changes in the income tax and benefits system might also have an impact on the percentage of the population of working age who are active in the labor market. The current assumption is that the population of working age will grow by approximately 0.4% per year for the next few years. But changes in the age structure of the population will inevitably affect the total number of people seeking work.<br />(2) The growth of the nation’s stock of capital – driven by the level of fixed capital investment. A rise in investment adds directly to GDP in the sense that capital goods have to be designed, produced, marketed and delivered and an increase in capital intensity provides workers with more capital to work with. New capital also tends to embody technological improvements which providing workers have sufficient skills and training to make full and efficient use of their new capital inputs, should lead to a higher level of productivity<br />(3) The trend rate of growth of factor productivity (including labour productivity) – a measure of gains in factor efficiency. For most countries it is the annual rate of growth of productivity that drives the long-term rate of economic growth. But of more interest and importance is where gains in productivity come from. The macroeconomic data on productivity is simply the aggregation of productivity performance at a microeconomic level throughout every industry and market in the economy. Although we often focus on the overall productivity data, the root causes of improved efficiency come from making individual markets work better and achieving better productivity within individual plants. <br />(4) Technological improvements which reduce the real costs of supplying goods and services and which lead to an outward shift in a country’s production possibility frontierDespite this, the underlying trend rate of growth has barely moved. The consensus remains that the British economy can sustain a rate of growth of output of only 2.5% per year over the long term. Even the rapid expansion of ICT over the last decade, and a welcome rise it he share of national output allocated to business investment has done little to improve Britain’s sluggish productivity record compared to other leading industrialized nations.<br />HISTORY OF PAKISTAN ECONOMIC GROWTH STUDIES<br />Pakistan's average economic growth rate since independence has been higher than the average growth rate of the world economy during the same period. Average annual real GDP growth rates. Were 6.8% in the 1960s, 4.8% in the 1970s, and 6.5% in the 1980s? Average annual growth fell to 4.6% in the 1990s with significantly lower growth in the second half of that decade. See also.<br />During the 1960s, Pakistan was seen as a model of economic development around the world, and there was much praise for its economic progression. The capital Karachi was seen as an economic role model around the world, and there was much praise for the way its economy was progressing. Many countries sought to emulate Pakistan's economic planning strategy and one of them, South Korea, copied the city's second "Five-Year Plan"; the World Financial Center in Seoul is modeled after Karachi.<br />Later, economic mismanagement in general and fiscally imprudent economic policies in particular, caused a large increase in the country's public debt and led to slower growth in the 1990s. Two wars with India - the Second Kashmir War in 1965 and the Bangladesh Liberation War in 1971 - and the resultant separation of Bangladesh from Pakistan also adversely affected economic growth. In particular, the latter war brought the economy close to recession, although economic output rebounded sharply until the nationalizations of the mid-1970s. The economy recovered during the 1980s via a policy of deregulation, as well as an increased inflow of foreign aid and remittances from expatriate workers. A substantial amount of Pakistan economic growth is largely expected in fiscal year 2008-2009. Pakistan economy, one of largest in South Asia has been forecast to grow 5.5 percent in 2009. However, it was previously estimated to be 5.8 percent, as was said by finance ministry in Islamabad. However shortage of power and flawed polices have made chances of economic growth in Pakistan a little slim, as pointed out by deputy chairman of Planning Commission, Salman Faruqui. Economic growth of Pakistan is seen through gross domestic product purchasing power parity, which was estimated to be $454.2 billion in 2008. Official exchange rate was approximately $160.9 billion, while real growth rate in 2008 GDP of Pakistan, as per statistical data was found to be 4.7 percent. GDP per capita income was $2,600 in 2008. For economic growth of Pakistan, each sector contributes individual amounts to economy and thereby adding to GDP. Agricultural sector contributes about 20.4 percent to Pakistan GDP. 26.6 percent is added by industrial sector as was estimated by 2008. 53 percent was received from service sectors during 2008. 106680727075<br />Government is introducing new policies to encourage economic growth in Pakistan. Poverty reduction is among main issues that have been taken up by government for economic growth of Pakistan. In Pakistan, it was estimated that more than 160 million people of this nation survive on less than $2 a day. Government has plans to improve roads, dams and power generating plants to create more job opportunity and enhance possibilities of economic growth at Pakistan. For this, 541 billion rupees will be spent to accentuate Pakistan economic growth. Pakistani Prime Minister Gilani assured that gains of Pakistan economic growth will be invested on benefit of common people. Farm sector is also expected to grow, which at present accounts for one-fourth of GDP. Central bank of Pakistan has increased discount rate at which it lends to commercial banks by 1.5 percentage points. This was done to bring down inflation rate in Pakistan. In 2008, total investment was estimated to rise to 22.4 percent of GDP. Economy of Pakistan showed 5.4 percent growth in manufacturing, 4.8 percent growth in large scale manufacturing and 1.5 percent growth in agriculture sector in 2008. It has been found that there has been a growth of 18.4 percent in per capita income and 17 percent growth in finance and insurance sector in 2008. Pakistan economic growth is also marked by increase in public debt burden, which rises from 55.2 percent of GDP to 56 percent.<br />but growth slowed in 2008-09 and unemployment rose. Inflation remains the top concern among the public, climbing from 7.7% in 2007 to more than 13% in 2010. In addition, the Pakistani rupee has depreciated since 2007 as a result of political and economic instability. The government agreed to an International Monetary Fund Standby Arrangement in November 2008 in response to a balance of payments crisis, but during 2009-10 its current account strengthened and foreign exchange reserves stabilized - largely because of lower oil prices and record remittances from workers abroad. Record floods in July-August 2010 lowered agricultural output and contributed to a jump in inflation, and reconstruction costs will strain the limited resources of the government. Textiles account for most of Pakistan's export earnings, but Pakistan's failure to expand a viable export base for other manufactures has left the country vulnerable to shifts in world demand. Other long term challenges include expanding investment in education, healthcare, and electricity production, and reducing dependence on foreign donors.<br />Traditional Factors Influencing Pakistan’s economic Growth<br />In my view there are at least six factors that are quite favorable for the present and future prospects of the economy. First is the size of the domestic market. With a population of 170 million people Pakistan offers an attractive market for goods and services. A growing middle class that constitutes almost one quarter of the population with its rising purchasing power creates demand for goods and services. Expansion of this demand helps the industry to achieve economies of scale and lowers unit cost of production. Backward and forward linkages to the industry generate new employment opportunities that add further impetus to demand and reduction in the incidence of poverty. Second is the favorable demographics. While the rest of the world particularly the advanced countries of Japan and Europe would have rising dependence ratios due to increase in ageing population Pakistan, India and Bangladesh would have relatively younger population. 63 percent of Pakistan’s population is below the age of 25 and 50 percent is below the age of 19. If properly educated and skilled this youth can become the work force for the labor deficient countries. In case we do not concentrate on their education and training the younger population can prove to be a source of social tension and explosion. Third Pakistan enjoys a highly favorable geostrategic location. Two giant economies of the world – India and China – are its neighbors. Peaceful relationship with India can spawn benefits to Pakistan’s economy through trade, economic cooperation and scientific and investment collaboration. Linking western China with Gwadar Port through railways, highways, pipelines, etc. can be mutually profitable for both the countries. Central Asian Republics and Afghanistan are land locked countries. The most economical transit route for their exports and imports is through Gwadar. Hydropower and gas resources of these Republics can ease the energy shortages in Pakistan. Fourth, one of the largest and well developed irrigation system in the world is the Indus Basin that has boosted Pakistan’s agricultural productivity over time. The country is not only able to feed its burgeoning population but is the third largest exporter of rice, generates exportable surplus of wheat from time to time and is one of the major cotton producer and textile exporter in the global market. Although both the share of labor force employed in agriculture sector and the share of agriculture in the GDP have declined over time the physical output has multiplied eight to ten times. Fifth, Pakistan’s enterprising Diaspora which has ventured out to almost all parts of the world accounts for almost 3 million people. This migration has not only eased the unemployment situation domestically but has been a consistent and upward inclining source of foreign exchange in form of remittances. Demand for Pakistani food products, fruits and vegetables have also risen in the markets where the Diaspora are located. In many instances investment has flown into Pakistan from the relatively well off overseas Pakistanis. Sixth, we should remember that there are very few developing countries who have achieved 5 percent annual average GDP growth rate over a sixty year period. Per capita incomes have gone up from $100 in 1950 to $1,000 today. This historical track record has been uneven and fluctuated widely with higher growth recorded in the 1960s, 1980s and 2001-07. But the point that I wish to make is that the country is capable of performing well if the economy is managed properly. However, the record is not too good compared to other countries in Asia Region which have overtaken us and have done much better than us.<br />Domestic Factors Next, I would like to present seven negative factors that are pulling Pakistani economy down. All of these factors are very much in our own control and can be rectified. <br />First Our domestic savings rates of 15 percent of GDP is dismally low which means that we have to depend on foreign savings to boost our investment rate. To grow by 6 percent per annum, a country needs at least 24-25 percent of GDP. Thus the effect of low domestic savings rate is either we have inadequate investment rate and consequently a much lower growth rate or we have to seek assistance from foreign sources to fill in this gap. By contrast India’s saving rate has risen to 35 percent of GDP which has enabled them to attain 38 percent investment rate and 8 to 9 percent annual growth rate. Some of you may be surprised that China’s domestic savings rate is 50 percent of GDP. Unless we augment our domestic savings and curtail conspicuous consumption the chances of sustained high growth are bleak.<br />Second Pakistan’s fiscal imbalances, i.e. the difference between government revenues and government expenditure are a source of macroeconomic stress. Financing fiscal deficit by heavy borrowings from the Central Bank and rising public debt have created inflationary pressures, giving rise to high interest rates and crowded out private sector credit. Public debt servicing now pre-empts one third of government budgetary expenditure and leaves very little degree of maneuverability in fiscal management. It is simply impossible to balance the books when out of every one rupee of income generated in private hands only nine paisas are collected as tax revenues. How can the government meet the debt servicing, defense, development, social services law and order and running of civil administration expenditures with such paltry amount? Unless tax evasion is curbed, tax net is widened and tax collection machinery is improved fiscal imbalances are likely to persist. <br />Third Public sector enterprises and corporations have become a major burden on the country’s exchequer. The enormous waste, corruption, leakages and losses are not only adding pressures on the budget but the goods and services provided by them are unreliable and do not satisfy the customer demand. The Government has no business in running the businesses because the incentives of the functionaries are not aligned with those of the enterprise. Government should have a strong regulatory framework and an enabling environment to facilitate private sector to run these businesses. By paying taxes to the exchequer the private sector will contribute to the government’s finances and losses incurred by the government corporations at present will disappear after privatization.<br />Fourth Weak social indicators and lack of attention to human capital formation over last six decades has done more damage to suppress the country’s economic potential than any other single factor. 54 percent of the population is literate and only 4 percent of the age group is enrolled in higher education. Net enrolment rate in primary schools is 53 percent and only one half of them complete primary schooling. Similarly, health indicators such as Maternal mortality, infant mortality, child malnutrition, access to drinking water and sanitation are at the bottom of the rung compared to other countries in the region. Technical and vocational education, so critical for imparting skills to our younger population, covers only 1 percent of the relevant age groups. Investment in social services and human capital formation does not impose a great burden on the finances but requires improvement in the organization and delivery of services.<br />Fifth, in the recent years the energy shortages both power as well as gas have created a havoc for the economy. The benefits of rupee depreciation could not be availed by our exporters as they were not able to deliver the orders on time due to load shedding and gas shut downs. The whole issue of circular debt in the energy sector has arisen due to mismanagement and weak institutional capacity of the Power Companies. Overdue reforms in the energy sector as well as new investment in non fossil oil energy sources are urgently needed to overcome these problems that are badly hurting the economy. The fragmentation among various agencies of the government in energy sector has to be replaced by a more cohesive, result oriented single agency.<br />Sixth the poor governance and dysfunctional civilian institutions, are in my view, the main culprit for most of the economic woes of the country. Civil Service, Police, Judiciary were all well functioning institutions but with the passage of time they have gone through a decay. Access to basic public services to a common citizen is no longer possible without connection or extra legal payments. Security of person and prosperity are no longer assured and dispensation of justice is expensive, time consuming and biased in favor of the well-off. The writ of the state has eroded and the capacity to implement projects and programs has weakened. Politicization of Civil Service and Police and the recent abolition of local government system have worsened the situation. Economic welfare is closely linked with good governance and sound institutions and the reforms for revamping them would make a huge difference to the lives of the ordinary citizens.<br />Seventh Unlike other countries in Asia region Pakistan is facing stagnating exports in a buoyant world market. We are struggling to cross $20 billion mark while a country devastated by war – Vietnam – attained $50 billion two years ago. Only a few years ago Vietnam was behind Pakistan in its exports. The reasons for the dismal performance of our exports lies in too narrow a commodity base and too much concentration on traditional markets. Sixty percent of our exports originate from textile sector that is not one of the dynamic sectors in the world markets. We have not yet penetrated the markets for electronics, semi-conductors, pharmaceuticals, industrial chemicals, health care products, etc. which are the rising sectors. At the same time we are shipping most of our goods to the U.S., Europe and Middle East while the fastest growing region in the world is Asia. Although we have a Free Trade Agreement with China we have not made any headway in that market. Pakistan has to diversity its exports both in terms of products and markets and focus its attention on the dynamic sectors and rapidly growing markets.<br />External Shocks <br />Pakistan has faced at least four major external shocks during the last decade:<br />The First was precipitated by Pakistan’s participation in the war against terror. Leaving aside the losses of human lives and a state of disorder and turbulence throughout Pakistan by the suicide bomb attacks it is estimated that Pakistan’s cumulative losses to the economy have so far exceeded $43 billion. The reimbursements received from the U.S. under the Coalition Support Fund have amounted to only $10 billion. A country in dire economic conditions like Pakistan can hardly afford to tolerate such a heavy financial burden. Part of the fiscal imbalance problem can be ascribed to the increased expenditures on paramilitary forces and defense. Export earnings, foreign investment, tourism receipts, diverted contracts and orders, increased insurance premiums, and cancellation of visits by buyers all have contributed to those losses.<br />The Second shock occurred in 2007-08 when the global food and fuel prices went through an abnormal and abrupt hike. Oil prices went up from $55 per barrel to $150 per barrel in a period of twelve months and so the prices of commodities such as palm oil imported by Pakistan. These price hikes put enormous pressures on the current account as the import bill jumped by almost 20-25 percent in one year. Fiscal deficit also widened as the government absorbed these price increases and did not pass on to the consumers. Resort to the Central Bank for financing the deficit and expansion of high powered money intensified the inflationary pressures.<br />The Third shock was the Global Financial Crisis of 2008-09 that resulted in a worldwide recession of the magnitude not witnessed since 1930s. As the incomes slumped in the U.S. and Europe, the demand for Pakistani goods and services also slackened. Foreign commercial borrowings and access to bond market disappeared.<br />The Fourth and most severe shock was the floods that devastated a large chunk of arable lands, displaced 20 million people, destroyed or damaged 1 million houses, roads, bridges, power grids, embankments, spurs, railway tracks, etc. The World Bank and Asian Development Bank have prepared preliminary assessments of the damage and they estimate that about $10 billion will be required for rehabilitation. It would be difficult for the Government of Pakistan to raise such a large amount and therefore the international community has to come to our rescue. The economy may in that case, get a kick start by the stimulus provided by the additional expenditures on flood rehabilitation works to be financed by the donors. A one-time flood surcharge tax would have to be imposed on the propertied classes of Pakistan to fund some of these works.<br />To sum up, the challenges faced by Pakistan’s economy are quite formidable but the salvation lies in resumption of growth that will result in decline in both unemployment and the incidence of poverty and preserve the living standards of the middle class. The reprioritization of development expenditures, savings on recurrent expenditure, reduction in across-the-board subsidies to public sector enterprises and corporations, improvement in tax collection and levy of flood surcharge tax along with the grants and donations from the international community for flood rehabilitation works can provide the stimulus for growth. Governance reforms are the key to economic stability and growth in Pakistan and should be relentlessly pursued.<br />Present trend in Pakistan economic growth<br />The striking feature of the literature on economic growth is the generally superficial attention it pays to the influence of demographic factors on economic growth. The standard approach acknowledges the possibility that rapid population growth might impede economic growth by including the rate of population growth among the list of variables used to explain the cross-country differences in income growth. However, more often than not, population growth is not significantly associated with the pace of economic growth, thereby supporting the conclusion of population neutralism (Bloom and Freeman 1986) that has held sway for nearly two decades (Kelley and Schmidt 1995). In recent years, investigators have revisited the connection between population and economic growth, emphasizing demographic transition as the process underlying population growth in most developing countries (Bloom and Canning 1999; Bloom and Freeman 1986; Bloom and Sachs 1998; Bloom and Williamson 1997). A demographic transition is a change from a situation of high fertility and high mortality to one of low fertility and low mortality. Bloom and Canning (1999) opines that high rates of population growth are temporary consequences of a decline in mortality rates which precedes a decline in fertility. Less widely recognized though perhaps more important, this situation also suggests sizable changes in the age distribution of the population. Unlike working individuals whose contribution to output and savings tends to commensurate more with their consumption (Higgins 1998; Higgins and Williamson 1997; Kelley and Schmidt 1996; Lee, Mason, and Miller 1998; Leff 1969; Mason 1988; Webb and Zia 1990), the young and the old consume more output than they generate, As a result, the output per capita — the most widely used indicator of economic performance — tends to be boosted when the population of working-age individuals is relatively large, and to be depressed when a large part of the population consists of young and elderly dependents (Hanushek 1992; Knodel and Wongsith 1991; Knodel, Havanon, and Sittitrai 1990; Rosenzweig 1990). Recent studies on the effects of population change on economic growth have two key features in common with another study: Coale and Hoover’s seminal book, Population Growth and Economic Development in Low-Income Countries (1958) that was published more than 40 years ago. Firstly, these works highlight and exploit the fundamental insight that reducing the current rate of population growth does not lead to a corresponding reduction in the current growth rate of the labor force. Secondly, they view that links between population and income move in one direction, that is, from the former to the latter. A finding from the recent economic development literature concerns the positive effects of good health, as measured by life expectancy, on economic growth. Presumably, this finding reflects the greater incentives that people with longer life expectancy have to save for old age (Mason 1988); increased returns on investments in human capital which are associated with having longer periods over which to recoup those returns (Meltzer 1995); higher productivity, and lower rates of absenteeism. Another potential influence on the pace of economic growth is population density. If natural resources, such as agricultural land, are fixed, increases in the population density are likely to depress the per capita income (Ehrlich 1968). In contrast, opportunities for specialization and scale economies can cause an increased population density to result in a higher per capita income (Boserup 1981; Kuznets 1967; Simon 1981). Bloom and Sachs (1998) and Gallup (1998) also argue that coastal regions can enjoy greater benefits of specialization through trade.<br />Pakistan’s economic performance during the last three decades has been impressive with the real GNP growing at an average rate of six per cent per annum. However, the savings rate has shown an almost horizontal trend over the years (State Bank of Pakistan Report, 2006). A number of studies have found a strong inverse relationship between the dependency ratio and the savings rate in the country (Ahmed and Asghar 2004; Khan and Nasir 1999; Burney and Khan 1992; Siddique and Siddique 1993; Khan, Hasan, and Malik 1992). In her study, Nayyab (2006) examines the demographic dividends available to Pakistan through three mechanisms: labor supply, savings, and human capital. Pakistan economic growth faced a serious setback in fiscal year 2009 because of the depressed consumer credit market, slow progress of public sector programmers, inflation, reduction in subsidies, security threat, and instability in the state and energy crisis. Additionally, no attention was given to the agriculture sector. The exports declined by six percent and imports by 10 percent. The only thing that became a silver lining was the increment in remittances by 22%. Apart from ignorance, agriculture sector has shown credible results because of good weather. Major crops, wheat, rice and maize recorded impressive growth i.e. 7.7% against the target of 4.5%. Live stock and poultry also add to GDP as there was no viral disease this year.<br />Shortages of energy and power don’t let the boom entered into the industrial sector. In addition the sanction applied by IMF on different sectors creating a hurdle. This resulted in unemployment and services sector decline. Because of security crisis the graph of investment does not take any surge. The beginning of declining in core inflation is a hopeful factor but the domestic inflation is on peak. There is a marginal improvement in health and educational sectors but the poverty in country rise Pakistan have the highest population growth. The largest population represents a large potential market for goods and services yet the condition are deplorable.<br />Being an agro based economy Pakistan should focus on the development of agriculture department. Financial sector should be developed. Instead in focusing to much on macro financing, micro financing must be given a chance. Trade deficits should be reduced. This can only be done by eradicating the trust deficit, which will boost our exports as well as imports. It will also bring FDI’s (Foreign Direct Investment) at home. There should be short term as well as long term policies. As Pakistan’s economy is dependent economy so it should be made strong enough to reject the foreign aid or loans on their conditions, which can directly or indirectly bring harm to the economy. Still the Government is unable to differentiate and reorganize the developed and non-developed budget. Solid fiscal policies should be made to give advantage to both, demander and supplier. This would also be beneficial for the skilled workers, who fly away from the land. Despite all these, there must be political, economic and social stability in the state. A proper accountability set up must be introduced to eradicate corruption as it leads to massive human deprecation. And the final solution of this problem is good governance.<br />PAKISTAN AND WORLD ECONOMIC GROWTH STUDIES<br />Learning from economies that have led the world, Pakistan still has an opportunity for introspection; to strive to balance the macro-economic indicators, instead of leaning towards unnecessary deficit financing and with overall reliance on our own revenue generation.<br />From mid 2008, Pakistan started registering an imbalance in its overall economy, a trend that kept up till 2nd quarter of 2010. By end of 2008, Pakistan’s fiscal deficit increased from $5.6 billion to exceed $8 billion. Trade deficit increased from $13 billion to exceed $18 billion. By November 2008, the foreign reserves had fallen to $6.5 billion. Instead of taking stock of the situation and implementing concrete measures, the government of Pakistan took the easy option, shoving the country towards adversity.<br />Pakistan was forced to approach IMF in a bid to help bail out its finances – to deficit finance the economy. The initial package with IMF was of $7.6 billion, which was later increased to $11.3 billion in 2009. Other than the IMF tranches, Pakistan sought the help of several Multi-lateral and Bi-lateral financers, which in return, increased its external debt & liabilities (EDL) to $54 billion by mid of 2010, from $41 billion in January 2008.<br />Pakistan also tried floating sovereign bonds, another form of deficit financing – the Euro and Saindak bonds worth $2.2 billion in FY09. Countries that have unpredictable inflation and varying exchange rates, with respect to their own currencies, often issue sovereign bonds in foreign currencies. This then creates the grave danger that in case the countries are unable to afford or repurchase the foreign currency bonds according to the specified timetable, chances of sovereign default become high. Such countries are further shunned by investors and as a double whammy, the foreign debt increases.<br />Pakistan’s domestic debt multiplied, from Rs.2,610 billion in FY07 to become Rs.4,490 billion by end of March 2010. This augmentation in the total domestic debt stock took place mainly in the ‘Floating Debt’, secondly in the ‘Unfunded Debt’ and thirdly in the ‘Permanent Debt’. By the end of March 2010, Pakistan’s domestic debt stood at $53.2 billion, which was approximately 30.6% in percent of GDP.<br />All this deficit financing has turned out to become a futile exercise, unsuccessful in bringing about the desired results and unable to stimulate the economy towards any positive direction. By mid 2010, Pakistan had a total Public debt of around $100 billion; is already paying annual Interest Payments of $5.6 billion and total Debt Servicing has exceeded $7.6 billion annually – expected to exceed $10 billion after the 2010-11 fiscal year.<br />The situation now is that in essence, Pakistan is raising debt to repay debt, with little or no impact on the overall condition of the economy.<br />It’s amusing to notice that the first IMF loan tranche was of $3.1 billion and during that same quarter, the government had to repay $3.65 billion as debt servicing. In the 2010-11 budgets, an amount of $10.3 billion has been kept for debt-servicing purposes, with an increase of 7% compared to previous year’s estimates. This again contributes to Pakistan’s budget deficit.<br />The government has to pay $10 billion every year till 2015 under the loan segment. Pakistan’s ‘clever’ Finance Manager Mr. Abdul Hafeez Sheikh has already announced that further IMF follow-up programs can be subscribed to, in order to repay the original sought debt. What does it concern him or anyone else in the government. In all likelihood, they will be gone ensconced somewhere abroad, while the Pakistani Awaam will continue to pay the price.<br />For Pakistan, this seems to be a never ending vicious cycle. Deficit Financing is never an ideal approach, nor to be dragged on unnecessarily.<br />Deficit financing – works only if there are concrete plans and sounds policies, with a long term vision of how to spend the money that is raised through debt, generate revenues and with an  actionable plan as to how to repay that debt. Under these circumstances, all we are doing is increasing our debt and raising the liabilities for our future generations to pay off. The money that should have been used to invest in the people and future of Pakistan has been and continues to be used to serve state expenditure on burgeoning and bloated bureaucracy, foreign visits, corruption, and extravagant personal expenses of the government functionaries.<br />Today, Pakistan’s debt situation is alarming. We have no viable plans to raise sustainable and steady revenue, and no viable specific plan to reimburse and settle off the accumulated external and domestic debts. There are very few choices to make – hard and purposeful decisions.<br />Similarly, China’s stimulus programs boast of a gigantic infrastructure spending program that would cover 10 major areas, including projects aimed at environmental protection and technological innovation. As announced in 2008, stimulus spending worth $600 billion was directed largely at funding bullet trains, nearly 100 airports, wind turbines, dams, highways, and bridges. About $54 billion were dedicated towards rural infrastructure projects to create employment. According to The Wall Street Journal, China’s road system will stretch 53,000 miles by 2020, topping the 47,000 miles of roadways in USA.<br />An emerging economy like Pakistan, unless sufficient in foreign reserves and revenue generation, in addition to a stable currency, in relation to trade deficit and fiscal deficit, will unfortunately face serious imbalances in macro-economic indicators, obstructing stable growth opportunities.<br />FACTORS THAT EFFECT WORLD AND PAKISTAN ECONOMIC GROWTH <br />1. Environmental impact<br />Some critics argue that a narrow view of economic growth, combined with globalization, is creating a scenario where we could see a systemic collapse of our planet's natural resources.] Other critics draw on archaeology to cite examples of cultures they claim have disappeared because they grew beyond the ability of their ecosystems to support them. Concerns about possible negative effects of growth on the environment and society led some to advocate lower levels of growth, from which comes the ideas of uneconomic growth and de-growth, and Green parties which argue that economies are part of a global society and a global ecology and cannot outstrip their natural growth without damaging them.<br />Canadian scientist, David Suzuki stated in the 1990s that ecologies can only sustain typically about 1.5-3% new growth per year, and thus any requirement for greater returns from agriculture or forestry will necessarily cannibalize the natural capital of soil or forest.]Some think this argument can be applied even to more developed economies.<br />Those more optimistic about the environmental impacts of growth believe that, although localized environmental effects may occur, large scale ecological effects are minor. The argument as stated by commentators Julian Lincoln Simon states that if these global-scale ecological effects exist, human ingenuity will find ways of adapting to them.<br />While acknowledging the central role economic growth can potentially play in human development, poverty reduction and the achievement of the Millennium Development Goals, it is becoming widely understood amongst the development community that special efforts must be made to ensure poorer sections of society are able to participate in economic growth. For instance, with low inequality a country with a growth rate of 2% per head and 40% of its population living in poverty, can halve poverty in ten years, but a country with high inequality would take nearly 60 years to achieve the same reduction. In the words of the Secretary General of the United Nations Ban Ki-Moon:<br />"While economic growth is necessary, it is not sufficient for progress on reducing poverty. <br />Researchers at the Overseas Development Institute compares situations such as in Uganda, where during a period of annual growth of 2.5% between 2000 and 2003, the percentage of people living in poverty actually increased by 3.8%.[61] The ODI thus emphasizes the need to ensure social protection is extended to allow universal access and that policies are introduced to encourage the private sector to create new jobs as the economy grows (as opposed to jobless growth) and seek to employ people from disadvantaged groups.<br />2.HUMAN CAPITAL AND ECONOMIC GROWTH <br />One ubiquitous element of both theoretical and empirical analyses of economic growth is the role of human capital. The skills of the population enter into both neoclassical and endogenous growth models.[42] The most commonly used measure of human capital is the level of school attainment in a country, building upon the data development of Robert Barro and Jong-Wha Lee.[43] This measure of human capital, however, requires the strong assumption that what is learned in a year of schooling is the same across all countries. It also presumes that human capital is only developed in formal schooling, contrary to the extensive evidence that families, neighborhoods, peers, and health also contribute to the development of human capital. In order to measure human capital more accurately, Eric Hanushek and Dennis Kimko introduced measures of mathematics and science skills from international assessments into growth analysis.[44] They found that quality of human capital was very significantly related to economic growth. This approach has been extended by a variety of authors, and the evidence indicates that economic growth is very closely related to the cognitive skills of the population.[<br />Corruption and its impact<br />The impact of corruption on the poor and on poverty reduction processes has now been reasonably widely discussed. The effect of corruption on the poor can be gauged through both its direct impact (through, for example, increasing the cost of public services, lowering their quality and often all together restricting poor people's access to such essential services as water, health and education) and the indirect impact (through, for example, diverting public resources away from social sectors and the poor, and through limiting development, growth and poverty reduction). While this impacts negatively on most of the segments of the society, it is suggested that the poor are more vulnerable both in terms of being easy targets for being subjected to extortion, bribery, double-standards and intimidation as well as in terms of being hit by the negative and harsh consequences of corruption on country's overall development processes. So, in addition to the negative impact of corruption, there is also an element of disproportionality and inequality. The following short examples (drawing on research, studies and diagnostic tools) are set to demonstrate some of the negative and disproportionate impact of corruption on the poor.<br />Present trend of economic growth in the world and Pakistan <br />1. The dangers of fast economic growth in developing countries.<br />World Bank report for 2011 prospects sees sluggish growth in the developed world, and a shift in economic power from west to east. But this change has risks attached<br />Hans Timmer, director of development prospects at the World Bank, speaks about the report indicating that the world economy is expected to have slower but solid growth this year and next. Photograph: Saul Loeb/AFP/Getty Images<br />Two things are striking about the World Bank's report on the outlook for the global economy in 2011. The first is that activity in most developing countries has recovered from the deep crisis of 2008-09.<br />The second, and more important message, is that this is part of a clear trend that will see economic power move from west to east over the next 20 or 30 years. On current trends, the clock will be turned back to the days before the Industrial Revolution, when China and India – by virtue of their huge populations – were the biggest economies in the world.<br />A quick look at what the World Bank expects in 2011 illustrates the point. Growth in the developed world is likely to remain sluggish at 2.4%, while developing countries are forecast to grow by 6%. Although the emerging market countries account for only around 25% of global GDP, in 2011 they will account for almost half of global growth.<br />In one year alone, this sort of growth disparity makes little difference to the big gap between rich and poor nations. But compounded over three or four decades, it matters a lot. Work by John Hawksworth, chief economist at PwC, has shown that the current G7 (US, UK, Germany, France, Japan, Italy and Canada) will be challenged by an E (Emerging) 7 of China, India, Russia, Brazil, Mexico, Turkey and Indonesia. These countries will benefit from economic catch-up, low labor costs, technology transfer and population growth.<br />In one sense, the prospect of rising incomes in large chunks of the developing world is good news, especially since the solid growth in emerging markets includes the poorest countries of all in sub-Saharan Africa. Stronger growth will help reduce poverty and, of course, provide markets for western goods.<br />But there are dangers too. Three short-term risks are identified by the World Bank in Global Economic Prospects 2011, published yesterday: a systemic crisis in the euro zone that sees more and more members of the single currency under speculative attack; the potential of high and volatile capital flows to destabilize developing countries, leading to protectionist pressures; and the risk of hunger and malnutrition from rising food prices.<br />All are real and present dangers. The crisis in the euro zone has not gone away and is likely to be one of the big stories of 2011. Brazil's decision to impose capital controls to cap the rise in the value of its currency is an indication of protectionist sentiment. The last time commodity pressures were rising rapidly, in 2008, there were food riots.<br />But there are also colossal longer-term risks. Growth rates of the sort envisaged for developing countries by the World Bank and PwC will put massive pressures on commodity prices and the environment. After two centuries of economic and political hegemony, rich countries may not take kindly to being challenged by China and India. <br />2. Prospects for terrorism conflict, proliferation and economic growth<br />Terrorism, proliferation, and conflict will remain key concerns even as resource issues move up on the international agenda.  Islamic terrorism is unlikely to disappear by 2025, but its appeal could diminish if economic growth continues and youth unemployment is mitigated in the Middle East.  Economic opportunities for youth and greater political pluralism probably would dissuade some from joining terrorists’ ranks, but others—motivated by a variety of factors, such as a desire for revenge or to become “martyrs”—will continue to turn to violence to pursue their objectives.In the absence of employment opportunities and legal means for political expression, conditions will be ripe for disaffection, growing radicalism, and possible recruitment of youths into terrorist groups.  Terrorist groups in 2025 will likely be a combination of descendants of long-established groups—that inherit organizational structures, command and control processes, and training procedures necessary to conduct sophisticated attacks—and newly emergent collections of the angry and disenfranchised that become self-radicalized.  For those terrorist groups that are active in 2025, the diffusion of technologies and scientific knowledge will place some of the world’s most dangerous capabilities within their reach.  One of our greatest concerns continues to be that terrorist or other malevolent groups might acquire and employ biological agents, or less likely, a nuclear device, to create mass casualties.  Although Iran’s acquisition of nuclear weapons is not inevitable, other countries’ worries about a nuclear-armed Iran could lead states in the region to develop new security arrangements with external powers, acquire additional weapons, and consider pursuing their own nuclear ambitions.  It is not clear that the type of stable deterrent relationship that existed between the great powers for most of the Cold War would emerge naturally in the Middle East with a nuclear-weapons capable Iran.  Episodes of low-intensity conflict taking place under a nuclear umbrella could lead to an unintended escalation and broader conflict if clear red lines between those states involved are not well established. We believe ideological conflicts akin to the Cold War are unlikely to take root in a world in which most states will be preoccupied with the pragmatic challenges of globalization and shifting global power alignments.  The force of ideology is likely to be strongest in the Muslim world—particularly the Arab core.  In those countries that are likely to struggle with youth bulges and weak economic underpinnings—such as Pakistan, Afghanistan, Nigeria, and Yemen—the radical Salafi trend of Islam is likely to gain traction. Types of conflict we have not seen for awhile—such as over resources—could reemerge.  Perceptions of energy scarcity will drive countries to take actions to assure their future access to energy supplies.  In the worst case, this could result in interstate conflicts if government leaders deem assured access to energy resources, for example, to be essential for maintaining domestic stability and the survival of their regimes.  However, even actions short of war will have important geopolitical consequences.  Maritime security concerns are providing a rationale for naval buildups and modernization efforts, such as China’s and India’s development of blue-water naval capabilities.  The buildup of regional naval capabilities could lead to increased tensions, rivalries, and counterbalancing moves but it also will create opportunities for multinational cooperation in protecting critical sea lanes.  With water becoming more scarce in Asia and the Middle East, cooperation to manage changing water resources is likely to become more difficult within and between states.  The risk of nuclear weapon use over the next 20 years, although remaining very low, is likely to be greater than it is today as a result of several converging trends.  The spread of nuclear technologies and expertise is generating concerns about the potential emergence of new nuclear weapon states and the acquisition of nuclear materials by terrorist groups.  Ongoing low-intensity clashes between India and Pakistan continue to raise the specter that such events could escalate to a broader conflict between those nuclear powers.  The possibility of a future disruptive regime change or collapse occurring in a nuclear weapon state such as North Korea also continues to raise questions regarding the ability of weak states to control and secure their nuclear arsenals.If nuclear weapons are used in the next 15-20 years, the international system will be shocked as it experiences immediate humanitarian, economic, and political-military repercussions.  A future use of nuclear weapons probably would bring about significant geopolitical changes as some states would seek to establish or reinforce security alliances with existing nuclear powers and others would push for global nuclear disarmament.<br />Conclusion<br />References<br /><br /><br /><br /><br /><br />:<br /><br /><br />