WHILE GDP growth has risen strongly and government finances have improved, major economic concerns remain in the form of inadequate social sector spending, widespread poverty and slack movement on trade diversification. Which problems need most urgently to be addressed and what is the way forward?

Dawn’s Naween A. Mangi spoke from New York with Teresita Schaffer, director of the South Asia programme at the Centre for Strategic and International Studies, a Washington D.C. think tank to get her views on Pakistan’s economy.

AN industrial recovery, impressive growth statistics and improvements in business confidence have given Pakistan’s economy a whole new look in the last few years. But beneath the surface, worries persist about narrowly concentrated exports, slow growth in foreign investment and insufficient increases in social sector spending. Much of this, economic experts say, is a drag from a troublesome past.

“Pakistan has gone through a very difficult ten years with very low growth in income, very fast growth in population and very low investment,” Teresita Schaffer told Dawn in an interview from her Washington D.C. office.

“That’s why it has a lot of lost time to make up for.” Schaffer, a 30-year veteran of the U.S. foreign who acted as a principal expert on South Asia at the State Department was also the former ambassador to Sri Lanka.

She speaks ten languages, including Urdu, Sinhala and Bangla and has written extensively on economic, political and security issues relating to the region in the scholarly and popular media.

Schaffer says her research over the years has focused on two major aspects of Pakistan’s economy: private, local investment and the government’s investments in its people. “On the first issue, things are really turning around,” she says. “Investment as a share of GNP is still low compared to fast-growing developing countries but it has picked up. And now when I visit Pakistan, it’s not just the finance minister and Prime Minister who say investment is rising. There are actual business people who tell us they are investing.”

However, when it comes to social investments in health and education, Schaffer describes the picture as more troublesome. “There are no major increases in spending on education and health and this is so important because there has been a deficit in that area for so long,” she says. In a world where the skill of the labour force will matter more and more, Pakistan is falling behind.”

She recommends the government assess countries in the same income range which are at the high end of spending on education and health and then aim to reach those levels. “Pakistan is very low on spending as a percentage of GDP so what you need is a range of policy changes to make sure the money gets spent,” she says.

Her view is that Madrassah reform, especially with U.S. involvement, is unlikely to yield results in part since the education ministry does not have the administrative horsepower to pull off the effort. Instead, she prefers a combination of building up the government-funded school system along with promoting NGO-funded schools.

“Pakistan can consider other countries like Indonesia and Bangladesh which have done successful experiments to get more people in school,” she says. “And closer to home, there may be lessons to be learned from the army. The army should not take over the school system but it can be studied since every child does go to school.”

Agriculture and poverty: On the issue of poverty, Schaffer says the availability of good agricultural land is the reason why poverty is not worse than it is. But even so, poverty has been on the rise and needs to be addressed through the agriculture sector.

“It is partly a question of time [to see the economic benefits filter down to rural areas] but it is also important to look at how economic policy is being implemented to make sure the benefits are available to the largest part of the population,” she says.

“The government’s focus on industrial investment is good and important but creating ever more factories in the ring around Karachi doesn’t solve rural unemployment. In rural Pakistan, most people make a living in agriculture, so for job creation we need higher value agriculture processing or investments closer to the villages where it’s needed.”

She also says the current government has not done particularly well in dealing with the differences among the provinces. Punjab as the long-time most dominant province and the area around Karachi as the dominant part of the economy have resulted in rural Sindh, Baluchistan and the Frontier being largely left out of prosperity.

“These are also the areas most affected by water problems, where human indicators at the worst, and where there are problems with land use and revenue from natural resources,” Schaffer says. “These things are important for the government to address not just for economic reasons but for political reasons as well.”

Privatization and investment: Schaffer says there has been movement on the privatization front where Pakistan has had an easier time than India. “The entities that have been scheduled for privatization would leave everyone better off once they’re in the private sector and well run,” she says. “But the risk for Pakistan is cronyism which I’m not saying has happened but could exist as a structural danger.”

Foreign investment, in Schaffer’s view, will be slow to grow and will remain dependent on keeping the ceasefire with India, the state of internal security, communal violence, attempts on the lives of senior government officials and operations on the Afghan border areas. “Investors tend to move slowly and these things kill investment prospects,” she says.

“[In the long-run], foreigners are not going to invest unless locals are doing so. And in the meantime, having foreigners build on privatization transactions is a real investment because it means foreign investors are willing to put funds at risk even if they are not creating new assets.”

The government’s plans to promote Pakistan’s “soft” image will yield few results without the right foundations. “Image building is 10 per cent packaging and 90 per cent substance,” Schaffer says. “And the Mukhtaran bibi case is an example of how everything is done as badly as it could be done. The Pakistan government missed a real opportunity to say this is not our idea of Pakistan.”

Foreign trade and export diversification: Export diversification remains a major trade concern for Pakistan. Schaffer says success in this area depends critically on identifying the right market which she recommends doing by getting business groups together and focusing on what is their unmet needs are which Pakistan can meet.

She is not optimistic that the textile trade regime will change to Pakistan’s benefit given the “extraordinary efficiency” of the U.S. textile lobby in Washington. “The real need therefore is for Pakistani entrepreneurs to build up new industries other than textile where there is not that much room for growth now,” she says.

However, she sees major prospects in trade with India. “There are political inhibitions but from an economic standpoint it is irrational to have Pakistan and India trade so limited,” she says. By some estimates indirect trade between the two countries that is routed via Dubai and Singapore amounts to $5 billion.

“The way to approach this is to look at areas where the two countries produce goods that are internationally competitive because both have brought their trade barriers down,” she says, adding that energy trade in terms of the pipeline and other forms such as combining electricity grids can be beneficial both economically and in terms of creating dependencies which generate a need to maintain peace.