IT will take the average Pakistani 30 years to double his income while a typical Indian or Bangladeshi can do so in half the time. This is because Pakistan’s growth rate has been 2.3pc in the years 2001-2010, while Bangla­desh has averaged a growth rate of 4.4pc and India 6pc. That is the difference the growth rate makes in the lives of ordinary people.

Why is there such a large difference in the growth rates of Pakistan vs those of India and Bangladesh?

The ‘war on terror’ has played an important role. But another reason for Pakistan’s muted economic growth is its dependence on external financing setting it apart from India and Bangladesh. This is important because in such an environment, day-to-day book-keeping takes precedence and economic fire-fighting trumps long term policy formulation.

Pakistan can possibly become the world’s ‘modern farmer.’

The real growth in output per person has been trending downwards for Pakistan since 1981. That is well before terrorism and acute balance-of-payments woes began. Therefore, an explanation must lie elsewhere. It appears that Pakistan is facing a long term economic decline possibly due to ‘sector reallocation’ that has taken place in the last 34 years towards sectors with limited capacity to raise productivity. Those sectors are agriculture and traditional services.

The realisation that the source of the problem for Pakistan is a long-term structural decline is important because thinking long term as a guide will actually help Pakistan to refocus its short-term priorities.

Indeed, a main difference between the economic transformation of Pakistan, Bangladesh and India has been the different economic focus. Bangladesh focused on industrialisation and increased role of the services sector while clearly moving away from agriculture. India moved away from agriculture, over the last three decades, to services, in particular modern services. Pakistan, on the other hand, has had no clear direction; we neither moved away from agriculture nor did we increase the share of industry in our GDP; instead we increased our reliance on traditional services which only have limited scope for increased productivity. The trouble with our approach is that the world only rewards productivity.

Consider the following basic facts.

Fact 1: In the 1981-1990 period, Pakistan’s economic performance was at par with that of India and superior to that of Bangladesh. In contrast, in the decade from 2000-2010 Pakistan lagged behind both peer countries in economic performance. Also, over the last 34 years some amount ‘economic transformation’ helped our peers surge ahead.

Fact 2: The three peer economies have gone through sector-wise reallocation over the last three decades. India and Bangladesh have gradually moved away from the agriculture sector towards industry and the services sector. On the other hand, Pakistan’s industrial sector has steadily declined to be substituted by the services sector, but more importantly it has not gone through a shift away from agriculture as such.

Fact 3: This sectoral reallocation has not quite worked out for Pakistan. Indeed, growth rates of value-added in all three economic sectors in Pakistan are now below India and Bangladesh. This implies that each unit of resource invested in any of these sectors on average yield better returns in India and Bangladesh. In other words, productivity is higher in India and Bangladesh for each sector.

Fact 4: The services sector has been the biggest contributor to Pakistan’s economy for a number for decades now. However, this sector is also a drag on its growth because it is not fully based on productivity-enhancing activities and not fully linked with the industrial sector. In particular, the share of modern services in GDP, the growth enhancing type, is three times higher in India relative to both Bangladesh and Pakistan; while the share of ‘traditional services’ in GDP is highest for Pakistan compared to its peers.

Fact 5: The lack of industrialisation in Pakistan also does not bode well for the future. Skipping industrialisation is a concern because: i) the services sector growth in Pakistan did not follow industrialisation and this sequencing determines the nature of the services sector; and ii) a large majority of services we offer are not tradable. This contributes strongly to the current account imbalances.

The misfortune in the economic transformation of Pakistan is no random event but has been achieved by choice. The good news is that if it can be chosen, it can also be changed. The future economic policy has to recognise that unlike our peers, Pakistan has not ‘de-agriculturalised’ and that could be our silver lining. If India can offer itself as the back office of the world while Bangladesh as the tailor of the world, Pakistan can possibly become the world’s ‘modern farmer.’ In an international context where our peers already occupy other product spaces, a fusion of agriculture and industry is probably an avenue worth considering as a future direction for Pakistan’s economy.

The author is the director of the research department, State Bank of Pakistan. The views expressed are his own.

Published in Dawn, August 5th, 2015

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