Abandoning economic growth for stabilisation is a poor choice. Unfortunately, it has been the choice in Pakistan. Historically, economic policy of the country has been vigorously pursuing stabilisation at the cost of economic growth. The focus has been limited to deficit management.
In the most recent episode, the current account surplus has been made a sign of success by ignoring that it has come at a very serious cost: economic growth dropped below the population growth rate of 2.0 percent even before Covid-19.
This fixation with stabilisation has a background. High economic growth brings macro-economic crisis in Pakistan by its very structure. Total or final consumption constituted 94.8 percent and 91.6 percent of GDP FY2018-19 and FY2019-20 respectively, increasing from 82 percent in FY2003-04. The share for India and Bangladesh in 2018-19 was around 71percent and 75 percent, respectively. Importantly, around 82 percent of this comes from household consumption.
Further, industry added 28.85 percent and 28.77 percent share to the total GDP of India and Bangladesh, respectively, in 2018-19, compared to 19.36 percent for Pakistan. A similar situation exists for exports’ share in GDP. Finally, the services sector contributes more than 50 percent to the GDP of Pakistan. But the sector has low productivity as the country passed from the agriculture sector to services sector without consolidating the manufacturing sector.
Policies to fuel household consumption and facilitate importers to support a higher growth, such as exchange rate overvaluation became the need of the hour. This not only led to higher trade deficits but also adversely affected capital account. Roughly, Pakistan has had a macroeconomic crisis every time the GDP growth rate has surpassed 5 percent. This has made economic growth look evil.
Further, the opportunity cost of not having growth was relatively low. Given its nature and composition, higher growth rate has done little to lower poverty. They were weakly associated with creating employment opportunities in the right quantity and quality. Particularly, higher growth failed to produce jobs for middle and high skills. Therefore, political constituency for economic growth did not develop and stabilisation league thrived.
Because of crisis associated with higher economic growth and low political demand for it, stabilisation occupied the centre stage in economic policy and deficit management emerged as the criterion of success. Tools able to discourage imports to manage deficits and attract protfilio investments to build reserves in order to sustain pressure on rupee emerged as macro-prudent policy.
While stabilisation is not bad per se, stabilisation at persistently low growth is definitely bad. Economic growth above a minimum threshold is a fundamental prerequisite to create employment, reduce poverty and transit towards a higher level of economic development. Persistent low economic growth in countries like Pakistan, which have a high population growth, costs economic development through multiple channels.
Pakistan’s population grew at 2.40 percent per year between 1998 and 2017. For a population of over 220 million, this is an addition of about 5.28 million people each year. Low economic growth, which already has low job elasticity in this context means being unable to meet the number of jobs required to provide employment to the ever-increasing labour force.
This, in turn, may compromise the efforts for poverty alleviation. There is much liking in Pakistan for the Chinese model of poverty reduction. One needs to remember that the Chinese miracle became possible only because of 30 years of explosive growth (averaging around 10 percent). In 2019, growth in Chinese economy totaled $22.5 trillion despite being the largest in the world, that’s roughly 8 percent more than in 2018.
Assuming that there is no change on labour force participation and population growth rate, Pakistan needs a GDP growth rate of 7 percent in order to retain the employment level of 2018. In order to absorb the two million new entrants into the labour market every year, the country needs a growth rate of 10 percent. Improved job elasticity may get the required rate down to 7 percent which to me is what Pakistan needs to grow at on a sustained basis in order to reach a higher level of development.
Finally, a sustained increase in household consumption and savings is not possible without a growing economy, particularly in the absence of household financing market. The two, in turn, fuel the economic activity through increased aggregate demand and investment at the macro level and investment in human capital – health and education – at the household level.
The preceding discussion begs two questions: how to achieve a sustained 7 percent GDP growth rate and how to ensure that it is good growth? In other words, how to have sustainable and inclusive economic growth at a high rate? While there is no straight forward answer, evidence suggests some basic building blocks for it.
Because of the crisis associated with higher economic growth and lower political demand for it, stabilisation occupied the centre stage in economic policy and deficit management emerged as the criterion of success.
First and foremost, economic policy needs to shift its focus to creating employment opportunities, attracting efficiency, seeking FDI and promoting exports. This is not possible without shifting from stabilization-centred (macro prudent) economic policy to a growth centric one. Both have competing objectives and policy tools.
The recent rise of Bangladesh shows that growth coming from the industrial sector, financed by investment and exports, producing jobs and encouraging female labour force participation can be sustained over long periods. It is associated with improved income and consequently household consumption, saving and private investment. It brings stabilisation with it.
Attracting efficiency seeking FDI and promoting exports require investment in people and growth centric prudent macro-economic policy. A growth centric policy acts to provide an environment which attracts efficiency, seeking FDI, bringing technological spillovers, adding to productivity and creating demand for middle and higher skills.
In contrast, policy for stabilisation is okay with attracting portfolio investment by offering lucrative returns in the form of high policy rate which actually discourages investment. Similarly, a growth-centric prudent policy promotes a fair exchange rate to attract FDI and access international trade market instead of overvaluation.
Second, priority must be given to economic inclusion of the people and businesses, particularly micro, small and medium enterprises (MSMEs). Steps must be taken to create demand for economic inclusion. In this regard, we need go beyond awareness and advocacy programmes and work to increase household income.
According to a study, 66.3 percent respondents from Pakistan reported low income as primary reason to not having a bank account. Further, digitalisation can help promote economic inclusion. The SBP and commercial banks need to partner with the private sector to promote economic inclusion of the masses and businesses, particularly MSMEs.
Third, focus on industries having a higher capacity to produce jobs. These industries must be supported to achieve economies of scale through work regulation and targeted economic policy interventions. The scale and duration of supportive policies must be linked with the performance of the beneficiaries. This is the key to developing resilient and competitive industries. This model not only provides a sustainable basis for economic progress but also lays out foundations for social inclusion through improved job opportunities and household incomes. Conversely, it reduces the socio-economic inequalities and poverty.
Fourth, population growth needs to be brought under control. Improving the female labour force participation can be the key as it increase the opportunity cost of having an additional child.
Take the example of Bangladesh. Economic growth boom started after 2006. It was the time when the country achieved and sustained an annual population growth rate of 1.1percent, compared to Pakistan’s 2.2 percent. Leaving the gains aside, the per capita income in Bangladesh grew faster than Pakistan’s by approximately 3.3 percentage points per year. It affects consumption, saving and domestic investment patterns.
Policy tinkerers in Pakistan must understand that a sustained improvement in the living standard is not possible with the current levels of economic growth. While economic policy must not be fixated with the GDP, it must not abandon economic growth to achieve the so-called stabilisation.
Stabilisation at low growth has been achieved and lost many times already. A stabilisation that costs the masses unemployment and poverty is unsustainable. It dies down before giving any gains. Good growth therefore must be ensured and promoted. In the words of Britain’s business lobby group, the CBI, it must aim “growth for everyone”.
The pandemic calls for and provides an opportunity for Pakistan to take a new approach to growth where economic growth and well-being go hand in hand. This will require: i) continuity and expansion of fiscal stimulus, ii) shifting the policy focus from stabilisation to growth, iii) building strong economic foundations for growth through monetary, fiscal and other regulatory policies, iv) creating a conducive environment for economic growth which is inclusive and produces employment opportunities and, v) investing in people.