Thursday January 20, 2022

Time to grow institutional spine

December 02, 2021

LAHORE: The model of growth in Pakistan's two most populated neighbours has been exemplary. The growth model of both countries differed but both emerged at the leading global economies. Pakistan unfortunately failed to benefit from these diversified growth strategies.

China is ruled by an authoritarian regime, while India is the world's largest democracy (at least before Modi assumed power). Pakistan has been ruled by both authoritarian regimes and controlled democracy.

We never really excelled under any form of government. One thing, common in China and India, was both have stable and strong institutions capable of executing government policies in letter and spirit.

The institutions in Pakistan are very weak and are frequently manipulated by the people in power. They are not capable of implementing policies transparently.

They easily succumb to the pressure of the ruling elite. While institutions in China and India are accountable; this is not so in Pakistan. This drawback is the main reason for lopsided growth cycles in our country.

Another point worth noting about China and India is the Chinese accelerated their growth on the strength of manufacturing and India through IT services.

It succeeded in creating a strong middle class of IT and its relative services professionals.

Three decades back accelerating manufacturing growth was considered the best solution to take people out of poverty. The East Asian economies did that in the 70s and then China succeeded in pulling 500 million of its citizens out of poverty by becoming the manufacturing hub of the world.

The IT revolution in India, however, could not provide employment to over 400 million poorest Indians residing mainly in rural regions. These people are not qualified enough to be absorbed in the high-tech services.

The Indians on the strength of IT services slowly and steadily improved their industrial sector as well and succeeded in reducing poverty.

The Chinese after excelling in mass production industries also gradually shifted high tech industries and IT services. Both India

and China are political rivals but are competing on the economic side in a civil and positive way.

The question is which growth model suits Pakistan. China has still not joined the rich club and with economies of scale is still competitive in most industries.

There are no such inhibitions in the service sector where the main raw material is rich human capital, but the growth is not inclusive. China is gradually opting out of relatively low valued-added industries but the problem in Pakistan is that we do not have enough skilled force for these industries as well.

There is no denying that manufacturing permits quick catch-up because it is easy to replicate and implement foreign production tools, even in poor countries that suffer from numerous drawbacks.

Even under weak institutions and flawed government policies manufacturing industries tend to close the gap at a reasonable rate of 3-4 percent per year.

Chinese, on the other hand, mechanised and upgraded their agriculture development before opting for mega manufacturing activities. The United States agricultural workforce has reduced from 20 percent of the population to only one percent still it is generating exportable surpluses in agriculture.

Pakistan must modernise its agriculture by accelerating mechanisation, use of reliable high-yielding seeds. It should go for sprinkle irrigation and move from manual harvesting to machine harvesting.

If we look at India, it will be clear that service-led growth has not been as inclusive as observed in manufacturing growth.

There is no doubt services, like software and call centres, have boosted the IT sector. However, it did not create enough jobs because the available human resource, mostly in rural areas, lacks the skills and education needed in this high-tech service sector.

Indian IT exports have crossed $130 billion per annum while its textile exports stand at $50 billion. Still the textile industry provides jobs to many times more workers than those engaged by IT sector.

Bangladesh almost eliminated poverty by stitching apparel and exporting them globally.

Pakistan should adopt that three-pronged approach for long-term growth. While promoting industrialisation we must start programs for steady and sustained improvement of our human resource and build up institutional capabilities.

It will provide us with ammunition for sustained growth in the service sector by the time industrialisation reaches its peak.

Otherwise, in absence of better human capital and strong institutions, growth would

be pushed back. Pakistan must benefit from its advantage in textiles and the fast-maturing IT sector to catch up with its neighbors. This will not be possible without strong institutions.