AS Pakistan’s current elected government enters the fifth year in office and begins to prepare itself and the country for the next general election, it is legitimate to take a good look at the situation as it prevails today.

These are troubled times in Pakistan. The PPP, the party that leads the coalition government in Islamabad, has an on-going confrontation with the judiciary. This has unsettled politics and created considerable amount of uncertainty about the future.

While there is growing political turmoil, the economy is slipping. Unless arrested by resolute public policy action, the economy may be headed towards failure.

With the government’s attention turned in another direction, it has not spent much time and effort on addressing economic issues. Thus neglected, the state of the economy continues to deteriorate. Some of the problems the economy now faces will have serious and damaging long-term consequences. One example is in the area of energy supplies.

The serious shortages of electricity and natural gas are not only causing large economic losses and enormous discomfort to the people. They are also changing the structure of the economy.

There is now a significant amount of defensive investment by enterprises and entrepreneurs to protect their economic interests against energy shortages. The resort to secondary sources of power is an example of this development. Installation of generators by firms and households bring inefficiency to the economy. They also create serious environmental problems.

Gas shortages are turning poor households to the use of wood stoves. This has worsened the condition of the already seriously depleted forest resources.

The list of problems the country faces does not stop here. What is clear is that the failure of public policy is the main reason for the country’s economic woes.

Pakistan is now the sick man of South Asia. If the current trends continue, it will, after having being over taken by Bangladesh whose GDP growth rate is now twice as high as that of Pakistan, the country may well become the poorest in the sub-continent.

The budget presented on May 30 covering the 2012-13 financial year did not address the issue of the loss of growth momentum.
Nor did it promise the long over-due structural reforms needed to restore health to the economy.

In the absence of serious structural reforms, the faltering economy is not likely to regain balance. Country’s relations with the United States have reached their lowest point in history. This will put a serious pressure on external capital and financial inflows.

Pakistan could do better. It is not much different in terms of its endowments than the BRICs states.

What distinguishes the BRICs countries from the rest of the developing world is their size (population and GDP), their dominance in the region to which they belong, their recent rates of economic growth, and their economic potential
Pakistan meets three of these four criteria. It has now a large population, approaching 200 million, less than that of China, India, and Brazil, but more than that of Russia and South Africa. It is located in the region that has high growth potential.

Several countries in its neighbourhood have vast energy resources. Some such as Afghanistan have large mineral deposits that may well extend into the Pakistani province of Baluchistan and the northeastern parts of the tribal belt. Mineral deposits don’t at stop at national borders.

Pakistan could become the centre of cross-country commerce between India in the south, China in the east, the Middle East in the west and Afghanistan and the Central Asian “Stans” in the north. Its rich human resources should provide what the demographers call the “window of opportunity” that will remain open for a period longer than that for the five BRICS.

Its large diasporas located in several parts of the world and estimated at four per cent of the total population are the source of large amounts of capital flows coming into the country. Remittances, if they continued at their current level and even if they don’t increase at the impressive rates of last several months, will delay the day of reckoning. Other sources of finance have dried up and Pakistan no longer has the ability to pay for its large trade deficits and service its large debt to many foreign creditors without depleting its foreign reserves.

The diasporas are also the untapped source of other kinds of help. They could provide valuable managerial, financial and other skills for modernising the economy. The country has a rich agricultural sector supported by one of the world’s largest irrigation systems. But this resource also needs minding. Lack of public sector maintenance has led to its serious deterioration over time.

These are some of the endowments that could be counted upon to produce a better economic future. Compared to the BRICS, the only area where Pakistan has performed poorly is in terms of the rate of economic growth in recent years.

This was not always the case. In fact the country has experienced a number of growth spurts over the last half century. In the 1960s, the 1980s, and the early 2000s, the rate of GDP growth reached between six to seven per cent a year for extended periods of time. This meant respectable increases in per capita incomes.

One consequence of these growth spurts was that the country now has a sizeable middle class that numbers between 40 and 50 million people. This is large enough to give the economy a sustained push towards higher rate of growth and economic modernisation.

Jim O’Neill, the author of the original BRICs idea, has now expanded his analysis by adding what he calls the “new eleven” to the original notion of the BRICs. Pakistan is included in this group of countries but is identified as one which will need better management in order to realise its large potential.

Why has the country done poorly compared to its potential? Part of the answer is to be found in politics. Had the country known greater political stability, it would have had a more consistent record of economic performance.

The country has tried several models of political governance and economic management. There was back and forth between military and civilian rule. There was also constant rethinking about the most appropriate role for the state.

The state was made to go yo-yo between a highly intrusive role in the economy to withdrawing to the margins of the economic management system. These matters will have to be resolved if the country is to be rescued from its current and deep economic distress.