Currently the impressive turnaround in the macro fundamentals of the economy is reflected in the restoration of the fiscal balance, external credibility and the rekindling of economic growth.
Attracting far less attention, but possibly having even a greater impact on our economic fortunes, are the fundamental changes taking place in the overall development strategy.
These far-reaching changes evident in a large increase in size of the development plan and a distinct shift in the pattern of expenditure, have the potential of putting the economy on a path of sustained growth and eventually transforming Pakistan into a middle-income, semi-industrialized economy over the next decade.
Improvements in the macro economy have clearly contributed to the change in the development path by creating a fiscal space through increases in revenue generation. It has also restored donor confidence leading to larger external resource inflows.
There is, however, an important difference. While the set of policy measures adopted for restoring the macroeconomic fundamentals followed to a large degree the standard IMF-World Bank deflationary package, the new development strategy is very much "home brewed".
What are the main elements of Musharraf's development strategy"? More importantly, what are its chances of its success? Will it be successful in transforming our economic structure, raise incomes significantly, provide basic services and perhaps, most important of all, reduce the poverty which by most indicators grew in the 1990s, although its trend reversed slightly in the last year or two.
Six distinguishing features of this new development strategy which to varying but still significant degree, represents a shift from the strategy followed in the past:
* re-establishment and recognition of the role of the public sector in the overall development as reflected in the almost doubling of the annual public sector development programme (PSDP) from around Rs115 billion in 2001 to Rs220 billion in 2005.
* launching of a number of mega infrastructure projects with a distinct thrust in harnessing, storing and efficient delivery of much needed water resources for the agriculture sector and also developing new ports (Gwadar), highways (Makran coastal highway) and the development of backward regions (Balochistan).
* a major shift towards higher education, especially in sciences and engineering.
* bridging the technological gap in the fields of information, communications and space technology.
* shifting the production base of the economy towards higher value-added goods, especially in the manufacturing sector.
* decentralization and devolution of decision-making and use of economic resources increasingly to local level.
Overarching the main elements of the public sector is the pre-dominant role assigned to the private sector as the main engine of economic growth and the job creation. The underlying aim of building up the physical and social infrastructure including a highly educated and skilled labour force is to draw in private investment, both domestic and foreign, into key sectors of the economy.
This should propel the economy into a growth trajectory of over eight per cent over the next decade finally overtaking the respectable though not spectacular "Pakistani growth rate" of six per cent at which the economy had grown for the four decades till the 1990s.
What forces and thinking may have inspired the new development strategy? There are shades within it of the strategy followed in the 1960s, especially the mega water projects, (even though they were mainly replacement schemes under the Indus Basin Treaty.)
A more active role of the state in economic development is gaining ground after the collapse of the so- called "Washington Consensus" which propagated the idea that the role of the state should be limited to only facilitating market forces and leaving the development almost solely to the private sector.
The recent Sach's Report on Investing in Development:" A Practical Plan to Achieve the Millennium Development Goals" strongly argues for developing countries to invest in essential infrastructure development if they are to be in a position to take advantage of opportunities of trade and investment opening up in the global economy.
So far as the mega projects are concerned, even those who were first opposed to them are now offering promises of loans and foreign assistance if the portfolio was to be enlarged. The rationale to develop our water resources was always very clear given the needs of the agricultural economy.
Similarly, the highway network which is opening up the neglected backward regions, would also link up Pakistan with the Central Asian economies. The rate of return on these investments would depend to a large measure on trends in growth and stability in the overall region.
Private foreign investment into Gwader will have to compete with the other Gulf states. But the latter are now becoming more costly in terms of services they offer. Similar was the situation before transition in Singapore, the model on which they are built, about 20 years ago.
If Gwader can offer storage and other services at much cheaper rates, its Gulf competitors will well justify the investment made in economic terms without deterring from its strategic significance.
The projects for development in Balochistan were long over due and will go a long way in removing the grievances of the people of that province. Passing on a share of the royalties from its natural gas resources directly to the elected local authorities for development would ensure that the people living in the area are receiving the benefits. Indeed, this principle should be followed in the case of any part of Pakistan from where natural resources are being tapped for national use.
The unfortunate neglect of higher education has cost the country very dearly. The deterioration in our governance structure and delivery of public services clearly reflect this neglect.
It is, however, important that this should not be at the expense of much needed expansion and improvements in primary and secondary education. Primary education and acquisition of basic skills has still the highest returns in terms of income and productivity growth and remains the most effective means of overcoming the poverty.
We also need to be careful in implementing the goals of the new higher education policy. The emphasis must be on ensuring quality and not a mechanical number game of producing PhDs and other degree holders of very poor quality.
Realistic targets need to be set keeping in mind the existing capacity in terms of supervising research and those who can teach at post-graduate level. But on the whole, we are moving in the right direction, especially in terms of increasing significantly resources towards the public sector universities and higher educational and research institutions.
What we need to ensure is that these resources provide adequate financial support to needy students and will not be misused in favour of those who can well afford it.
The need to invest in the development of new technologies was also long overdue and Pakistan missed out in the first phase of the software boom of which India took full advantage, earning as much as $10 billion in exports annually over the last decade.
The need is to ensure the supply of relevant skills, which the education system with its new emphasis should be able to do, besides proper pricing of ICT inputs and outputs and development of up-to-date infrastructure.
The economy as a whole and especially manufacturing and financial sector will benefit in terms of both efficiency and productivity from the use of ICT. Our software exports and related services are still negligible and we should take a major jump over the next few years, in this direction. If the overall strategy is sound, its success will depend on its implementation.
Inflation has re-emerged and is reaching double-digit proportions. To the extent that it is fuelled by external developments, mainly the increase in oil prices. Subsidies are needed to reduce its adverse impact. It would increase dependence on foreign borrowing. More prudent monetary management may help. Some of the monetary expansion in the last two years has helped fuel inflation e.g. the rising land prices.
Concern is also being expressed on the emerging concentration of economic power in few hands and monopoly profits are being reaped in certain sectors of the economy through possible collusion between the major producers. Without shackling down the private sector and controlling or penalizing it, what is needed is greater vigilance.
The State Bank needs to carefully monitor that where large industrial houses control directly both banks and industrial interests, this linkage is not being misused in terms of use of finances from their own banks and for keeping out potential users of these funds. The Monopoly Control Authority also needs to play a more active role.
The most vulnerable part of the new strategy is the apparent disconnect between the overall development strategy and the newly drawn up poverty reduction strategy (PRSP).
The development strategy seems to support a more "trickle down" process of benefits of growth and development. The poverty reduction strategy still does not emphasize sufficiently the need for the creation of productive and remunerative employment which is the most effective means of reducing poverty. The gulf between the two may not, however, be as large as it looks.
Finally, the strategy must take into account the fact that it is mainly through the functioning of an equitable labour market that the gains of economic growth will be passed on to the men and women living below the poverty line.
In a country with "unlimited supplies of labour", given the still high growth rate of the labour force for the long period of time, it will be possible to hire labour at a wage rate which would not be sufficient to raise workers and their family out of poverty.
Raising the social floor in terms of periodic review of minimum wages and ensuring that labour laws are in conformity with the fundamental workers' rights must be an integral part of the development strategy, if it is to really make a significant dent in poverty levels.
(The writer is director, policy planning (employment) in the International Labour Organization. The views expressed in this article are his own and in no way reflect those of the organisation in which he works.)
