(Editor’s Note: This is the second in a series on Pakistan’s New Growth Strategy. In this article Dr. Nadeem ul Haque, who heads the Planning Commission of Pakistan, elaborates on the four areas within the new strategy and outlines some reform ideas. He also invites ideas and suggestions on the strategy. Have your say.)
First, let me thank All Things Pakistan for this initiative and thank the readers of ATP for the useful comments and suggestions that you have already posted on the initial post by Prof. Adil Najam. I hope that the enthusiasm you have already shown will continue and I look forward to more comments, and even more detailed and precise comments, on what we should be thinking of us as devise a growth strategy for Pakistan, one based on a new development approach. Let me lay out some of my ideas for this and I look forward to your reactions and ideas about it.
An unintended consequence of our past policies has been the stifling of internal markets, cities and communities, which play a critical role in fostering productivity, innovation and entrepreneurship and ultimately promote growth, prosperity and development.
Historically, the Planning Commission has been involved in the formulation of Perspective, Medium-term and Annual Plans based on savings-driven approach, where growth rates are arbitrarily set and incremental capital (investment) to output ratios are used to generate investment requirements in key sectors of the economy. Public investment across sectors is allocated according to the planner’s priority and it is assumed that public sector development programme (PSDP) will crowd-out private investment. Never has there been a more pressing need in Pakistan’s history to search for a new model. However, at the outset it should be said that if there has to be a new development framework, it should by all means take account of the damages caused by recent flash floods, security and governance issues currently facing the country.
In the new development framework, private sector should be the growth-driver in open market environment that rewards efficiency, innovation and entrepreneurship, while the government is facilitator that protects public interests and rights, provides public goods, enforces laws, punishes exploitative practices, and operates with transparency and accountability.
What constrains Pakistan’s growth? Pakistan’s economic growth has been a story of boom-bust cycles where foreign investments led to sharp upward spikes; however, because the resources were not channelled into high-impact investments, the GDP would plummet to a low equilibrium, where it stayed until the next round of foreign injection. The average real GDP growth rate from 1972 – 2010 is about 5.2 percent. In comparison, China and India had an average real GDP growth rate of around 9.9 and 6.4 percent, respectively, from 1980 to 2008.
One of the key determinants of growth in conventional planning was the accumulation of capital. Given that markets were not well-developed to direct savings into productive investments with sustained payoffs, the investment to GDP ratio in Pakistan remained at a low average of 18 percent between 1960 and 2010. The investment to GDP ratio for China and India in the medium-term has averaged around 45 and 27 percent, respectively.
This current strategy has led to PSDP being skewed towards brick and mortar projects, where the government is involved in building assets that could have been furnished by the private sector, more efficiently. The government ended up occupying land and dedicating it to a single use for many years, which could have been used for multi-purpose domestic commerce by the private sector. The high share of civil works in PSDP (almost 50 percent) leaves little space for training and retaining human capital in productive and social sectors. Our current throw-forward (accumulated backlog of approved projects where investment is lagging) is approximately Rs 3 trillion, comprising about 2000 projects and schemes, which suffer from cost and time overruns. There exist substantial incentives for project initiation and delayed completion.
There is a tremendous need to review Pakistan’s development planning process. The current narrative of growth that focuses on ‘my project’ and ‘my allocation’ combined with distortive incentives (subsidies and protectionism) for industrialization needs to be shifted to a new narrative that drives us beyond excessive focus on building infrastructure and overly diversified public investment, and towards the pillars of ‘new growth theory’ – i.e., towards productivity (improving returns/yields) of assets and all factors of production and efficiency (producing goods and services cost-effectively).
It is now time to argue that Pakistan stands reasonably sound as regards the hardware of growth (physical infrastructure). We now need to reorient our narrative towards the software of growth (innovation, entrepreneurship and markets).
New Development Approach (NDA): The two key factors that have determined economic growth in the past are external resource inflow and public sector projects. The latter used to be mainly financed by the former. In the old model, Pakistan has excessively focused on public sector investment and producing labour with low-end technical skills. The NDA should now be based on endogenous growth, where the quantity of investment should be complemented by efforts to improve the quality of investments – i.e., their productivity and efficiency. The private sector must drive economic growth with timely implementation of market reforms, which should promote competitiveness. Pakistani cities presently are configured as suburban clusters instead of as creative cities which are locomotives of growth.
It is essential for Pakistan to step up its efforts to produce high-end human capital. Promoting innovation and entrepreneurship should be the cornerstone of our government’s facilitation to private sector.
In the following sections, let me elaborate on the four pillars of the New Development Approach and outlines some of the ideas for reform we are considering. Please comment with your ideas on these.
Productivity-led growth: Pakistan’s economic history has witnessed many episodes of high growth but these could not be sustained for longer periods due to the absence of the software of growth. Productivity takes central place in the New Development Approach (NDA) which is ensured through innovative and entrepreneurial practices. Creative Ideas translate into innovations while, entrepreneurship blends innovative ideas and the risk-taking streak to increase productivity and in turn enhance the growth of an economy. Innovation and ideas drive growth and not just infrastructure development and investment promotion.
Small to medium-sized enterprises (SMEs) comprise 85% of entrepreneurial businesses in Pakistan. They employ approximately 78% of the non-agricultural labor force and contribute over 30% to Pakistan’s GDP and 25% of the country’s exports of manufactured goods (S.P. Coy et al. 2007). Pakistan, despite having a huge market size, has very weak market efficiency indicators, indicating very low level of innovation.
Despite the low cost of doing business in comparison to the regional economies, Pakistan ranked 103 out of 125 countries in the global innovation index. Pakistani exports have long suffered due to a lack of product and regional diversification. Manufacturing supply chain is skewed towards production and assembly of goods that use imported inputs, intensively. Components of the supply chain, such as: research and development, design, distribution and marketing, have long been ignored.
Reform ideas for productivity-led growth include:
- First, competitive markets are the starting point towards sustained economic growth. Free and flexible markets should allow businesses, which have run their course, to exit and be replaced by more efficient firms. Instead of providing incentives and subsidies to different sectors, markets should be allowed to determine optimal allocation of resources.
- Second, it is imperative that there are deep reforms, which limit the effectiveness of rent-seeking mechanisms.
- Third, a sound judicial system that ensures property rights and contract enforcement can go a long way in sustaining inclusive growth.
- Fourth, the triple helix system of promoting innovation should require universities, industry and government to collaborate for the promotion of new and marketable ideas.
- Finally, entrepreneurship should be incorporated in school curriculums at all levels of education. Institutions having practical facilities for young entrepreneurs need to be strengthened.
Reforming internal markets: Pakistan’s growth strategy has traditionally followed a mercantilist approach with a skewed focus on import substitution and at times export promotion. Our policies have supported this approach through high tariff walls for consumer goods imports and by giving subsidies to chosen sectors for export promotion. With our focus on choosing sectors to promote, be it agriculture or industry, one area has remained ignored throughout: domestic commerce. This is despite having a share of over 30% in Pakistan’s GDP and employing about 20% of the country’s work force (Economic Survey of Pakistan, 2009-10). Domestic commerce includes wholesale and retail trade, warehousing and transport.
Desired Reforms for Internal Markets include:
- Demand-driven approach for internal markets, starting with consumers and working back to link into supply systems with the producer by improving the quality and quantity of retail outlets.
- Urban management and land use reforms for encouraging the development of mixed use areas, city centers and commercial development. Government land in prime city center areas should be privatized and made available for mega commercial projects.
- Taxes, legislation and regulations should not penalize commercial development as is currently the case. Clarity in zoning and building regulations needs to be provided to allow for more and bigger warehouses and cold chain services.
- Focus on improving transport efficiency, while prioritizing freight transport efficiency considering its role in linking up the entire supply chain network.
- Secure legal rights and strengthen regulatory environment for bringing transparency to property rights and concretizing intellectual property (especially, brand names) protection. These promote innovation-led productivity.
- Promote openness and competition, e.g. bringing goods of international quality to consumers will promote innovation. Furthermore, competition in value chain development needs to be promoted. Free entry and exit of participants in the market (without special privileges or licenses) as well as a more liberal policy allows for mobility with greater fairness and competition for wholesalers thus, encouraging private investment.
Creative cities as engines of growth: Cities provide facilities and encourage interactions amongst people of various age and ethnic groups. Cities are the hubs of knowledge, innovation, creativity and institutions. Cities such as Paris, London and New York have been the birthplace of modernization and inspiring vision. Creative cities enhance individual and collective productivity through the exchange of ideas and easy access to information. Such cities are culturally rich and offer a range of learning experiences for people to grow as individuals. Cities that prosper economically have a mix of three T’s; talent, technology and tolerance. Cities not only have the hardware (e.g., infrastructure) but also require the software (e.g., talent and technology).
Current state of cities in Pakistan is abysmal. Pakistan’s population has increased rapidly over the last 5 decades with urban population escalating at a rapid rate of 3 percent.City-dwellers and city administrators do not have much say in running a city. But, a great deal of involvement by government agencies is apparent in managerial and administrative decisions. There is confusion regarding how the cities are governed and controlled. Lack of availability of land/space and convoluted commercial laws have hindered the growth of our cities.
Desired Reforms for Urban Management include:
- Focus of policy, research and thinking on the role of cities as engines of growth. There is a need to move towards the development approach while focusing on the software (talent, technology and tolerance) of cities.
- Development of city centers for dense mixed use. ‘Government ownership of city-centre land needs to be reduced if it is retarding downtown development’.
- Involve the community in decision-making regarding city planning and its openness.
- While places for the elite are preserved due to revealed preferences of rich, places for cultural and educational activities (for poor) need immediate attention.
- Decentralization needs to be strengthened to allow city planners adequate control over their land and resources
- Commercialization policy should be reviewed to remove the bias against engaging in business.
- Zoning laws should be improved and made transparent.
- Vertical expansion of cities should be promoted to reduce property costs, thus allowing the low income group affordable living space.
Community and youth development: It is universally accepted and advocated that without community involvement and youth participation, development processes have little chances of success, as has been proven by international experiences. Youth and community development go hand in hand. The essence of the NDA recognizes the need to develop communities focusing more on utilizing the youth in line with the best international and local practices. Moreover, the provision of community infrastructure and social capital are equally important for the success of community development.
Networking plays an important role for increasing awareness in the communities as elaborated by Fukuyama. Networking reduces transaction costs and promotes associational life, which are both necessary for the success of limited government and modern democracy. Thus, while awareness of social capital is often critical for understanding development, it is usually difficult to generate through public policy or through intervention. However, government policy alignment may be critical to establish a stable environment for inclusive interaction between the multiple stakeholders.
Some ideas for reform in this area include:
- The NDA focuses on increased community development and social networking by increased access and ownership and systems for strengthening neighbourhoods.
- Collective asset creation helps in reducing health hazards and increasing awareness via improved education, mass action plans through consensus-building and adaptability to new modes of development, improving social networking through connectivity and outsourcing, prioritizing and respecting ethical and cultural diversification.
- The increased role of the private sector is necessary for bringing fast paced development and employment opportunities and promoting youth entrepreneurship through the extension of platforms like the youth parliament in the political sphere to more broader social, economic and cultural areas as well.
Dr. Nadeem ul Haque is the Deputy Chairman of the Planning Commission of Pakistan. He has also served as the head of teh Pakistan Institute of Development Economists (PIDE).