Pakistan’s Economic Future
Economists have a very poor track record of forecasting the future as the dynamic interactions between complex variables, an imperfect understanding of the noneconomic factors and the occurrence of unanticipated exogenous shocks turn their judgments into hit and miss episodes. Despite these weaknesses economic forecasting flourishes as a discipline and the economists show indomitable courage to sketch out their scenarios of an uncertain and unknown future. This article therefore examines the past developments, current trends of Pakistani economy and the future global and regional outlook and builds the most likely scenario for the medium term economic prospects of the country (next 10 years or so) and then reviews the downside risks and upside gains around this scenario.
Pakistan is still a low income country and it would require at least next 14 years of 7 percent average annual GDP growth to double its per-capita income to around $ 2000 (official exchange rate conversion). This growth rate should also be able to reduce the incidence of poverty by half and meet the Millennium Development Goal.
It is easy to make this normative statement but more difficult question is how can this growth rate be achieved on a sustained basis? The prophets of doom and gloom in Pakistan (and there are plenty of them) who are constantly polluting the minds of our younger generation and turning them into cynics at very early age sapping their energies for constructive thinking and actions would dismiss this exercise as a figment of imagination or at best a fantasy. To them, all the economic gains have accrued due to the windfall of 9/11 and Pakistan’s support to the US in the war against terror. When confronted with the stark fact that Pakistan was one of the few countries that grew by 6 percent annually between 1960 and 1990 and reduced the incidence of poverty to as low as 18 percent they again dismiss this as outcome of US assistance. The widespread negative mindset of our elites and lack of confidence in the capabilities of our own workers, farmers, traders, businessmen and overseas Pakistanis, is one of the major stumbling blocks that can unravel our projections. Growth momentum can also dissipate if other existing or emerging structural constraints and bottlenecks are not resolved on time.
Leaving that aside my own reckoning is that if we are able to fulfill some critical preconditions it is possible to reach this goal of doubling the per-capita income by 2020 and reducing the poverty by half by 2015. What are these preconditions? In my view the main preconditions are:
• Favorable global economic conditions
• Successful integration of Pakistan into the global economy
• Pursuit of sound, credible and consistent economic policies
• Strong institutional delivery and governance framework
• Investment in physical infrastructure and human development and
• Continued political stability and peaceful security conditions. Before examining each one of the above factors let us recapitulate the journey we have traversed so far. Pakistan has been a relatively fast growing economy in comparison to other developing countries but has lagged far behind the dynamic economies of East Asia and China. It was a leader of the pack in the South Asia until 1990 but India has overtaken us during the last 15 years. Political instability and frequent changes of governments, poor governance, nuclear explosion, economic sanctions and unfavorable external environment brought about a decline in Pakistan’s growth rates in the decade of 1990s below the trend and also resulted in macroeconomic instability.
The reforms initiated since 2000 have put Pakistan back on its historic growth trajectory, revived investors’ confidence and access to international capital markets, and developed resilience to face exogenous shocks. Structural reforms in the areas of financial sector, tariff and tax administration, privatization of state-owned enterprises, creation of an enabling environment for private sector, liberalization of foreign exchange and foreign direct investment, market orientation and openness to the global economy have brought about at least 2 percentage point increase in total factor productivity. If this is empirically valid then the output potential of