THE recent period has seen distinct improvement in business morale, aided by stable current macroeconomic indicators, and incipient recovery in power generation. Whether the stage is now set for sustained and rising growth, though, is not certain.

Over the past five years, growth has been fuelled by rising consumption, now 89 per cent of GDP, and growing at around 5pc annually, against GDP growth of under 4pc per year. The modest GDP growth we have been able to muster is led by the services sector, while manufacturing and agriculture have performed below GDP, at 3.5pc and 3pc respectively.

High aggregate demand and falling energy prices for the past couple of years should have been a stimulus for domestic investment and steadily rising production. That is not how it has worked out, with rising demand leaking into imports and, probably, into the shadow economy.

This year the economy has registered its highest growth rate (4.7pc) in almost a decade. Dawn asked a former State Bank governor to reflect on whether this means the economy has turned the corner or if strong headwinds remain.

In fact, the major productive sectors of the economy look moribund and forward-looking indicators are lacklustre. The substantially reduced trend for investment to GDP, down from 22pc in 2007 to under 15pc in recent years, continues. Much of the 4.7pc growth reported for year to date 2016 in manufacturing comes from greater capacity utilisation in a variety of low-weight sectors — the biggest textiles, with a 20pc index weight, in fact saw a 0.6pc decline in the year to date. Agricultural production shows no positive direction. Annual growth is squeezed out of fluctuating sizes of different crops, and any momentum for broad-based increase in productivity is missing.

The services sector, now 59pc of GDP, is perhaps oversize in relation to industry’s share of 21pc. More than half of service GDP, or 32pc of the total GDP, comes from trading and storage/distribution — which add value to production but don’t create value in themselves. The services sector in India also has a much larger share of GDP than industry, 62pc vs 15pc. However, the services sector there makes more intrinsic value-contribution than in Pakistan — financial services, business processing services and real estate in India generate about 30pc of services GDP, against rather less than 7pc in Pakistan. Transport and storage/distribution in India are only 10pc of services GDP.

Two aspects of our economic environment that weigh down on growth must be noted: one is the huge (effective) share of indirect taxes in tax revenue and the second is the declining contribution of national savings to national development. Instead of fuelling growth, savings are largely recycled by banks to serve governments’ fiscal needs.

Reasons for our low tax to GDP are well known. Looking forward, the tendency to impose further, multi-tiered, taxes on those companies and sectors already reporting for tax can become counterproductive: under-reporting of production combined with partial disinvestment can become the outcome.

Indirect taxes are already, effectively, 85pc of FBR’s tax take (if the non-income based aspects of direct taxes, such as withholding taxes, are taken into account). Quite besides the regressive iniquity of such a regime, more indirect taxes in a slow-growth economy will suppress demand, hurting production prospects.

With capital markets for debt quite undeveloped, business must rely on banks for expansion. Our banks have progressively and substantially shrunk exposure to lending for development. Their investment in government securities and in the public sector (80pc/20pc respectively) is now 70pc of their exposure, an inversion of the situation of a decade ago, when the private sector took 70pc. If the increase in government borrowing was spent on infrastructure, it could count as investment in the future. Instead, with a primary deficit (revenue less expenditure before debt servicing), increase in government debt mainly supports current expenditure.

A history of turgid production, in an unaccommodating fiscal and financial framework, hems in initiative for investment. We have fallen behind our emerging market counterparts in industrial scale and technology, in development of supply and value chains, in agricultural productivity, and in human resource development.

So how do we go from here towards the ideal of high, sustainable, growth?

The fundamental precondition for sustainable investment is assurance regarding continuity of a policy framework: businessmen will tell you that predictability is more important than perfection, when it comes to operative government fiscal and investment policies.

Looking around the Asian leaders, the roots of growth were laid over a long period of political and policy continuity.

China had in fact been experimenting with highly decentralised, market-related, production incentives, well before its take-off in the ‘80s. The methodology of ‘proceeding from point to surface’, i.e. from micro-experimentation with a particular line of policy, to its national application was well established, before China’s SEZs developed. The town and village enterprises (TVEs), which were the backbone of China’s industrial surge from the‘80s onwards, were actually created in the ‘50s. China’s burst of 30 years of sustained, high growth developed on the back of policy and political continuity.

India’s ‘Nehruvian’ economic philosophy, i.e. import substitution led by public sector heavy industry, with an emphasis on technical education, was managed by Congress-run governments for all but three years between 1947 until 1985; it laid a strong base for the later, very successful performance of the liberalised economy.

Similarly, Japanese economic success was nurtured under the Liberal Democratic Party in Japan — except for four years, in power continuously since its foundation in 1955; economic policy was shaped by the Japanese Ministry of International Trade and Industry directing strategy for growth of Japan’s conglomerates.

South Korea had its Planning Commission playing a hands-on role in development of Korea’s chaebols, business groups, under military or military-controlled governments, continuously from the early ‘60s till 1987.

Pakistan’s history has lacked this sustained unison of policy and political continuity. Fiscal policy towards business has been consistently variable, always subject to budget or lobby pressures. Therefore, long-term investment has been inadequate, production capacity cannot accommodate demand in high growth periods, and rising imports lead to BoP crises.

For Pakistan to ‘break the mould’ of languishing development, there is considerable expectation that CPEC will become the catalyst for broad-based acceleration. While China has a distinct vision of CPEC’s role with respect to Western China, its investment plans within Pakistan provide comprehensive, new logistical capability. Besides, CPEC provides for energy projects, for the creation of special enterprise zones (SEZs); for harnessing the undeveloped potential of agriculture, and for building the long-underinvested mining sector of Pakistan.

But CPEC cannot become our next medium-term development plan, which must have a wider canvas, including objectives for social and human indicators. But it can become the means by which internal productive capacity is regenerated across the industrial, agricultural and commercial sectors.

If we are to reap this “harvest”, we have to galvanise the already delayed planning process for ancillary industry enabled by CPEC, where the private sector must be a full partner with the government. Critically, to avoid the disruptive shocks imparted by regime changes, we must anchor CPEC’s continuity on enduring and independent official institutions. If we continue to treat our institutions as an extension of politics, policy development will neither be independent nor durable, and we will remain mired in growth without development.

Published in Dawn, June 1st, 2016