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An emerging market?

January 21, 2012

A RECENT Global Research Report by HSBC Bank noted that 19 of the top 30 economies in 2050 will be countries that are “emerging”. It is “not just the likes of China and India that will be powering global growth over the next four decades.

Countries as varied as Nigeria, Peru and the Philippines will also be playing a significant part”.

The study projected Pakistan as the 30th among 100 economies in 2050, in the ‘growth’, but not ‘fast growth’, list. It observed that Pakistan makes it into the top league, less because of individual prosperity, than because of population size.

To some extent, this is true of all populous countries — China, India, Indonesia, Brazil — among them. However, these large countries have been growing at seven to 11 per cent annually in recent years while Pakistan’s GDP growth has hovered around four per cent.

With its population growing at 2.5 per cent, and given the gross inequality in income growth, the ranks of the poor has increased from 20 to over 30 per cent of the population. Poverty will continue to enlarge unless economic growth accelerates and the benefits of growth are more evenly shared.

Over the past 60 years, several countries have registered very high growth rates, multiplied GDP and per capita incomes and broken the shackles of poverty. These include Japan, South Korea, Taiwan, Singapore and, most recently and prominently, China. Is Pakistan capable of such growth? What are the preconditions, policies and actions required to achieve this?

Empirically, there are a number of preconditions that are essential for dynamic economic expansion: good governance, reasonable security and clarity and consistency of economic policies. These preconditions do not exist in Pakistan today; obviously their realisation must be the highest priority for the growth-oriented government Pakistanis hope to instal in the near future.

These conditions are necessary but not sufficient for dynamic growth. The economic factors responsible for growth are both common and different for each country.

The availability of capital, usable natural and/or human resources, and consumers, domestic or foreign, are the common factors that generate economic growth. But national strategies differ according to endowment and opportunity. China has relied on building a manufacturing base initially for export markets, India has focused more on the domestic consumers and the services sector, and Brazil and Indonesia have concentrated on natural resources.

To double per capita income within a decade, Pakistan’s economy will need to grow at nine to 10 per cent annually. It cannot achieve these growth rates without massive investment — domestic and foreign. Unfortunately, investment has been stagnant for the past several years and is declining at present. A conscious and concerted effort is required to generate investment in the Pakistan economy from all possible sources.

The most important sources are the national development budget, foreign direct and portfolio investment, exploitation of natural resources, export earnings, expatriates’ ‘home’ remittances and official investment and transfers from friendly countries and international institutions. Mobilising investment from each of these sources confronts specific challenges.

For several years now, the national development budget has provided no significant input for the country’s growth or socio-economic development. It has been diverted for current consumption and political patronage. Unless national revenues are augmented through tax reform, the restructuring of public-sector enterprises and an end to leakage and misuse of national money due to corruption and incompetence, the federal and provincial governments will remain unable to contribute to growth or to creating the foundations for economic dynamism in the country. Indeed, in many ways, the government has become an impediment to Pakistan’s growth. The current energy crisis is a case in point.

Foreign direct investment has ground to a halt; inflows in the last quarter were the lowest in recent history, no doubt due to the current political uncertainty and security concerns. Yet, Pakistan’s laws and regulations are vastly more ‘friendly’ to foreign investment. And foreign corporations have recorded significant profits in Pakistan (and are among the largest taxpayers).

There are several sectors where domestic and foreign investment would be highly profitable: energy (hydro, coal, gas, wind, solar), transportation, housing, telecommunications, health and education, agriculture and food processing, electronics and light and heavy machinery.

Portfolio investment can be an important input to growth specially for private-sector companies. But Pakistan’s public equity market is ‘thin’ and subject to manipulation. Like several other countries, Pakistan also needs to build barriers against the volatility of capital flows into the market.

Similarly, home remittances are at best an auxiliary source of productive investment. The higher than expected expatriate inflows last year prevented a foreign exchange crisis; but the levels may decline. Moreover, since the inflows are ‘dedicated’, they cannot be utilised significantly for investment purposes.

Pakistan’s natural resources are a promising option. They lie under-explored and unexploited. Thar coal and Balochistan copper are two advertised examples. Pakistan is one of the least explored areas of the world for oil, gas and other resources.

There are authentic studies indicating that the minerals underground in western Pakistan could, for example, supply the requirements of China for copper and several other strategic minerals for 50 years.

Here again, it is the poverty of government budgets and the greed and ignorance of involved politicians and officials that have prevented the realisation of Pakistan’s potential.

Likewise, Pakistan’s export potential is grossly underutilised. Apart from exploiting and exporting natural resources and other commodities, Pakistan has considerable potential to enlarge the volume and value-addition of exports in agriculture, food products, textiles, electronics, engineering goods, heavy and light machinery as well as IT, banking and other services.

With focused investment inputs and adequate government support, Pakistan can multiply its export earnings tenfold within a decade to reach ‘parity’ with countries of similar size and endowment, for example, Mexico.

Finally, in the pursuit of rapid growth, Pakistan enjoys advantages in its external relations unavailable to other ‘emerging’ economies — a strategic relationship with China, besides traditional aid and trade relations with the US and Europe. The latter will remain important for Pakistan’s growth, notwithstanding the slowdown in their economies and the current crisis in Pakistan-US relations.

Yet, a large part of Pakistan’s growth can be best achieved through a close partnership with China. Beijing is already making a vital contribution in the shape of the numerous infrastructure and other projects which Chinese companies are executing and, in many cases, financing. However, it would be even more productive to secure investment in Pakistani venture from China’s state and private enterprises. Such Chinese investment is taking place all over the world, even in far-flung countries in Africa and Latin America. India too has secured Chinese investment.

So far, Chinese private-sector investment has taken place in cellphones and the acquisition of British Petroleum oil assets. But there are as yet no major investments or joint ventures with major state enterprises. Such collaboration with Chinese companies can enhance production and exports inter alia by integrating Pakistani companies into the global production chain of Chinese enterprises.

In short, Pakistan is eminently capable of not only becoming one of the ‘emerging markets’. It can also be one of the fastest-growing economies in the coming decades.

The writer is a former Pakistan ambassador to the UN.