THE word ‘crisis’ may have been overused to describe Pakistan’s economy, but it is an apt term. With only a month of reserves left, the country is crumbling under financial pressure and is looking forward to the IMF again. The Fund may bring temporary relief but will do nothing to improve the chronically ill economy. The government will make some immediate payments to keep the country from defaulting, but, in the absence of sustainable growth, it will soon be back to knocking on the door of the Fund and friends.

Apart from fleeting moments of relief, Pakistan has been stuck in this loop of misfortune for long. However, many experts are not too alarmed. After all, tales of shrinking productivity and poor exports are not new, nor are those of wasteful subsidies and elite capture. For example, Pakistan provides Rs1.3 trillion in tax subsidies to big businesses and industries, while its share in world goods export is 0.1 per cent compared to India’s 2pc. According to the Economic Intelligence Unit, this will increase to a mere 0.2pc in 2026.

There is consensus that to avoid an existential crisis, Pakistan must improve its economy. The National Security Policy recommends a ‘Fourth Industrial Revolution’ as a policy solution, but fails to explain how this is possible. It forgets that the Fourth Industrial Revolution is based on the knowledge economy — Pakistan stands behind India and Bangladesh, and barely above Afghanistan in education rankings. Less than 60pc can read or write and 75pc of educated people are ‘learning poor’. Pakistanis’ lives are shorter than their peers’ in most neighbouring countries, and ownership of computer devices in households is less than 8pc. Whatever little economic growth the country has achieved has been without much human development improvement. Hence, the growth is short-lived.

Evidence confirms that economic growth occurs when countries are a part of global supply and value chains. But, what defines value changes. For example, Adam Smith in The Wealth of Nations lists some of the most unproductive professions — including that of churchmen, lawyers, musicians, dancers and sportsmen. He would be surprised to know how much money there is in these professions now. For Pakistan to achieve sustained growth, it needs to create value for the goods and services in global demand. There are no easy answers for how this can be achieved, but there are ideas to debate.

Development pathways lie in the service sector.

For 200 years, economic growth has been linked with manufacturing, but this may no longer be valid. Several reports show that many low-income countries might have missed the boat to developing industry. As pointed out by Ejaz Ghani and Stephen O’Connell, industrialisation needs two main factors to flourish: 1) enhanced availability of electric power; 2) higher capital investment. With power shortages and an inability to attract investment, Pakistan has struggled with both. However, evidence suggests there is still a chance for developing countries to shape their development pathways which lie in the service revolution. In Pakistan, the service sector has contributed more to growth than industry since 1950 and surpassed agriculture in 1965. In 2020, it employed 36pc of labour and contributed 54pc to GDP. The level of productivity measured at purchasing power parity is also higher than in industry.

Thanks to technology, the sector is no longer exclusively driven by domestic demand and services are globally tradable. This results in increased exports of trade in services. For example, Pakistani freelancers earned $150 million in FY2019-20 (in the absence of PayPal) and Pakistan was ranked fourth in the freelancers’ market (above India and Bangladesh). This proves that manufacturing is not the only driver of growth, and that the service sector is not only sustainable but also inclusive. If Pakistan can expand and improve its service sector, it may result in faster job creation and higher household spending. This would not mean giving up on industrialisation, but divorcing protectionism in the hope of better returns.

Still, there’s a need to recognise that services are an urban phenomenon and skill-centric, and may not bring prosperity to all in equal measure. To bring rural prosperity, there’s a need for inclusive capitalism to reach farmers, which means access to formal finance, informed policymaking, investment in agro-tech and autonomy in farming decisions. Skipping manufacturing to leapfrog to services is possible, but this cannot be done without raising farm incomes.

What is suggested here is to end the factory fetish and protectionism, keep away from subsidising land, credit and power, empower small farmers, remove growth constraints in agriculture, invest in people, and change the state’s role from regulator/inhibitor to enabler/value creator — and to remember that the only failure is the failure to envision a better future.

The writer is a research fellow at IBA, Karachi.
nizsara@gmail.com Twitter:@SarahNizamani

Published in Dawn, May 30th, 2022