By: Uzair M Younus
The catch-up effect, also referred to as the theory of convergence, argues that less developed countries grow faster than developed economies. According to this theory, over time per capita incomes in developing economies will catch up with the developed world. The fundamental basis of this theory asserts that with access to advanced technology and capital, developing countries can boost economic growth and productivity. A number of countries have been able to grow at rapid rates and in all cases, we find a commonality: a cohesive developmental strategy.
The current government in Pakistan made economic growth a central pillar of its agenda. Cabinet ministers, led by the honourable finance minister, argue that the economy is on an uptrend, foreign exchange reserves are recovering, investment is occurring, and that the future is bright for Pakistan. A closer look reveals that the picture is not as rosy. Foreign exchange reserves have improved not because of export growth, but due to re-engagement with the IMF and the sale of external debt instruments. Meanwhile, domestic liabilities and debt of the government hit record highs and have grown by 13 per cent on a yearly basis. According to the State Bank of Pakistan (SBP), the reduction in fiscal deficit to 5.5 per cent of the GDP was mainly due to one-off factors. Furthermore, the government has not paid off the circular debt this year, which now stands at more than Rs200 billion. Exports, which stood at $24.8 billion in 2013, grew by only $400 million to $25.2 billion in 2014. The annual report of the SBP report highlights this problem, arguing that Pakistan “must increase its hard currency earnings” and that Pakistan’s “ability to borrow from abroad … could easily become an FX crisis”.
This is where a robust developmental strategy centered around boosting exports comes in. Countries like South Korea, Bangladesh, India and China have been able to drive their economies on the back of strong export growth. This, in turn, allowed them to accumulate foreign currency reserves, raise tax revenues and further invest in their economic development. In 1990, Pakistan’s exports as a percentage of the GDP stood at 16 per cent, while Bangladesh’s was a paltry six per cent. By 2013, Pakistan continued to remain stagnant with exports equal to 13 per cent of the GDP, while Bangladesh’s exports had soared to 20 per cent of the GDP. This allowed Bangladesh to boost its foreign exchange reserves from almost $600 million in 1990 to $18 billion in 2013. Pakistan was only able to increase its reserves from $1 billion to $8 billion in the same period. A lack of a forward-looking economic strategy has been responsible for this and successive governments, including the current one, have failed to develop a cohesive plan to boost value-added export growth.
When South Korea decided to pursue export-led economic growth, special economic zones were set up to develop clusters of technologically advanced industries. These industries reached economies of scale and earned foreign currency for the country. Subsidies and economic incentives were given, and strong performance-based conditions were set. Companies that failed to meet required targets were allowed to die while those that performed strongly were further aided by the government. The result of this was the development of indigenous corporations like Samsung which are the world’s leading multinationals today. China has followed a similar strategy, fostering local competition amongst export-oriented companies and thereby boosting export earnings and long-term economic growth. The benefit of this strategy is visible today, with companies like Alibaba and Xiaomi emerging as global giants and China becoming an economic superpower.
Growth in value-added exports cannot occur without a well-educated labour force. Pakistan has the world’s second-largest number of children out of school, ranking only behind Nigeria. In an age where developing countries have taken advantage of their demographic dividend, Pakistan is turning a potential dividend into a ticking time bomb. In the next decade, these children will want jobs and unable to be productive, they will become a societal nightmare. Instead of having decent standards of living, they will find themselves unable to perform productive tasks in a globalised world where basic technical skills will be key. Investment in our education system will not only give these children a better future, but it will help Pakistan drive economic growth and boost output of value-added goods and services. A technically sound workforce will not only generate growth in technologically-advanced industries, but it will allow the country to raise revenues to further invest in social and human development of the country. One sees little to no effort on curriculum reform today and we are continuing to focus on rote-learning and other ineffective means of education, which puts our economy’s human resources at a severe disadvantage to the rest of the world.
Sadly, the focus of the government thus far has been on one-off measures that create a false sense of optimism in the country. If one were to take out the positive impact of one-off measures such as the IMF tranches, funds from 3G/4G auctions and privatisations, the picture for Pakistan is rather bleak.
Reforms centered on eliminating inefficiencies in our economy, boosting exports, and focusing on sustainable economic development through human resource development are lacking. A focused strategy centered on export-oriented economic growth has not been developed and it seems like the government is content with a growth model that is not sustainable. These one-off measures have bought the government time to implement a sound economic strategy, but there is little evidence that the powers that be have any clue of what Pakistan’s development strategy should be.
If the current policy continues to be followed, then the country will continue to go from one economic crisis to another. This will only elongate the cycle of economic stagnation in the country and will not allow Pakistan to converge with the rest of the world. It is about time that the political elite of this country developed a strong development strategy that allows the country’s economy to stand on its own feet. If they fail to deliver on this, then the best case scenario is economic default, and the worst case scenario is unimaginable.