12 July 2004	Monday	23 Jamadi-ul-Awwal 1425

According to the Economic Survey of Pakistan, the economy grew at 6.4 per cent during the year 2003-04. This is a healthy growth rate and among the highest in the region.

The high growth rate, if sustained, may provide the country with a launching pad for economic development.

A fundamental condition for development is economic growth signified by the expansion of the real GDP or total output of the economy. For meaningful economic growth, the real GDP must grow at a pace faster than the population growth. Conversely, if the GDP growth lags behind population growth, the growth of the economy will be impeded.

The engine of growth is investment or capital formation. It is the deficiency of capital that is the major weakness of less developed countries (LDCs). Capital formation or investment has both demand and supply sides. On supply side, investment requires savings. In case of LDCs, investment falls below the desired level, partly because of low savings.

Savings are a function of income, and low incomes account for low savings. On demand side, investment decisions are based on an estimate of the level of demand for the output.

In case there is deficiency of potential demand for their goods or services, businesses shy away from investment. As in case of savings, the key determinant of demand is income. Again, in case of LDCs, since per capita income tends to be low, demand is deficient, which restricts investment.

In fact, LDCs are in a Catch-22 situation. Low per capita income restricts capital formation and output, which is responsible for unemployment and underemployment. The higher the level of unemployment, the lower the level of per capita income. Increase in per capita income is thus essential for growth and development.

There are two ways to get out of this Catch-22 predicament: availability of foreign capital and increase in government spending. We take the latter first. When demand is depressed and corporate profits low, the private sector cannot be counted upon to step up investment. The job has to be performed by the government.

By borrowing, the government generates the funds necessary for development expenditure. Government investment increases demand for business goods and services. Businesses respond by increasing output for which they hire additional labour. The income earned by the workers is partly consumed, partly saved, which adds to demand and savings.

High per capita income is a necessary, but not a sufficient condition for development. This is borne out by the fact that many LDCs, like the oil rich Gulf states, have a high per capita income but fall short of development.

For economic growth to be self-sustaining and translate itself into development, the increase in the real GDP or output must be accompanied by institutional development and socio-economic changes: stability of political institutions, vibrant capital and financial markets, a shift from an agrarian to an industrial economy, social sector and infrastructure development, technological progress, dynamic entrepreneurship, and a greater labour productivity.

That high economic growth may not be translated into development is corroborated by Pakistan's own example. During 1960s, the economy registered a healthy growth rate of 6.8 per cent.

However, because the expansion of the economy was not accompanied by the concomitant changes, during 1970s, the growth rate declined to 4.8 per cent. The growth rate again increased to 6.5 per cent in the next decade-1980s. During 1990s, there was again a fall in the growth rate as the economy grew at 4.6 per cent.

From 2000-01 to 2003-04, the economy has grown on average by 4.1 per cent. During last two and half decades, the economy registered the highest growth during 1984-85 when it grew at 8.7 per cent, while the lowest growth rate during this period was registered in 1996-97 when the economy grew at only 1.7 per cent.

This means Pakistan has not been able to sustain a high economic growth. For next three years, the economic managers have set the target of 7-8 per cent growth in the real GDP. Even if the target is achieved, will Pakistan be able to sustain that growth rate? Or would the high growth rate prove a bubble, as in the past?

For long-term economic growth, the following conditions will have to be satisfied:

* Political stability is essential for durable economic growth. Political instability makes for discontinuity of policies and an uncertain environment, which increase the cost of doing business.

In such a scenario, entrepreneurs-domestic as well as foreign-hesitate to invest. Along with political stability, law and order situation needs to be improved. Bad law and order not only increases the risk of doing business but also impairs country image, which reduces its attractiveness as a market for foreign investment.

* To increase the rate of capital formation, the government would have to undertake investment projects itself as well as create the right investment climate for the private sector.

In fact, the very purpose of public sector investment should be to increase the level of aggregate demand as well, develop the right infrastructure necessary for encouraging the private sector to invest. According to the Economic Survey, as percentage of GDP, the share of total investment is 18.1 per cent. This of course is well below the desired level.

However, compared with the previous fiscal year, that is 2002-03, investment as percentage of GDP has registered an increase of 1.4 per cent from 16.7. During the financial year 2003-04, public sector investment registered a healthy increase of nearly 40 per cent.

In the budget for the next fiscal year, Rs 202 billion have been allocated for development expenditure-26 per cent higher than the last fiscal year's allocation.

* A major cause of less than desirable level of investment is low domestic savings-GDP ratio, which stands at 17.8 per cent. To fill the gap between the actual level of savings and the desired level of investment, foreign investment, particularly, foreign direct investment (FDI) is needed.

Though Pakistan has a very liberal FDI regime, the level of foreign investment has been rather unsatisfactory. From 1992-2003, total FDI in Pakistan was worth $6.4 billion.

This makes average investment per year nearly $550 million. The volume of investment was the highest during 1995-96, when FDI crossed $1 billion. In the first ten months of the fiscal year 2003-04, FDI receipts, according to the Survey, stood at $760, which are likely to cross $1 billion for the full year-an increase of 25 per cent.

Apart from a liberal regulatory regime, there are many other determinants of FDI such as political stability, law and order situation, interest rates and exchange rate stability.

Though. interest rates in Pakistan have been reduced to an all-time low-6 per cent-and the rupee is stable, political risks of doing business in Pakistan continue to be high.

Another weakness of Pakistan regarding a market for FDI is unsatisfactory protection of intellectual property rights (IPRs), particularly copyrights. Pakistan has updated its IPR laws, but the enforcement of the laws needs a lot of improvement.

* An agrarian economy remains underdeveloped. It is the industrial sector that is the engine of growth. Hence, to accelerate the pace of development, the industrial sector has to play an increasingly larger role.

During the year 2003-04, the industrial sector grew by 13.1 per cent. The large scale-manufacturing sector registered a growth of 17.1 per cent, which is more than double of its growth in 2002-03.

Small-scale manufacturing sector grew at 7.8 per cent. Now the industrial sector accounts for 24.5 per cent of the GDP and has overtaken agriculture as the second largest contributor to the GDP after the services sector.

* There is a reciprocal relationship between poverty and development. Lack of economic development means low per capita income, capital deficiency and slow rate of capital formation, technological backwardness, low standard of living, low level of industrialisation, high level of unemployment and underemployment, low labour productivity and low education standards and literacy levels.

All these factors perpetuate poverty. Poverty, on the other hand creates conditions, which hampers efforts for development. Poverty means high birth rates, low incomes, low level of savings and low level of capital formation and investment.

According to the Survey, poverty level has come down by 4 per cent to 23.10 per cent from 27.30 per cent in 2000-01. However, the definition of poverty that was used to arrive at that figure is that anyone whose monthly consumption exceeds Rs 748.56 per month is not poor.

This definition establishes a standard of poverty which falls below the internationally accepted standard of poverty, which is earning less than $1 a day. If we go by that standard, then at least one-third of the population is poor.

The government measures to eradicate poverty must make emphasis on increasing real incomes. If per capita income increases, but prices also increase, people are not better off.

The real measure of poverty is lack of access to basic amenities of life, which is possible only, if increase in incomes is higher than inflation. To increase incomes, not only employment opportunities will have to be created, but labour productivity will also have to be increased. At present, 8.27 per cent of the labour force is unemployed, *whereas in 1996, unemployment level was 5.37 per cent.

This means unemployment has increased by 2.9 per cent in eight years. To bring down unemployment, it is necessary to step up investment and check population growth.

It is good to see that during last two decades, population growth rate has come down from more than 3 per cent in 1980 to 1.90 per cent in the current year. However, even this rate is un-affordable for Pakistan and has to be further substantially lowered.

* There is also a need for greater investment in social sector development, particularly education. According to the Economic Survey, literacy in Pakistan is 54 per cent. Granted that this figure is not exaggerated, the literacy level is still very low.

From 1996 to 2004, literacy in Pakistan has grown on average by 1.5 per cent, whereas population during the same period has grown by 23 per cent. A major cause of low level as well as slow increase in literacy is the low level of education expenditure, which has been less than 2 per cent of the GDP.

For advance in education, what matters is both the number of educated people and the quality of education. In case of Pakistan, the quality of education is also very low.

There are only a few quality academic institutions and most of them are beyond the reach of the ordinary student. Besides, education is divorced from practical life, which partly accounts for the problems faced by the educated youth in finding jobs.

In developed countries the role of the state in social sector development has shrunk and the private sector has assumed a greater role. However, this happened only after a certain level of development was reached.

In case of Pakistan and most of other LDCs, where the private sector is lacking in potential, the public sector has to play a leading role in social sector development.

Finally, technology is the catalyst for economic development. Technology accelerates the rate of capital formation, improves productivity and increases per capita income.

It is by means of technology that capital, labour and land can be used to their full potential. Technology is another area in which Pakistan lags behind the desired level. Therefore special efforts are needed to fill the gap.

Promoting technical education, is essential. However, what is equally essential is to link education and academic research to business and industry requirements.