THE government has set a target for economic growth of 5.1pc for 2014-15. To achieve this, it is reportedly aiming to allocate Rs1.3 trillion in combined development expenditure, a large chunk of which is for ‘special’ mega projects. Though it should not be pre-judged, but it does appear that more spending is the predominant ‘vision’ that will inform the upcoming budget. If so, the government will be choosing to ignore much more potent measures, such as tax reform, that can refuel Pakistan’s growth engine on a longer-term, more sustainable basis.

With its fixation on ‘spending’ as the silver bullet that will lift the economy from the doldrums, the question to examine is the following: will the ramping up of development expenditure alone produce durable growth — contrary to our past experience and the experience of many other countries? Or, will it leave us with swanky ‘showcase’ projects and a pile of debt to be serviced till the next generation?

The impulse to spend our way to growth is strong — and fed by half-baked but well-entrenched ideas of how Malaysia, Thailand, Indonesia, Turkey and China have all achieved economic prosperity. But each borrow-and-spend binge our short-of-ideas governments have indulged in since the 1990s has produced the same sorry outcome — a full-blown macroeconomic crisis — which, in most cases, have been occurring with shorter frequency and increasingly greater intensity. (What was it that Einstein had said about doing the same things repeatedly and expecting different results each time?)

On the other hand, in clear proof that there are things beyond spending that got these countries to their present status, all of these countries share a common macroeconomic experience: low-to-moderate fiscal deficits and high tax-GDP ratios. More importantly, in my belief, the governance ranking of each of these countries says it all — revealing a much stronger underlying institutional framework than Pakistan.

Hence, not surprisingly, irrespective of the size of the Public Sector Development Programme/Annual Development Programmes (PSDP/ADPs), Pakistan’s low-growth problem has refused to go away. Economists who think within a ‘Keynesian’ frame will immediately insist that Pakistan has not spent enough on development. In their (and the finance minister’s) prescription, the key to prosperity is to somehow swallow the minor inconveniences of a public debt overhang — and a declining marginal efficiency of capital — and to march boldly ahead with a spectacular increase in the PSDP.

Before embarking on this prescription, however, it is worth considering the following: over the past 10 years (since 2004), Pakistan has spent slightly more than Rs4.7tr under the head of development spending, both at the federal and provincial levels. The average GDP growth rate to show for this amount is 4.8pc per annum.

In fact, with development spending increasing significantly since 2008, the comparison between monies spent under this head and its return is even starker for the five-year period 2008-2013. For nearly Rs3.1tr spent under the federal PSDP and provincial ADPs during this period, the average growth rate achieved was only 2.9pc.

These statistics neatly underscore the weaknesses of the ‘project approach’ — for various institutional reasons, development expenditure is not delivering its ‘bang for the buck’. A crude measure of the declining efficiency of capital spending will demonstrate this further: whereas in 2004, to achieve each one percentage point of GDP growth required only Rs21.5 billion of development expenditure, the same soared to Rs115bn (inflation adjusted) for each one percentage point of growth in 2013.

The institutional weaknesses this crude measure is starkly pointing to are:

Flawed project selection, especially where the Planning Commission is either completely bypassed or is a willing endorser of projects dreamed up by the party leadership with little or no economic rationale (as has been the case since 2005);

Faulty project implementation;

Outright corruption in project execution (and, in a much wider sense, in public sector contracting). These weaknesses are manifestations of a larger issue: how the institutional framework has been undermined and subverted since the 1990s for personal or party interests, and how, until this basic fundamental is corrected, no amount of spending or projects will turn around Pakistan’s economic fortunes.

It is also worth considering the experience of other countries down in the dumps. Before the crisis, Greece seemed to performing well for a number of years with decent rates of economic growth — but all on borrowed money and borrowed time. Japan has been throwing money at its deflation since 1989 via one fiscal stimulus after another, but to little avail.

In fact, I would argue that till such time that we have built our economic revival plans on more solid institutional foundations, annual growth targets may be irrelevant at best — or a dangerous distraction, at worst. On a year-to-year basis, until we have ‘fixed’ it, growth could well be a low of 3pc or a high of 6pc — it shouldn’t matter. What we need to aim for is a sustainable 6-7pc for the next 20 years. To achieve that, we need to do much more than just construct highways or build more flyovers. As I have written on quite a few occasions, our economic malaise is not cyclical — it has structural as well as institutional roots. We can’t ride our way out of this on a metro bus.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, May 30th, 2014

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