Quest for a new growth strategy

PAKISTAN has for a very long time followed an economic system characterised by aid-led public investment, heavily regulated markets and sector-picking through distortive subsidies and taxation regime. Such a strategy has resulted in sporadic economic growth usually created by external resource inflows. If one looks at the country's growth history, it is clear that growth volatility added to uncertainty in the medium and long run; there has been a falling long run average growth rate since 1970s, and continuous boom-bust cycles in the absence of structural reform. One does not see a long-term, consensus-based thinking on economic growth in the country. In order to move in this direction, it is important to answer a few essential questions. What are the key constraints to economic growth? The current challenges can be grouped under: a) market failure, and b) governance failure. While the former is primarily concerned with lacking competition in domestic markets and absence of innovation and entrepreneurship at the firm level, the latter is concerned with poor contract enforcement and property rights, distortive taxes and subsidies, and lacking software of economic growth. The importance of growth software has in fact never been fully realised. While hardware of economic growth implies the infrastructure availability, software is about how one efficiently and productivity utilises the available infrastructure. The current service delivery crises in energy, water, transport and even social sectors are not so much about non-availability of adequate capacity but the way one manages and organises the existing capacity. Why an urgency now to debate about growth strategy? Projected population numbers indicate a bulge in the working age groups in the coming 40 years. This phenomenon called by some as the demographic dividend increases potential productive capacity of a country. However if economic growth is not leveraged on a higher trajectory then the coming demographic changes will imply rising unemployment, shortage of assets and difficulties in competing with neighbouring South Asian countries–which are also benefiting from younger populations over the same period. In a few decades this youth will age and there will not be enough economic reserves to provide care for an ageing population. What is the minimum economic growth rate required for absorbing increasing working age population? The long run projected labour force growth is around 3.5 per cent. Planning Commission estimates that in order to absorb only the incremental labour, a sustained annual real GDP growth of 7-8 per cent will be required over a 20-year time horizon. Can economic stabilisation and growth be achieved simultaneously? Implementing a stabilisation programme does not necessarily imply that economic growth will stagnate. Many of the factors holding back the GDP growth are institutional or policy-based, and require correctional measures rather than the application of large amounts of financial resources. Stabilisation and growth can be engineered simultaneously. What may be a possible roadmap for driving the economy on a high growth trajectory? In the short term all efforts have to be geared towards getting the economy back to its potential growth rate. This will involve: a) macroeconomic stability (particularly stability of prices, resource mobilisation and expenditure management in public sector), b) removing key constraints faced by productive sectors (energy and related infrastructure management issues), and c) utilisation of existing capacity (several large scale manufacturing sectors currently working at 50 per cent of installed capacity). In the longer term focus should be towards increasing economic potential for achieving competitiveness. This will require a focus on productivity which has been missing due to lack of innovation and entrepreneurship across the board. What may be the key pillars of a productivity-led growth strategy? One has to start with a governance and institutional reform agenda which should largely focus on: process reengineering (address outdated regulations, remove multiplicity of processing layers); performance based governance and devolving powers, responsibilities and resources to lower tiers of government for better service delivery; and restoring talent in civil service through improved structure and incentives. The governance agenda needs to be complimented with four key initiatives which include: restoring competition across all markets, improving connectivity particularly through incentivising use of ICT services, urban management which makes cities entrepreneur-friendly, and youth and community engagement in order to ensure inclusiveness. While one cannot put a deadline on the current security threats faced by the people, one can certainly seek inspiration from other war zone economies which have managed to keep the economic growth buoyant despite external and internal security threats. There are three universal commonalities amongst countries that have succeeded. These countries invested in their people, were able to do business with others, and relied upon competitive markets as drivers of growth. To join the league of such countries, an equal emphasis will be required on accumulation of physical, human and social capital. The writer is national institutional adviser at Planning Commission of Pakistan. e-mail: vahmed@gmail.com