Out­look

Enterprise - - Contents - By Shahid Kar­dar

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

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