Pakistan's economy is expected to stabilise. Is growth next?

The government's focus must shift towards productivity-improving reforms.

Updated 28 Sep, 2019 09:15am

By now almost everyone acknowledges that the consumption-driven growth model that Pakistan has come to rely on to achieve high growth rates is unsustainable. Most commentators also agree that Pakistan must shift towards exports as the key driver of growth.

This narrative has given significant room to the present Pakistan Tehreek-i-Insaf government to implement necessary stabilisation measures aimed at containing consumption while, at the same time, providing incentives to export industries.

However, these and similar policy proposals by most commentators (including me) seem to have given rise to a fallacy that implementing stabilisation policies alone to address macroeconomic imbalances will somehow give rise to high growth path that does not lead to the International Monetary Fund. This is incorrect.

Stabilisation policies — which include fiscal and monetary policies — remain what they are: they stabilise the economy around its underlying productivity growth rate. Another way to view it is that, every time the real gross domestic product grows by more than the underlying productivity growth rate, macroeconomic imbalances start to emerge, requiring policymakers to respond with stabilisation policies.

Related: So, what comes after the IMF?

Appreciating this alone can help policymakers reorient their focus away from macroeconomic stabilisation as the ultimate policy objective towards improving the productivity of the economy. The need for this shift cannot be overemphasised. As Paul Krugman — a Noble Laureate economist — puts it, “productivity isn’t everything, but in the long run it is almost everything.”

Appreciating the importance of improving productivity will help break through another related fallacy often pointed out by economists: that the government has its hands tied with reference to implementing growth-friendly policies when under an IMF programme.

A cursory look at data presents a depressing outlook demanding immediate policy response. Every time the growth rate exceeds 4 per cent for few years, macroeconomic imbalances start emerging. For example, between fiscal years 2014 and 2018, the real GDP grew at more than 4pc. However, the current account worsened from -1.49pc of the GDP to -6.14pc.

The growth episode during 2000s also presents a similar picture. While the economy grew at more than 5pc between FY04 and FY08, the current account deficit worsened from -0.8pc to -9.2pc of the GDP. Both these episodes culminated in large fiscal deficits primarily due to rising debt servicing costs and governments’ desire to delay undertaking necessary adjustments.

This leads to an obvious conclusion that any attempt to raise GDP growth rate beyond 4-5pc must come from increasing the productivity of the economy rather than from implementing expansionary fiscal and monetary policies.

Read next: Three things Asad Umar failed at that cost him his job

The importance of shifting our focus towards improving productivity can be further appreciated by acknowledging the critical role it plays in a country’s export performance. In a 2002 paper published in the Journal of International Economics, researchers use data on Spanish manufacturing firms to show that it is essentially the more productive firms that are more likely to enter the export market.

In a 2005 paper published in the Review of World Economics, researchers at the Bocconi University and the Centre for European Economic Research found similar results for German manufacturing firms. A 2008 paper published in the American Economic Review shows the same for Taiwanese electronics producers.

The precise factors determining the productivity of an economy have been a subject of much debate that continues to remain unresolved. But what can be said with relative certainty is that productivity growth rate depends on how effectively a country’s economic resources can come together for production purposes.

To be sure, policymakers must not restrict their attention to the quality of resources alone. Instead, and as emphasised by Robert Solow (another Nobel Laureate economist), social norms and institutions can also be important enabling or limiting factors in a country’s pursuit towards improving its productivity.

Also read: Are insecure property rights holding back Pakistan’s economy?

Considering this, any policy that facilitates interaction between a country’s resources — land, labour and capital — or improves the quality of such resources will contribute towards raising the productivity of the economy.

In many cases, a plethora of archaic and poorly researched rules and regulations present key hurdle in coming together of economic resources. In other cases, the lack of adequate laws is what is hindering development of markets.

Similarly, addressing critical infrastructure and diplomatic bottlenecks with the aim to develop trade linkages with regional Central and South Asian economies can go a long way in improving the productive potential of the economy. Reforming technical and vocational training programmes is another area which has not received necessary attention.

Now that the government has already put in place most stabilisation measures, the focus must shift towards productivity-improving reforms. The economy is expected to start stabilising in a year’s time. However, all this means is growing at a meagre rate of around 4pc.

If the government does not initiate these reforms now, political considerations closer to election will once again force the government to rely on expansionary macroeconomic policies to fulfil pre-election promises. This will be a disaster or a repeat thereof.

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Ahmed Jamal Pirzada has a PhD in Economics. He currently teaches at the University of Bristol and is a visiting fellow at the SDPI.

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

Comments (37) Closed

Sep 26, 2019 03:51pm
Very good analysis ...
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Sep 26, 2019 04:42pm
A great Article. Specially the relation between GDP growth and Current Account Deficit was very useful. This factor is usually ignored by most economists. On the flip side you should have given examples of how Pakistan as a country can improve it;s productivity.
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Syed A. Mateen
Sep 26, 2019 04:54pm
I have serious doubts that during next four years Pakistan's economy is going to grow which was projected by PTI government. I have my own reasons to believe and it is not necessary for every one to also agree with me. The picture of economy portrayed prior to last general elections was totally based purely on assumptions and not by doing concrete home work and as soon as PTI government took over whatever the economic growth was left started falling down abruptly. Growth of economy needs to basic parameters. One is political stability and other one is economical stability. Unfortunately, both of them can't be seen or even heard after drastic measures were taken by PTI government through FBR. The on going cases against political prisioners have also terrified from industrialists to a common man and nobody is interested to spend a single rupee as an investment. The inflation is on its peak and people are just passing the time with high hopes that good time will come back once again.
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Osman Karim Khara
Sep 26, 2019 05:11pm
Population will overwhelm economic growth.
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Jehanzeb Ahmad
Sep 26, 2019 05:21pm
Excellent article that accurately reflects the problem with our economy. Even our labor is much less productive than most other countries. The land is very very expensive and its impossible for a small investor to buy land to build a factory. Capital is available 20% interest rate. Under these conditions how do you increase productivity.
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Coming Up
Sep 26, 2019 05:51pm
You have to produce something first to export that next. What exactly does Pakistan produce? Cotton, Wheat and Sugarcane, that too produced with primitive methods are not exactly exportable.
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Sep 26, 2019 06:07pm
True the stock market says it all !!!!
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Malik Saab
Sep 26, 2019 06:49pm
So many economists are coming forward with their expert opinions now a days. What they are forgetting that our economy was on the right track when it was destabilized in a calculated manner. Our Forex reserves reached 20 Billion US Dollars. Our stock market was the best performing in the region. Our economic growth crossed 5% stable growth. The business confidence was all time high 2-3 years ago. But the ego of the most powerful has destroyed our country and will continue to do so. Stability can never be achieved in this country, where the decisions are made in some drawing rooms.
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Sep 26, 2019 06:51pm
Thank you sir, for your guidance.
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Sep 26, 2019 07:11pm
Next, 20 percent growth.
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Sep 26, 2019 07:24pm
In your schools teach kids to draw, research, discover, innovate and think not memorise. Value, mathematics, science, innovation and creativity and you will generate a good workforce for these companies. Have schools with metal work and wood work machines and tools and science labs with good teachers.
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Sep 26, 2019 07:25pm
Since people from Mirpur and the area around Mangla Dam work in every profession in the UK and lead global companies around the world, this area will become the most developed area in the world within 5 years if you let them. Have no taxes and no duties for 30 years and have just one government office they need to deal with, one stop shop business friendly government where everything could be done on line in minutes. Sack the existing bureaucrats like the taseel dars and the patwaris. Additionally encourage off shore banks to locate there, because it will be tax free. Since there is Mangla Dam there, there will be enough electricity and therefore encourge IT and Software companies, call centres and online companies to set up their servers there and therefore work tax free. This will bring in foreign currency and generate employment.
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Sep 26, 2019 07:34pm
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Sep 26, 2019 07:41pm
Awesome new. I m glad, someone sane, put the solution in place instead of rhetoric of bad economy alone. Thanks for explaining a layman terms.
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Junaid Imran Mahmood
Sep 26, 2019 07:42pm
IK is dng an amazing job. They have thrown the kitchen sink at him. But hes still on track. Pay of the IMF loans, open up the economy with a free floating currency and follow all IMF directives. Once done and corruption and money laundering ends CPEC will kick in.
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Bitter Truth
Sep 26, 2019 07:44pm
Didn’t agree at all with the contents of this article!!! If the author thinks that more 4 million people loosing jobs in just one year ( in organised and unorganised sectors) means stabilisation of economy. If the thinks masses sleeping hungry could wait for IMF laden growth era then i would suggest ( with all due respect ) to try to sleep hungry for just two days
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Sep 26, 2019 09:35pm
Very well written article.
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Sep 26, 2019 09:35pm
It's only assumed that Pakistan has products that are needed elsewhere for exports. Since, there isn't any great manufacturing available in Pakistan, so from where these products or services will come about, that is left for the imagination. Flight of fancy on what should be done isn't needed at all, hard facts must be presented.
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Sep 26, 2019 09:59pm
Pakistan is growing at an accelerated pace. With natural resources on the edge of being extracted it is only a nick of time that will make us a whole new country. However the only drawbacks are from the previous leaders blunders and inadequate policies who looted the country and filled their pockets.
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Sep 26, 2019 11:12pm
Well written. The basic fundamental of economy depends upon productivity. However, political parties, inflate their growth by taking debt and miscalculate the wrath of debt cycle. I have not seen any article nor program which touched this topic, however, people loosely talked about this topic, in shape of increasing exports. We are still using outdated technology, unskilled labour and higher interest rates are the main deterrents of growth. Govt should invest in vocational training and include such training as part of the education. It is a long journey but surely, if we continue to work rationally, we will eventually come out of this mess.
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Ravi Kini
Sep 26, 2019 11:22pm
Wishful thinking... All the best...
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Sep 26, 2019 11:57pm
Increasing productivity requires good governance but good governance doesn't pay the government's bills. The government finances itself via foreign bailouts and import duties. So it is always looking to borrow more money from foreigners to keep the rupee overvalued and imports affordable so that it can collect the maximum amount in import duties.
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S. Nasheed Ahmed
Sep 27, 2019 12:25am
Reality check : GDP growth is likely to be around 2% in the current year. GDP growth rate was around 5-8% in 2004-2007 without CPEC or IMF support. If current account deficit has increased, subsequent governments should have addressed this issue through innovative means without slowing down the economy. What you now term as stabilization could turn out into stagflation. With zero confidence in both the foreign & local investors, and high interest rates, how do you expect to enter into the growth phase next year ? Good governance is a prerequisite & we see no signs of this so far.
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Sep 27, 2019 04:30am
Far from reality...
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Rao saheb
Sep 27, 2019 06:16am
its a day dream..building castle on the sky...
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Sep 27, 2019 07:55am
Excellent, in-depth and conclusive.
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Ali Hashim
Sep 27, 2019 08:05am
Very well written Ahmed Bhai. Finally read something that talks about productivity of Pakistan's economy and not just monetary and fiscal policies. The aforemntioned policies are just tools to allow the economy function in a smooth manner, while the underlying productivity is all that matters. It is common sense, the more we produce the more we can afford to consume without borrowing heavily and eventually ending up on IMF doore.
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Sep 27, 2019 10:10am
One who has inclination towards knee jerk reactions is not good for economy. Civilian Govt should manage economy, that also brings confidence in investors. Be bold and say it loud what is wrong in Pakistan. IK said we work together not that his govt/he directs what to do.
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kamran ali
Sep 27, 2019 10:10am
best one sir , you analysed about how to create system to increase productivity .. you also, hit the nail on the head that with coming to near the election the ruling party rightly rely on expansiory macroeco.. policies to fulfill th pre election promises .. this tactics used by the previous govt with very cleverness ,.
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Saif Zulfiqar
Sep 27, 2019 12:05pm
The economy of Pakistan is on the road to stabilise. We have qualified economists, honest and hard working government officers and the PTI. We just to have some patient and trust in the government.
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Muskaan Asif
Sep 27, 2019 12:20pm
This was such a well explain and well linked article covered with so many knowledgeable points not like many others. I even linked it in my school paper and got extra credit for it. I’m really looking forward to any further articles you publish analysing Pakistan’s Economy.
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Sep 27, 2019 04:46pm
Is this for real?
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Sep 27, 2019 07:46pm
Hopefully Pakistan's economy grows, so that people can get back to their lives. Focusing only on Kashmir is causing massive damage to Pakistan's future.
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Tahir Shah
Sep 27, 2019 11:15pm
Growth and economic stability are different from each other. The growth target can be achieved at the expense of high CA deficit following by high inflation. The CAs deficits are embraced in years 2004-8 and 2014-18 for high growth. Besides no specialization in economic policies, PM sb has repeatedly mentioned that the policies are stabilization based rather than growth based. Trade coverage is very important and solid steps should be taken.
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Sep 28, 2019 11:12am
If country's leadership fails in identifying its internal problem, whatever may be rhetoric language used in public, may not suffice to lead the country out of economic crisis.
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Sep 29, 2019 02:02am
With soaring inflation, loan returns above growth and macroeconomic status in subdue, please don't write such eyewash. Need realistic change. need an economist at helm not an ex cricketer who is not interested in growth and rather spends all time on external affairs
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Sep 29, 2019 09:05am
Yeas after the UN speech it started booming at a tremendous high...
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