Making A Strong Case for Governance Reforms
Economic growth and political stability are deeply interconnected. If, on one hand, the uncertainty associated with unstable political environment reduces investment and the speed of economic development on the other, the poor economic performance may lead to government collapse and further political unrest. Economists consider political instability as a serious malaise that impedes economic growth because it not only shortens policymakers’ horizons leading to sub-optimal short-term macroeconomic policies, it may also lead to a more frequent switch of policies, creating volatility; thus, negatively affecting macroeconomic performance. The uncertainty that has engulfed Pakistan because of intermittent instances of political instability has taken a heavy toll on Pakistan’s economic development.
In theoretical and empirical literature, the fact that political factors impact economic performance is well established. It is also true that there are many channels of political impact on the economy. Political instability hampers economic growth as it attracts lower investment which leads to low-key economic activities. In the modern-day world, there are many instances where the political volatility phenomenon led to shortened government tenures which, in turn, jeopardized the prospects of implementation of sound economic policies. Fragile political systems in many countries of Sub-Saharan Africa, the Western Europe and the Middle East have been a major constraint for economic development. The experience of these countries reinforces that political factors be accorded an important place in the discussion of economic progress of countries.
Prerequisites for Economic Growth
There are at least four essential prerequisites to achieving the goal of a sustained economic growth.
First, is a long-term vision that the country’s leadership provides to set the direction of the country’s economy as well as the goals to be achieved. It is the leadership that also formulates the execution strategy through which this vision is to be translated into reality. Today, all countries of the world are faced with changing environments and uncertainty is besetting them. This requires a continuous adjustment and fine-tuning is required by the policymakers.
For instance, China laid down its 25-year plan in 1980 under the visionary leadership of Deng Xiaoping. Every succeeding leader followed that plan after some modifications to suit the contemporary circumstances. One of the explanations for China’s stellar achievements in infrastructure and energy is the disciplined pursuit of this long-term plan.
Second, political stability is another sine quo non for economic growth. If the investors are constantly told that the government’s days have been numbered and that it is going to be removed or toppled any time soon, they would never put their money at risk. Candidly, if they are not sure about the returns they will get on their investments, they would never invest. As investment remains shy, growth will remain a dream. This leads to high unemployment and acute poverty. Political stability can be cultivated only if there is an orderly and predictable transition of power at regular intervals. Premature and abrupt dismissal of elected governments — which Pakistan has witnessed many times — is highly inimical for sustained economic growth.
Third, almost every new government in Pakistan reverses the policies, suspends or abandons the programmes and projects initiated by the previous government without any solid justification. So, the private investors shy away from committing their money in the country. Although a broad political consensus does exist in Pakistan on the direction of economic policies, yet every government tends to condemn whatever has been done during the tenure of the previous government. This causes serious handicaps for economic development. Continuity, consistency and predictability, thus, are the things which foreign investors like.
Fourth, overall governance structure and the strength of institutions determine whether we can achieve the goals we have set for ourselves. If the enforcement agencies are saddled with corruption, incompetence, indifference and ineptness, there will, surely, be a lot of leakages and waste. A rupee, if properly invested, can bring 10pc returns but if only half rupee is invested and the other half is pocketed for personal use, then we will end up with negative returns and, ultimately, a faltering economy.
Positive Factors Influencing Pakistan’s Growth
At present, there are at least six factors which serve as good omens for the future of Pakistan’s economy.
First is the size of domestic market. With a population of more than 180 million people, Pakistan offers a huge and attractive market for goods and services. Pakistan’s ever-growing middle class with its rising purchasing power creates demand for goods and services. Expansion of this demand helps the industry in achieving economies of scale and lowers per unit cost of production.
Second factor is the favourable demographics. While the rest of the world, particularly the advanced countries, would have rising dependence ratios due to increase in ageing population, Pakistan has relatively a younger population — 63 percent of Pakistan’s population is below the age of 25 years while almost 50 percent is below the age of 19. If properly educated and skilled, this youth would serve as the workforce for the labour-deficient countries.
Third, Pakistan enjoys a highly favourable geostrategic location. Two giant economies of the world — India and China — are immediate neighbours to the country. With India, a peaceful relationship can spawn benefits to our country’s economy through trade, economic cooperation and scientific and investment collaboration. On the other side, linking western China with Gwadar Port through railways, highways, pipelines, etc., can be mutually profitable for both the countries. Some important Central Asian Republics as well as Afghanistan are landlocked countries. If Gwadar serves as the most economical transit route for their international trade, the hydropower and gas resources of the CARs can help resolve Pakistan’s acute energy crisis.
Fourth, the Indus Basin of Pakistan is one of the largest and well-developed irrigation systems in the world and it has boosted Pakistan’s agricultural productivity over time. Although both the share of labour force employed in agriculture sector and the share of agriculture in the GDP have declined over time, the physical output has multiplied eight to ten times.
Fifth, Pakistan’s enterprising Diaspora, which has ventured out to almost all parts of the world, accounts for more than 3 million people. This migration has been a consistent and upward inclining source of foreign exchange in form of remittances. In many instances investment has flown into Pakistan from the relatively well off overseas Pakistanis.
Sixth, Pakistan is capable of performing well if the economy is managed properly. However, the record is not too good compared to other countries in Asia which have overtaken us and have done much better than us.
There are nearly six negative factors that are pulling Pakistan’s economy down. However, all these factors are very much in our own control and can be rectified with little but sincere efforts.
1. Our domestic savings rate is dismally low. So, we have to depend on foreign savings to boost our investment rate. To grow by 6 percent per annum, a country needs at least 24-25 percent of GDP. Thus the effect of low domestic savings rate is either we have inadequate investment rate and consequently a much lower growth rate or we have to seek assistance from foreign sources to fill this void.
2. Pakistan’s fiscal imbalances are a source of macroeconomic stress. Financing fiscal deficit by heavy borrowings from the Central Bank and rising public debt have created inflationary pressures, giving rise to high interest rates and crowded out private sector credit. Public debt servicing now eats up one-third of government budgetary expenditure and leaves very little degree of manoeuvrability in fiscal management. Unless tax evasion is curbed, tax net is widened and tax collection machinery is improved, fiscal imbalances are likely to persist.
3. Public sector enterprises and corporations have become a major burden on the country’s exchequer. The enormous waste, corruption, leakages and losses are adding pressures on the budget. Government should have a strong regulatory framework and an enabling environment to facilitate private sector to run these businesses.
4. Weak social indicators and lack of attention to human capital formation over last sixty-seven years has done more damage to the country’s economic potential than any other single factor. However, investment in social services and human capital formation does not impose a great burden on the finances but requires improvement in the organization and delivery of services.
5. In recent years, the energy crisis has wreaked havoc on economy. The benefits of rupee depreciation could not be availed by our exporters as they were not able to deliver the orders on time due to load-shedding and gas shutdowns. Overdue reforms in the energy sector as well as new investment in non-fossil oil energy sources are urgently needed to overcome these problems.
6. The poor governance and dysfunctional civilian institutions are the main culprits for most of the economic woes of the country. Civil service, police, judiciary were all well functioning institutions but with the passage of time they have gone through a decay. The writ of the state has eroded and the capacity to implement projects and programmes has weakened. But, economic welfare is closely linked with good governance and sound institutions and the reforms for revamping them would make a huge difference to the lives of the ordinary citizens.
Pakistan has suffered at least four major external shocks during the recent years:
1. The first shock was precipitated by Pakistan’s participation in the US-led war on terror which has caused colossal losses to the economy that far exceed $100 billion along with the unaccounted for losses of human lives and a state of anarchy permeating throughout Pakistan by the unending suicide bomb attacks. A country in dire economic conditions like Pakistan can hardly afford to tolerate such a heavy financial burden.
2. The second shock occurred in 2007-08 when the global food and fuel prices went through an abnormal and abrupt hike. Oil prices went up from $55 per barrel to $150 per barrel in a period of twelve months and so did the prices of commodities such as palm oil that Pakistan imports. These price hikes put enormous pressures on the current account as the import bill jumped by almost 20-25 percent in one year.
3. The third shock was the Global Financial Crisis of 2008-09 that resulted in a worldwide recession of the magnitude not witnessed since 1930s. As the incomes slumped in the US and Europe, the demand for Pakistani goods and services also slackened.
4. The fourth and most severe shock has been the floods that time and again devastated a large chunk of arable lands, displaced countless people, destroyed or damaged millions of houses, roads, bridges, power grids, embankments, spurs, railway tracks, etc.
To sum up, the challenges faced by Pakistan’s economy are quite formidable but the salvation lies in resumption of growth that will result in decline in both unemployment and the incidence of poverty and preserve the living standards of the middle class. The reprioritization of development expenditures, savings on recurrent expenditure, reduction in across-the-board subsidies to PSEs and corporations and improvement in tax collection can provide the stimulus for growth. Governance reforms are the key to economic stability and growth in Pakistan and those should be relentlessly pursued.
This post has been seen 3760 times.
Dr M. Usmani
03:33 AM (GMT +5)
Wednesday, April 08, 2009
Economic crisis In Pakistan
Economic Crisis in Pakistan
In 21st century economy is taken as Religion. It is the blood in the veins of nation state, vitality in the human muscles, base for brutal wars and a reason for governments to rule. The motherland has painfully experienced rising poverty and sinking economy; despite worlds best canal system, profitable geostrategic location, and unexplored resources. The nation, who earned nuclear position despite miseable poverty and sever foreign pressure, can do wonders, if provided with dedicated leadership.
Pakistans economy is in a downward spiral. Inflation is at 25percent (food inflation 50%), foreign reserves are falling, and the government is in danger of defaulting on its foreign debt. A spike in global food prices has hit Pakistanis especially hard, and the global financial crisis only threatens to exacerbate Pakistans economic woes. Pakistan is watching foreign investors flee.
Weak governance has contributed to growing militancy in Pakistan, economic troubles, and regional instability. As in the past, the possibility remains that Pakistans military could conduct a coup if it perceives the government as inept. Or Pakistanis may rise up in protest due to the governments inability to deal with economic issues.
Pakistan economy is under its terrible crisis due to following REASONS
Ø One of the immediate causes is Political instability due to Musharafs position as president, delay in restoring judiciary and resultantly withdrawal of PML (N) from the alliance leaving behind dead ministry of finance. In contrast the present government is not showing strong will to cope with the situation. Though some Positive Measures. To end Load Shedding till 14th August, 2009, Benazir income Scheme programme, Distribution of Land in Sindh, tight Tariff System against luxury items
Ø Suicide attacks in the industrial cities-fear among people, disinvestment and maximum outflow of capital, especially in Dubai stock exchange crash.
Foreign investment in 2007 was $ 700,63.5 million but in 2008 only $329 million.
Ø Soaring oil prices due to increased demand from growing economics of China and India, Iraq crisis, Iran holding its oil export, devaluation of Dollar after Iraq invasion and limited supply by OPEC, refusal of Saudi Arabia to enhance its oil supply. More population to use energy from to $ 134/ barrel in 2008.
Ø Food crisis oil prices, low agriculture yield due to heavy cost of production (seeds, pesticides, water and fertilizers), unavailability of small loans to small farmers, power shortage, fast increasing of population, poor governance in managing the food and to stop its smuggling to Afghanistan. Central Asia and Iran which stored big food stocks due to American war. World Food Crisis encouraged its smuggling. Less attention by the governments to live stock, dairy stock, increased circulation of paper currency. Big share of Middle Man.
Ø World Food Crisis: population explosion, emergence of middle class with more food consumption in India and China. Low yield in India. Earthquake in China, increase in world oil prices.
Ø ENERGY CRISIS:
Ø Inflation means price hike, huge gar between demand and supply, too many rupees chasing too few things. More supply of Money due to; AID after 9/11. Foreign Remittances due to over seas Pakistanis, growth in banking sector and investment in real estate. Poor supply of goods, food items due to low yield. Inflation due to rise in oil prices, food, removal of food subsidy, devaluation of Rupee, higher import price, Government borrowing from State Bank Rs . 544 billion. Resultantly increase in wage-price. Delay in monetary tightening by the State Bank. Government claims 25% while actual is 32% while food inflation is 45%
Ø Deceleration of growth in manufacturing: energy crisis. Terrorist incidents. High interest rates by SBP discouraged Private investment. High imports and low exports. 75 industrial units in Karachi and 85 in Faisalabad were closed due to energy crisis.
Ø Fiscal deficit: 6.5% of GDP, target was 4%. Due to slippage in revenue and expenditure- Dismal Growth; lower Tax collection. Heavy subsidy on oil effected current expenditure, increased in development expenditure. Decline external financing flows, so the government borrowed from SBP which caused monetary expansion, continuous Defense Budget.
Poor tax system:
Only salaried persons pay regular tax, while the major sectors find safe path through corruption. Agriculture tax cannot be imposed due to feudal in policy making.
Production was not encouraged by the previous government, rather Pakistan was made a consumer society, services sector was enhanced which created less jobs.
Cheaper Chinese products destroyed our industry thus created unemployment, more burdens on economy.
Illiterate labor: is less productive
Defence budget at the expense of economic development
Regional conflicts has marred the gas pipelines and usage of Gwadar.
Overpopulation at the rate of 1.9% is swallowing the resources
IMF loans hinder development and put burden on the masses.
Services sector expansion at 8.2%. Highest Sugarcane production 63.9% million.
Construction field, per capital income $ 1085.
GDP growth rate 5.8% investment declined to 21.6% of GDP. National savings to 13.9% of GDP.
· political commitment to formulate short term and long term policies with consistency
· Levy of an excise duty on non-essential consumer goods to save foreign reserves
· Development of the agricultural income tax by the provinces
· Give priority to agriculture, water, power, health and education.
· Limiting the extent of govt borrowing from the State Bank of Pakistan
· Establish an independent Federal Bureau of Statistics headed by a professional that directly reports to the Parliament and not to the govt.
· Establish independent panel of experts to engage in the consultative process in the design, implementation and monitoring of donor supported projects critical to the medium-term economic recovery. This will ensure transparency, rig our and relevance.
· Given the multiple dimensions of uncertainty in the global, national and household economy, it is essential that the highest priority for protection to the poor where uncertainty can lead to irreversible damage-in the shape of high morbidity and mortality, decline in the nutritional status of children and women, and withdrawal from schools.
· An over-arching principle should be maximum leveraging of scarce public resources by exploring all potential avenues for private partnership in the public development program.
· A core structure weakness of the economy highlighted by the current crisis is the lack of international competitiveness that retards an export-led growth strategy.
· Govts role in providing marketing information and producing to international needs to be revamped.
· Within country logistics costs should be reduced.
· Worker skills are critical to give our firms a competitive edge in international markets; programs for skill upgrading need to be modernized.
· The current debilitating power shortages have to be redressed quickly and a well through medium term energy plan need to be in place that provides reasonably priced and good quality power to industry.
· Given our natural comparative advantage in agriculture, i.e. the worlds largest contiguous canal irrigation system, diversity of agro-climatic zones, good soil conditions and cheap labor with a centuries old farming traditions, poor crop yields and absence of high value added agricultural exports, is a glaring example of unfulfilled promise.
· Maintenance, modernization and expansion of key rural infrastructure spanning water, roads and electricity are in urgent need of policy and institutional reforms.
· Accelerating the growth of small and medium farms where there is considerable potential for increasing yield per acre and employment generation
To reduce regional inequalities by actively targeting less-developed areas of the country. The Balochistan govt must be provided the resources to implement its strategy. In addition, similar strategies need to be developed for NWFP.
Greater decentralization of resources and setting of development priorities by the provinces themselves.
Encourage investment by China in Pakistan through development of infrastructure and appropriate
incentives to tap South Asian markets.
Increase and modernize land trade routes, including investment in infrastructure and allowing each others trucks and containers to carry cargo to market destinations.
Pakistans institutional and economic structure continues to constrains its ability to achieve long-term poverty reduction and inclusive economic growth; and sustain an unequal distribution of income and opportunities for its male and female citizenry. Therefore to provide equitable market access for the poor and enable them to contribute to GDP growth through sustainable livelihood.
· Access over productive assets to provided to the poor.
Distribution of state land to landless and tenant households that support production and provide extension services. Provision of credit to the poor, particularly small farmers, to become equity holders in mainstream corporate enterprises and fields such as milk, livestock, marine fisheries, processed food and even industries like telecommunications, apparel and software.
During President Clintons visit to Pakistan in March 2000- he said, This era does not reward people who struggle in vain to redraw borders with blood. It belongs to those in the region who look beyond borders, for partners and for commerce and trade.
Pakistan is surrounded by numerous internal and external threats of gigantic magnitude. Our mother land is the achievement of millions of sacrifices. Therefore, it is prime duty of every individual, the society, and the state to uphold the constructive norms in order to get honor in the community of nations. Pakistan is not a poor country, but a poorly managed country; only a sincere leadership with real commitments can turn this hell into heaven. Need is for restoring confidence of people who have potential to achieve all the colors of rainbow. The present ongoing occupation of neighboring brother countries by the worlds only super power, America, signifies that a disorganized Pakistan may fell prey to its aggression. Only energetic people, a dedicated leadership with strong military muscles, improved economy and dynamic society face
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