Missing Economic Growth: The Case of Pakistan

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This presentation exhibits the journey of Pakistan economy. The historical performance is exhibited and explained through contemporary theories of economics

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  • Growth volatility adding to uncertainty Falling long run potential growth rate Boom bust cycles in absence of reform
  • Since the 1980s we have falling decade-wise growth rates for agriculture and industry. The sectoral share of industry is still the same as for1970 levels. However the concerning aspect is that agriculture growth rate is almost the same as population growth rate, which speaks volumes about the food security threat and the fact that agriculture provide employment to a majority population.
  • Constraints to Economic Growth are Market andGovernance FailureMarket Failure: Lack of Competition,No Incentives for Innovation & EntrepreneurshipGovernance Challenges: Poor Contract Enforcement,Distortive Taxes and Subsidies, Anti Competitive Practices, Lacking Software of Growth
  • India at 27 and China at 40
  • Score:1= underdeveloped, 7=as extensive and efficient as the world’s best
  • Source: WDR 2009
  • No media campaign against corruption. Fiscal mechanism post-18th amendments needs to be chalked out, removing multiplicity of processes, stop fiscal bleeding.
  • No entreprenuerial firm in KSE-100 index, again we are not talking of SMEs, Micro credit, funds for innovation incubators. We are asking to revisit laws and regulations – governance for markets!
  • No vertical expansion, nothing beyond 2000 sq
  • Least connected country. If easy to go to dubai from here and more difficult to travel to quetta, capital of the biggest province
  • Least connected country. If easy to go to dubai from here and more difficult to travel to quetta, capital of the biggest province
  • No new money is coming. So how to squeze maximum gains from existing resources. This brings you towards initiating an efficiency drive. Efficiency and Productivity !!!
  • Assumption: For the first two years we are constrained by power sector etc. We need time to come back to our trend growth rate. Once these constrained are lifted, then u start eliminating excess capacity after which fresh investment is expected.
  • Assumption: For the first two years we are constrained by power sector etc. We need time to come back to our trend growth rate. Once these constrained are lifted, then u start eliminating excess capacity after which fresh investment is expected.
  • Missing Economic Growth: The Case of Pakistan

    1. 1. Missing Economic Growth The Case of Pakistan Dr. Vaqar Ahmed Advisor, Planning Commission of Pakistan May 2011 1
    2. 2. Outline• Growth Experience of Pakistan• What is the Current Growth Strategy?• Why Move Towards a New Growth Strategy?• What is the Proposed Growth Strategy?• Development Planning – Post 18th Amendment 2
    3. 3. Old Growth Model (Harvard Advisory Group)Harrrod Domar Model allowed planners to predict required savings for agiven growth target and capital-output ratioBased on works of Harrod (1939), Domar (1946, 1957), Lewis(1954), Rostow (1960), Kuznet (1963), Chenery (1966) How Old Model Collapsed?Markets not Model does not Take-off fails Reliance ondeveloped so incorporate due to poor foreignsavings are not endogenous quality of resources aschanneled into productivity investments savings are lowproductive uses growth
    4. 4. GDP Growth (%) 1971-2009 Lower long run average growth in comparison to regional competitors10 9.1987 6.4 6.0 5.96 5.3 4.9543210 China Malaysia Indonesia Thailand India Pakistan
    5. 5. Investment & Savings 1971 - 2009 12 Savings rate too low to compete Pakistan 17 with regional economies India 22 24 Thailand 29 30Indonesia 29 26Malaysia 35 27 China 38 32 0 5 10 15 20 25 30 35 40 Domestic Savings to GDP Fixed Investment to GDP
    6. 6. Current Trend of Economic Growth • Growth volatility adding to uncertainty • Falling long run potential growth rate • Boom bust cycles in absence of reform 10 9 8GDP Growth (%) 7 6 5 4 3 2 1 0 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 6 No Long Term Thinking on Growth Strategy
    7. 7. 12 10 2 4 8 0 6 10 15 -5 -20 -15 -10 5 0 1961 1961 1965 1965 1969 1969 1973 1973 1977 1977 1981 1981 1985 1985 Pakistan Bangladesh 1989 1989 1993 1993 1997 1997 2001 2001 2005 2005 2009 10 2009 -4 -2 0 2 8 4 6 10 15 20 25 -5 0 5 -10 1961 1961 1965 1965 1969 1969 1973 1973 1977 1977 1981 1981 India 1985 1985 Sri Lanka 1989 1989 1993 1993Falling Competitiveness vis-à-vis Regional Economies 1997 1997 2001 2001 Growth Experiences Across South Asia 7 2005 2005 2009 2009
    8. 8. Structural Transformation 1970 - 201010 Sectoral Growth Rates (%) 60 Sectoral Shares in GDP (%)8 506 404 302 200 10 1970s 1980s 1990s 2000-10 0 1970 2010 Agriculture Manufacturing Services Agriculture Industry Service Sector Agriculture and Industry growth rate declining. Decade average slightly above population growth rate. Issues for food security, unemployment and poverty 8
    9. 9. What is the Current Growth Strategy?Growth policy by default • Projects being multiplied Market Failure with no available resources • Regulated markets and Governance sector picking Challenges • Lack of structural reform 9 Result: Sporadic Growth Usually Created by External Resources
    10. 10. Investment & Savings 1981 - 201025201510 Declining PSDP with serious quality issues50 1983 2005 1981 1982 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 National Savings to GDP Ratio Fixed Investment to GDP Ratio 10 Development Expenditure to GDP
    11. 11. State of Public Sector Development ProgramPSDP Weaknesses• Project Governance• Decreasing PSDP Size• High share of brick & mortar (60% of total)• Money Spread thin (large sectoral & regional spread) Prioritizing PSDP • Projects nearing completion • Key Infrastructure Project • Projects for removing regional disparity 11
    12. 12. Why Move Towards a New Growth Strategy?• Expected long run labor force growth 3.6 % annually• Absorbing incremental labor requires GDP growth in excess of 8 % annually 6 Rising Unemployment 14 Real Per Capita Income Growth 12Unemployed Labour Force 5 10 4 8 (millions) (%) 3 6 Falling Per 4 2 Capita 2 1 Incomes 0 0 -2 2001 2002 2003 2004 2005 2006 2007 2008 2009 12
    13. 13. Approach to a New StrategyThink Global – Act Consensus- Achieving Local driven Balance Need for home Consultations with Physical Capital grown ideas Provinces Growth possible Meeting all segments of during society including Human Capital stabilization academia, civil society, business community Taking stock of local and global Social Capital knowledge 13
    14. 14. Outline• Growth, Investment & Savings – an Overview• Pakistan’s Growth Problem • Planners approach to Growth • Past plans unveiled • Productivity – missing link• Advances in Scientific Literature• The Need for Growth Strategy & Reforms• Some Scenarios – Desired Growth Paths
    15. 15. Current Instruments of National Planning1. Policies2. Plans i. Perspective Plan 10-25 Years ii. Mid Term Plan 04-07 Years iii. Rolling Plan 03 Years iv. Annual Plan 01 Year3. Transformation of plans into projects Policies  Plans  Projects 15
    16. 16. Plan Periods in Pakistan Plan Period1. Colombo Plan (Six Year Plan) 1951-572. Ist Five year Plan 1955-603. 2nd Five year Plan 1960-654. 3rd Five year Plan 1965-705. 4th Five year Plan 1970-756. 5th Five year Plan 1978-837. 6th Five year Plan 1983-888. 7th Five year Plan 1988-939. 8th Five year Plan 1993-9810. 9th Five year Plan 1998-200311. 10 Year Perspective Development Plan 2001-1112. Medium Term Development Framework (MTDF) 2005-1013. Vision 2030 2008 -16
    17. 17. Plan Periods in Pakistan Plan Period Playing1. Colombo Plan (Six Year Plan) with black 1951-572. Ist Five year Plan boxes 1955-603. 2nd Five year Plan of Neglect Human Excessive 1960-65 Control4. 3rd Five yearResources Plan 1965-705. 4th Five year Plan 1970-756. 5th Five year Plan 7 Sins of 1978-83 Planners7. 6th Five year Plan 1983-88 Growth (Haq 1972) Investment8. 7th Five year Plan without Illusion 1988-93 Justice9. 8th Five year Plan 1993-9810. 9th Five year Plan 1998-200311. Divorce 10 Year Perspective Development Plan 2001-11 between Development Fashions12. Medium Term Development& Planning Framework (MTDF) 2005-10 Implementation13. Vision 2030 2008 -17
    18. 18. Evaluating Growth in MTDF 2005 - 10 Obsession with Physical Capital Thrust of MTDF Strategy Where isproductivity? Accelerating Output Growth Upgrading Physical Infrastructure Supporting the Private Sector Achieving MDGs Sector Picking  PSDP– led  endogenising productivity not possible 18
    19. 19. Revisiting Determinants of Economic Growth Labour Capital Technology Economic Growth Productivity Management Institutions Information
    20. 20. Pakistan Lacks Software of Economic Growth Hardware Software Overall Infrastructure Quality Country Score Global Quality of Firms Indonesia 2.5 Innovation Education Spending Country (132 System on R&D India 3.3 countries) China 3.4 Pakistan 79 99 80 Pakistan 3.4 India 30 37 36 Thailand 5.0 Indonesia 39 44 28 Korea 5.1 Taiwan 5.4 Thailand 57 67 47 Malaysia 5.7 Malaysia 24 23 19 Hongkong 6.4 China 26 52 23 20Source: Global Competitiveness Report
    21. 21. What about Total Factor Productivity?
    22. 22. Low Productivity Growth (1981-2030) 4.5 Pakistan’s average annual productivity growth 4.0 lower than competitors’ and projected to remain low in future 3.5 TFP Growth Rate % 3.0 China 2.5 Viet Nam Thailand 2.0 Korea 1.5 India 1.19 1.04 Pakistan 1.0 0.78 0.5 0.0 1981-2007 2011-20 2021-30 22Source: Lee, Jong-Wha and Kiseok Hong (2010) Economic Growth in Asia: Determinants and Prospects.
    23. 23. TFP: Management & Organization• The primary issue with Pakistan’s supply side: • Not the supply of labour and Capital• The way we organize our operations • Organization of factor markets • Organization of markets • Organization of cities & communities• Also due to slow knowledge diffusion due to: – Lack of competition (IO models) – Quality of human capital (Lucas Jr. 1988) – Information (Akerlof 1970) – Adjustment costs (Lucas 1967) – Incentives (Mikkelson 1997) – Institutions (Acemoglu 2003, Rajan 2003)
    24. 24. Current Productivity Gaps• Losses of PSEs• Over-regulated markets• Low quality of investment• Poorly organized urban centers• Inefficiency – misallocation of resources due to interventions like subsidies• Low spending on R & D (public & private)
    25. 25. Outline• Growth, Investment & Savings – an Overview• Pakistan’s Growth Problem• Advances in Scientific Literature • Growth Strategies in Regional Economies • H-D to Endogenous Growth and Beyond • Designing Growth Strategies• The Need for Growth Strategy & Reforms• Some Scenarios – Desired Growth Paths
    26. 26. 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, 26 (2004-10) technology entrepreneurship and support to R&D
    27. 27. 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
    28. 28. Designing Better Growth Strategies 1. Growth diagnostics: what are the most binding constraints on growth? 2. Policy design: how do we best alleviate the relevant constraints? 3. Institutionalization: how do we institutionalize the diagnostic/policy design process in view of the fact that the nature of binding constraints will change over time? 28
    29. 29. 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 29Adapted from Hausmann & Rodrik (2005) Enforcement
    30. 30. 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 30Adapted from Hausmann & Rodrik (2005) Enforcement
    31. 31. Outline• Growth, Investment & Savings – an Overview• Pakistan’s Growth Problem• Advances in Scientific Literature• The Need for Growth Strategy & Reforms • Stabilization & Adjustment • Governance & Institutions • Markets, Entrepreneurship & Investment Climate • Cities & Connectivity • Youth & Community• Some Scenarios – Desired Growth Paths
    32. 32. New Economic Growth Strategy Short Term: Getting Back to PotentialUtilization of Macroeconomic Removing MajorExisting Capacity Stability Constraints• Up to 50% in fertilizer, • Inflation eroding • Energy (Electricity & auto sector, sugar, competitiveness Gas) cement and steel • Resource Mobilization • Goods & factor markets & Expenditure Management 32
    33. 33. Long Term: Growth Strategy Economic Productivity Discipline Responsible Fiscal & Governance & Institutions Monetary Policies Market ReformsRestructuring of PSEs Urban Management ConnectivityRationalization of PSDP Youth & Community 33
    34. 34. Potential Governance Agenda BusinessCivil Service Devolution process PSE Reforms Reform reengineering Need to Structure and Devolving Reform for Power address Incentives to powers, Sector Under outdated Implementation Attract Talent responsibilities regulations and resources to lower tiers Remove Monetized Reforms Strategy multiplicity of Salaries, Merit for Railways & processing Gas Formulated based Performance layers Promotion, an based d Easy Entry & Governance Exit TCP & PASSCO to be examined for closing down 34
    35. 35. New Role of GovernmentMarkets Government Ownership Policy of Assets Financing Regulation of Assets Production & Management 35
    36. 36. Markets & EntrepreneurshipModernize Laws Deregulate Encourage Domestic & Regulations Markets Innovation Commerce for Markets Wheat, Sugar Innovation Agriculture Taxation & through Market Regime, Rent Commodities Incubation Committees Laws etc. Exchange Centers Review Cluster Legal System Investment in Sectors where Strengthening for Common New Sectors Government (e.g. Sialkot, Property may Exit Gujranwala, Ownership Wazirabad) (shops & flats) Bankruptcy Law (legislation drafted) 36
    37. 37. Cities as Hubs of CommerceModernize Laws Address Excess & Regulations Land Markets Property Rights Demand for Cities Need to Need to Bridge Excess Freeing Reform Address Demand for Government Zoning & Issues of Commerce, Land for Building Titles, Taxatio Office Space, Commercial Regulations n Structures Warehouses Purposes etc. etc. 37
    38. 38. Reforms for Connectivity Incentivizing useRevisiting ‘PPP’ Freight sector Aviation of ICT services Phase 1: Partial Reducing CAA’s Adding ‘PPP Option analysis’ privatization + role to ICT & Customs in PC-1 opening rail regulating track Reviewing Phase 2: Facilitating ‘procurement Unbundling of Auctioning of clearance of law & rail assets and routes against goods at dry processes’ privatization preferred ports allocation to PIA E-government: Bringing land acquisition Reduction in ‘Electronic laws in-line import tariffs signature act’ with on modern to give cover international trucks to the use of norms digital IDs etc
    39. 39. Youth & Community Engagement Youth Youth Social CapitalDevelopment Entrepreneurship Empowerment Making Social through Capital Available for Support Innovation Representation Youth Mentorship Social Infrastructure Framework forEducation and Skills Youth Self (Libraries, Communi Service Learning ty Centers etc.) Employment
    40. 40. Development Planning – Post 18th Amendment Strategic Decentralized Results Level Planning Planning Monitoring Service Delivery Review of Key Towards Provincial Plans with Socio-Economic Growth & Reforms Sectoral Ministries Challenges Strategy & Provinces Local and Setting Developing Vision Municipal level Performance & Mission Strategy Targets Helping Provinces Monitoring Key and Line Ministries Performance Formulate Indicators40 Execution Plan
    41. 41. Outline• Growth, Investment & Savings – an Overview• Pakistan’s Growth Problem• Advances in Scientific Literature• The Need for Growth Strategy & Reforms• Some Scenarios – Desired Growth Paths • SWOT • Demographic Challenges • Required Growth Rate • Returns from Reforms
    42. 42. Pakistan Economy: SWOT Analysis• Strength: Youth bulge• Weakness: Governance• Opportunity: large domestic demand• Threat: Coordination & information failures
    43. 43. 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. 43
    44. 44. Demographic change also raises challenges Country Global Brain Quality of • UNEMPLOYMENT without Innovation Drain Education adequate investment Index System (Out of 132 • ASSETS & SKILLS shortage Countries) Pakistan 79 68 99 India 30 34 37 • COMPETING South Asian Indonesia 39 27 44 countries also have young Thailand 57 38 67 populations Malaysia 24 28 23 China 26 37 52 Missing Facilities in Government Schools (2009)Indicators % of totalSchools without Electricity 59.6Schools without building 10.9Schools without boundary wall 37.7Schools without drinking water 33.9Schools without Latrine 36.9*NEMIS 2009, Ministry of Education
    45. 45. Growth Alternatives (2011-15) 7 Stabilization : Reform of PSEs, increase 6 resource mobilization (Average 4.7%) 6.0 5.5 5 5.0GDP Growth Rate (%) 4 4.0 3.9 3.8 3.6 3.4 3 3.0 2 Business as Usual: Low aid-led public investment, high Inflation (Average 3.5 %) 1 0 2010-11 2011-12 2012-13 2013-14 2014-15 45
    46. 46. Growth Alternatives (2011-15) 9 Stabilization + Reform: Market reforms 8 & productivity gains (Average 5.6%) 8.0 7 Stabilization : Reform of PSEs, increase 7.0 resource mobilization (Average 4.7%)GDP Growth Rate (%) 6 6.0 6.0 5.5 5 5.0 4 4.0 3.8 3.9 3.4 3.6 3 3.0 2 Business as Usual: Low aid-led public 1 investment, high Inflation (Average 3.5 %) 0 2010-11 2011-12 2012-13 2013-14 2014-15 46
    47. 47. Income Physical ProductivityEndogenous Capital, Human Capital WeaklyEndogenous Trade Institutions Exogenous Geography
    48. 48. What the individualowns:• Assets• Human Capital External Constraints • FamilyEmpowerment • Community (caste, religion) • Society • GovernanceInternal Constraints• Perceptions of own role• Preferences• Capacity to aspire
    49. 49. Quality GovernanceCreative Quality of Vibrant Cities Life Markets Energetic Youth & Community Thank You Thank You 49 www.pc.gov.pk

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