The endogenous growth theory (EGT), which emerged in the 1980s, offers a fresh perspective on how internal factors and forces drive long-run economic growth.
EGT argues that a persistent rate of prosperity is driven by an internal process such as human capital, innovation and investment capital rather than uncontrollable external forces. Challenging the neoclassical economic theory, it maintains that human capital is a critical determinant in the growth process. EGT ties productivity directly to faster innovation and investment capital from the government and private sector institutions.
The EGT is under the spotlight in Pakistan. Pakistan’s long-run economic growth is declining due to both low productivity and low investment, demonstrating a very dangerous trend, says the Pakistan Institute of Development Economics (Pide) Vice-Chancellor Nadeemul Haque.
Experts estimate that the country needs a 7-9pc annual economic growth rate for the next 30 years to create 2m jobs per annum and reduce the unsustainable public debt
Addressing the launching ceremony of the Pide agenda for “Reforms for accelerated prosperity and inclusive development” (RAPID), Mr Haque said: “We are fixated with macroeconomic stabilisation and the IMF programmes are by definition recessionary.” The event was chaired by Federal Minister for Planning and Development Asad Umar. The RAPID report stresses that ‘there is a need to shift from brick and mortar growth to endogenous growth.’ And Deputy Chairman of the Planning Commission Jahanzeb Khan told the audience that the assumption that economic growth is averse to stabilisation needs to be examined.
Pide experts estimate that the country needs a seven to nine per cent annual economic growth rate for the next 30 years to create two million jobs per annum and reduce the unsustainable public debt. And the solution to the perpetual balance of payments, fiscal and debt issues lies in sustained growth acceleration.
RAPID envisages that our growth policy must, on an urgent basis, catalyse private investment so that our investment GDP ratios go up well beyond 20pc from the current 15pc.
The RAPID recommends that the government’s footprint, which controls up to 80pc of the economy, be reduced to spur economic activities. While putting the government at the centre of economic development, the strategy paper notes that the biggest risk is the government’s ability to deliver its complex agenda which requires a lot of detailing through continuous research. That is why the government reforms should come early.
Pakistan needs to bring a radical shift in the functioning of the state and redefine the government’s role as a facilitator for a long-run high growth rate. Senior Pide researcher Idrees Khawaja elaborates: “All laws, rules and procedures need to be amended to allow economic activity to take place at a brisk pace. The entire public sector service including civil service, judiciary, regulatory bodies, local governments, etc must be reformed to serve as enablers of the economy.”
The policy implication should emanate from research entrusted to the country’s universities that would be grounded in local ground realities and help universities produce youth who fit well in this tech-driven age. Thus RAPID sees new software of society becoming a harbinger of high and sustained growth.
Since EGT’s debut, the role of human capital and innovation has gained currency in international economic and political discourse. The role of internal forces and factors as a whole in forging long-term growth, however, is seldom highlighted. Nevertheless, the space for freedom of operation of internal forces is being widened by the return of protectionism in many countries and persisting external sector problems of countries, worsened by the US economic sanctions against some nations. For example, Pakistan cannot expand its trade and economic ties with Iran because of American sanctions.
James Morley, an eminent Australian economist, addressing the World Economic Forum on the ‘Future of Economic Progress’ in 2015 regarding the endogenous growth strategy, said: “The problem is that physical capital explains only one-third of the variations in incomes per capita across countries and the other two-thirds are explained by a more nebulous concept that economists refer to as total factor productivity.” Worse yet, he pointed out, capital accumulation is subject to diminishing returns.
According to the United Nations Development Programme’s Pakistan’s National Human Development Report, the total benefits and privileges enjoyed by its corporates including banks, followed by feudal class and then rich individuals, amounted to Rs2.66trillion or 7pc of the country’s GDP.
On the other hand, the public sector performance in increasing productivity is quite puzzling. Not only financial allocation for development expenditure is falling, but the utilisation of earmarked funds is also a major problem. The Economic Advisory Council members have expressed serious concern over the slow progress in the execution of the Public Sector Development Programme (PSDP). While the PTI government has entrusted relevant ministries to manage development spending, Council members noted that ‘ministries appear to have no spending capacity.’
For seeking out-of-the-box solutions for accelerating growth the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) is also trying to scale up its research activities. It has decided to set up a Policy and Research Board headed by former federal secretary Mohammad Younus Dagha. The board would provide expert input for policy advice and advocacy, formulate the business community’s inputs in international trade, tariff and taxation policies, ease of doing business initiatives, macroeconomic issues, regulatory laws and access to finance.
Published in Dawn, The Business and Finance Weekly, May 3rd, 2021