The minister for planning and development, Ahsan Iqbal, recently revealed the government’s vision for economic development aimed at reviving all economic sectors. The yet to be finalised plan will manage economic growth until 2025. The Minister has asked for suggestions for the plan that will be ready by December 31.
The discourse on economic planning and policy in Pakistan has largely been devoid of facts and evidence. Instead of relying on sound economic policy driven by evidence-based planning, economic policy-making has largely been an exercise in wishful thinking. If the current government is serious in pursuing a high economic growth agenda to reduce poverty and improve human development in Pakistan, it must consult informed experts and opinions, rather than relying on self-proclaimed economic rainmakers who have largely been the architects of past policies that have left Pakistan deeply indebted to the lenders of the last resort.
Pakistan simultaneously faces unique opportunities and threats. On one hand is the demographic dividend with one of the largest working age population in the world. On the other lies an equally large infrastructure deficit that may pre-empt the demographic divided from delivering prosperity. Pakistan can, through careful planning, invest in infrastructure development to capitalise on her demographic dividend to achieve high economic growth.
In a recently released paper by the World Bank, Jouko Kinnunen and Hans Lofgren argued that carefully planned infrastructure investments in Pakistan have the capacity to improve human development by reducing poverty and unemployment, and by improving progress towards achieving Millennium Development Goals (MDGs) by 2022. Using a state-of-the-art macroeconomic model developed specifically for Pakistan, the authors simulated several scenarios for infrastructure investments in Pakistan and concluded that investments in infrastructure financed by achieving savings from eliminating other wasteful government spending will not only increase the rate of economic growth from 4.5 per cent to almost 7 per cent, it will also improve human development indicators in Pakistan.
The authors developed future growth scenarios with the specific aim of increasing the annual GDP growth from the 4 per cent to 5 per cent range to 7 per cent during 2013 and 2022. They were equally interested in exploring ways to create fiscal space for increased spending on infrastructure. The two avenues explored included increase in domestic taxes and reduction in non-developmental government spending.
The subsidizers and their discontents
Given the sustained political instability in Pakistan, each government tries to win over the voters by offering them short-term relief through subsidies on, among others, fuel and food staples. Such short-term thinking may help the incumbents win the next elections, however, these myopic policies fail to deliver in the long run. “Transfer programs can generate immediate welfare gains but are less effective over time unless they are designed to raise productivity, perhaps via improvements in health, nutrition, and education outcomes,” they noted.
The authors instead argue that rapid economic growth requires significant increases in savings, investments, and total factor productivity (economic output that is not accounted for by typical inputs, such as labour and capital).
The authors noted that infrastructure investments achieved by curbing growth in wasteful spending, i.e. spending that does not impact productivity, welfare, or human development, has the highest welfare and growth effects. They also found that infrastructure investments funded by increase in domestic taxation or a reduction in energy subsidies did not have the same positive effects as the ones achieved from a cut in wasteful spending by the government.
The authors noted that infrastructure investments funded by increase in domestic taxes had a marginal impact on GDP growth and an impeding impact on private consumption and poverty reduction. Instead, a fiscal space created by eliminating wasteful government spending reported the highest acceleration in economic growth and poverty reduction. The authors have shown that a high growth scenario can bring the unemployment rate from 8.6 per cent under business as usual to 3.1 per cent in 2022. At the same time, human development indicators measured in terms of Millennium Development Goals will also improve significantly.
It is possible for Pakistan to achieve a 7 per cent economic growth rate by 2022. However, this will require careful planning, efficient execution, and responsible governance. The World Bank paper is therefore a must read for those entrusted with the task of devising fiscal policy in Pakistan. The economic analysis presented in the paper allows the planners to test their hypothesis using simulations before committing billions of dollars to projects that may never live up to their assumed benefits.