Profile of the economy

THE Economic Survey released by the finance ministry on Sunday indicates the challenges that an economy on a high growth trajectory encounters and which, if unaddressed, may precipitate a downturn. The good news for the policymakers is that for the third consecutive year, the growth rate has been within the range of the targeted six to eight per cent. It is estimated at 6.6 per cent for 2005-2006 against the exceptional 8.6 per cent of last year. But the economy appears to be heating up with an inflation rate of eight per cent, creating risks for the stability of exchange and interest rates, and is also coming under pressure from a low savings rate and record trade and current account deficits — without good implications for the investors. With a few exceptions, the growth has somehow declined in most sectors, including segments of the service sector estimated to grow at 8.8 per cent this year. What casts doubt about the current year’s growth rate is the negative growth rate of 8.4 per cent in electricity and gas distribution against last year’s 3.5 per cent. But whatever the challenges, the economy is likely to maintain the high growth momentum in the short-term. The risks to growth is of a longer term nature, primarily because of structural imbalances, with the economy being susceptible to the boom and bust cycle, which the first generation of reforms has not been able to tackle.

The slowing down of the pace of expansion of the commodity-producing sector from 9.2 per cent to 4.3 per cent has reduced its share in GDP growth to one-third as against to two-thirds of the service sector. Although agriculture provides raw materials as well as market to the industry, its contribution to GDP is declining fast — it is about 22 per cent against 23.5 per cent last year. The output of major crops has fallen by 3.6 per cent which, combined with decline in cereal production, has brought last year’s 6.7 per cent growth in agriculture to 2.5 per cent this year. Livestock, which is largely family managed and in the informal sector, is said to have been “the sole saving grace.” The growth in manufacturing has plummeted from 12.6 to 8.6 per cent, indicating that the existing capacity is approaching its maximum utilisation point and new investments are still slow to come. Massive imports of a wide range of products ranging from foodstuff and other consumer items, industrial raw materials and capital goods, have brought the trade deficits down to record levels and indicate the unrealised potential of economic growth from import substitution and domestic production for which no effective policies have been adopted.

The targeted six to eight per cent growth rate cannot be sustained in view of a falling trend in both national and domestic rates of savings, marginally lower than last year’s and at 16.4 per cent and 14.4 per cent respectively now. A much higher rate of domestic savings is required to finance investments to achieve the targeted growth. No doubt, net foreign investments have picked up fast and are estimated at $3.3 billion for this year. But more than half of it has come from privatisation proceeds and portfolio investments and not from direct foreign investment. The low rate of domestic savings is increasing our dependence on foreign sources of money. Both the trade and services sector deficits are impacting adversely on the overall external sector while rising privatisation proceeds, foreign investments and debts are helping maintain a foreign exchange reserve of $13 billion. The buoyancy of the external sector which contributes 34 per cent of the GDP, is the outcome of a 43.4 per cent growth in imports and an 18 per cent rise in exports, resulting in a trade deficit of $8.6 billion in three quarters of the current fiscal year. It includes 35.6 per cent growth in food imports for which the shortfall in output as well as cartels are equally responsible.

In consumer-led economic growth, propelled by remittances and rise in incomes and bank lending, a rise in prices is inevitable. But it is a policy failure if the inflation rate continues to remain as high as eight per cent, though lower than 9.3 per cent of last year. Food prices have dropped from 12.8 per cent to 9.3 per cent but the low-income groups have not got relief as house rent, transport and energy costs have shot up. With the purchasing power of the consumers eroded by high prices, the official claim that people living below the poverty line have come down from 32.1 per cent in 2001 to 25.4 per cent in 2005 lacks credibility, more so because of the government’s reluctance to convert the Federal Bureau of Statistics into an autonomous body. It should, however, be conceded that three years of high economic growth, despite the weakening of the trickle-down effect and the absence of an income distribution policy, must have made some dent in poverty levels. But more needs to be done to reduce unemployment among the youth by doing away with the mismatch between the available trade skills and the needs of the growing economy. Much of the employment is in the informal sector which offers low-paid jobs. The slowdown in the growth of the labour-intensive construction industry from last year’s 18.6 to 9.2 per cent this year should be a source of some concern. In case of an economic downturn, the housing industry often helps the economy pick up. The stagnation in the growth of housing units is not a welcome trend. The growth in ownership of dwellings has remained static at 3.5 per cent. Even the growth in the service sector has come primarily from transport, storage and communications and from the public administration and defence.

The Economic Survey has highlighted the performance of the economy by picking up any two years at random for comparisons to indicate growth sustainability over the years. But comparisons do not seem to be valid after rebasing the national accounts recently after two decades of neglect, without the corresponding changes being made in the previous annual accounts. The size of the GDP has become much larger after rebasing the national accounts to make GDP ratios comparable with that of previous years. Similarly, the current economic performance cannot be compared with that of the 1990s which was a lost decade for most countries, something cyclical in nature. In Pakistan, the situation worsened by quick dismissals of political governments and economic sanctions imposed by the West, following the nuclear tests in May 1998. Economic sanctions are no longer there and 9/11 has brought windfalls. Helped by reforms, the economy has been stimulated by favourable exogenous shocks.

While the policymakers are bringing about a balance between the market and the role of the government by raising the Public Sector Development Programme for revamping social and physical infrastructure, the perils in this move cannot be ignored. With the PSDP at 4.8 per cent of the GDP and budget deficit rising to 4.2 per cent, an efficient delivery system is a must to avoid landing into a debt trap. The risks to sustained long-term economic growth are many, but the issues and problems are manageable at this point of time. The government needs to focus on growing economic imbalances to keep a buoyant economy robust.

Pakistan’s likely shape in 2020

THE hallmark of great nations is that they learn from their past experience to become wiser in conducting their current and future affairs. Another distinctive feature of such nations is that they try to understand the emerging long-term trends to identify new challenges, and plan for the future so as to take maximum advantage of the opportunities and avoid the pitfalls that may lie ahead.

On the other hand, the nations on the trajectory of decay and ultimate oblivion neither learn from the past nor have the inclination to look ahead into the future to plan for their security, progress and welfare.

Let us see how different studies view the world of 2020. The intention here is not to present a comprehensive summary of those studies, which in any case would be an impossible task in the brief space of this article, but to merely highlight some of the likely salient features of the world of 2020 and to draw policy conclusions for Pakistan.

There is a general consensus among political thinkers and economists that based on existing trends, China and India will emerge as the new major world powers by 2020. According to some studies, China by 2020 will have a population of 1.4 billion, the second largest GDP in dollar terms ($7 trillion dollars) after the US ($17 trillion) and the largest economy in purchasing power parity terms ($29.6 trillion), followed by the US ($28.8 trillion). Its demand for oil would be almost equal to that of the US and its defence expenditure would amount to $150 billion in 2020 assuming a medium rate of growth, as against $439 billion proposed by President Bush for the fiscal year 2007.

India will emerge as a rival of China on the Asian mainland by 2020 with a population of 1.3 trillion and the third largest GDP in the world in purchasing power parity terms ($13.3 trillion) as against its current fourth position.

Japan, which has the second largest economy in the world currently in dollar terms, will decline to the third position with a GDP of five trillion dollars by 2020. In purchasing power parity terms, its economy will go down from the third position currently to fourth position.

The process of globalisation marked by instantaneous communications, real time coverage by mass media, fast means of transportation, growing reach of multinational corporations, lowering of trade barriers, easy movement of capital across national borders, and the growing role of foreign direct investment and outsourcing will become irreversible.

Growth in the world economy will generate rapid increase in demand for energy. Despite the growing emphasis on renewable sources of energy, fossil fuels will continue to dominate the energy scene in 2020. Oil will meet approximately 40 per cent of the world energy needs in that year. The corresponding figures for natural gas, coal, nuclear and renewable sources of energy would be 24 per cent, 22.5 per cent, six per cent and eight per cent respectively, according to the report of the US National Intelligence Council’s 2020 project.

The world population will increase to 7.8 billion in 2020 according to the report mentioned above, with 56 per cent of the world population in Asia, 16 per cent in Africa, 13 per cent in North America, seven per cent in Eastern Europe and the former Soviet Union, five per cent in Western Europe, and three per cent in the Middle East.

The foregoing projections establish beyond any shadow of doubt that the world centre of gravity will definitely shift to Asia by 2020 which would have the two largest populous countries of the world, the first, the third and the fourth largest economies, the fast growing economies of South Korea and Asean, and the world’s largest reserves of oil and gas if one includes the Persian Gulf region, Central Asia and Siberia in Asia.

The US, militarily, economically and politically, will still remain by far the most powerful nation in 2020. But we would have a multipolar world with several centres of power including the US, China, Japan, the European Union, Russia, India, Brazil and Asean.

Within Asia, a new equilibrium will be established among the four giants, that is, China, India, Japan and Russia. It seems likely that China and Russia will continue to gravitate towards each other to counter the US tendency towards unilateralism and its military presence in Central Asia. This is clearly borne out by the Russo-Chinese summit communique and the Shanghai Cooperation Organisation declaration of 2005.

The US will be engaged more and more deeply in Asian affairs to protect its security and economic interests and to contain China, which will be viewed by the US as posing a challenge to its power and influence in Asia despite fast-growing US-China economic relations. The US declaration to help India become a major world power in the 21st century, its agreements of cooperation with India in the nuclear and defence fields, and the more recent US-Japanese agreement to streamline security ties between the two countries and enable Japan to play a more active role in security issues in the region and the world, need to be seen against the background of the growing US concern about the expansion of Chinese power and influence. India will take advantage of US concerns about China’s growing power, to build up its economic and military strength. However, it will retain its freedom of action by simultaneously boosting relations with Russia and China. It will be China’s effort to keep India engaged and to avoid taking any steps which would push India deeper into the lap of the US.

What will be the shape of Pakistan in 2020? There are two possible scenarios: one based on the continuation of past and present trends, on the painful assumption that we as a nation will fail to learn from the past and become wiser the other, and more optimistic, scenario assumes that we would draw appropriate lessons from the past, identify the emerging challenges and take advantage of the opportunities waiting to be exploited while avoiding the pitfalls in the way of our progress.

The former scenario would hold the prospect of a rather dark future for our country marked by repeated political crises and instability caused by the ineptitude of our politicians and the continued involvement of the army in politics. The long-term prospects of economic development will remain bleak because of low levels of national savings and investment, excessive military spending and the neglect of human resource development particularly education, science and technology.

The second and more optimistic scenario assumes that the nation has learnt from its past mistakes and has become wiser for dealing with future challenges. What the country needs is a national concord on political framework based on recognised democratic principles of the supremacy of representative institutions, the independence of the judiciary, and fair and transparent elections. The army must keep away from politics and concentrate on its professional duties. Only such a political framework by strengthening the various institutions of state and upholding the Constitution and the law can provide political stability to the country.

The government must adopt plans for the rapid economic development of the country so as to take the GDP growth rate to eight per cent or above per annum on a sustainable basis. After all, even India has been recording GDP growth rates of seven to eight per cent over the past several years. This would require, on the one hand, that we save and invest around 30 per cent of our GDP on a sustained basis, and, on the other, that we concentrate on human resource development by increasing sharply the allocation of resources to education, the sciences, technology and research. The proposed high rates of saving and investment, however, will not be possible unless our elite classes learn to lead simple lives and avoid conspicuous consumption. We will also have to exercise strict control over military expenditure. Further, it is imperative in the interest of social harmony and political stability that the benefits of economic growth are passed on to the common man rather than being restricted to the privileged few as is the case now.

We must also modify our diplomatic approach in dealing with foreign policy issues to lower the risk of armed conflicts as the Chinese did under Deng Xiaoping towards the end of the 1970s when they adopted development at home through reforms and peace abroad as their supreme national objectives. There are compelling strategic reasons in the likely shape of the world in 2020 for us to strengthen our relations and cooperation with China.

Our friendship with the US should be complemented by a coherent regional policy aimed at strengthening relations with Iran, Afghanistan, the Central Asian republics and Russia, and defusing tensions in relations with India. The need for the promotion of close ties with the Islamic countries particularly the countries in the Gulf region, the EU, Japan and other East Asian countries is too obvious to need any special justification.

In short, our destiny is in our hands. If we as a nation persist in our past practices which have caused political instability, prevented us from realising our full potential in the field of economic growth and development, weakened our institutions, subverted the constitution, lowered respect for law and merit, increased inequalities of income and wealth, and aggravated provincial disharmony, we would be heading for trouble. In that case, we will become a perennial problem state in the international community by 2020 or even earlier.

If, however, through conscious decisions taken within a democratic framework we are able to change course for the better as suggested above, a bright and prosperous future would await us leading to an honourable and dignified place for Pakistan internationally. It remains to be seen whether we have the ability to rise up to the occasion and seize the opportunity that is within our grasp.

The writer is a former ambassador.

E-mail: javid_husain@yahoo.com