missing economic growth: the case of pakistan
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Missing Economic GrowthThe Case of Pakistan
1
Dr. Vaqar AhmedAdvisor, Planning Commission of Pakistan
May 2011
2
• 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
Outline
Old Growth Model (Harvard Advisory Group)
Harrrod Domar Model allowed planners to predict required savings for a given growth target and capital-output ratio
Based on works of Harrod (1939), Domar (1946, 1957), Lewis (1954), Rostow (1960), Kuznet (1963), Chenery (1966)
How Old Model Collapsed?
Markets not developed so savings are not channeled into productive uses
Take-off fails due to poor quality of investments
Reliance on foreign resources as savings are low
Model does not incorporate endogenous productivity growth
GDP Growth (%) 1971-2009
China Malaysia Indonesia Thailand India Pakistan0
1
2
3
4
5
6
7
8
9
109.1
6.46.0 5.9
5.34.9
Lower long run average growth in comparison to regional competitors
Investment & Savings 1971 - 2009
China
Malaysia
Indonesia
Thailand
India
Pakistan
0 5 10 15 20 25 30 35 40
32
27
26
30
24
17
38
35
29
29
22
12
Domestic Savings to GDP Fixed Investment to GDP
Savings rate too low to compete with regional economies
6
Current Trend of Economic Growth
No Long Term Thinking on Growth Strategy
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0123456789
10
GD
P G
row
th (
%)
• Growth volatility adding to uncertainty• Falling long run potential growth rate• Boom bust cycles in absence of reform
7
-20-15-10
-505
1015
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Bangladesh
-10
-5
0
5
10
15
20
25
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
India
02468
1012
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Pakistan
-4
-2
0
2
4
6
8
10
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Sri Lanka
Growth Experiences Across South Asia
Falling Competitiveness vis-à-vis Regional Economies
8
Structural Transformation 1970 - 2010
0
2
4
6
8
10
1970s 1980s 1990s 2000-10
Sectoral Growth Rates (%)
Agriculture Manufacturing Services
0
10
20
30
40
50
60
1970 2010
Sectoral Shares in GDP (%)
Agriculture Industry Service Sector
Agriculture and Industry growth rate declining. Decade average slightly above population growth rate. Issues for food security, unemployment and poverty
9
Growth policy by default
• Projects being multiplied with no available resources
• Regulated markets and sector picking
• Lack of structural reform
What is the Current Growth Strategy?
Result: Sporadic Growth Usually Created by External Resources
Market Failure
Governance Challenges
Investment & Savings 1981 - 2010
10
19811983
19851987
19891991
19931995
19971999
20012003
20052007
20090
5
10
15
20
25
National Savings to GDP Ratio Fixed Investment to GDP Ratio
Development Expenditure to GDP
Declining PSDP with serious quality issues
PSDP 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
State of Public Sector Development Program
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
2001 2002 2003 2004 2005 2006 2007 2008 20090
1
2
3
4
5
6
-2
0
2
4
6
8
10
12
14
Une
mpl
oyed
Lab
our F
orce
(mil-
lions
)
Real
Per
Cap
ita In
com
e G
row
th
(%)
Falling Per Capita
Incomes
Rising Unemployment
13
Approach to a New Strategy
Think Global – Act Local
Need for home grown ideas
Growth possible during
stabilization
Taking stock of local and global
knowledge
Consensus-driven
Consultations with Provinces
Meeting all segments of society including
academia, civil society, business community
Achieving Balance
Physical Capital
Human Capital
Social Capital
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
Current Instruments of National Planning
1. Policies
2. Plans
i. Perspective Plan 10-25 Years
ii. Mid Term Plan 04-07 Years
iii. Rolling Plan 03 Years
iv. Annual Plan 01 Year
3. Transformation of plans into projects
15Policies Plans Projects
Plan Periods in Pakistan
16
Plan Period1. Colombo Plan (Six Year Plan) 1951-57
2. Ist Five year Plan 1955-60
3. 2nd Five year Plan 1960-65
4. 3rd Five year Plan 1965-70
5. 4th Five year Plan 1970-75
6. 5th Five year Plan 1978-83
7. 6th Five year Plan 1983-88
8. 7th Five year Plan 1988-93
9. 8th Five year Plan 1993-98
10. 9th Five year Plan 1998-2003
11. 10 Year Perspective Development Plan 2001-11
12. Medium Term Development Framework (MTDF) 2005-10
13. Vision 2030 2008 -
Plan Periods in Pakistan
17
Plan Period1. Colombo Plan (Six Year Plan) 1951-57
2. Ist Five year Plan 1955-60
3. 2nd Five year Plan 1960-65
4. 3rd Five year Plan 1965-70
5. 4th Five year Plan 1970-75
6. 5th Five year Plan 1978-83
7. 6th Five year Plan 1983-88
8. 7th Five year Plan 1988-93
9. 8th Five year Plan 1993-98
10. 9th Five year Plan 1998-2003
11. 10 Year Perspective Development Plan 2001-11
12. Medium Term Development Framework (MTDF) 2005-10
13. Vision 2030 2008 -
7 Sins of Planners
(Haq 1972)
Playing with black
boxes
Excessive Control
Investment Illusion
Development Fashions
Divorce between
Planning & Implementation
Growth without Justice
Neglect of Human
Resources
18
Evaluating Growth in MTDF 2005 - 10
Obsession with
Physical Capital
Where is productivity?
Sector Picking PSDP– led endogenising productivity not possible
Thrust of MTDF Strategy
Accelerating Output Growth
Upgrading Physical Infrastructure
Supporting the Private Sector
Achieving MDGs
Revisiting Determinants of Economic Growth
Economic Growth
Labour
Capital
Productivity
Technology
Management
InformationInstitutions
20
Overall Infrastructure Quality
Country ScoreIndonesia 2.5India 3.3China 3.4Pakistan 3.4Thailand 5.0Korea 5.1Taiwan 5.4Malaysia 5.7Hongkong 6.4
Source: Global Competitiveness Report
CountryGlobal
Innovation (132
countries)
Quality of Education
System
Firms Spending on R&D
Pakistan 79 99 80
India 30 37 36
Indonesia 39 44 28
Thailand 57 67 47
Malaysia 24 23 19
China 26 52 23
Hardware Software
Pakistan Lacks Software of Economic Growth
What about Total Factor Productivity?
Low Productivity Growth (1981-2030)
221981-2007 2011-20 2021-30
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
0.781.04
1.19000000000001
ChinaViet NamThailandKoreaIndiaPakistan
TFP
Gro
wth
Rat
e %
Pakistan’s average annual productivity growth lower than competitors’ and projected to
remain low in future
Source: Lee, Jong-Wha and Kiseok Hong (2010) Economic Growth in Asia: Determinants and Prospects.
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)
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)
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
Growth Strategies in Regional Economies
26
Country Plan Strategy Focus
Indonesia Medium Term Plan 2010-14
Focus on social infrastructure for creativity development
Thailand 10th Plan 2007-11 Opportunities for learning, increase potential of communities by linking them in networks
Malaysia New Economic Model (launched in 2010)
Developing quality workforce, competitive domestic economy and transparent markets
China 11th Five Year Plan 2006-10
Promotion of independent innovation, and enhance social harmony
India 11th Five Year Plan (2007-12)
Reinforces focus on basic services such as education and urban development
Bangladesh Draft Plan 2011 Effective governance, promoting innovative people for a digital Bangladesh, creating a caring society and enhancing regional cooperation
Philippine Medium Term Plan (2004-10)
National innovation system, market reforms, technology entrepreneurship and support to R&D
From Harrod Domar to Endogenous GrowthTheories Main Insights
Harrod-Domar Growth Model – 1940s
Model focuses on saving and the efficiency with which capital is used
Solow (Neoclassical) Growth Model – 1950s
Allows for substitution between labour & capital. Technology increases exogenously
Endogenous Growth – 1980s
Competition and knowledge – related externalities imply increasing returns. Romer 1986; Lucas Jr. 1988.
Endogenous Growth – 1990s
Knowledge spillovers lead to falling R&D costs resulting in further growth. Romer 1990; Grossman & Helpman 1991
Endogenous Growth – 2000s
Schumpeterian entry & exit, with entrants bringing new technologies, knowledge accumulation in cities lead to growth. Aghion & Howitt 2005
Designing Better Growth Strategies
28
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?
Growth Diagnostics–Binding Constraints
29
Entrepreneurship
Availability of Finance
Domestic
Intermediation
Domestic Savings
Foreign
Return to Economic Activity
Social Returns
Infrastructure
Human Capital
Appropriability
Market Failure
Coordination
Information
Govt. Failure
Macroeconomic Stability
Contract EnforcementAdapted from Hausmann & Rodrik (2005)
Growth Diagnostics – Binding Constraints
30
Entrepreneurship
Availability of Finance
Domestic
Intermediation
Domestic Savings
Foreign
Return to Economic Activity
Social Returns
Infrastructure
Human Capital
Appropriability
Market Failure
Coordination
Information
Govt. Failure
Macroeconomic Stability
Contract EnforcementAdapted from Hausmann & Rodrik (2005)
Low incentives for “self-discovery” – information
externalities
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
New Economic Growth Strategy
32
Short Term: Getting Back to Potential
Utilization of Existing Capacity• Up to 50% in fertilizer,
auto sector, sugar, cement and steel
Macroeconomic Stability• Inflation eroding
competitiveness• Resource Mobilization
& Expenditure Management
Removing Major Constraints• Energy (Electricity &
Gas)• Goods & factor markets
33
Long Term: Growth Strategy
Economic Discipline
Responsible Fiscal & Monetary Policies
Restructuring of PSEs
Rationalization of PSDP
Productivity
Governance & Institutions
Market Reforms
Urban Management
Connectivity
Youth & Community
Potential Governance Agenda
34
Civil Service Reform
Structure and Incentives to Attract Talent
Monetized Salaries, Merit
based Promotion,
and Easy Entry & Exit
Devolution
Devolving powers,
responsibilities and resources to lower tiers
Performance based
Governance
Business process
reengineering
Need to address
outdated regulations
Remove multiplicity of
processing layers
PSE Reforms
Reform for Power Sector
Under Implementation
Reforms Strategy for Railways &
Gas Formulated
TCP & PASSCO to be examined for
closing down
35
New Role of Government
Policy
Regulation
Production & Management
Financing of Assets
Ownership of Assets
Markets Government
Markets & Entrepreneurship
36
Modernize Laws & Regulations
for Markets
Agriculture Market
Committees
Investment in New Sectors
Bankruptcy Law
(legislation drafted)
Deregulate Markets
Wheat, Sugar &
Commodities Exchange
Review Sectors where Government
may Exit
Encourage Innovation
Innovation through
Incubation Centers
Cluster Strengthening (e.g. Sialkot, Gujranwala, Wazirabad)
Domestic Commerce
Taxation Regime, Rent
Laws etc.
Legal System for Common
Property Ownership
(shops & flats)
Cities as Hubs of Commerce
37
Modernize Laws & Regulations
for Cities
Reform Zoning & Building
Regulations
Address Excess Demand
Need to Bridge Excess
Demand for Commerce,
Office Space, Warehouses
etc.
Land Markets
Freeing Government
Land for Commercial
Purposes
Property Rights
Need to Address Issues of
Titles, Taxation
Structures etc.
Reforms for Connectivity
Revisiting ‘PPP’
Adding ‘PPP Option analysis’
in PC-1
Reviewing ‘procurement
law & processes’
Bringing land acquisition laws in-line
with international
norms
Freight sector
Phase 1: Partial privatization + opening rail
track
Phase 2: Unbundling of rail assets and privatization
Reduction in import tariffs
on modern trucks
Aviation
Reducing CAA’s role to
regulating
Auctioning of routes against
preferred allocation to
PIA
Incentivizing use of ICT services
ICT & Customs
Facilitating clearance of goods at dry
ports
E-government: ‘Electronic
signature act’ to give cover to the use of digital IDs etc
Youth & Community Engagement
Youth Development
Empowerment through
Representation
Education and Skills
Service Learning
Social Capital
Making Social Capital Available for Youth Mentorship
Social Infrastructure (Libraries,
Community Centers etc.)
Youth Entrepreneurship
Support Innovation
Framework for Youth Self
Employment
Development Planning – Post 18th Amendment
40
Strategic Level Planning
Review of Key Socio-Economic
Challenges
Developing Vision & Mission
Helping Provinces and Line Ministries
Formulate Execution Plan
Decentralized Planning
Towards Provincial Growth & Reforms
Strategy
Local and Municipal level
Strategy
Results Monitoring
Service Delivery Plans with
Sectoral Ministries & Provinces
Setting Performance
Targets
Monitoring Key Performance
Indicators
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
Pakistan Economy: SWOT Analysis
• Strength: Youth bulge
• Weakness: Governance
• Opportunity: large domestic demand
• Threat: Coordination & information failures
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.
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
Missing Facilities in Government Schools (2009)
Country Global Innovation
Index(Out of 132 Countries)
Brain Drain
Quality of Education
System
Pakistan 79 68 99India 30 34 37Indonesia 39 27 44Thailand 57 38 67Malaysia 24 28 23China 26 37 52
• UNEMPLOYMENT without adequate investment
• ASSETS & SKILLS shortage
• COMPETING South Asian countries also have young populations
Demographic change also raises challenges
45
Growth Alternatives (2011-15)
2010-11 2011-12 2012-13 2013-14 2014-150
1
2
3
4
5
6
7
3.03.4 3.6 3.8 3.9
3.0
4.0
5.05.5
6.0
GD
P G
row
th R
ate
(%)
Business as Usual: Low aid-led public investment, high Inflation (Average 3.5 %)
Stabilization : Reform of PSEs, increase resource mobilization (Average 4.7%)
46
Growth Alternatives (2011-15)
2010-11 2011-12 2012-13 2013-14 2014-150
1
2
3
4
5
6
7
8
9
3.03.4 3.6 3.8 3.9
3.0
4.0
5.05.5
6.0
3.0
4.0
6.0
7.0
8.0
GD
P G
row
th R
ate
(%)
Business as Usual: Low aid-led public investment, high Inflation (Average 3.5 %)
Stabilization : Reform of PSEs, increase resource mobilization (Average 4.7%)
Stabilization + Reform: Market reforms & productivity gains (Average 5.6%)
Income
ProductivityPhysical Capital, Human Capital
InstitutionsTrade
GeographyExogenous
Weakly Endogenous
Endogenous
Empowerment
What the individual owns:
• Assets• Human Capital
Internal Constraints
• Perceptions of own role• Preferences• Capacity to aspire
External Constraints
• Family• Community (caste, religion)• Society • Governance
Thank Youwww.pc.gov.pk
49
Thank You
Quality of Life
Quality Governance
Vibrant Markets
Energetic Youth & Community
Creative Cities
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