Devising a Growth Strategy for Pakistan (2): Towards a New Development Approach

Posted on February 5, 2011
Filed Under >Nadeem Ul Haque, Economy & Development
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Nadeem ul Haque

(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).

29 responses to “Devising a Growth Strategy for Pakistan (2): Towards a New Development Approach”

  1. Mahmood says:

    The Energy Sector, is what I think will drive all types of development, making the existing assets more efficient both in terms of production and distribution. Increasing capacity to meet present deficits and future expansion with cost effective means of generation keeping into account the pollution index.

  2. HJ says:

    It is indeed a good sign that the Commission is seeking public views on the future of Pakistan’s economic growth strategy. The Commission’s proposed plan outline presented here (it would be good to share a more detailed plan with clear, achievable goals and execution plans) focuses on real needs education, innovation, youth and urban issues.

    First a few observations:

    Pakistan’s population currently stands at 185 million and will exceed 220 million in just another 9 years alone.

    Pakistan’s very basic economy is being pushed by two key factors: Internal lack of innovation and booming economies of the two giant neighbors which will continue to exert pressure on wages in the decades to come.

    Now to more specific issues. How does the new strategy address the following challenges:

    – What will it take to remain self sufficient in food (as Pakistan currently is) over the next 20 years when the population will probably be near 300 million? Can the agriculture sector be modernized faster to create the kind of innovation and efficiency that Dr. Nadeem rightly wishes to see him Pakistan? If rural poverty is effectively addressed, it will also reduce pressure on urban growth and will be a sea-change in terms of the overall socio-economic structure of the country. What are the Commission’s recommendations?

    – At what rate will the economy need to expand every year over the next 10-15 years to raise the current PPP GDP from $2,500 to, say $5,000 and yet also avoid these boom-and-bust cycles? Raising real per capita income should remain a key focus on any future planning because (assuming there is efficiency in revenue collection), it will create the fiscal space that Pakistan will need both at the national and provincial levels. Despite all the doom and gloom, Pakistan’s problems are reasonably manageable (imagine continent-sized China and India with more than 1 billion people below poverty line and the efforts it takes to lift them up).

    – What would be the energy needs of a population of 220 million plus and how will these needs be met?

    – While Dr. Nadeem is right in pointing out that civil works has been the focus of “development” in Pakistan (we all know why), Pakistan’s urban and rural infrastructure is woefully inadequate to meet the needs to an ever growing population.

    – On education, this blog and others have said time and time again that we are robbing our future generations by not focusing enough on this issue. The focus has to be on primary education, secondary education, technical education AND high education. In previous columns, Dr. Nadeem highlighted the empty schools and the wasteful spending of tax payers’ (in other countries) money. Will the Commission offer an alternative, comprehensive plan soon. This has to be the very first priority, I argue.

    In addition, we tend to forget that Pakistan’s literacy rate is just 50%. Does the Commission have a plan to raise the literacy rate to above 75% in a decade? Dr. Mahboobul Haq, who served the country in the same capacity as Dr. Nadeem now does, once suggested that everyone graduating from high school should teach at least one person to read and write. We need something even more radical and bold than that plan.

    Last, Pakistan has no shortage of ideas but has an extremely poor execution capability. Unless we correct that, no plan, no matter how new or how innovative will succeed.

  3. Anwer says:

    The Egyptian story bears a haunting similarity to what has been going on in Pakistan for nearly two decades now. In both places superficial theories of economic growth based purely on “sweeping privatization policies” championed by “Milton Friedman & Co.” have provided the cover for transferring of the national public resources into private hands at substantial losses to the public. The result has been increasing poverty in both societies and a massive widening of the gulf between their very small but rich, and very large but poor segments of their populations.

    ====================================
    guardian.co.uk, Sunday 6 February 2011 19.00 GMT

    A private estate called Egypt
    Only a thousand families count in a country that Mubarak and his cronies regard as their fiefdom

    Salwa Ismail

    There is a lot more behind Hosni Mubarak digging in his heels and setting his thugs on the peaceful protests in Cairo’s Tahrir Square than pure politics. This is also about money. Mubarak and the clique surrounding him have long treated Egypt as their fiefdom and its resources as spoils to be divided among them.

    Under sweeping privatisation policies, they appropriated profitable public enterprises and vast areas of state-owned lands. A small group of businessmen seized public assets and acquired monopoly positions in strategic commodity markets such as iron and steel, cement and wood. While crony capitalism flourished, local industries that were once the backbone of the economy were left to decline. At the same time, private sector industries making environmentally hazardous products like ceramics, marble and fertilisers have expanded without effective regulation at a great cost to the health of the population.

    A tiny economic elite controlling consumption-geared production and imports has accumulated great wealth. This elite includes representatives of foreign companies with exclusive import rights in electronics, electric cables and automobiles. It also includes real estate developers who created a construction boom in gated communities and resorts for the super-rich. Much of this development is on public land acquired at very low prices, with no proper tendering or bidding.

    It is estimated that around a thousand families maintain control of vast areas of the economy. This business class sought to consolidate itself and protect its wealth through political office. The National Democratic party was their primary vehicle for doing so. This alliance of money and politics became flagrant in recent years when a number of businessmen became government ministers with portfolios that clearly overlapped with their private interests.

    Mubarak presided over a process in which the national wealth passed into a few private hands while the majority of the population was impoverished, with 40% living below the poverty line of less than $2 a day, rising rates of unemployment, and job opportunities for the young blocked. In the last few months of 2010, Egyptians protested for an increase of the minimum monthly wage to less than $240, but the now departed Nazif government decreed that less than $100 was sufficient as a basic income. This, at a time when the prices of food staples and utilities tariffs increased at very high rates. Indeed, as one local economist asserted, every single commodity and service cost significantly more under the Nazif government – which is the government of business that ended progressive taxation and replaced it by a single unified income tax.

    Additionally, public social services underwent masked privatisation, taking health and education beyond the reach of vast segments of the population. Many poor families were forced to give up the hope of educating children and had to send them to do menial work to contribute to the income of the household. There was little public investment in most services, and in infrastructure such as roads, water and sewerage. In the 2000s, Egypt witnessed numerous demonstrations by ordinary people across the country for the construction of overpass bridges on fast roads and for clean water in towns and villages.

    The legitimate social and economic demands of the people were repressed and denied, and the regime used the police to control the population. Under emergency laws, the police acquired extensive powers and engaged in surveillance and monitoring of the population. Torture and abuse in police stations became routine. Police roadblocks and checks were part of the daily reality of Egyptians. Under the generalised corruption, the police engaged in extortion and offered their services to private interests.

    Egypt was governed as a private estate. Mubarak’s immediate family is implicated in crony capitalist activities as partners of most of the businessmen who benefited from the regime’s corruption. These beneficiaries do not want to leave their palaces, beaches and resorts, lucrative businesses and extreme riches. These are fixed assets that could not be transferred outside the country – although it should be noted that the ruling elites have siphoned off much capital to foreign banks. Nonetheless, it is the country-turned-private-estate they do not wish to abandon – that’s why they deployed the thugs in Tahrir Square to terrorise the population. This is a tactic that the National Democratic party has used on many previous occasions. In the national elections to the people’s assembly and to the shura council, thugs are hired to intimidate voters and to support rigging the results. At all popular protests, the police set thugs to attack the protesters using all means of intimidation, including the sexual harassment of women participants. Thugs have become an arm of the police and they have been used as informants in popular quarters of the city. They are rewarded with licences to operate kiosks or run minibus services. In a sense, practices of thuggery have been adopted by the regime to maintain itself and protect the interests of the ruling elite for decades now. Facing the growing possibility of losing their illegitimately acquired wealth and power, the regime and its cronies resorted to the techniques and practices that they have previously used with impunity to silence all opposition and resistance. However, the magnitude of popular mobilisation and the resolve to fight for dignity and freedom have rendered the regime’s tactics obsolete.

  4. Imran Khan says:

    No country in the world teaches entrepreneurism in schools. What they do teach is to question everything and not rote learning.

    Using baseball terminology we need to get to first base first. All this is about later stuff.

    First base is:

    a. Provide Security to your minorities.
    b. Majority needs family planning.
    c. Provide Non stop, pervasive and cost effective power.
    d. Get rid of easily exploitable blasphemy laws.
    e. Expedite delivery of justice.
    f. Get rid of corrupt leaders.

    And not necessarily in any order of preference.

  5. Roshan Malik says:

    It good that PC is more inclusive this time and intends to revamp policy paradigm. Nadeem ul Haq has mentioned four major areas where PC intends to focus in the long term and the idea seems very neat and promising.
    I am glad that youth and community has been incorporated in the planning process. Achieving ‘productivity and efficiency’ is the central to all four but I fear it may lead us in the same race that PC or economic experts had been in the past.
    Productivity and efficiency follows ‘ growth machine’ paradigm that encourages to transform value chain into vertical integration and amalgamation of organizations. Yes I agree that it increases growth but may not creativity, increases production but may not diversity.
    Just take the example of U.S.that had been following the policy of efficiency and productivity in agriculture production. This vertical integration in the beginning was considered as marvel but it resulted erosion of family farms, concentration of large scale farms and also youth out-flight from the rural areas. Now majority of the farms in Midwest predominantly are mono-cropping (sustainability threat) and have some confinement (turkey, pork, poultry etc) rented to a big company. The majority of the people living in small towns in Iowa are more than 55 years old and rate of youth retention is low. Mushrooming of Walmarts in small towns further brought closure of small businesses in small towns that gave a deserted look to the downtowns and of-course rapid erosion of social capital that is very important fabric of rural community.
    There is shift towards ‘SMART GROWTH’ paradigm among the community and regional planners who now believe that revitalizing small towns is pivotal to retain skilled youth or creative class. Now the downtowns small businesses are being promoted and city councils are investing in downtown rehabilitation. Many small towns are now focusing more on community capital framework and also adopting Putnam’s approach to social capital.
    I would suggest that rather than looking into the ‘efficiency’ and ‘output’ approach, we need to go towards ‘effectiveness’ and ‘outcome’ as the latter is more equitable and responsible. In Pakistan, we are already witnessing high rate of urbanization and majority of our rural population ends up staying in sprawling slums rather than sophisticated suburbs.
    Unless we are not going to fix the problem in rural Pakistan we cannot manage our urban Pakistan. We have to revitalize our rural Pakistan, not with vertical integration but through SMEs. Yes government has its role to play by providing infrastructure (built capital), but for sure the intervention by private sector and Non for Profit Sector can contribute to increase other community capitals (cultural, social, financial, human) too.
    Apologies for long response.

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