Foreign Aid or Export-Led Growth?

By Mr. Gohar Ejaz

Current Debt Snapshot

Pakistan’s total public debt rose to Rs36.3 trillion, which is equivalent to 87 per cent of the GDP, by the end of the previous fiscal year, and is anticipated to continue on a steep upward trajectory. It is evident that in spite of the large amounts coming in, the country’s economic performance has not been sufficient, and yet we maintain that our economy is being revived in the aftermath of COVID-19. The real question is how much of this revival is sustainable, as these loans translate into massive debt with interest, and require political compromise. How much is truly going to strengthen us, while we struggle to return the rest?

Why Foreign Aid?

We often talk of sustainable reform, sustainable growth, and sustainable policies. Sustainable is defined in the Oxford dictionary as “able to be upheld or defended.” There is not much the aid industry has done for Pakistan that can be described as such. Even the longest cycle of donor aid runs for about 5-6 years. Then it is smoothly wrapped up, priorities change and the focus is shifted to a different area. Aid is becoming less of a means to an end, and more of an end in itself, as stated by Prof. Masooda Bano, a professor of Development Studies at Oxford.

The pomp and circumstance surrounding the events by international organizations, and the formal language of “empowerment, community, change” often blind us to the reality: where are the results? Largely politically motivated, aid undermines the country’s national sovereignty. We are quick to accept the blame on our poor infrastructure, lacking human resources and much trumpeted government corruption. Given that we were already aware of these issues when we first reached out for donor aid, dare we adjust our lens and question our foreign saviors and loans?

Pakistan’s History with Foreign Aid

Let us consider CPEC. At $6.8 billion, the ML-1 project alone is almost equal to Pakistan’s entire development budget for fiscal 2020/21, which stands at 1.32 trillion Pakistani rupees ($7.9 billion). CPEC has received criticism from several western countries, particularly the United States, which labels the project as not transparent enough and likely to burden Pakistan with expensive Chinese loans. However, the expensive western loans don’t seem to be a problem for them. Pakistan owes US$11.3 billion to Paris Club, US$27 billion to multilateral donors, US$5.765 billion to International Monetary Fund, and US$12 billion to international bonds such as Eurobond and sukuk.

There is a vast body of empirical evidence showing that foreign aid in Pakistan erodes the quality of governance by increasing corruption, weakening accountability, and limiting policy learning. Bureaucracy uses the aid agencies to line up jobs post-retirement and are generally compromised in negotiating a fair deal for Pakistan. Foreign aid programs should be considered only as a temporary and short-term development tool, yet they have ballooned into much larger bodies that dominate the policy landscape in Pakistan. The fact is, ours is a nation suffering from a colonial hangover, where the approach to development tends to be imperial rather than people-oriented.

A Shackled Economy

As shown by our index of economic freedom scores, the Pakistani economy has been mostly un-free since the inception of the Index in 1995. Any GDP growth we have managed has been primarily a result of exports of cotton textiles. This gives us sufficient evidence of what the economy needs in order to remain stable. Rather than allowing foreign donors to be our crutches, we need to support our local exporters, investors and thought leaders. It comes as no surprise that private investment has been declining in Pakistan for several years, given how rapidly private investors have been losing confidence in the economy.

It is time we realign our trust towards our local business community as well as our entrepreneurs. They have the potential to bring us out of the debt cycle, and it is critical that we empower them to do so. We must begin by revisiting our policies, priorities and redundant practices. These are largely skewed against the local business community, exporting sectors and SMEs. As the world moves forward in technological upgradation and value addition, our businesses remain unprofitable, as all the time and energy gets used up in meeting high tariffs, as well as complicated regulations.

It is no surprise that Pakistan ranks low in the ease of doing business and competitiveness indices, as any potential startups are burdened by over-regulation that hinders them from taking off. Those that do manage to take off are soon crippled by high levels of advance tax and the day-to-day intricacies of conducting business in Pakistan. It takes a business in Pakistan 161 days to obtain an electricity connection, compared to South Asia’s regional average of 98 days, and the cost is 50 percent higher than anywhere else in the region. Furthermore, archaic technology, lack of policy continuity and redundant business practices are likely to persist as long as we keep donor agencies on a pedestal and neglect our business community.

Is Export Promotion the Key?

Enhanced trade competitiveness leading to an increase in exports is undoubtedly a sustainable path to economic growth. Unlike aid, it is not tied up in any form of liability. Export earnings, coupled with remittances, will be the forces that can eventually pull us out of our current account deficit. We can enhance our trade competitiveness through diversification, improved quality, and integration into global value chains. Government support is an absolute requirement in each of these paradigms. The economy’s unprofitable nature is exacerbated by an unreasonable anti-export bias, which includes tariffs and duties. Firms are left in a quandary as exorbitant amounts have to be set aside to meet these requirements.

The textile sector remains under immense pressure to maintain a heavy chunk of Pakistan’s exports. So this sector must be considered critical for Pakistan’s economic prosperity and its challenges should be tackled head-on. These include a number of barriers: the lack of access to the latest seed technology for cotton farmers, high tariffs banning entry into value-added sectors and product diversification, and the fragmented nature of the textile chain which must be streamlined through new infrastructure.

What is Holding Exports Back?

While a number of things contribute to the anti-export bias, a primary factor has been the exchange rate. Of late, the State Bank has kept the exchange rate market-driven, allowing the current account to remain in balance, and leading to import compression, inflow of remittances and a much needed revival of exports. The formula was simple: provide exports with an essential stimulus and the results will be evident. The rise in demand has served as an impetus for idle capacity to come into use, and perhaps even new capacity to be installed, carving a sustainable path to economic growth. Subsequent to the correction in exchange rates, it is not surprising that all of Pakistan’s installed capacity is currently committed with no spare capacity for the next six months at the very least.

The major obstacles for SMEs include access to concessionary finance, international marketing, skilled labor and compliance of international standards. Furthermore, improving the productivity and sustainability of our business community would require training programs. The focus of these must be on entrepreneurship and SMEs. Pakistan’s youth bulge is an exceptional asset which can translate into a goldmine of talent. But only so long as they are equipped with the skills necessary in the modern economy. We must mitigate our reliance on traditional commodities and move towards export of manufactured, value-added services and nontraditional goods. This highlights the need to equip labor with new technologies and train them in the latest skills. This will shift them from primary to secondary and tertiary activities.

What We Can Do

Without addressing these key issues, it would be difficult to attract new entrepreneurship in Pakistan. Our business rankings have improved since 2018 as a result of World Bank’s work on SME development and ease of doing business. However, our own community should sustain and further accelerate this effort. Pakistan illogically neglects its own first-rate talent and gives preferential treatment to the donors, while our diaspora shines abroad. We must prioritize and create conditions to retain our first-rate talent and capitalize on our own human resources. They have immense talent so we should allow them to shape the policy landscape of Pakistan.

We should view these challenges in a positive sense; representing untapped opportunities for Pakistan’s economy to excel. Yet our aid dependency and the shiny promises of development have kept us distracted. Achieving growth and development by being tied up in soaring debt is too paradoxical to digest, but still a reality. We must recognize that these short-term fixes come attached to high political costs. These costs effectively outweigh the economic benefits. They have benefits for short-term development and can serve as a useful launching pad for more nationalized development programs. But that is as far as the role of foreign aid should go. If we truly want sustainability, we must invest our trust and resources in building up our inherent capacity, talent, industries and institutions.

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