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Misplaced optimism

Published Mar 14, 2017 03:52am


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THE PricewaterhouseCoopers (PwC) report The World in 2050, that came out a few weeks ago, forecasts Pakistan as the world’s 16th largest economy — in terms of GDP — by 2050, ahead of Italy and Canada. The forecast is perceived by some to mean that Pakistan is on course to becoming a developed economy. However, a large economy is not necessarily a developed economy. India is the world’s third largest economy, much ahead of Canada, but that does not mean it is more developed than Canada.

While development is a broader and somewhat abstract concept, a larger economy is one that has greater GDP relative to others. GDP is the total income of all individuals of a country; other things being equal, the greater a country’s population the greater its GDP. There is not much to cheer about in being a larger economy, if being larger owes to an increase in population that earns little.

PwC has projected the GDPs of 32 countries using mostly a single set of assumptions. One is that countries will follow ‘growth-friendly’ policies. This is a big if, and what makes it even bigger is that we seem to be unsure what policies are growth-friendly and which ones are friendlier.

For example, building motorways, on which negligible cargo traffic plies, versus putting the 25 million out-of-school children in schools — which one is a growth-friendly policy and which one is friendlier? Are we following growth-friendly policies? Bear in mind that innovations like Google and Facebook are owed to human capital alone.

Rising inequality is a ticking time bomb.

‘Youth bulge’, ie more people entering the working age bracket than leaving it, and the level of inequality in the country are the two ticking bombs that may embarrass PwC on the projected size of Pakistan’s economy. The PwC’s report says that a huge increase in working age population delivers a ‘demographic dividend’. However, this depends upon whether the young people entering the job market will manage to find a decent job. Otherwise the kind of political unrest seen in the Middle East and North Africa in recent years cannot be ruled out.

Among the countries experiencing a youth bulge and to which the scenario painted above could apply, the PwC’s report includes Nigeria, Pakistan, Egypt and Philippines.

One study suggests that Pakistan witnessed the onset of the ‘youth bulge’ in 1990 which is likely to continue till 2045. Out of around 55 years of the bulge, half stands consumed.

With little evidence of reaping significant benefits from this youth bulge so far, scepticism prevails over its future potential. PwC assumes a 1.4pc per annum average GDP growth in Pakistan till 2050 due to population growth — the second highest after Nigeria’s 2.3pc among the 32 countries examined by PwC. Given Pakistan’s poor record of benefiting from the youth bulge, PwC’s estimates should be significantly trimmed.

A body of literature suggests that income inequality impedes growth through various channels. The PwC report also cautions that high inequality in some countries could be a huge drag on their economies. Quoting research, it argues that 1pc increase in the income share of the top 20pc decreases GDP growth by 0.08 percentage points while a similar increase in income share of the bottom 20pc increases GDP growth by 0.38 percentage points in the following five years.

While including domestic (economic) policies as drivers of inequality, the report tells us that mass education, heavy taxation of the rich and large social transfers (from rich to poor) reduced inequality from 1945-1980 in a number of countries. Inequality measured by the Gini coefficient has increased significantly over time in Pakistan. The question then is: should we expect inequality reducing policies in years to come? Our GDP in 2050 crucially hinges on this assumption. A buoyant economic scene is not in sync with increasing inequality and absence of policies that would curb it.

The return to four and eight years schooling factored in by PwC is 13.4pc and 10.1pc respectively. Studies, undertaken exclusively on Pakistan, show a much lower return on primary and secondary education.

Terrorism has not significantly affected the majority of the 32 countries examined by PwC. Therefore the report does not account for its adverse impact on the economies. But Pakistan is bearing the impact even today. The projections regarding Pakistan need to be revised accordingly.

All this is not to say that Pakistan has no economic potential at all — evaluating such potential requires a separate column. This piece only suggests that regardless of what the current economic scenario is, PwC’s forecast seems exaggerated as it does not account for specific growth-constraining conditions at home. It does not, therefore, afford an opportunity to celebrate.

The writer is a researcher at the Pakistan Institute of Development Economics.

Twitter: @khawajaidrees11

Published in Dawn, March 14th, 2017


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The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (10) Closed

JA-Australia Mar 14, 2017 08:07am

I have never heard someone from Finland, Norway or Denmark talk about how big or small their GDP is. There are things that matter for ordinary citizens, and then there is chest thumping about GDP by internet warriors...

maleeha Mar 14, 2017 09:28am

I don't agree with this line "All this is not to say that Pakistan has no economic potential at all "..There are issues but, presenting such a dismal scenario is not solution to issues.

Manzoor Ahmad Mar 14, 2017 10:50am

Excellent analysis. I think the politicians deliberately confuse forecasts about the size of economy with the economic welfare of the masses. Our taxation policies, with higher reliance on indirect taxes, further aggravate inequality. Unfortunately even the PMLN government which is composed of well-meaning ministers and bureacrats has done nothing to address this issue.

sharlone Mar 14, 2017 11:34am

Inequality is a threat and must be addressed, but we can also say that people are less poor than a few decades ago. There is no shortage of wheat and we see markets full of necessities and choice. Rising inequality is common in many other countries including rich ones like Germany and USA. In Germany there are a few million people living with less than €350 a month which is worrying. One of the good things Sanders fought for in last years election was just that: Bridge the gap between the very rich and poor. It is a pity that he did not make it but he made us all aware of the urgency to solve this tragedy. I agree with the author fully.

Ahmad Mar 14, 2017 02:57pm

@maleeha Respectfully, There are people painting positive possible scenarios but Things haven't moved a bit. SAD!

Ali Raza-NY Mar 14, 2017 06:30pm

Thank God I left Pakistan in 1980's.

Very happy here.

wellwisher Mar 14, 2017 09:30pm

I feel India should ignore income inequality.It will remain whether we like or not.Instead it should boost low end income.This will improve quality of life. Best way is to drastically cut population growth rate.Sorry but I am not the right person to comment on Pakistan.

Abdul Latif Mari Mar 15, 2017 12:32am

To sum up the article:

PwC report is based on false assumptions in total disregard to challenges faced by Pakistan. The country can attain economic growth without achieving development as it also includes human development.

Two major aspects will hinder what PwC estimated for Pakistan.

  1. Youth bulge
  2. Rich-poor divide

Youth bulge is the major driver of growth in the world. But in Pakistan it can turn into an obstacle due to economic incapacity to absorb it in job market. History also proves that we have failed to reap demographic dividends.

Second, rich-poor gap will continue to widen in the foreseeable future, which itself is a bottleneck for economic growth.

Based on these assumptions, one must be cautious to approve the report as a certification to the economic managers.

MEDUSA Mar 15, 2017 07:07am

A country which Pakistan should look to and where the following is paramount: socio-economic growth not limited to one province - it should be nationwide leading to world -class educational standards, affordable healthcare for all, widespread updated infrastructure and modern transportation (benefiting the majority), clean drinking water, affordable power grid systems which work 24/7 and pollution-free cities.

That nation is Singapore which comprises all of the above and more. It's an amazingly efficient government which Pakistan should look to. Imran Khan has admired Singapore as the ideal nation for Pakistan to emulate. Singapore has been largely successful due to strict governance and almost zero corruption at the government and private level. Instead of spending vast amounts of money on defense, it spends on education and on its people. If Pakistan's leaders would refrain from robbing the nation and its people, Pakistan could very well become another Singapore.

Alba Mar 15, 2017 10:09pm

"That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. "