Missing Economic Growth: The Case of Pakistan

Missing Economic GrowthThe Case of Pakistan

1

Dr. Vaqar AhmedAdvisor, Planning Commission of Pakistan

May 2011

2

• Growth Experience of Pakistan

• What is the Current Growth Strategy?

• Why Move Towards a New Growth Strategy?

• What is the Proposed Growth Strategy?

• Development Planning – Post 18th Amendment

Outline

Old Growth Model (Harvard Advisory Group)

Harrrod Domar Model allowed planners to predict required savings for a given growth target and capital-output ratio

Based on works of Harrod (1939), Domar (1946, 1957), Lewis (1954), Rostow (1960), Kuznet (1963), Chenery (1966)

How Old Model Collapsed?

Markets not developed so savings are not channeled into productive uses

Take-off fails due to poor quality of investments

Reliance on foreign resources as savings are low

Model does not incorporate endogenous productivity growth

GDP Growth (%) 1971-2009

China Malaysia Indonesia Thailand India Pakistan0

1

2

3

4

5

6

7

8

9

109.1

6.46.0 5.9

5.34.9

Lower long run average growth in comparison to regional competitors

Investment & Savings 1971 - 2009

China

Malaysia

Indonesia

Thailand

India

Pakistan

0 5 10 15 20 25 30 35 40

32

27

26

30

24

17

38

35

29

29

22

12

Domestic Savings to GDP Fixed Investment to GDP

Savings rate too low to compete with regional economies

6

Current Trend of Economic Growth

No Long Term Thinking on Growth Strategy

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0123456789

10

GD

P G

row

th (

%)

• Growth volatility adding to uncertainty• Falling long run potential growth rate• Boom bust cycles in absence of reform

7

-20-15-10

-505

1015

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

Bangladesh

-10

-5

0

5

10

15

20

25

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

India

02468

1012

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

Pakistan

-4

-2

0

2

4

6

8

10

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

Sri Lanka

Growth Experiences Across South Asia

Falling Competitiveness vis-à-vis Regional Economies

8

Structural Transformation 1970 - 2010

0

2

4

6

8

10

1970s 1980s 1990s 2000-10

Sectoral Growth Rates (%)

Agriculture Manufacturing Services

0

10

20

30

40

50

60

1970 2010

Sectoral Shares in GDP (%)

Agriculture Industry Service Sector

Agriculture and Industry growth rate declining. Decade average slightly above population growth rate. Issues for food security, unemployment and poverty

9

Growth policy by default

• Projects being multiplied with no available resources

• Regulated markets and sector picking

• Lack of structural reform

What is the Current Growth Strategy?

Result: Sporadic Growth Usually Created by External Resources

Market Failure

Governance Challenges

Investment & Savings 1981 - 2010

10

19811983

19851987

19891991

19931995

19971999

20012003

20052007

20090

5

10

15

20

25

National Savings to GDP Ratio Fixed Investment to GDP Ratio

Development Expenditure to GDP

Declining PSDP with serious quality issues

PSDP Weaknesses• Project Governance• Decreasing PSDP Size• High share of brick & mortar (60% of total)• Money Spread thin (large sectoral & regional

spread)

Prioritizing PSDP• Projects nearing completion• Key Infrastructure Project• Projects for removing regional

disparity 11

State of Public Sector Development Program

12

Why Move Towards a New Growth Strategy?

• Expected long run labor force growth 3.6 % annually• Absorbing incremental labor requires GDP growth in excess of 8 %

annually

2001 2002 2003 2004 2005 2006 2007 2008 20090

1

2

3

4

5

6

-2

0

2

4

6

8

10

12

14

Une

mpl

oyed

Lab

our F

orce

(mil-

lions

)

Real

Per

Cap

ita In

com

e G

row

th

(%)

Falling Per Capita

Incomes

Rising Unemployment

13

Approach to a New Strategy

Think Global – Act Local

Need for home grown ideas

Growth possible during

stabilization

Taking stock of local and global

knowledge

Consensus-driven

Consultations with Provinces

Meeting all segments of society including

academia, civil society, business community

Achieving Balance

Physical Capital

Human Capital

Social Capital

Outline• Growth, Investment & Savings – an Overview• Pakistan’s Growth Problem

• Planners approach to Growth• Past plans unveiled• Productivity – missing link

• Advances in Scientific Literature• The Need for Growth Strategy & Reforms• Some Scenarios – Desired Growth Paths

Current Instruments of National Planning

1. Policies

2. Plans

i. Perspective Plan 10-25 Years

ii. Mid Term Plan 04-07 Years

iii. Rolling Plan 03 Years

iv. Annual Plan 01 Year

3. Transformation of plans into projects

15Policies Plans Projects

Plan Periods in Pakistan

16

Plan Period1. Colombo Plan (Six Year Plan) 1951-57

2. Ist Five year Plan 1955-60

3. 2nd Five year Plan 1960-65

4. 3rd Five year Plan 1965-70

5. 4th Five year Plan 1970-75

6. 5th Five year Plan 1978-83

7. 6th Five year Plan 1983-88

8. 7th Five year Plan 1988-93

9. 8th Five year Plan 1993-98

10. 9th Five year Plan 1998-2003

11. 10 Year Perspective Development Plan 2001-11

12. Medium Term Development Framework (MTDF) 2005-10

13. Vision 2030 2008 -

Plan Periods in Pakistan

17

Plan Period1. Colombo Plan (Six Year Plan) 1951-57

2. Ist Five year Plan 1955-60

3. 2nd Five year Plan 1960-65

4. 3rd Five year Plan 1965-70

5. 4th Five year Plan 1970-75

6. 5th Five year Plan 1978-83

7. 6th Five year Plan 1983-88

8. 7th Five year Plan 1988-93

9. 8th Five year Plan 1993-98

10. 9th Five year Plan 1998-2003

11. 10 Year Perspective Development Plan 2001-11

12. Medium Term Development Framework (MTDF) 2005-10

13. Vision 2030 2008 -

7 Sins of Planners

(Haq 1972)

Playing with black

boxes

Excessive Control

Investment Illusion

Development Fashions

Divorce between

Planning & Implementation

Growth without Justice

Neglect of Human

Resources

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Evaluating Growth in MTDF 2005 - 10

Obsession with

Physical Capital

Where is productivity?

Sector Picking PSDP– led endogenising productivity not possible

Thrust of MTDF Strategy

Accelerating Output Growth

Upgrading Physical Infrastructure

Supporting the Private Sector

Achieving MDGs

Revisiting Determinants of Economic Growth

Economic Growth

Labour

Capital

Productivity

Technology

Management

InformationInstitutions

20

Overall Infrastructure Quality

Country ScoreIndonesia 2.5India 3.3China 3.4Pakistan 3.4Thailand 5.0Korea 5.1Taiwan 5.4Malaysia 5.7Hongkong 6.4

Source: Global Competitiveness Report

CountryGlobal

Innovation (132

countries)

Quality of Education

System

Firms Spending on R&D

Pakistan 79 99 80

India 30 37 36

Indonesia 39 44 28

Thailand 57 67 47

Malaysia 24 23 19

China 26 52 23

Hardware Software

Pakistan Lacks Software of Economic Growth

What about Total Factor Productivity?

Low Productivity Growth (1981-2030)

221981-2007 2011-20 2021-30

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0.781.04

1.19000000000001

ChinaViet NamThailandKoreaIndiaPakistan

TFP

Gro

wth

Rat

e %

Pakistan’s average annual productivity growth lower than competitors’ and projected to

remain low in future

Source: Lee, Jong-Wha and Kiseok Hong (2010) Economic Growth in Asia: Determinants and Prospects.

TFP: Management & Organization

• The primary issue with Pakistan’s supply side: • Not the supply of labour and Capital

• The way we organize our operations• Organization of factor markets• Organization of markets• Organization of cities & communities

• Also due to slow knowledge diffusion due to: – Lack of competition (IO models)– Quality of human capital (Lucas Jr. 1988)– Information (Akerlof 1970)– Adjustment costs (Lucas 1967)– Incentives (Mikkelson 1997)– Institutions (Acemoglu 2003, Rajan 2003)

Current Productivity Gaps

• Losses of PSEs• Over-regulated markets• Low quality of investment• Poorly organized urban centers• Inefficiency – misallocation of resources due

to interventions like subsidies• Low spending on R & D (public & private)

Outline• Growth, Investment & Savings – an Overview• Pakistan’s Growth Problem• Advances in Scientific Literature

• Growth Strategies in Regional Economies• H-D to Endogenous Growth and Beyond• Designing Growth Strategies

• The Need for Growth Strategy & Reforms• Some Scenarios – Desired Growth Paths

Growth Strategies in Regional Economies

26

Country Plan Strategy Focus

Indonesia Medium Term Plan 2010-14

Focus on social infrastructure for creativity development

Thailand 10th Plan 2007-11 Opportunities for learning, increase potential of communities by linking them in networks

Malaysia New Economic Model (launched in 2010)

Developing quality workforce, competitive domestic economy and transparent markets

China 11th Five Year Plan 2006-10

Promotion of independent innovation, and enhance social harmony

India 11th Five Year Plan (2007-12)

Reinforces focus on basic services such as education and urban development

Bangladesh Draft Plan 2011 Effective governance, promoting innovative people for a digital Bangladesh, creating a caring society and enhancing regional cooperation

Philippine Medium Term Plan (2004-10)

National innovation system, market reforms, technology entrepreneurship and support to R&D

From Harrod Domar to Endogenous GrowthTheories Main Insights

Harrod-Domar Growth Model – 1940s

Model focuses on saving and the efficiency with which capital is used

Solow (Neoclassical) Growth Model – 1950s

Allows for substitution between labour & capital. Technology increases exogenously

Endogenous Growth – 1980s

Competition and knowledge – related externalities imply increasing returns. Romer 1986; Lucas Jr. 1988.

Endogenous Growth – 1990s

Knowledge spillovers lead to falling R&D costs resulting in further growth. Romer 1990; Grossman & Helpman 1991

Endogenous Growth – 2000s

Schumpeterian entry & exit, with entrants bringing new technologies, knowledge accumulation in cities lead to growth. Aghion & Howitt 2005

Designing Better Growth Strategies

28

1. Growth diagnostics: what are the most binding constraints on growth?

2. Policy design: how do we best alleviate the relevant constraints?

3. Institutionalization: how do we institutionalize the diagnostic/policy design

process in view of the fact that the nature of binding constraints will change over time?

Growth Diagnostics–Binding Constraints

29

Entrepreneurship

Availability of Finance

Domestic

Intermediation

Domestic Savings

Foreign

Return to Economic Activity

Social Returns

Infrastructure

Human Capital

Appropriability

Market Failure

Coordination

Information

Govt. Failure

Macroeconomic Stability

Contract EnforcementAdapted from Hausmann & Rodrik (2005)

Growth Diagnostics – Binding Constraints

30

Entrepreneurship

Availability of Finance

Domestic

Intermediation

Domestic Savings

Foreign

Return to Economic Activity

Social Returns

Infrastructure

Human Capital

Appropriability

Market Failure

Coordination

Information

Govt. Failure

Macroeconomic Stability

Contract EnforcementAdapted from Hausmann & Rodrik (2005)

Low incentives for “self-discovery” – information

externalities

Outline• Growth, Investment & Savings – an Overview• Pakistan’s Growth Problem• Advances in Scientific Literature• The Need for Growth Strategy & Reforms

• Stabilization & Adjustment• Governance & Institutions• Markets, Entrepreneurship & Investment Climate• Cities & Connectivity• Youth & Community

• Some Scenarios – Desired Growth Paths

New Economic Growth Strategy

32

Short Term: Getting Back to Potential

Utilization of Existing Capacity• Up to 50% in fertilizer,

auto sector, sugar, cement and steel

Macroeconomic Stability• Inflation eroding

competitiveness• Resource Mobilization

& Expenditure Management

Removing Major Constraints• Energy (Electricity &

Gas)• Goods & factor markets

33

Long Term: Growth Strategy

Economic Discipline

Responsible Fiscal & Monetary Policies

Restructuring of PSEs

Rationalization of PSDP

Productivity

Governance & Institutions

Market Reforms

Urban Management

Connectivity

Youth & Community

Potential Governance Agenda

34

Civil Service Reform

Structure and Incentives to Attract Talent

Monetized Salaries, Merit

based Promotion,

and Easy Entry & Exit

Devolution

Devolving powers,

responsibilities and resources to lower tiers

Performance based

Governance

Business process

reengineering

Need to address

outdated regulations

Remove multiplicity of

processing layers

PSE Reforms

Reform for Power Sector

Under Implementation

Reforms Strategy for Railways &

Gas Formulated

TCP & PASSCO to be examined for

closing down

35

New Role of Government

Policy

Regulation

Production & Management

Financing of Assets

Ownership of Assets

Markets Government

Markets & Entrepreneurship

36

Modernize Laws & Regulations

for Markets

Agriculture Market

Committees

Investment in New Sectors

Bankruptcy Law

(legislation drafted)

Deregulate Markets

Wheat, Sugar &

Commodities Exchange

Review Sectors where Government

may Exit

Encourage Innovation

Innovation through

Incubation Centers

Cluster Strengthening (e.g. Sialkot, Gujranwala, Wazirabad)

Domestic Commerce

Taxation Regime, Rent

Laws etc.

Legal System for Common

Property Ownership

(shops & flats)

Cities as Hubs of Commerce

37

Modernize Laws & Regulations

for Cities

Reform Zoning & Building

Regulations

Address Excess Demand

Need to Bridge Excess

Demand for Commerce,

Office Space, Warehouses

etc.

Land Markets

Freeing Government

Land for Commercial

Purposes

Property Rights

Need to Address Issues of

Titles, Taxation

Structures etc.

Reforms for Connectivity

Revisiting ‘PPP’

Adding ‘PPP Option analysis’

in PC-1

Reviewing ‘procurement

law & processes’

Bringing land acquisition laws in-line

with international

norms

Freight sector

Phase 1: Partial privatization + opening rail

track

Phase 2: Unbundling of rail assets and privatization

Reduction in import tariffs

on modern trucks

Aviation

Reducing CAA’s role to

regulating

Auctioning of routes against

preferred allocation to

PIA

Incentivizing use of ICT services

ICT & Customs

Facilitating clearance of goods at dry

ports

E-government: ‘Electronic

signature act’ to give cover to the use of digital IDs etc

Youth & Community Engagement

Youth Development

Empowerment through

Representation

Education and Skills

Service Learning

Social Capital

Making Social Capital Available for Youth Mentorship

Social Infrastructure (Libraries,

Community Centers etc.)

Youth Entrepreneurship

Support Innovation

Framework for Youth Self

Employment

Development Planning – Post 18th Amendment

40

Strategic Level Planning

Review of Key Socio-Economic

Challenges

Developing Vision & Mission

Helping Provinces and Line Ministries

Formulate Execution Plan

Decentralized Planning

Towards Provincial Growth & Reforms

Strategy

Local and Municipal level

Strategy

Results Monitoring

Service Delivery Plans with

Sectoral Ministries & Provinces

Setting Performance

Targets

Monitoring Key Performance

Indicators

Outline• Growth, Investment & Savings – an Overview• Pakistan’s Growth Problem• Advances in Scientific Literature• The Need for Growth Strategy & Reforms• Some Scenarios – Desired Growth Paths

• SWOT• Demographic Challenges• Required Growth Rate• Returns from Reforms

Pakistan Economy: SWOT Analysis

• Strength: Youth bulge

• Weakness: Governance

• Opportunity: large domestic demand

• Threat: Coordination & information failures

43

Need for Rapid Economic Growth

(i) Rapid population growth increases demand:– Pakistan adds:

• Every 1 year a New Zealand to its population; • Every 2 years a Switzerland; • Every 3 years a Greece; • Every 4 years a Chile or a Netherlands; and • Every 5 years an Australia.

– It does not accumulate capital assets at the same pace.

Indicators % of totalSchools without Electricity 59.6Schools without building 10.9Schools without boundary wall 37.7Schools without drinking water 33.9Schools without Latrine 36.9

*NEMIS 2009, Ministry of Education

Missing Facilities in Government Schools (2009)

Country Global Innovation

Index(Out of 132 Countries)

Brain Drain

Quality of Education

System

Pakistan 79 68 99India 30 34 37Indonesia 39 27 44Thailand 57 38 67Malaysia 24 28 23China 26 37 52

• UNEMPLOYMENT without adequate investment

• ASSETS & SKILLS shortage

• COMPETING South Asian countries also have young populations

Demographic change also raises challenges

45

Growth Alternatives (2011-15)

2010-11 2011-12 2012-13 2013-14 2014-150

1

2

3

4

5

6

7

3.03.4 3.6 3.8 3.9

3.0

4.0

5.05.5

6.0

GD

P G

row

th R

ate

(%)

Business as Usual: Low aid-led public investment, high Inflation (Average 3.5 %)

Stabilization : Reform of PSEs, increase resource mobilization (Average 4.7%)

46

Growth Alternatives (2011-15)

2010-11 2011-12 2012-13 2013-14 2014-150

1

2

3

4

5

6

7

8

9

3.03.4 3.6 3.8 3.9

3.0

4.0

5.05.5

6.0

3.0

4.0

6.0

7.0

8.0

GD

P G

row

th R

ate

(%)

Business as Usual: Low aid-led public investment, high Inflation (Average 3.5 %)

Stabilization : Reform of PSEs, increase resource mobilization (Average 4.7%)

Stabilization + Reform: Market reforms & productivity gains (Average 5.6%)

Income

ProductivityPhysical Capital, Human Capital

InstitutionsTrade

GeographyExogenous

Weakly Endogenous

Endogenous

Empowerment

What the individual owns:

• Assets• Human Capital

Internal Constraints

• Perceptions of own role• Preferences• Capacity to aspire

External Constraints

• Family• Community (caste, religion)• Society • Governance

Thank Youwww.pc.gov.pk

49

Thank You

Quality of Life

Quality Governance

Vibrant Markets

Energetic Youth & Community

Creative Cities