Thursday June 13, 2024

What should Pakistan do? ( Part – III )

It has become a norm for the first task of any government to be to sign a new IMF package

By Asad Umar
March 25, 2024
IMF headquarters in Washington. — AFP/File
IMF headquarters in Washington. — AFP/File

Yet another finance minister walks into Q Block, facing the challenge of finalizing an IMF bailout package as his priority. When power was handed over to Benazir Bhutto after the 1988 elections, ending 11 years of martial law, one of the preconditions for the transfer of power was for her to sign off on an already negotiated IMF package. She was sworn in as PM on December 2, 1988 and just 26 days later two agreements were signed with the IMF. Since then, it has become a norm for the first task of any government to be to sign a new IMF package.

However, this economic malaise was not always the reality of Pakistan. Starting its life as an agrarian society with virtually no industry and very low literacy levels, Pakistan was in a worse economic condition than India. Despite this disadvantaged beginning, over half a century Pakistan outperformed India. In 1997 Pakistani per capita income (purchasing power parity data. Source: IMF) was 19 per cent higher than India’s. Similarly, the gap between Pakistan and Bangladesh had increased after the 1971 separation, and by 1997 Pakistani per capita income was double that of Bangladesh.

Since then, the story has been very different. Our GDP growth which on a five-year rolling average basis was close to 6.0 per cent at the end of the 1980s had declined to below 3.5 per cent by 2020. That is a dramatic difference and a look at South Asia over the last 25 years shows the result. From a per capita income which was 19 per cent higher than India in 1997, we reached 2022 with a per capita income 20 per cent lower than India. The difference between Bangladesh is even more dramatic. Bangladesh has gone from having a per capita income half of Pakistan in 1997 to 19 per cent higher than Pakistan in 2022.

So what went wrong? The answer in my opinion lies in politics more than economic policy. From 1958 to 1988, the highest growth period in Pakistan’s economy, it was clear who was in control, and no uncertainty in the minds of the decision-makers that they were here to stay. Most of this period was under military rule. However, even in the five years of civilian rule, it was clearly the elected government that was in control and seemingly facing no threat of an intervention in the democratic process until after the 1977 elections. So, regardless of who was in power, there was a belief in continuity and decisions taken not just for today but also for the long term.

Starting in 1988, a new era of governance started which can be called the Pakistani hybrid model. In the first 11 years, Article 58(2)(b) of the constitution was used to dissolve the National Assembly. With this sword hanging over their heads, no government had any sense of continuity and soon after forming the government intrigues started and the government was focused on survival.

After the interregnum of the Pervez Musharraf era, a new kind of hybrid system came into being with pretty similar results. Now the National Assembly was not being dissolved but prime ministers kept losing their jobs before the end of their term, with not a single one completing their term. Once again, the incumbents facing the challenge of survival mostly focused on short-term policy measures and firefighting.

Economic policy became a game of finalizing an IMF programme and trying to complete the programme while minimizing the political cost of implementing it. With the deep structural problems facing the Pakistani economy, most of the measures included in the IMF programme like increasing revenue, curtailing nonproductive expenditure, reducing government stranglehold on the economy, stopping the bleeding of SOEs etc need to be taken. However, these will only provide you macroeconomic stability, at best, and lay the foundation on which an economic growth strategy can be built. On their own, these measures will not put Pakistan on the path of sustained growth.

So in addition to negotiating an economically sensible IMF programme and implementing it, what else does the government need to do? We need a clear comprehensive growth strategy based on decisions made for long-term success and not just short-term survival. Data shows that countries that have higher know-how in their economy produce more complex higher value-added products and services and consequently have higher incomes.

Mapping Pakistan's product map on the complexity chart shows that most of our products are in a narrow cluster of complexity. What’s worse is that it has barely changed over the last 25 years. Because Pakistan only produces a few low-value-added products, its exports have stagnated and export growth lags far behind other regional countries. Between 2000 and 2020 Bangladesh's exports grew twice as fast, India’s three times faster, China's four times and Vietnam's and Rwanda's more than six times faster than us. The path to higher economic complexity and greater value added is not traveled by an economy without a strategy that focuses resources and nudges the economy on an ever-increasing value addition path.

Without getting into technical details, there are well-established methods of selecting which industries have the highest potential for success given the current state of the economy. In the case of Pakistan, the criteria would include: the ability to attract FDI for transfer of knowhow, high export propensity, hence the selected sector must produce tradable goods or services, high labour intensity to absorb the large youth labour force we have and low energy intensity as we are an energy deficit country and energy is our biggest import.

An excellent example of our low value-added production profile being a drag on our export potential can be seen in our exports to China. If we had the same share of Chinese imports from non-OECD countries as our GDP share of these countries, our exports to China would be more than $7 billion a year instead of just over $2 billion (data is a couple of years old). Given the relationship between Pakistan and China, our exports should be much higher than our share of non-OECD GDP.

So, is it China’s fault? No. It is because we are not producing what China, or most of the world, needs. There is virtually no overlap between the top 100 exports from Pakistan to China and China’s top 100 imports from non-OECD countries comparison done only with non-OECD countries as the OECD countries produce advanced products that cannot be produced in a country like Pakistan).

The big question is: will this government be able to look beyond firefighting and being in survival mode, and make decisions needed for the long-term which help bring Pakistan out of the debt trap we are in? Lacking the credibility of being a fairly elected government and speculation rife about how long the government will last, the challenge seems daunting. The bottom line: no political stability, no sustainable development.


The writer is a retired corporate CEO and former federal minister.