Raising the growth rate
Pakistan needs to ramp up its growth rate because the country faces a population bulge for almost the next 35 years; 230 million are projected to be in the labour force by the end of that period. This huge number of young men and women will have to be provided productive jobs to avoid social unrest and reduce the recruitment queues for Taliban-like forces. To absorb this youth the growth rate will have to be boosted from its present lackluster levels.
How fast must the economy grow to accommodate these annual entrants to the labour force? All estimates suggest a seven-percent rate per annum. However, to reduce the previously unemployed and underemployed, a rate of eight percent per year may be necessary, as against the average rate of five percent that we have achieved since the mid-70s – reflecting the existing potential of the economy, ignoring one-off events like an exceptional harvest, a spike in export prices.
How can this shift to a higher growth path on a sustainable basis be achieved? I would preface the discussion to follow by arguing that, for reasons of efficiency, the bulk of this growth must come from the private sector. Achieving such growth rates will: a. Require a much higher rate of investment than our average historic rate of less than 19 percent of GDP. It is not possible to generate a growth rate of around eight percent per annum over a 30-year period without an investment ratio of 30-percent-plus.
b. Necessarily require a sharp increase in domestic savings (less than 15 percent of GDP for most of our history, compared with India’s 35 percent) to finance the investments needed to attain and then maintain such rates of growth. And this can only be achieved gradually over time, and provided adequate incentives and reforms are in place.
c. Need continued improvement in the productivity of the resources – capital and labour – employed. Higher growth rates will not only require more capital but, more importantly, higher productivity from all factors of production – necessitating a combination of greater technological progress and more efficient use of these inputs. Between 1970 and 2005 increases in productivity contributed only 20 percent of the growth in our GDP, while between 1998 and 2008 its contribution fell to a mere 11 percent, well below that of India, Sri Lanka and Bangladesh.
The impediments to productivity increases include availability of reliable energy at reasonable rates, an educated, skilled and healthy labour force, and entrepreneurial and managerial skills. In our case, entrepreneurial skills have not developed partly because of our history of the state providing different industries protection against competition through policy crutches. The deficiency in managerial skills is a product of our weak educational systems, poor work ethic and the incentive structures that do not create a demand for professional skills – an entrenched culture of SROs to protect different sub-sectors of industry renders irrelevant the need for quality skills to improve industrial competitiveness.
Going forward we will have to look at domestic sources to meet our growing investment requirement since international capital flows are destined to become more volatile, the country’s poor image will only make it more difficult to access such funds at affordable rates. This will require more savings both “public” and private. How will these be raised?
Private savings can be stimulated through incentives and the right mix of economic policy and financial, regulatory, goods and labour-market reforms, institutional reforms (the last in the form of better and more accountable civil service structures), availability of skilled labour, technological readiness, etc. – the “software of growth” that the Planning Commission argues for. These are expected to boost investment rates by reducing the cost of doing business – we presently rank lower than other South Asian countries on ease of doing business – and most of these reforms will not require sizeable volumes of expenditures to implement. This will make businesses profitable, thereby providing an incentive to save and invest – a virtuous circle.
As for ways to support the growth in household savings, I would propose:
(a) improvement in financial intermediation by ensuring real and increased returns on financial savings, say, on instruments of national savings schemes: this will incentivize the acquisition of financial assets and reduction in currency in circulation, today Rs. 1.7 trillion (close to 35 percent of deposits) and force banks to compete to mobilize deposits; and
(b) introduce new institutions and instruments like portable and mandatory savings/pension schemes.
These reforms, in order to facilitate private investment and savings, will need to be supported by complementary government investments in physical infrastructure. However, the financing of infrastructure, education, health, etc., related investments to improve both quantity and quality, will require