Inclusive Growth and Sustainability


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Presentation by Dr. Vaqar Ahmed on Inclusive Growth & Sustainability at University of Lahore - 8 November 2012

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Inclusive Growth and Sustainability

  1. 1. Inclusive Growth and Sustainability Dr. Vaqar Ahmed Sustainable Development Policy InstituteLecture at University of Lahore – 8 November 2012 1
  2. 2. How do economies grow? 2
  3. 3. Growth Strategies in Regional Economies Country Plan Strategy FocusIndonesia Medium Term Plan Focus on social infrastructure for creativity 2010-14 developmentThailand 10th Plan 2007-11 Opportunities for learning, increase potential of communities by linking them in networksMalaysia New Economic Developing quality workforce, competitive domestic Model (launched in economy and transparent markets 2010)China 11th Five Year Plan Promotion of independent innovation, and enhance 2006-10 social harmonyIndia 11th Five Year Plan Reinforces focus on basic services such as education (2007-12) and urban developmentBangladesh Draft Plan 2011 Effective governance, promoting innovative people for a digital Bangladesh, creating a caring society and enhancing regional cooperationPhilippine Medium Term Plan National innovation system, market reforms, 3 (2004-10) technology entrepreneurship and support to R&D
  4. 4. From Harrod Domar to Endogenous Growth Theories Main InsightsHarrod-Domar Growth Model focuses on saving and the efficiency withModel – 1940s which capital is usedSolow (Neoclassical) Allows for substitution between labour & capital.Growth Model – Technology increases exogenously1950sEndogenous Growth – Competition and knowledge – related externalities1980s imply increasing returns. Romer 1986; Lucas Jr. 1988.Endogenous Growth – Knowledge spillovers lead to falling R&D costs1990s resulting in further growth. Romer 1990; Grossman & Helpman 1991Endogenous Growth – Schumpeterian entry & exit, with entrants bringing2000s new technologies, knowledge accumulation in cities lead to growth. Aghion & Howitt 2005
  5. 5. Growth Diagnostics–Binding Constraints Intermediation Domestic Availability Domestic of Finance Savings Foreign Infrastructure Entrepreneurship Social Returns Human Capital Return to Economic Coordination Activity Market Failure Information Appropriability Macroecono mic Stability Govt. Failure Contract 5Adapted from Hausmann & Rodrik (2005) Enforcement
  6. 6. Growth Diagnostics – Binding Constraints Intermediation Domestic Availability Domestic of Finance Savings Foreign Infrastructure Entrepreneurship Low incentives for “self- Social Returns discovery” – information Human Capital Returnexternalities to Economic Coordination Activity Market Failure Information Appropriability Macroecono mic Stability Govt. Failure Contract 6Adapted from Hausmann & Rodrik (2005) Enforcement
  7. 7. • The Need for Growth Strategy & Reforms • Stabilization & Adjustment • Governance & Institutions • Markets, Entrepreneurship & Investment Climate • Cities & Connectivity • Youth & Community
  8. 8. • Some Scenarios – Desired Growth Paths • SWOT • Demographic Challenges • Required Growth Rate • Returns from Reforms
  9. 9. Pakistan Economy: SWOT Analysis• Strength: Youth bulge• Weakness: Governance• Opportunity: large domestic demand• Threat: Coordination & information failures
  10. 10. Need for Rapid Economic Growth(i) Rapid population growth increases demand: – Pakistan adds: • Every 1 year a New Zealand to its population; • Every 2 years a Switzerland; • Every 3 years a Greece; • Every 4 years a Chile or a Netherlands; and • Every 5 years an Australia. – It does not accumulate capital assets at the same pace. 10
  11. 11. Some criticism on Planning Commission’s approach• Some said: – The strategy does not talk enough about pro-poor interventions – Some said it does not cater for sustainable development – Lets see what these are….
  12. 12. Exclusion Analysis• What is the development process?• Income generation process• Empowerment
  13. 13. • Development is……….
  14. 14. • Development is………. – Creating and investment climate and empowering poor • Nicholas Stern
  15. 15. IncomePhysical, Human Productivity& Social Capital Trade Institutions Geography
  16. 16. • But then somebody gains and some lose in the growth process….standard critique on market process• This is where interventions around empowerment become important
  17. 17. What the individualowns:• Assets• Human Capital External Constraints • FamilyEmpowerment • Community (caste, religion) • Society • GovernanceInternal Constraints• Perceptions of own role• Preferences• Capacity to aspire
  18. 18. Beyond Inclusive Growth and MDGs• Sustainable Development…..• And the talk about Sustainable Development Goals (SDGs)
  19. 19. Three Pillars of Sustainable Development
  20. 20. Sustainability 101• Case study: Chitral in 1970s• Nature of economy: • Self-reliant  food secure  justice  social capital• Then comes globalization (the bad one!) • Provide irrelevant education without opportunity  brain drain • Sectoral reallocation away from agriculture  loss of comparative advantage • Ex-Chitral firms flood agriculture and industrial output killing agriculture and low-end industry in Chitral • In the end no agriculture, no industry for Chitral (recall 20 2007 global food crisis)
  21. 21. Sustainability 101• Now Chitral’s people migrate to cities • Skill mismatch  exploitation in name of cheap labour • Slums  environmental and health hazards • Crime• Result: • We have destroyed production structure in rural economy & and overloaded urban economy • Please remember GDP is still growing 21
  22. 22. Before Jumping to Remedies……• Some questions: • Who benefited from adopting bad forms of globalization? • Power structure  imposed not adopted • Why was no value attached with good form of globalization? • Why not celebrate diversity!• If one tries to answer these questions, one will not blame political leadership rather ownself • Revealed preferences • Voted for external competition, urban living and extravagance  choice (bigger and better) 22
  23. 23. Before Jumping to Remedies……• How to sustain extravagance  fiscal deficit?• Where to finance subsidized production & consumption? • Debt • Trade-off own natural resources • Gas and water at throw-away prices ! 23
  24. 24. Now where to go from here……• Kickstart growth  create sustainable jobs• Lets revisit our comparative advantage: • Rural • Agriculture (crop sector, livestock) • Labour (unskilled) • Urban • Infrastructure • Integrated markets • Labour (skilled)  educated and healty• Inequality is clear  not sustainable 24
  25. 25. Now where to go from here……• To move towards sustainable jobs, give rural economy what urban has • Education with opportunity (relevant education) • Food security and health• How? • Through inclusive markets and rural infrastructure • Give large rural populations municipal services• Need for local-area growth strategies • Putting value on local-area production and diversity • Not forcing Chitrali framer to go to cities for selling output 25
  26. 26. But the story is not complete…• The above mentioned is what East Asia has done e.g. China [Rural Development Strategy] and Thailand [Once Village One Product]  balanced growth strategies• But Chinese model will only kickstart growth  what about sustainability and equity • With local-area growth model ….need for local-area sustainability and equity planning • 18th Amendment to help! • Planning Commission’s Growth Strategy important 26
  27. 27. Where should we go from here?• Any ideas for Pakistan economy? 27
  28. 28. Our Advice: Go for Responsible Growth• Restore Economic Growth  for employment • Energy for Industry • Water for Agriculture• Open up competition  markets for middle class and poor • Rural markets  focus on human capital • Urban markets  focus on connectivity• Pay attention to trade restrictions • Trade with China and India is good!  regionalism• Respect natural resources • Hurting environment brings natural disasters 28
  29. 29. Our Advice: Who will do it• Need for Civil Service & Accountability Reform  Supply side capacity• Need to strengthen civil society  Demand side engagement 29
  30. 30. Thank, 30