FOR long, Pakistan has been stuck in a sub-optimal growth equilibrium when other countries in the region have moved forward. Meanwhile, policymakers, politicians and international financial institutions remain focused on short-term stabilisation.
It is time to pause and look at the big picture to identify past policy mistakes and set a future course of action.
The long-term economic decline (original sin) is at the source of most of its economic weaknesses, and can be explained by a structural policy focus that relies primarily on low-productivity traditional services to generate value-addition and less so on agriculture and industry.
As a result, the agriculture sector is slowly receding, while the industrial sector is growing far slower compared to its peers.
The average real growth of GDP per capita during 2001-2010 was 2.5pc, 4.4pc and 5.8pc respectively for Pakistan, Bangladesh and India. At this pace, Pakistan, Bangladesh and India will double their real incomes in 30, 15 and 12 years respectively.
These countries are comparable because they share a common colonial history, institutional development and similar natural endowments. Even though all three have moved away from agriculture over the last three decades, what is noteworthy is that the moving away from agriculture has been the slowest for Pakistan. This partially explains the lower growth of Pakistan compared to Bangladesh and India, as the agriculture sector has the lowest value-added growth out of all three sectors of the economy.
There is no clear trend for the three countries. Clearly, Bangladesh is industrialising at a fast pace, while the industrial sector in both Pakistan and India have been stagnant.
The falling share of agriculture and a fast-rising services sector points towards the idea that India and Pakistan have skipped the industrialisation phase and jumped from being predominantly agriculture-based to service-oriented economies.
However, the case for Bangladesh is different in the sense that the declining contribution of its agriculture sector is being substituted by increased contributions from both industry and services.
This pronounced transformation in the GDP composition of both Bangladesh and India provide a possible explanation for their relatively better performance in terms of real per capita growth. However, Pakistan, unlike Bangladesh and India, has been unable to reap the gains from structural dividends.
Value-addition by agriculture in Pakistan has declined significantly during the last decade, while it has increased in both Bangladesh and India.
Pakistan is an example of a country dependent on external financing, setting it apart from India and Bangladesh. Day-to-day book-keeping becomes a priority and economic fire-fighting a highly sought-after profession
The growth in value-addition by the industrial sector has been different across three decades. In the last decade, growth in value-addition by industry has been somewhat similar for Bangladesh, India and Pakistan, but Pakistan lacks consistency in the industrial growth rate and suffers from a low growth in services.
India has excelled in developing modern services — finance, insurance, real estate and business etc, which are knowledge-based services with a higher productivity potential — while Bangladesh and Pakistan have fallen behind.
Pakistan has excelled in traditional services — retail and whole trade, hotels and restaurants, transport and communication etc, which offer limited productivity growth potential — whereas India and Bangladesh are at the same level. These differing focuses of India on modern services and Pakistan on traditional services partially explain the almost double the growth of services in India as compared to Pakistan.
This growth of modern services in India may in part be motivated by its industrial sector. For example, the Suzuki-India partnership was able to meet its deletion programme and the Maruti car is now totally indigenous; whereas in Pakistan, to date, the deletion programme remains incomplete.
According to research by ADBI, the main reason for the growth of the services sector in India was the growth in the domestic demand for services instead of exports of services. Furthermore, it also found that the total factor productivity growth contributed significantly to the growth of the services sector in India.
There are four reasons why skipping industrialisation can be a major concern for Pakistan. First, the services sector growth did not follow industrialisation. This sequencing is important because the type of services behind this structural shift offers limited productivity growth and export potential, given that Pakistan’s services sector is largely made up of traditional services.
Second, not all services a country has to offer are exportable. This implies that countries heavy in traditional services and weak on the industrial front may have perennial balance of payment concerns. Indeed, until last decade, all the three economies were in a persistent state of current account deficits. But in the recent decade, this situation has become less inconvenient for India, while Bangladesh has an export surplus.
The lower ability to export services also implies less-than-adequate export earnings, which in turn limit the ability of the economy to import new technologies to achieve higher productivity in other sectors. This point is especially evident from the weak growth of both agriculture and industry. Again, this hurts the long-term economic growth prospects.
Three, an economy that consistently suffers from balance-of-payments issues spends much of its efforts trying to balance its books. Indeed, since 1990, Pakistan has sought an IMF programme 12 every three years (i.e. eight programmes) compared to 7.7 and 12 years for Bangladesh and India respectively.
Pakistan is an example of a country dependent on external financing, setting it apart from India and Bangladesh. In such an environment, day-to-day book-keeping becomes a priority and economic fire-fighting a highly sought-after profession. In turn, decision-making for the longer term suffers without the realisation that the source of the problem for Pakistan is its long-term decline.
The structural dividends have not materialised for Pakistan and are unlikely to materialise given the general nature and evolution of different sectors of the economy and the fast-moving nature of the world economy. The long-term growth prospects of the economy remains limited and further balance-of-payments crises can be anticipated.
It seems that the policymakers and economic managers of the three countries used different visions and strategies to structurally transform their economies. This structural transformation has worked quite well for both Bangladesh and India, but unfortunately not so much for Pakistan.
The future direction for a new structural change must refocus on industry, agriculture and a fusion therein, with the sole objective of enhancing productivity.
The article is an edited extract from a research paper by the writers.
Ali Choudhary is Director, Research Department, and Farooq Pasha is Senior Joint Director, Research Department, at the State Bank of Pakistan, Karachi.
Published in Dawn, Business & Finance weekly, December 21st, 2015
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