Saturday January 28, 2023

Growth’s open secrets

December 06, 2022

LAHORE: Every economy that sustained high growth of over seven percent for at least two decades maintained macroeconomic stability, high saving rate culminating into high investment and creditable, capable and committed governments.

Thirteen economies that sustained for 25 years an average growth of seven per cent from 1950 included Botswana; Brazil; China; Hong Kong, China; Indonesia; Japan; the Republic of Korea; Malaysia; Malta; Oman; Singapore; Taiwan, China; and Thailand. India, Vietnam and Bangladesh joined this high growth club at the start of the century.

Pakistan unfortunately lacks attributes needed for high growth that automatically leads to inroads in the global markets. A growing GDP is evidence of a society getting its collective act together.

When an economy grows, its society becomes more tightly organised, more densely interwoven. A growing economy is one in which energies are better directed; resources better deployed; techniques mastered, then advanced. It is not just about making money. A selected few in Pakistan are making huge money, but the society is neither organised nor densely interwoven.

These economies opened up to the global economy and imported knowledge, ideas, technology and know-how from the rest of the world. They then exploited global demand which provided a cheap elastic market for their goods. They imported what the rest of the world knew and exported what it wanted.

Pakistan's economy for decades has been based on the concept of protecting the domestic industries from competition. There was no emphasis on import of technology, rather obsolete technology was allowed in the country for substituting imports through protection.

This technology produced products that could only be used in Pakistan but could not be exported as the world had gone much ahead. We are producing cars from the small plants long abandoned in developed countries as they were too small and could not compete with the larger plants having economies of scale 100 times higher. After more than two decades of protection, we cannot export cars due to this inefficiency.

The four Asian tigers, on the other hand, increased their manufactured exports from $4.6 billion (in 2000 dollars) in 1962 to $715 billion in 2004. Now their combined exports are over $1,200 billion. If there was any small decline in price, it was overwhelmed by the vigorous growth in sales.

All the successful economies remained were fiscally responsible. Many ran budget deficits for extended periods; some nursed high ratios of debt to GDP. But this public debt did not get out of hand, not least because the economy grew faster than the stock of public liabilities. Pakistani governments have never been fiscally responsible and run unmanageable budget deficits and debt to GDP ratios.

All high growth economies were all “future-oriented”, forgoing consumption in the present in pursuit of a higher level of income in the future. China has saved more than a third of its national income every year for the past 25 years. India has reached the same saving level of 34 percent, while Pakistan’s saving rate is a pathetic 13 percent.

A country's comparative advantage will evolve over time. In any period of fast growth, capital, and especially, labour moves rapidly from sector to sector, industry to industry. This mobility of resources was a feature of all the 13 high-growth cases.

Governments did not resist (although they may have tempted) the market forces that pulled people into the urban areas or destroyed some jobs, while creating others. Pakistani governments have been trying to shield its most inefficient industries. The obsolete technologies still operate in Pakistan alongside the modern technology as the marketing is done through cartelised practice.

Successful economies include democracies, dictatorships, one party socialist regimes, and kingdoms but the rulers did not deviate from basic economic principles. Last but not the least, all successful post-war economies thrived on creditable and committed leadership based on good governance and strong institutions which we lack.