In recent years growing unemployment and poverty amid decent economic growth rates in Pakistan has had at least one positive outcome.

The international financial institutions (IFIs) no longer insist that in the economic growth alone lies the hope for poverty reduction. Recent weeks have seen the donor community advocate a larger role for the private sector in the economy in curbing poverty and unemployment.

No doubt, investment spurs and gets spurred by the economic activity but it, too, depends critically on the business environment including the cost of doing business.

An adverse business environment with the cost of doing business higher than that operative elsewhere in the region would keep investors off the line. Optimal poverty reduction in response to investment occurs when the multiplier effect is at its peak.

Adverse business environment weakens the multiplier effect to the extent that an increase in investment, other things being the same, only marginally lowers unemployment.

In our context, the situation is all the more worse. First, public investment that spurs private investment activity in the economy has been on the decline. Two, the investment effect on poverty or unemployment is palpably weak in the face of adverse business environment. It is quite understandable.

If I ask someone to invest in my business, he would ask about my stake in the business. The amount I invest reflects my commitment to, and the profitability assessment of, the business in hand. The more I am ready to invest in the business, the more others would be tempted to put in it. The situation in Pakistan is a kind of like this.

The government is expecting private investment, including, foreign direct investment to accelerate in the face of a declining public sector investment. Table 1:

It would be useful to look at the relevant numbers to see the point. The trend analysis of public and private investment from the FY 1988-89 to FY 2001-02 indicates that the growth rates of public and private investment have been erratic, but on the whole, steadily looking down. Public and private investments peaked in terms of growth rates in the fiscal year 1991-92 at 23.2 per cent and 30.3 per cent, respectively.

The growth rates of public investment in FY 98-99 and private investment in FY 1999-00 may sound great but one must appreciate that the base years in the two cases reported negative growth rates and that largely accounted for a swell in growth rates in the following years.

The public and private investments as percentage of the GDP also exhibit disappointing trends. While public investment as percentage of the GDP has steadily fallen down to below 5 per cent in the FY 2001-02 from 9 per cent in the FY 88-89, the private investment has been stagnant around 8-10 per cent since FY 88-89.

Decline in investment over a long period has weakened the productive capacity of our economy. Investment follows a predictable pattern. Public investment results in the development of physical infrastructure necessary for the economic activity.

Private investment follows suit because the availability of physical infrastructure is the minimum requirement for private business. And the foreign investment occurs when physical infrastructure is in place, and domestic private investors are investing.

Adverse business, as referred to above also, exacerbates the situation as it multiplies the negative effects of declining investment on poverty and unemployment. Clearly, the economy has fallen into a vicious cycle of low investment, low employment, and pessimist mood. What is more, these variables reinforce each other, and make poverty reduction a hard nut to crack for policy makers.

Current circumstances provide ample evidence in support of this argument. We note that interest rates are down. Banks have a lot of liquidity and want to lend money for businesses. The government is giving incentives required for boosting the economic activity. The economic policies have by and large been consistent for about four years. Credit rating has marginally improved.

Inflation is reportedly the lowest ever witnessed in Pakistan. Exchange rate vis-a-vis the US dollar has been stable. Foreign reserves are looking to skies by our standards. Debt servicing cost is at the lowest level in decades. In substance, the economy has kind of reached macroeconomic stability considered vital for economic take-off and prosperity.

Why we don’t see the kind of acceleration in economic activity that often results amid this scenario. Macroeconomic stability is, unquestionably, a necessary condition for rapid economic activity but it alone is not sufficient to put life into an economy that confronts a declining public investment amid adverse business environment.

The US trade team that visited Pakistan to explore business opportunities identified instable political environment as the major stumbling block to foreign investment.

Undoubtedly, the government faces a gigantic task of curbing poverty that itself sows the seeds of political turbulence. Those lacking voice and a share in economic pie are too vulnerable to groups that stand for violence to prove a point.

The government favours pro-poor spending to counter poverty in Pakistan. While it might help a little in the short run check growth in poverty, it could not be considered a sustainable approach. Investing in physical infrastructure and human capital in ways that specifically benefit the poor families, and induce domestic and foreign investment could be more effective and sustainable approach.

This investment cycle must start with public sector that will induce domestic private and foreign direct investment in the country. One might argue how come the investment by public sector provides sustainable basis for a fight against poverty when its pro-poor spending does not?

First, selective public sector investing helps create economic assets for the poor that generates streams of public goods for the poor over a long period of time.

Second, investing to help the poor learn marketable skills in their peculiar socio-economic context gradually diminishes their dependence on the public sector.

Third, this approach makes the poor feel as though they have a stake in the economic and social pie; something that will resist their joining groups that contribute to political instability in the country.

Fourth, it would emit positive signals for private and foreign investors to invest. It is job creation through a healthy and growing private sector that the government can effectively tackle poverty problem. Pro-poor spending tends to provide short-term relief to the poor, without addressing the root causes of the problem.

We are still at early stages of economic development and replete with the investment opportunities that offer rates of return higher than those in the developed economies.

We need political stability, along with the macroeconomic stability to score points on development front. The government ought to craft and implement pro-poor investment strategy that gets the poor on their feet and minimize their dependence on the state.

This alone would be sustainable. Fortunately, the government has fiscal space available to consider pursuing this approach aggressively right away.