Has the economy ‘developed’ rather than simply grown? Is the growth sustainable? Has a platform for future economic growth been laid? Have the benefits of that growth had a positive social impact on the nation and its people? The government claims that this is so, arguing that their policies have placed the economy on a footing whereby it will be able to sustain growth at 7% to 8% annually for the foreseeable future.
Pakistani economists of one stripe or another, have advocated in the media one of three models of economic development. A general idea that runs through these is that a developing economy needs a large amount of capital investment, which spurs economic activity until ‘lift off’ is finally achieved when economic growth becomes self-sustaining and the effects of this growth permeates throughout society.
The first model, which I will call “The World Bank Model: Mark I”, was formulated in the 50s. It is based on the idea that to achieve ‘lift off’, an economy needs investment from abroad focused on promoting rapid GDP growth. This rapid growth will lead to industrialisation which will in turn allow the country to repay its loans. The movement of labour from rural to urban areas would feed industrialisation and allow the benefits of economic growth to ‘trickle down’ to the population at large. Eventually, once the supply of labour starts to contract, wages for the population will begin to rise. Living standards will rise and lo and behold! A fully developed society will result! A couple of elements were added to the this model in the 70s and 80s. Firstly, the growth of export-oriented industries was seen as key to achieving “lift off” – otherwise economies would remain in debt for a very, very long time. Secondly, the need for ‘responsible’ fiscal and monetary policies were emphasized –gotta pay off those loans.
The second model, which I will call “The World Bank Model: Mark II”, was formulated based on the experience of the preceding decades. It was belatedly realised that the wealth of most developing economies didn’t really trickle down, so much as pool at the top. It was therefore decided that certain institutional structures needed to be created, mostly to do with educational and health infrastructure as well as governance, if the channels for trickle down were to work effectively. The need for social sector and governance reforms was emphasized, not just because of 'fuzzy liberal' sentiment for the teeming masses, but because economists found that developing economies without social governance actually undermined economic growth. Opportunities for expansion were lost and instability ensued. This second model was given explicit shape in the World Bank’s World Development Report 2006. Shahid Javed Burki, a former World Bank economist and ex-Finance Minister of Pakistan, is a proponent of this approach, both in his columns in Dawn and in his book Changing Perceptions, Altered Reality: Pakistan’s Economy Under Musharraf, 1999-2006.
The third model, which I will call “The Slow GDP Growth Model” is gleaned from what I have read by the economist Qaiser Bengali. This model has a greater emphasis on government intervention in the economy, an emphasis on industrial growth for domestic consumption, low foreign debt and higher employment at the expense of a high GDP growth. The idea is to replace “trickle-down” with heavy government investment in social infrastructure in order to raise living standards, with explicit reference to China and India’s nurturing insular, state-dominated economies for a "gestation" period, allowing them to grow and attain a certain critical mass before subjecting them to global market forces. The idea is that a socio-economic foundation first needs to be laid before “lift off” can occur.
While the Musharraf government has made lip-service to adhering to the second model of development (it has to, since many of the country’s loans from institutions such as the Asian Development Bank and other foreign donors are tied to investing in the social sphere), it is obvious that it has not made any serious attempts to work in this regard. Policy and political will is focused on the first model of economic development. This sense is reinforced by listening to the various pronouncements of former PM Shaukat Aziz or former special adviser to the President and current Finance Minister, Salman Shah – their focus is all on GDP growth and foreign investment.
But the problem here is, not only is the first model flawed, but Pakistan’s economic performance does not even meet its relatively simplistic standards. The government has repeatedly claimed that they have placed the economy on a sound footing and the country is poised for “lift off”. [More recently, Musharraf has said that this position was being threatened by the Chief Justice’s ruling against the Steel Mill sale and the consequent deleterious effect on foreign investment.] But something both Shahid Burki and Qaiser Bengali, amongst just about every other dispassionate (and some rather impassioned) economic observers, have underlined, is that the claims that Pakistan has undergone an economic miracle is a myth.
Lets look at the country’s economy in terms of the First Model:
The government claims that its policies have led to:
- Foreign investment
- Increase in exports
- Increase in Foreign Reserves
- A decline in poverty
- Sustained economic growth
All seems to sit well with World Bank Model I, right? Maybe not. Lets look more closely.
1. Foreign investment was mostly confined to privatising existing state run enterprises, along with small, yet significant amounts in the stock market and in real estate. While the injection of foreign capital and management was expected to help improve these enterprises, investment in new industries has been tentative to say the least, and is only done in limited form with major concessions (50 year tax holidays, limited liability, etc.). Foreign Direct Investment (FDI) is still very low and contributes very little to the economy. Pakistan is still considered too politically unstable to be an attractive proposition for long term investments. Anything that can’t be dumped for cash in quick order is risky.
2. The increase in exports have mostly been in primary goods – agricultural produce, cotton, etc. These are dependent on price fluctuations and seasonal variations. While the increase in global prices in a number of primary commodities have inflated the export ledger, its important to realise that percentage wise the export of industrial goods has dropped precipitously. For example, textile exports have actually declined, leading to the closure of hundreds of textile mills, but the export of raw cotton has increased. Furthermore, the rise in exports has not matched the rise in imports which have escalated at a far faster rate, which means that the balance of payments deficit is now at unprecedented levels.
3. Thanks to the global crackdown on money laundering, the vast amounts of money previously remitted through the ‘black’ hundi system from foreign workers now came through official channels. This had three consequences: these vast amounts were now taxed, providing additional revenue to the government; the local banks were flush with cash, [which along with banking sector reforms and the introduction of newer technologies (ATMS, credit cards etc.) spurred the boom in consumer credit financing]; foreign exchange reserves grew. Foreign exchange reserves were also bolstered by three other windfalls; heaps of money from the United States for participation in the War on Terror; the sale of state enterprises as part of the ‘privatisation’ process; the cancellation or rescheduling of foreign debt post 9-11, and a geopolitical climate conducive to new loans on generous terms. I term all of these ‘windfalls’ because they arose from particular situations external to the economy and may not come again. The U.S. money tap will close someday (perhaps sooner, perhaps later); the state will run out of stuff to privatise; and the rescheduled loans will eventually come due once more. The Pakistani economy needs to be able to handle its balance of payments before this happens. Which it currently can’t.
4. A decline in poverty? Statistics in this field have become a free for all. Government sponsored reports insist that poverty is declining. NGOs beg to differ. Its probably safe to say that the data is inconclusive. The problem is not just of current data, but of past data as well. Approximately a third of the population earns less than a dollar a day. But whether or not that is defined as poverty is debatable. And whether or not that figure is a significant decrease from previous years is also debatable. But given increasing inflation, especially food inflation, which far outstrips the rise in GDP per capita, or increases in minimum wage etc., its safe to say that while figures on poverty are debatable, the purchasing power of a large chunk of the population has been decreasing over the last few years, particularly the urban poor and agricultural wage workers.
Perhaps more to the point is the question about whether the Pakistani economy has moved (or is moving) to the point presented in the ‘World Bank Model I’ where the benefits of the growing economy can trickle down to the population at large. The answer is a resounding ‘no’. Firstly, most of the economic growth has been in the services sector, which has created upward economic oppurtunities almost exclusively for the educated, urban middle classes. Few jobs have been added to the economy. There has been very little industrial growth. Agribusiness has benefited landholding farmers, particularly those who own middle and large sized land holdings (or institutions like the army which owns huge tracts of agricultural land) – but this has basically been confined to parts of the country (incidentally building on the success of the transport infrastructure built there during the Nawaz years). Agricultural productivity is limited by the lack of credit, transport, irrigation and other oppurtunities to large tracts of land, particularly in Sindh, Balochistan and southern Punjab.
5. Is the current economic growth sustainable? The answer has to be ‘not yet’, given that the trade deficit is so high, that investments are skewed towards speculative sectors, that the country has a very low investment to national savings ratio, and that growth has been focused on the service sectors, particularly banking, which itself is exposed to a wide variety of consumer loans. These consumer loans were driving growth in other sectors where the performance was good, such as agribusiness and the automobile industry. Already, the banks have started drawing back from these sectors (several banks have stopped giving auto loans for example). The government itself is now borrowing very heavily from local banks and the wave of inflation coming from the rise in oil prices is only now going to hit the economy (so far the government has been subsidising costs through various ‘buy now, pay later’ schemes with Saudi Arabia and the UAE, dipping into the National Reserves, and borrowing). On top of this are infrastructural failures which are active hindrances to further growth, such as the energy crisis, poor human resource development, underdeveloped infrastructure, lack of foreign markets and of course the political instability. Its all very well to sell off existing industries and talk about the money you have made. But the conditions for more industries to be created simply are not being put into place. 'Lift off' has not yet been achieved.
Now all of these are criticisms from the standpoint of ‘World Bank Model I’. There are more criticisms to be made if we look at matters from the perspective of the other two models. Unfortunately I don’t really have the time to go into them at this point in time (I do have a job and a family after all). Perhaps that can await a later post.
Update: Kaiser Bengali recently gave a talk in which he expounded on his criticisms of economic development. I find his characterization of Pakistan in the 50s, 60s and 70s as a development state, and in the 80s, 90s and 00s as a 'national security state' an interesting and informative tool.
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