Pakistan Institute of Development Economics


Economic dilemma

Publication Year : 2017
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THE latest available Pakistan Standard of Living Measurement Survey asked households to compare their economic situation in 2014-15 with the previous year. Thirty-seven per cent of the households reported, their economic situation as ‘worse’ or ‘much worse’, 44pc reported ‘no change’; only 19pc reported ‘better’ or ‘much better’. If even half the perceptions are true, the situation is worrisome.The people’s economic situation improves with growth of the economy and the wide dispersal of the benefits of this growth. Pakistan’s economy is in dire need of a boost. But without addressing structural issues, ad hoc policy measures such as export packages, cutting interest rates and a public expenditure boom will have limited success.The World Economic Forum computes the Global Competitiveness Index annually. The GCI for 2014-15 has been computed for 138 countries using 120 indicators. The index accounts for a large number of variables that directly or indirectly influence an economy’s long-term potential. Pakistan’s ranking on various elements of the GCI highlights the structural issues the economy faces.Structural issues must be sorted out for economic growth.The policy of cutting the interest rate assumes that lower rates will induce businessmen to borrow more and therefore produce more. However, banks lend only if they can recover their money. What if a borrower enjoying the means to pay back refuses to do so? The banks expect the courts to come to their rescue. With Pakistan ranking 103rd on the ‘efficiency of legal framework’, can we expect that the legal framework will deliver? Disappointed with its performance, banks erected barriers to access to finance. No wonder Pakistan ranks 95th on ease of access to finance.Much of the credit to private businesses goes to the manufacturing sector, which contributes just 21pc to GDP. The services sector contributing about 60pc to GDP borrows much less. Why? We at PIDE surveyed 300 small retailers in Rawalpindi for a study on entrepreneurship. The survey reveals that 37pc of retailers do not have a bank account and the majority has less than 10 years of schooling. Should we expect those who do not even maintain a bank account to be able to negotiate a bank loan? It is the literacy level of the entrepreneurs that limits their demand for bank loans and hence investment options.The government may itself invest in the economy in a big way or subsidised different inputs. Will such a fiscal stimulus boost growth? Yes, but only if public money is actually put to the intended use. Pakistan ranks 102nd on ‘wastefulness of government expenditures’ — can we expect the entire sum to be put to the intended use? Our 135th position in ‘efficient use of talent’ and 95th in the ‘relationship between pay and productivity’ categories makes effective utilisation even more suspect. Finally, ranking 117 out of 167 on the corruption perception index computed by Transparency International, it appears that part of the money may end up in the likes of Swiss banks. Clearly, fiscal stimulus is unlikely to be very effective.No developed economy relies entirely on its own talent. It is their capacity to attract talent from abroad that has made developed economies what they are. We rank 110th on the ‘capacity to attract talent’ — can we hope to attract the talent required to grow economically? Pakistan ranks 126th when it comes to reliability of police services — entrepreneurs have to hire private security services to guard their income and assets. This increases cost and decreases competitiveness.Countries that grow fast make sufficient use of technology. Pakistan ranks 114th on technological readiness — our use of technology remains well below what characterises high-growth economies.No entrepreneur can handle unlimited work himself. It is the delegation of tasks that generates greater output. Pakistan ranks 115th on the willingness to delegate — are we delegating enough to make us grow fast?Slashing interest rates and a public expenditure boom can boost economic activity. To realise this potential, structural issues such as efficiency of the legal framework, the state of law and order, the quantity and quality of schooling, the capacity and efficiency of public employees, leakages of money from government, technological readiness and willingness to delegate, etc must be addressed.Addressing structural issues calls for a long-term perspective. However, the vision of politicians extends only to the next election, ie a maximum of five years. Reason: a road project begun today will be operational in a few years and therefore yield votes. But a child enrolled in grade one today will only be in the sixth grade five years later. This conflict between political objectives and the economy’s long-term needs is a dilemma we need to resolve. The solution lies in having intuitions that curb myopic policies.