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December 20, 2017

The wait for an economic messiah


December 20, 2017

Pakistan’s road to economic development is long, bumpy and full of potholes. With per capita income of about $1456 our world ranking is 140th. It is a periphery country. The next higher stage is semi-periphery and then core or advanced countries. China is still at the semi-periphery stage with $6894.5 per capita income (2016 figure).

Pakistan is not an emerging country either like China, Thailand, Peru, Malaysia, turkey and India. Emerging countries are those which are open, fast developing and attractive to foreign capital. It has no numerical convention.

Turn around the above short sketch in the mind and you will realise how many years and decades we have to wait if we get it right in the years to come.

What are the potholes? First take the population factor. According to provisional estimates of 2107 census, Pakistan population stands at 207.8 million with 2.4 percent annualised growth rate. The population is outstripping every resource that we have at present. But do not be overawed by the aggregate figure. To produce strong economic growth with a shrinking population is close to impossible. What is important is the working-age population between 15 and 65 years of age. Population growth pays off automatically in rapid economic growth when political leaders create economic conditions necessary to attract investment and generate jobs. Create full-time gainful employment opportunities to the working age population and they will feed the rest.

Literacy, education, infrastructure, power and agriculture development are all necessary and desirable but they alone cannot ensure development. The most critical factor to start the engine of development is investment in the manufacturing sector. It is the ability to produce goods which can be marketed abroad to bring foreign exchange which can be further invested in setting up new factories or modernizing the existing ones. Harvard economist Dani Rodrik calls manufacturing the ‘automatic escalator of development’. Once a country finds a niche in global manufacturing, productivity often rises automatically. Investment of 25-30 percent of GDP in manufacturing is considered necessary. Private investment in Pakistan is 10 percent of GDP. In the emerging market it is 18 percent. Pakistan’s exports come to 15 percent of GDP. In emerging markets, it is four times as high.

We are witnessing a flurry of investment in the real-estate sector – and that too for the rich class. The types of millionaires/billionaires we have produced are ‘rent-seekers’. They invest in construction, real estate and mining. These sectors are prone to corruption to extract maximum possible rent from these resources. In Pakistan, such bad billionaires are household names.

The other critical challenge is the current account deficit and the rupee value. Briefly, current account deficit signifies that the country is consuming more than it is producing and is living beyond its means. Research shows that five percent current account deficit of GDP for a consecutive five years foretells trouble. A deficit of three percent is considered acceptable but it means that money is nevertheless flowing out of the country. Pakistan’s current account deficit has been consistently in the red except for a brief period from 2000 to 2003. It has reached a whopping $5.473 billion during the first eight months of the current year as compared to $2.482 billion in the same period last year.

In 2016, Pakistan’s public debt was $188,512 million, 67.57 percent of Pakistan GDP, a 4.25 percent rise from 2015. It has risen since 2006 in global debt terms, when it was $73,714 million and also in terms of GDP percentage when it was 53.72 percent.

Pakistan’s per capita debt in 2016 was $974 per inhabitant. In 2006, the debt per person was $470. The position of Pakistan, as compared with the rest of the world, has worsened in 2016 in terms of GDP percentage. Currently its country number is 135 in the list of debt to GDP ratio and 59 in debt per capita, out of the 185 countries.

The size of the debt is important but what is more crucial is the pace of the rise. When a country is accumulating more debt fast, it may experience the kiss of debt which spells disaster.

Many people are excited about the $65 billion CPEC. Most of it is debt. When it is received it may ease the current account deficit in the short run but when it is time to pay back it may not be an unmixed blessing. Take the case of Sri Lanka. As reported by Ruchir Sharma in his seminal book ‘The Rise and Fall of Nations’, China was pouring money into the country. Sri Lanka was running up foreign debts and current account deficit. When President Mahinda Rajapaksa was asked in 2013 how he planned to finance the deficit, he replied with a wink and thumbs-up “We have China”. Two years later he was out of office and the country was under debt. They eventually had to concede a port to Chinese outside Sri Lankan control.

We must avoid the kiss of debt. Unfortunately, Pakistan has an unfavourable economic location. It has failed to become a hub for any trading activity. It is not on the global shipping route. While it is touted as a gateway to Central Asia, that gateway will fling open when the blood of the last Afghan is shed to the ambitions of the world and regional powers playing games in Afghanistan.

It is not my purpose to spell gloom. No country perpetually rises up the economic ladder nor is any country trapped in a quagmire for good. In a nation’s adversity, the role of leadership becomes paramount. Leaders who deliver are not touched by populism. They are not afraid to take hard decisions and see them through. Turning around an economy is politically more rewarding ultimately than looking after cronies and vested interests. Pakistan is in the waiting room for an economic messiah.

The writer is a former civil servant and a former minister.

Email: [email protected]

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