Pitfalls and Economic Prospects of Pakistan

Dr. A. R. Kemal[1]

Abstract:

(Despite some successes, the overall economic performance of Pakistan has been far below its potential. The paper assesses the prospects and pitfalls for future growth and development. It outlines a strategy for overcoming the constraints in the way of achieving self-sustaining progress and prosperity. – Editor).

1. INTRODUCTION

“On the eve of independence the Quaid-i-Azam held out a glorious vision for Pakistan’s future, a vision of prosperous and tolerant people, a responsible government free from corruption, nepotism and jobbery, and an enlightened society based on the Islamic values of justice and equity.”

This quotation from Pakistan 2010 shows that the founder of the nation had a vision of a prosperous and just society without hunger and starvation in which there would be equal opportunities for all sections of the society. However, even after 59 years of independence, at least one quarter of the population are unable to meet their minimum nutritional requirements, almost half of the children of school going age are not enrolled, the poor are denied health facilities, the ordinary individual lacks civic amenities, corruption is rampant, merit has given way to nepotism, and governance has deteriorated with all its adverse implications. Despite these problems, Pakistan’s per capita income has tripled, the proportion of the poor has declined by two-thirds, there are significant improvements in physical infrastructure and, though far from satisfactory, there has also been vast improvement in human resource development such as education and health. However, much more effort is required to fulfil the vision of the Quaid.

The performance of the economy, far below its potential, is the result of an amalgam of factors including poor utilization of natural resources and the failure to: (i) save and invest a larger proportion of incomes; (ii) optimally distribute resources between physical and human capital as well as within each of these areas. and; (iii) ensure proper distribution of incomes. Reliance on thermal power in the perspective of abundant hydro resources; imports of coal and iron ore despite the availability of reserves in the country; and water misuse resulting in barren land, water-logging and salinity are just a few examples of the failure to optimally use indigenous natural resources. Despite substantial foreign aid, the slow growth of the physical and social capital of Pakistan has been due to low savings as well as entrepreneurial reluctance to risk investing in non-traditional industries, inconsistent government policies, and low priority to human resource development etc. Furthermore, distortions in the incentives structure have resulted in misallocation of resources, low growth of GDP and income inequalities.

The Medium Term Development Framework (MTDF): 2005-10 acknowledges the constraints to the growth and income distribution processes and presents a similar vision to that of the founder of the nation. The vision 2030 outlined in MTDF is:

“Developed, industrialized, just and prosperous Pakistan through rapid and sustainable development in a resource constrained economy by deploying knowledge inputs”.

In the present study, we examine the growth and distribution patterns in Pakistan in the past, factors constraining the growth process, strategy for the economic development that not only helps in rapid growth but also in better distribution of income so that the vision of the Quaid is realized. Economic growth, human resource development, employment generation, income distribution and poverty are presented in the historical perspective with the main focus on the last 25 years with a view to isolating the constraining factors and in evolving a future strategy for the development process. The prospects for Pakistan’s economy on alternative assumptions and policies are also assessed.

The plan of this paper is as follows: After this introductory section, economic growth and patterns of development are reviewed in section 2. Constraints on the growth and development process are outlined in section 3. Strategy for future development is presented in section 4. Major conclusions and future prospects for Pakistan’s economy are in the concluding section.

2. ECONOMIC GROWTH AND PATTERNS OF DEVELOPMENT

The Gross Domestic Product (GDP) of a country depends on the stock of capital, labour and the efficiency of factor use. Accumulation of capital is contingent to investment[1] and the related transfer of technology. Labour supply depends on crude (or refined) activity rate which, in turn, is linked to the level of wages and the availability of jobs. The demand for labour is connected with investment levels, technological choices, industrial mix while labour productivity is linked to human resource development. The efficiency of production is based on factors such as the quality of entrepreneurship, discipline, labour-management relations and government policies.

The GDP growth rate relies on changes in the inputs and in total factor productivity. The latter depends on various considerations including alterations in the resource allocation, human resource development, learning by doing, possibilities of catching up, and technology acquisition. Rapid-growth countries are reliant on technological improvements for which they deploy the knowledge inputs.

Investment Trends:

Financed at least one-third by foreign capital, investment increased sharply from just 5 percent of GDP in the early 1950s to 22.5 percent by 1964-65. However, the suspension of aid after the 1965 war led to a consistent decline in investment and by 1969-70 it had fallen to 15.6 percent of GDP. The nationalization policy of the 1970s led to a sharp decline in private investment but due to an increase in public investment, the aggregate increased to 19 percent of GDP. After 1977 the government abandoned nationalization policies and encouraged the private sector but, despite an increase in private investment, total investment declined to around 17 percent of GDP over the 1977-88 period due to a drop in public investment. Because of the continuity of liberal economic policies, investment increased from 17.3 to 20.6 percent in the 1988-93 period as private investment increased sharply and public investment also increased but only marginally. However, because of the lack of continuity in policies which led to a reduction in private investment, the government commitment to reduce the fiscal deficit resulted in an overall decline in investment to 17.3 percent of GDP by 1997-98. The 1998 nuclear tests prompted the imposition of sanctions and investments in Pakistan gradually declined to 14.7 percent by 2001-02.

The revision of national accounts and change of base to 1999-2000 indicates underestimation of investment in Pakistan. Compared to the investment level of 16.0 percent in the old base, the revised figure shows an investment rate of 17.4 percent in 1999-2000. The difference was due to a revision of private sector investment estimates. Although the investment levels corresponding to the new base are higher, a declining trend is observed up to 2003-04 when the level declined to 16.6 percent of GDP. This later increased to 18.1 and 20.0 percent of GDP in 2004-05 and 2005-06 respectively.

“Developed, industrialized, just and prosperous Pakistan through rapid and sustainable development in a resource constrained economy by deploying knowledge inputs”.

2. ECONOMIC GROWTH AND PATTERNS OF DEVELOPMENT

Investment Trends:

Table 1: Trends in Investment

(Percentage of GDP)

Years	TotalInvestment	FixedInvestment	Public Investment	Private Investment	Share of private sector in fixed Investment
1987-88	17.3	15.8	8.5	7.4	46.5
1992-93	20.6	19.0	9.0	10.0	52.5
1997-98	17.3	14.7	5.2	9.6	65.3
1998-99	15.6	13.9	6.1	7.9	56.8
1999-00	16.0	14.4	6.0	8.4	58.3
1999-00	17.4	16.0	5.6	10.4	65.0
2003-04	16.6	15.0	4.0	10.9	72.7
2004-05	18.1	16.5	4.4	12.1	73.3
2005-06	20.0	18.4	4.8	13.6	73.9

Source: Based on Economic Survey, various issues.

A decline in investment has been observed in all the three major commodity producing sectors. The agriculture sector shows a persistent decline due to a decrease in public sector investment. Investment in the manufacturing sector increased over the 1998-93 period but, since then, there has been a declining trend. In the electricity and gas sector investments gradually increased up to 1995 due to Independent Power Producers (IPPs) but declined subsequently. It needs to be underscored that, despite an overall increase in 2004-05 and 2005-06, investment in the commodity sector has declined and almost the entire increase has been in the communications sector.

Table 2: Pattern of Investment

(Investment as a percentage of GDP)

	1987-88	1992-93	1997-98	2001-02	2001-02	2004-05	2005-06
Agriculture	1.8	1.5	0.9	0.8	1.6	1.0	0.9
Manufacturing	2.9	4.7	2.6	2.3	3.8	3.0	2.8
Power	2.0	2.5	2.5	1.3	1.3	0.5	0.6

Source: Economic Survey, various issues.

Foreign private investment

Whereas until the late 1980s, Pakistan had an ambivalent attitude towards foreign private investment, it subsequently encouraged this through various measures including:

(i) Issuance of a negative list of industrial activities for private investment.[2]

(ii) Removal of restrictions on maximum holding of equity by foreigners.

(iii) Remittances of dividends and disinvestment proceeds no longer require the State Bank’s permission.

(iv) Removal of restriction on raising loans from domestic market.

(v) Foreign firms are allowed to raise equity capital from the domestic market.

(vi) Investment in stock exchange has been allowed to be repatriated.

(vii) Restrictions on royalties and technical fees have been removed.

(viii) Guarantees to remittances of profit, capital, and appreciation of capital.

(ix) Similar income taxes on indigenous and foreign investors.

(x) Relief from double taxation.

(xi) Incentives to assemble through an indigenization programme.

These initiatives resulted in a significant increase in both direct as well as portfolio investment until sanctions were imposed on Pakistan following the nuclear tests in 1998. Foreign investment declined sharply to US $182 million by 2000-01, but since the removal of sanctions after 9/11, the investment levels have increased reaching US $3.8 billion in 2005-06. No doubt this figure includes privatization proceeds but even without them Foreign Direct Investment (FDI) exceeds US $1.5 billion.

Table 3: Foreign Investment

(Million $)

Years	Direct	Portfolio	Total
1987-88	—	—	177.0
1992-93	306.4	1368	443.2
1994-95	442.4	1089.9	1532.3
1995-96	1101.7	205.0	1306.7
1996-97	682.1	267.7	949.8
1997-98	601.3	221.3	822.6
2000-01	322.4	-140.4	182.0
2004-05	1524.0	141.0	1665.0
2005-06*	3450.0	350.0	3800.0

Source: Economic Surveys (various issues) and unpublished data.

* Provisional estimates

Labour employed:

Through the years, the active working population of Pakistan has been less than 30 percent. There was a declining trend till 1995 when it was as low as 27.46 percent. Since then, however, the percentage increased to 30.41 in 2004 (see Labour Force Survey 2004). The low employment level is because of the high proportion of the population below the age bracket of 15. Another reason is that many, especially women who constitute a sizeable segment of society, do not normally join the labour force for various reasons. These include the non-availability of jobs commensurate with their skills and the location of work places at a distance from their homes.

The rising proportion of the work force is not matched by a corresponding increase in employment opportunities. As a result, even though the number of gainfully employed people may increase, so does the unemployment rate as a percentage of the population. For example, the labour force grew at the rate of 1.64 percent in the 1980s and 3.0 percent during 1991-2004, but the employment rates increased by only 1.3 percent during 1981-1991 and 2.8 percent in 1991-2004. The unemployment rate, therefore, increased from 5.9 to 7.7 percent by 2004.

Growth of GDP:

The GDP growth of Pakistan on average has been around 5 percent over 1950-2006 and with a population growth rate of 3.0 percent, it translates into per capita income growth rate of about 2 percent. No doubt this performance is respectable especially when compared to other South Asian countries but it is, nevertheless, far lower than its potential as well as the spectacular growth achieved by South East Asian countries.

There is an interesting pattern to the GDP growth rates of Pakistan, rising and then falling in alternate decades with wide fluctuations within the decade. From a very low growth rate of around 3.5 percent in the 1950s, GDP increased sharply to 6.8 percent in the 1960s; it fell to 4.8 percent in the 1970s followed by an increase to 6.5 percent in the 1980s; there was a decline to 4.6 percent in the 1990s followed by an increase to 5.7 percent in the first five years of the current millennium. Instability in the growth rates has also been observed in the agriculture, industry and the manufacturing sectors but the fluctuations have been substantially lower in the service sector which showed growth rates of more than 6 percent over a 30-year-period which encompassed the 1960s, the 1970s and the 1980s.

Table 4: Trends in GDP growth rates

Period	GDP	Agriculture	Industry	Manufacturing	Services
1950s	3.5	1.7	8.2	7.7	3.1
1960s	6.8	5.1	10.9	9.9	6.7
1970s	4.8	2.4	6.1	5.5	6.3
1980s	6.5	5.4	7.6	8.2	6.7
1990s	4.6	4.4	4.3	4.8	4.6
2000-06	5.4	2.2	7.4	9.3	5.9
1950-2006	5.2	3.7	7.3	7.4	4.9
2003-04	7.5	2.3	16.3	14.0	5.9
2004-05	8.6	6.7	11.4	12.6	8.0
2005-06	6.6	2.5	5.9	8.6	8.8

Source: Fifty Years of Pakistan in Statistics and Economic Survey (various Issues)

During the 1950s, the government policies focused on the manufacturing sector to the neglect of agriculture and, despite the sharp growth rate in the manufacturing sector, the growth rate of GDP was confined to 3.5 percent. During the 1960s, the manufacturing sector kept the growth momentum and the agriculture sector also registered a healthy growth rate of 5.1 percent and, consequently, the GDP growth increased at a rate of 6.8 percent. Due to various factors including loss of the eastern part of the country, higher energy prices, and nationalization, the growth rate of the manufacturing sector slumped to just 5.5 percent, with the agriculture sector registering a growth of only 2.2 percent, the GDP growth declined to 4.8 percent. Due to the liberal economic policies during the 1980s, the manufacturing sector witnessed a growth rate of 8.2 percent, the agriculture sector 5.1 percent and services 6.7 percent resulting in a GDP growth of 6.5 percent. Inconsistent economic policies led to a low level of investment especially in the infrastructure. Load shedding, law and order problems and the demand management policies as part of IMF Stablisation and Structural Adjustment Programs led to a slow down in the GDP growth in the 1990s to 4.6 percent. During the current decade, the growth rate has increased to 5.4 percent and over the 2004-06 period it has jumped to 7 percent. The high growth achieved in the last three years, despite low levels of investment, is due to demand stimulus through bank credit for purchase of consumer durables which allowed the maximum utilization of the idle capacity.

Sources of Growth:

As noted earlier, growth is the result of both the accumulation of inputs as well as increase in the productivity levels. Total Factor Productivity (TFP) for the period 1964-65 to 2000-01 increased at a rate of 1.66 percent and for the agriculture and the manufacturing sectors the rates of increase have been 0.37 percent and 3.21 percent respectively[3]. Total Factor Productivity has contributed 31.26 percent to the aggregate growth; its contribution towards the growth of agriculture has been low i.e., 9.6 percent but in the manufacturing sector, it has been as high as 50.3 percent.

Table 5: Trends in Total Factor Productivity

(Percentage Growth Rates)

Sector	Growth rates	Contribution of		TFP
Sector	Growth rates	Capital	Labour	TFP
Overall GDP	5.31	2.48	1.17	1.66
Agriculture	3.89	2.70	0.82	0.37
Manufacturing	6.39	2.23	0.94	3.21
Contribution to
Aggregate Growth		46.62	22.12	31.26
Agriculture Growth		69.33	21.11	9.57
Manufacturing Growth		34.99	14.74	50.27

Source: Kemal, Muselhuddin and Qadir (2002)

Total Factor Productivity increased at a rate of 3.4 percent during the sixties, contributing 48.4 percent to overall output growth. It is noteworthy that TFP growth in the agriculture sector was 4.0 percent. In the manufacturing sector, TFP was 4.3 percent.[4] Growth in total factor productivity considerably slowed down in the seventies. For the economy as a whole, TFP increased at a rate of 0.8 percent, in the agricultural sector and in the manufacturing sector by 2.0 percent. The overall TFP for the economy grew at a rate of 2.5 percent in the 1980s; TFP in the agriculture sector declined but in the manufacturing sector it was as high as 5.4 percent. TFP growth decelerated in the 1990s to just 0.8 percent. While it recovered in the agricultural sector to 1.5 percent, it declined to 1.6 percent in the manufacturing sector. The growth in the current decade seems to be more in line with the increase in productivity levels due to better capacity utilization.

Whereas the growth in total factor productivity in Pakistan is relatively higher than the other countries, it needs to be noted that TFP in agriculture was stagnant; and rising levels of TFP in manufacturing reflects extreme forms of inefficiency in the base year and the growth is essentially catching up. It may be difficult to maintain the momentum unless major efforts are made towards improvements in human resource development. Non-availability of skilled workers has been one of the factors impeding the growth of productivity because, in the absence of such workers, producers make stopgap arrangements leading to sub-optimal decisions. Improvements in the science and technology infrastructures; streamlining of technology generation, absorption and diffusion systems are essential for further growth of productivity.

Table 6: International TFP Comparisons

Economy	Period	TFP
Pakistan	1964-2001	1.70
Bangladesh	60s-1985	0.33
Sri Lanka	60s-1985	1.25
Indonesia	1960-94	0.80
Malaysia	1960-94	0.90
Philippines	1960-94	-0.40
Thailand	1960-94	1.80
Republic of Korea	1960-94	1.50
Singapore	1960-94	1.50
Taipei, China	1960-94	2.00

Source: Kemal, Muslehuddin & Qadir (2002), Basudeb & Bari (2000) and Collin & Bosworth (1997)

Human Resource Development:

Despite some improvements in the last few years, Pakistan still ranks 135 in the Human Development Index (HDI) ranking of the United Nations and is barely above the Low Human Development Countries. Poor HDI ranking reflects low per capita incomes, low enrolments, and poor health indicators. Pakistan is one of the signatories to Millennium Development Goals (MDG) and it lags behind in 14 out of 34 indicators (See Planning Commission 2006). The Medium Term Development Framework: 2005-10 makes the bold promise to realize all of the MDG targets.

Table 7: Human Development Index

Year	Human Development Index
1975	0.363
1980	0.386
1985	0.419
1990	0.462
1995	0.492
2000	0.522
2003	0.527

Source: Human Development Report (2000, 2005)

Education

Fifty-nine years of independence, almost half the population is still illiterate and female illiteracy exceeds 60 percent.[5] Even though there have been some improvements in the enrolment rates at primary, middle and secondary levels, they continue to be low. The gross enrolments at primary level increased from 42.8 percent in 1980 to 72.0 percent by 2002 and to 86.0[6] percent in 2005. The net primary enrolment rate corresponding to the age group 5-9 shows a decline from 46 to 42 percent from 1995 to 2002 and to 52 percent in 2005.[7] The net enrolment rate in Pakistan is way below those of Bangladesh, India and Sri Lanka where it is 75, 77 and 100 percent respectively.

Besides low enrolments, retaining the students in the schools has been a major problem. Dropouts have been high at all the levels but more so at the primary level. As low as 44 percent of the enrolled children reach grade 5 due to a number of factors including deteriorating standard of education as a consequence of poor quality of teachers and lack of facilities in schools, but, more importantly, due to rising poverty levels in the country.

The poor performance of the education sector may be attributed to several reasons besides the low level of public expenditure on education and poor service delivery. The expenditure increased gradually from 1.4 percent of GDP in 1980-81 to 2.5 percent of GDP in 1996-97 because of the Social Action Program initiated in 1993. However, the increase in expenditure failed to raise the enrolment rate or retention in schools mainly due to poor monitoring and management as well as increase in poverty levels that forced the parents to withdraw their children from school. While no effort was made to improve governance aimed at better outcome with smaller investment levels, public expenditure on education has been falling and had gone down to just 1.7 percent of GDP by 2002-03. However, in the last couple of years it has increased to around 2.1 percent.

Due to the poor quality of public sector schools, private sector schooling has expanded sharply and at present accounts for at least 50 percent of the enrolments at the primary level. Nevertheless for increasing the enrolment further, public assistance for the poor to get their children enrolled in private sector institutions is essential.

Health

Since independence, health facilities measured in terms of doctors, dentist and nurses per 1000 persons have significantly improved and the average level of availability of these services are better than most of the developing countries. However, there exists wide inequalities in access to health-care facilities and the poor families, especially in the rural areas, have little access to medical facilities. Nevertheless there have been some improvements in health indicators. Immunization of children was negligible until the late 1980s but increased to 77 percent by 2004-05. Though the proportion of children suffering from diarrhoea has increased, the proportion of using ORS increased from 54 to 78 percent over 1998-99 to 2004-05. The proportion of pregnant women receiving tetanus injections has increased from 39 to 51 percent and almost the entire increase is due to improved coverage in the rural areas though significant differences still exist in the health-care facilities between the rural and urban areas. There has also been improvement in post-natal consultations and larger numbers of pregnancies are being attended by the doctors.

Despite these improvements, almost one-quarter of the children are not yet immunized and do not receive ORS when they suffer form diarrhoea which has increased over time as well. Life expectancy though up from 56.9 in 1984-86 to 64 is still far from satisfactory. The public health system is weak and is infested with a number of problems. The insufficiency of funds has made this sector inadequate and ineffective to help remove the suffering of the poor. The public sector expenditure on the health sector as a percentage of GDP shows an erratic but declining trend and is around 0.5 percent of GDP at present. Because of the failure of the government to provide adequate health services reflected in absenteeism and unavailability of medicines in the public health system, private sector participation in the health sector has increased but the poor cannot afford these services.

Demographic Trends:

Pakistan has witnessed a high population growth rate of around 3 percent per annum over a considerable period of time but due to a number of factors including the government’s active population welfare programmes[8] during the 1990s, there has been a sharp decline in the total fertility rate from 6.9 in 1984-86 to around 3.7 at present and a population growth rate of around 1.9 percent been achieved. As a result, the dependency ratio has gone down which promises demographic dividends as has been witnessed by the South East Asian countries but can be actualized only if Pakistan effectively implements human resource development programmes with emphasis on demand-driven training for the work force and generation of sufficient employment opportunities.

Housing Facilities:

Even though there is a shortage of 5 million houses, there has been some improvement over time in the housing facilities. The number of persons per housing unit has declined from 6.7 to 6.5 and rooms per housing units have increased from 1.9 to 2.2 over the 1980-1998 period. The nature of construction has also improved: the proportion of brick houses has increased from 44 to 58 percent. Most significant has been the improvement of various facilities including electricity, piped water and piped gas. The proportion of households with all such facilities has doubled over the last 25 years.

Access to safe water is essential for better health; two-thirds of diseases in Pakistan are water-borne. Unfortunately, data on safe drinking water is not available. Access to tap water within the house has increased from 26 to 39 percent over the 1999-2005 period and seems to have replaced the hand pumps. However, the quality of water may not be safe and the government has initiated a programme that promises country-wide access to safe water within the next three years.

Income Distribution and Poverty Trends:

Although the level of inequality in Pakistan has tended to be moderate compared to most other countries, it has increased significantly since 1987-88. The income is more unequally distributed in rural areas than in the urban areas.

Whereas over the long run there has been a decline in the proportion of the poor, during the 1990s poverty increased once again. During the 1960s despite the growth of GDP at a rate of 6.8 percent, poverty increased from 40.2 percent in 1963-64 to 46.5 percent by 1969-70; it increased in the rural areas from 38.9 to 49.1 percent because employment growth was just 0.5 percent but declined in urban areas from 44.5 to 38.7 percent due to a higher level of job creation. Despite a decline in the growth rate to just 4.4 percent in the 1970s, the proportion of the poor declined due to high growth of employment resulting from out-migration and the pro-employment generation policies of the government which also included generation of employment opportunities[9] within the government sector. Consequently, the proportion of the poor fell from 46.5 to 30.7 percent; in the rural areas from 49.1 to 32.5 percent and in the urban areas from 38.8 to 25.9 percent. During the 1980s, GDP grew at a rate of 6.5 percent and the per capita income at the rate of 3.1 percent. Poverty declined sharply because the increase in per capita income was accompanied with job creation and remittances. The proportion of the poor declined from 30.7 percent to 17.3 percent; in the rural area from 32.5 to 18.3 percent and in urban areas from 25.9 to 15.0 percent. During the 1990s, poverty increased sharply because of the decline in growth and very few employment opportunities in the formal sector of the economy. The proportion of population below poverty level increased from 26.6 to 32.2 percent over 1992-93 to 1998-99; in the rural areas from 29.9 to 36.3 and in urban areas from 20.7 to 22.4 percent. The proportion of the poor increased further by 1.5 percentage points up to 2000-01. Poverty seems to have sharply declined[10] over the 2001-02 to 2004-05 period. It may have been due to a good agricultural year and the high growth rates observed in 2002-05 period accompanied by employment generation.

Per capita income, employment and remittances are the major determinants of the changes in poverty levels. If the unemployment situation deteriorates it tends to increase the poverty levels. The relationship of growth, employment and poverty across various time periods shown in Table 8 reveal interesting patterns.

Table 8: Growth and poverty

Year	1963-64 to 1969-70	1971-72 to 1976-77	1976-77 to 1987-88	1987-88 to 1992- 93	1992-93 to 1998-99	1998-99 to 2001-02
Growth rate of GDP	7.16	4.83	6.66	4.82	4.22	3.16
Growth rate of Labour Force	1.67	3.49	2.54	1.85	3.61	2.48
Growth rate of employment	1.49	3.37	2.49	1.52	3.40	1.61
Changes in the Unemployment rate	0.98 to 1.99	2.06 to 2.62	2.62 to 3.14	3.14 to 4.71	4.71 to 5.90	5.90 to 8.26
Change in poverty level over the period	40.24 to 46.53	46.53 to 30.68	30.68 to 17.32	17.32 to 22.40	25.7 to 32.6	30.6 to 32.1

Imports, Exports and Balance of Payments:

Pakistan has been relying on non-tariff barriers including outright bans, quota restrictions, procedural requirements etc., for restricting imports to a level that could be financed by the availability of foreign exchange. Non-tariff barriers have now been removed and any such barriers that still exist are only for religious, health and safety reasons. The tariffs are the main protection instrument and have been rationalised. Similarly export duties and other restrictions on exports have been withdrawn and exports are actively encouraged through concessional credit, income tax rebates and duty drawbacks.[11] Because of import liberalisation, Pakistan’s dependence on international trade, as measured by the total trade to GDP ratio, increased significantly from 13.3 percent in 1960-61 to 28.2 percent in 1987-88 and has further increased to 34.0 percent in 2000-01, increasing by another 4 percentage points in subsequent years.

Table: 9. Degree of Openness in Pakistan’s Economy

(% of GDP)
Period	Exports	Imports	Openness
1987-88	11.61	16.66	28.28
1989-90	12.47	17.43	29.91
1994-95	13.46	17.20	30.66
1999-00	14.10	16.96	31.06
2000-01	15.75	18.32	34.06
2001-02	15.46	17.49	32.95
1999-00*	11.70	14.07	25.77
2000-01*	12.95	15.06	28.01
2004-05*	13.06	18.70	31.76
Source: Economic Survey 2004-05 and Previous Issues* indicates calculation based on the revised GDP in the new base

Pakistan’s exports over the last 55 years have increased at a rate of 8.4 percent. However, its exports have fluctuated widely; while exports declined in the 1950s they have grown at a rate of around 12 percent in the subsequent period. In the seventies, worldwide inflation and diversion of inter-wing to international trade resulted in a high growth rate of 22.35 percent. In the 1980s, exports grew at a rate of 8.6 percent and in the 1990s at a rate of 6.1 percent. During the first six years of the current millennium it has grown at a rate of 11.7 percent.

Table 10: Growth rates of exports

Year	US dollars
1950s	-5.72
1960s	10.72
1970s	22.35
1980s	8.55
1990s	6.11
2000-06	11.65
1950-2006	8.40

The data shows that exports have not only grown, there has also been a structural transformation of the exports. While in 1947-48, Pakistan hardly exported any manufactured goods and even by 1955, the manufactured goods accounted for only 8.7 percent of the exports, manufactured and semi-manufactured goods account for 78 and 11 percent respectively at present. We may add, however, that almost two-thirds of exports comprise textile products and the high dependence on one sector creates volatility and, without diversification of exports, the instability in foreign exchange earning may continue.

Pakistan’s imports have grown roughly at a rate of 10 percent over the last 55 years and, like exports, the import growth also fluctuated widely though these fluctuations have been less compared to exports. There has been a structural transformation of the imports as well. Whereas at the time of partition the manufactured consumer goods formed an overwhelming proportion of the imports, at present these are the industrial raw materials and the capital goods which account for almost 90 percent of the imports.

Exchange Rate Policy:

Pakistan’s exchange rate has always been overvalued and the equilibrium in the foreign exchange market has been brought about through a complex foreign exchange system. Until 1982 Pakistan devalued her currency only twice: first in 1956 and then in 1972 (it was re-valued in 1973). In 1982 the rupee was de-linked from the dollar and the State Bank announced exchange rates by taking into consideration changes in a basket of currencies chosen on the basis of the country’s major trading partners. Throughout the 1980s, Pakistan continued with the system of a managed float exchange rate system. During the 1990s, the exchange rate remained overvalued despite several adjustments. At present Pakistan has a free float exchange rate system and the State Bank intervenes only if it feels that the currency may overshoot.

Fiscal Policy:

Pakistan has been relying heavily on indirect taxes especially trade taxes but in recent years reliance on trade taxes has been reduced and replaced with an increase in the sales taxes. Import duties have been rationalised and the maximum import duty at present is 25 percent. The tariffs on most of the raw materials have been brought down to 5 percent, on most of the intermediate products in 5 to 20 percent range and on most of the finished products in the range of 20 to 25 percent. The share of excise duties show a consistent decline as most of the products subject to excise taxes have been brought under the sales tax net. To compensate for the decline in revenues from import duties and excise duties, a generalised sales tax was introduced in 1989-90 but its progress has been patchy. Introduction of sales taxes has increased the tax burden of the poor and the mild progression in the tax structure observed in the earlier years has turned into regression.

The public expenditure of Pakistan is heavily influenced by defence expenditure and debt servicing which leaves very little money for human resource development, subsidies and development expenditure. The agreement with the IMF, which had an upper limit for the fiscal deficit, led to a reduction in subsidy and development budget with implications for growth and poverty.

Monetary Policy:

Monetary policy by changing the monetary aggregates impacts the interest rate, inflation, and foreign exchange reserves with implications for investment, growth, employment, and poverty levels. The high fiscal deficit in Pakistan over the years has made it difficult to achieve the twin objectives of price stability and growth. In recent years even though the fiscal deficit has declined to a low level, money supply continued to rise at a rapid rate because of the huge amount of remittances received and the policy of the State Bank of Pakistan to accumulate reserves and keep the rupee above the market rate in the absence of interventions with a view to encouraging exports.

The rates of nominal interest on advances have been quite high except for the 2002-04 period when they fell sharply due to a steep increase in the liquidity with the banks. The average interest rate on advances declined from 14.47 percent in 1998-99 to 7.48 percent in 2003-04. The real rate of interest on advances has been positive and increased to around 9 percent in the late 1990s but fell to 2.7 percent in 2003-04. While the interest rates have been quite high, the rate on deposits have been low and in 2003-04 it was as low as 1.3 percent. The spread between the advance and deposit rate has been quite high in the range of 7 to 9 percent compared to 2 to 3 percent in the world.

Pakistan introduced regulations in 1993 to ensure that credit is not misused and the infected portfolio diminishes. However, the infected portfolio had increased to significant proportions; by 2001, non performing loans (NPL) amounted to Rs. 279 billion, i.e., 6.7 percent of GDP, 18.6 percent of domestic assets, and 32.5 percent of total credit made available to the private sector and public enterprises. Non-performing loans of the banking sector were Rs. 221 billion, i.e., 6.5 percent of GDP and 22.1 percent of total deposits. Out of NPLs, the defaulted loans of the financial institutions and the banking sector were Rs. 172 billion and Rs. 141 billion respectively in 2000-01. Because of such a large infected portfolio, the spread between lending and deposit rate has remained high. However, the non-performing loans as well as defaulted loans have declined since 2000-01. It is estimated that in June 2005 the non performing loans were Rs. 220 billion and defaulted loans were Rs. 147.8 billion which is approximately 3.98 and 2.67 percent of GDP. It represents 8.8 percent of total advances, and 32.5 percent of the total credit extended to the private sector. By March 2005, non-performing loans had fallen further to Rs. 203.7 billion.

The credit distribution has been quite uneven and small enterprises have not been able to get loans due to various factors. With a view to meeting the credit needs of the micro, small and medium enterprises, the government has set up a Poverty Alleviation Fund (PPAF) and Khushhali Bank for micro enterprises and Small and Medium Enterprises (SME) Bank for the SMEs. Whereas a large number of households have been able to obtain small loans ranging between Rs 10,000 to Rs 100,000 from PPAF and Khushhali Bank the SME bank has not been able to operate effectively because of a lack of finances.

Debt Issues:

Rising fiscal deficit during the 1990s led to a sharp growth of public debt and balance of payments deficit resulted in an increase in the external debt. Public debt was as high as Rs. 4003 billion i.e., 115.3 percent of GDP; internal debt was 48.4 percent and external debt 64.9 percent in 2000-01. The debt servicing was as high as 55.4 percent of export earnings in 1997-98 mainly due to a preponderance of short term debt. However, after the debt rescheduling granted in 1998-99 it declined to 37.4 percent of exports earnings in 2000-01.

Since 2000-01 debt has somewhat stabilized; as a percentage of GDP it has declined from 93.3 in 2000-01 to 72.3 percent in 2004-05. (See State Bank, 2005). The decline in debt has been due to a number of factors. First, some of the debt has been written off while some has been converted into debt-social sector spending swap. Pakistan got debt relief amounting to $ 1495 million from the US. Second, the denomination in rupees is affected by the exchange rate changes; the foreign debt denominated in the local currency declines as rupee appreciates against dollar. Third, there has been smaller budget deficit and at least a part of that has been financed through grants rather than loans. Fourth, there has been a reduction in the interest rate and the borrowing for repayment has been less costly. Fifth, rising remittances have improved the balance of payments situation and allowed the government to retire the expensive loans. Resultantly, debt servicing as a percentage of exports, foreign exchange earnings, or public revenues has declined significantly.

With an increase in fiscal and balance of payment deficits in recent years, there is an imminent danger that debt may rise once again at a rapid pace. We may note that whenever the debt crisis assumes significant proportions, the resource inflows dry out and there is a negative transfer of resources from the debtor countries. The investment tends to fall as the debt rises beyond safe limits, investible resources fall due to sharp increase in debt servicing, investors loose confidence, demand falls to low levels, interest rates start rising and there is a massive capital flight [see Williamson (1989), Ahmed and Summers (1992), Fishlow (1985), and Lustig (1999)]. Therefore all efforts need to be mounted to ensure that the debt does not assume alarming proportions

Development of Physical Infrastructure:

Infrastructures play an important role in the growth process. Despite an impressive growth in the infrastructure facilities over time, the infrastructure situation is quite inadequate and unsatisfactory. Even though energy consumption has increased, it is still below various developing countries surrounding Pakistan. Starting with less than 25 MW electricity generation capacity in 1947-48 at present Pakistan has generating capacity of 19439 MW[12] but the problem of load shedding continues to exist. Moreover, at the time of independence power was not available even in some towns; almost 100 thousand villages out of 125 thousand villages in Pakistan now have power supplies. The challenge is to provide power supplies to the remaining 20 percent of the villages.

The roads have increased from 14 thousand kilometres at the time of independence to more than 258,340 kilometres and the number of vehicles has grown from 12 thousand to 6845 thousand. The capacity of Karachi port has been enhanced and the Bin Qasim port was established and is being upgraded. The Gawadr port is soon to be inaugurated. However, the railways have suffered badly. It has lost in terms of passenger and cargo business. The length of track, the number of wagons and engines have gone down.

There were only two radio stations in Pakistan at the time of independence, but at present there are twenty-two. Similarly, in 1947 radio sets were owned by a very few persons, at present almost everybody has a radio or television. The number of post offices has increased from 3,086 to 12,411 and there are courier services. The total number of telephones was no more than 10 thousand at the time of independence but at present they exceed 5.2 million and mobile connections exceed 27.3 million. Internet facilities are also available but the connectivity problem persists.

III. ISSUES AND THE CONSTRAINING FACTORS TO THE DEVELOPMENT PROCESS

There are various factors that have constrained the achievement of the Quaid’s vision and some of these are discussed in this section before presenting a strategy for future economic development in the next section.

Absence of Long-term vision.

Whereas the founder of the nation had given a vision for the economy soon after independence, the policy makers never adhered to that vision while formulating the strategy and various policy measures. Economic policies have been politicized and, in general, formulated for the benefit of the elite and privileged but not the common man. Because the policies were crafted for the vested interest groups without taking into consideration the long term interest of the country, changes in the government led to reversals of the policies. Such revisions erode investor-confidence while policies designed to benefit mostly the privileged few result in stark disparities in income distribution.

Low Level of Investment:

Investment levels in Pakistan have all along been low around 18 percent of GDP, whereas for a sustained growth rate of 7 to 8 percent the minimum level required is between 25 to 30 percent of GDP. The low investment rate is the result of both low levels of investible resources as well as issues such as investment climate.

Savings behaviour

Investible resources comprise savings and capital inflows such as grants, loans and foreign direct investment. The savings rate in Pakistan has been low, around 14 percentage of GDP, with three adverse consequences for the economy. First, the low savings resulted in low investment levels and to increase this, the country had to rely on foreign capital with rising debt burden which, in turn, had serious implications for growth and distribution. Second, since a significant proportion of investment had been financed by foreign capital, investment and growth showed wide fluctuation whenever aid was suspended and, on occasions, economic and even political sovereignty was threatened. Third, the foreign capital inflows had a negative impact on the savings rate and. instead of supplementing domestic resources, supplanted the resources.

It is important to distinguish three types of savings, viz., household savings, corporate savings and government savings. The low per capita income, high interest rates, under-developed financial system have been responsible for the low rates of private savings. Reduction in fiscal deficit can be helpful in the promotion of savings, provided resource mobilization efforts are not at the cost of private savings. The privatization of public enterprises is expected to result in higher corporate savings rate.

Demand for investment

Public investment depends on the role assigned to government in the economy and availability of revenues. Whereas the government is divesting the public enterprises and has decided that public sector investments will be restricted to only those sectors where private investment is not forthcoming, non-availability of fiscal space has constrained public sector investment so much that it has not been able to provide for even the necessary social and physical infrastructure.

Private investment depends on the availability of profitable opportunities and these depend on the consistency and continuity of policies, availability of skilled workers, availability of inputs at competitive price, facilitation by the government etc.

Balance of Payments Deficit:

Persistent balance of payments deficit is also a reflection of inadequate savings to finance the requisite investment. Whereas there has always been a deficit in balance of payments, it turned surplus during 2001-04 due to a sharp increase in workers’ remittances. The current account balance, however, turned negative because of the steep increase in trade deficit in 2004-05 and 2005-06. Since the remittances have stagnated around US $ 4 to $ 4.5 billion a further increase in the import bill for machinery, intermediate products and raw materials as well as higher petroleum prices will impact adversely on the trade balance and the balance of payments deficit may rise further. If the growth rates of exports do not significantly exceed those of imports, the GDP growth may also be badly affected because of the balance of payments problems.

Debt Problems:

With the rescheduling of US $ 12.5 billion debt and resumption of aid flows after 9/11 events, the immediate debt problem of Pakistan has been resolved. Debt servicing has increased to manageable levels and that has allowed the government to increase development and social sector expenditures. The three main factors that helped in reduction of fiscal deficit are positive primary balance; low interest rates; and stabilisation of currency.

The primary balance turned positive not because of an increase in revenues but due to a reduction in the public expenditure. Since the public expenditure needs to be increased for growth, the primary balance would remain surplus only if the revenues increase substantially. We may also note that there is a possibility of an increase in the interest rates and, considering the high rate of inflation, there may be instability in the exchange rates. Therefore it is important that the fiscal deficit is kept within manageable limits by not keeping the expenditure low but through revenue generation.

Deregulation of the Economy:

Until the mid-1980s almost all the private sector activities were subject to government control. The government administered prices; investment sanctions were required prior to setting up any firm; credit was rationed and regulated by the State Bank of Pakistan; trade was controlled through import and export licenses; and the foreign exchange system was administered through a foreign exchange budget formulated by the ministry of finance and the State Bank. However, Pakistan’s economy has been considerably deregulated over the last 20 years. The government no longer controls prices except in the power, gas and oil sectors and even for these the government has appointed various regulatory agencies.

Privatization:

There are four main issues in privatization. First, there is still confusion as to what are the strategic assets that may not be privatized. Second, transparency in the privatisation process has been an issue especially in the determination of reserve price of the privatized firms. People are rarely taken into confidence about the valuation of assets, determination of liabilities, labour issues, payment of golden handshakes etc. Third, the private sector is expected to improve the efficiency levels by reducing the cost of production to maximize the profits but it is possible only in a competitive framework. How to provide the competitive framework has been a major problem for the government. Whereas in case of traded goods, a liberal import policy can help in forcing the producers to reduce prices, the lobbies do not allow the government to do so. In the case of non-tradable goods, the government has appointed regulatory bodies but they neither have the staff well-versed in regulation, nor are their decisions final and the government still intervenes. Moreover, there is always a danger that the producers may take over the regulatory agencies. Fourth, the non-transparent way of privatizing has led to malpractices such as lower values of the privatized enterprises and, instead of reducing fiscal deficit, could in fact increase the deficit.

Lack of Coordination:

Economic policies cannot be effectively implemented unless all the ministries and departments are well coordinated. This is indispensable because investment decisions are based on such factors as the ease with which land can be acquired, the provision of utilities, the incentives and tax benefits that are granted etc. These elements require coordination if investors are to be facilitated or else there may not be any investment. Furthermore, lack of coordination amongst various ministries/departments at the time of policy formulation can result in subsequent reversal of policies. We may note that over the 1988-97 period various fiscal incentives were granted under different schemes including special industrial zones, industrial estates, rural industrialization etc. The incentives included tax holidays, concessionary duties on imports of intermediate and capital goods, exemptions from sales taxes, lower interest rates, freight subsidy, lower fuel costs etc. However, most of these incentives were withdrawn later. The consequence was that most of the production units became sick with attendant wastage of resources and the result was increased unemployment and poverty.

Political Instability:

There have been frequent changes in the governments while the constitution of Pakistan, or a part of it, has either been suspended or amended at various points in time. Changes in the government also implied changes in economic policies because these are not formulated in the long-term interest of the country. Owing to the ease with which changes in the constitution have been effected, guarantees provided by the governments have lost value. One of the main reasons for decline in the investment rate after 1992-93 has been the frequent changes in governments followed by reversal of policies and, at times, even arbitrary arrests of various investors.

High Cost of Doing Business:

The entrepreneurs feel that cost of doing business is high in Pakistan due to a number of factors. First, bureaucratic red-tape delays investment decisions and the cost of projects increase significantly. Whereas de-regulations in terms of price, investment, import regulations, and foreign exchange control have been quite significant, a corresponding change in the bureaucratic mindset is required. Second, discretionary powers have been misused by various public officials resulting in rampant corruption and thus increasing the cost of doing business. Third, obtaining the power connection is difficult, time-consuming and costly. More often than not, the investors have to bear the cost of cable and other expenditures from the main line to the factory. Moreover the power tariff for industries is high because of a cross-subsidy whereby the industrialists, who are bulk purchasers, find themselves subsidizing households, the high cost of generation and transmission. Furthermore, there is load-shedding leading to major problems especially to the continuous process industries. Fourth, land prices have increased sharply and because of the absence of industrial estates it is difficult to set up a new industry. Moreover, even if an industrialist is willing to pay high land prices, there is problem about the land title. Fifth, the tax rates in Pakistan are still high compared to competitor countries. There is also multiplicity of taxes. The tax officers have been using their discretionary powers for their own gains and penalizing the industries. Sixth, collection of labour levies by a large number of inspectors has meant an increase in the cost and waste of time.

Low Levels of Productivity:

Due to various factors Pakistani industries are suffering from technical, allocative and X-inefficiency. The distorted tariff structure has been the major factor behind this and with tariff rationalisation the inefficiency levels must have declined but tariff needs to be further rationalized.

Unbridled Wastage:

There is waste of resources in terms of pre and post-harvest losses, the high rejection rate in case of various industrial products, poor quality, standardization etc. At the same time, there is a huge waste of public sector expenditure, both current and capital, which constrains the delivery of various public services including education and health. The Planning Commission estimates that around Rs 600 billion is the annual wastage.

Human Resource Development (HRD):

The improved human resource development indicators are helpful in raising productivity levels, improving quality of life and creating a virtuous cycle for intergenerational economic and social mobility and poverty eradication. The three HRD activities, such as education, health and training are rather poor.

The lack of quality education has been the most important variable in low productivity and poverty. The access to education facilities remains inequitably distributed across income groups and provinces. While the well-off sections of the society send their children to private schools, where presumably the quality of education is better, the poor cannot afford to send their children to such schools. The non-availability of quality public schools has constrained the enrolment and retention rates.

Despite some improvements, health facilities continue to be poor. The low levels of expenditure and improper distribution between preventive and curative health and service delivery are the major problems in the health sector. Like education, a large number of private clinics and hospitals have sprung up who provide better services, but they are beyond the reach of a common man.

Probably the single most important cause of low productivity in Pakistan is the dearth of skilled workers. Not only is the number of technical and vocational institutions low but enrolments are few and the quality of the pass-outs leaves much to be desired. Outdated syllabi, inexperienced teachers, lack of coordination between the industries and the training institutions and outdated laboratories have been the major factors towards the poor training.

Science and Technology Infrastructure:

Pakistan is ranked 87 out of 104 countries in the technology index and is classified as marginalized. Its high technology exports are less than one percent of its exports and R&D expenditure is only 0.24 percent of GDP compared to 3.0 percent in South Korea. There are hardly any scientific and technology information centres, very few technology parks, incubators or common facility centres. The learning centres for science and technology are very small in number and there is hardly any linkage between these institutions and the industry. There are very few public sector R&D institutions and there has been little interaction between these institutions and industry. Moreover, there has been hardly any R&D activity in the private sector due to various factors including lack of demand resulting from import substitution industrialization strategy, failure to internalize the benefits from innovation, and the policy environment to support R&D etc.

Poor Physical Infrastructure:

Even though there has been significant improvement in the physical infrastructure, it is far from adequate. The railway system, which is normally used for the long haul all over the world, is in shambles. Similarly, even though port facilities have improved, the port authorities are inefficient. The time in loading and unloading of ships in Pakistani ports is too high compared to ports elsewhere and this increases costs.

Social Safety Nets:

The social safety nets enable the poor to better manage their risks by preventing them from distress sale of their assets; providing them a system of income insurance to protect them through short term stress and calamities; and taking care of their long term disability. In Pakistan the social safety nets comprise food support programmes, revamping of social protection system (primarily through Zakat and Bait-ul-Mal system), and expansion of micro credit facilities at the doorstep of the poor. In recent years, income generation and employment creation programmes through integrated small public works programmes have also been initiated. These programmes have inadequate resources and the delivery services leave much to be desired. The philanthropic organizations in the private sector also need to be coordinated.

Poor Governance:

Poor governance is the root cause of most of the problems of Pakistan and is manifested in all spheres. Poor governance implies that, despite inputs for better services, the outcomes would be poor. One of the major causes of inadequate health and education services is poor governance and, despite an increase in expenditure under the Social Action Program, the human development indicators continue to be low.

IV. STRATEGY FOR PROSPEROUS AND JUST SOCIETY

For realizing the potential of the economy and distributing the income judiciously the constraints outlined above need to be removed and pro-active policies pursued. The strategy outlined in the following has been grouped:

(a) Sustained growth and competitive production structure

(b) Availability of infrastructure;

(d) Improved governance.

(a) Sustained Growth and Competitive Production Structure.

Sustained Growth

High growth rates can be sustained provided the production capacity increases and there is an improvement in the productivity levels. Whereas productive capacity would increase if the investment increases rapidly so that the capital stock increases and the productivity level increases if there are better human development activities especially training. For increase in investment, consistency and continuity of policies have to be ensured; training facilities improved; the tax and labour levies made competitive; and social and physical infrastructures provided.

For self-reliant growth it is essential that most of the investment is financed by domestic sources. However, even for low levels of investment it relies heavily on foreign capital. Therefore, a conducive atmosphere for households savings where savings are rewarded and consumption is not encouraged, corporate savings need to be encouraged through improvements in the productivity levels leading to increase in profits and tax structure that does not penalize the retention of profits for investment purposes and increase in the revenues so that the government dissaving at present is converted into higher levels of government savings.

Export-oriented Production Structure

Pakistan has pursued an import substitution industrialization strategy which breeds inefficiency but if the country is to improve the efficiency level it must follow the export oriented industrialization strategy. This involves tariff rationalisation thereby ensuring that inputs are available at competitive prices. Therefore, all such schemes meant to provide duty free imported inputs need to be reformed. To ensure that importing countries do not unfairly impose anti-dumping and countervailing duties on Pakistani products, the government and the private sector must develop capacity to counter such moves.

Increasing the Share in the Geographic Division of Labour

Various economic activities are vertically integrated internationally, and the sub-processes of these ventures are located in different countries. Pakistan can act as a sub-contractor and increase its production and exports. A start can be made by entering into sub-contracting agreements with the Chinese manufacturers.

Producer-Customer Compact

Pakistan has been exporting products without brand names whereas internationally there has close interaction between producers and customers with the forming providing after sales services to the latter. This helps in winning the confidence of the customer and in increasing sales within and outside the country.

Reliance on the Private sector

Private sector led industrialization needs to be promoted but should be regulated to avoid exploitation of consumers. The government’s role will be to facilitate private enterprise. Effective public sector institutions would be set up and their performance measured by the efficiency they are able to bring to the system through improvement in quality and ensuring a competitive market structure.

Improving the S & T infrastructure

A scientific culture needs to be created both in the universities and institutes as well as in the industrial sector through public investment in R& D and encouraging the private sector through tax breaks to participate in such activities. Export-orientation and exposing domestic producers to competition necessitate the reduction in production costs. Better quality products generate demand for R&D. This can be met by strengthening the existing institutions and setting up new facilities. Special performance awards maybe given to scientists and technologists. Effective implementation of the intellectual property rights would help in the promotion of research and internalize the benefits from innovation.

Development of Clusters

Whereas the government, with the help of UNIDO, is developing a few clusters it should develop clusters in all types of industries so that the SME producers are able to compete in the world market. Government intervention through clusters where common facilities are provided would help in reducing production costs of the industries set up in the clusters.

Development of skills

With a view to meeting the shortage of professional and skilled manpower, the provincial and federal governments have set up training authorities which will co-ordinate activities previously undertaken by diverse ministries/departments. While the initiative is good, it will yield optimum results only if sufficient resources are allocated. The funds should be used for revising syllabi, training of teachers and improving laboratories. A coordinated mechanism is required to ensure that the training is in accordance with the needs of the industries. A public-private partnership is needed for this purpose.

(b) Availability of Physical Infrastructure

The provision of infrastructure at competitive rates and institutional support would go a long way in improving competitiveness and realising the export potential. The quality of infrastructure and their cost are the two crucial variables determining competitiveness.

Energy

The government has approved an energy plan for 2030 for which WPADA has formulated a Hydro Plan. This must be implemented forthwith. The power mix should be such that the cost of generation is minimum, line losses reduced and the power tariffs rationalized. The private sector should be allowed in energy generation and transmission as long as they provide the power at competitive rates.

Railways Network

The best long haul mode of transport is the railways but in Pakistan, at present, the goods traffic through this method is limited. The track needs to be relayed and extended, new engines and goods wagons are required. The private sector should be encouraged to lease tracks and run the goods trains.

Road Network

Although Pakistan has a well developed road network, those leading to the production locations especially to the industrial estates like Hattar and SITE are in poor condition. Construction of such roads needs to be prioritised and the government may award the contracts on BOOT or BOO basis to the private sector.

Shipping

Though the port facilities have improved, the time taken to off-load is much higher than at the ports in Singapore and Dubai. To improve efficiency, the ports may be handed over to the private sector.

Air network

Extension of the air cargo network to provide all the storage facilities at various airports will help in the realization of the objectives for which the cool-chains are being established as has been announced in the trade policy. The capacity of cargo handling needs to be enhanced.

( c ) Improving the Socio-economic Status of the Individuals

The primary objective of economic development is to raise the living standards of the common man by proper distribution of income and providing the basic civic amenities.

Equitable Distribution of Income

Economic growth may not trickle down to the poor if it results in further deterioration in income distribution. There is need for the promotion of pro-poor growth involving higher employment generation so that the share of the workers in total GDP increase would be ensured. In the rural areas promotion of livestock industry, agribusiness and rural industrialization and in urban areas promotion of garments, light engineering and construction industries and various service sectors would help in generation of employment.

Revamping the Education System

Education, at all levels, particularly at primary and secondary levels should be the focus. The broad issue of literacy, numerology and related skills provided at primary level with the more advanced skills and flexibility at secondary level are pivotal ingredients in the development process. For increasing enrolments and retention of the students, the quality and relevance of education needs to be improved.

Distribution of Land amongst the Landless

State lands should be distributed amongst the poor for cultivation purposes. In the urban centres, 3-marla schemes may be introduced for the construction of houses by the poor. The Katchi Abadis need to be regularized, but at the same time, it should be ensured that new ones do not spring up.

Balanced growth across regions

Pakistan is a federation and all the provinces of the country must grow and the backward regions should be provided more resources so that the standards of living in all the federating units are similar. The federating units should be provided resources in accordance with their needs and enabling measures would help in attracting private sector investment.

Empowerment of Women:

The women in Pakistan are left behind in most of the fields. Pakistan has signed MOGs and one of them calls for gender balance.

( d) Good Governance

Neither sustained economic growth nor improvement in the social services is possible without the restoration of governance in the country. Poor governance ranges from: (i) ineffectiveness in policy implementation, (ii) widespread corruption in the public services and financial institutions, (iii) inability to raise revenues, (iv) failure to target policy to selected groups or sectors and, (v) inability to regulate or monitor potentially hazardous economic behaviour to protect the lives and livelihoods of citizens.

V. CONCLUSIONS

We are still far away from the vision of the founder of the nation comprising a prosperous and just society without hunger and starvation and with equal opportunities for all sections of the society. To realize that vision, the present study has outlined a strategy for overcoming the various constraints that had impeded the growth and better distribution of incomes and has also outlined pro-active remedial policies.

The various constraining factors include politicization of the government policies with a focus on benefiting the elite and the privileged; reversal of economic policies; rising debt burden; high cost of doing business; inefficiencies in the production process; distortion in the protection structure; poor human development; substandard technology level; poor skills; lack of good infrastructure and governance; and inadequate social safety nets. For realizing the potential of the economy and distributing the income judiciously a strategy has been proposed by way of sustained growth and competitive production structure; availability of infrastructure; improvement in the socio-economic status of the individuals; and improved governance.

Pakistan can sustain high growth rates provided investment levels are increased and the government implements the human resource development strategy effectively. Pursuit of an export oriented industrialization strategy involving tariff rationalisation, ensuring that inputs are at competitive rates, increasing the availability of skilled workers in accordance with demand and developing the quality of infrastructure would be conducive towards achieving high growth rates. The government must continue the policy of relying on and facilitating the private sector.

It needs to be underscored that without proper governance neither sustained economic growth nor improvement in the social services is possible.

If the recommended strategy is effectively implemented, Pakistan has a great future but if the constraints are not removed in the short run then it will take unacceptably long to achieve the goal of the Quaid.

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[1] The author is a former Sirector of the Pakistan Institute of Development Economics and has been nominated for the award of Sitara-e-Imtiaz on 14 August 2006.

[1] The investment levels besides a large number of factors including consistency and continuity of policies also depend on the fiscal deficit, corporate tax rates, import duties, sales taxes and excise duties. The protection structure and fiscal incentives play a crucial role in the allocation and utilization of investment.

[2] Industries on negative list are the ones for security and social reasons such as arms and ammunition, security printing, currency and mint, high explosives and radioactive substances.

[3] Total factor productivity may be estimated through the ratio method or the Solow’s residual method. In the present study estimates corresponding to the latter method are presented and for the residual method please see Kemal, Muslehuddin and Qadir (2002).

[4] As a matter of fact, if only large scale sector is taken into consideration, it exceeded five percent [see Kemal (1978)].

[5] The definition of a literate person in Pakistan census, the only source of data on literacy, is the one who can read or write with some understanding. An individual without any knowledge of simple arithmetic functions such as addition, subtraction multiplication or division is classified as literate person.

[6] The data for 2005 is taken from Pakistan Social and Living Standard Measurement Survey (PSLM) which may not be strictly comparable with the data for previous periods.

[7] Net enrolments for 6-10⁺ age group increased from 44 percent in 1995 to 51 percent in 2002 (PIHS) and to 60 percent in 2005 (PSLM).

[8] Contraceptive prevalence rate though still low has increased over time and main factor behind this has been the lady health workers induction especially in the rural areas.

[9] Most of the jobs were created in the public sector where the growth rates have been around 6 percent per annum which had serious implications for the employment generation in the 1990s. these

[10] Government has revised the base year figure upwards and the data for 2004-05 may not be strictly comparable with earlier data. Moreover, the 2004-05 is abnormal year from the growth standpoint and therefore it is too early to say if the downward trend in poverty would continue.

[11] However, despite duty draw backs, bonded warehousing, export processing unit and no-duty-no-drawback schemes, the exporters feel that they have been unable to get imported inputs at competitive rates. In 2005-06 budget, government has allowed the imports of all raw materials and machinery duty free for the five major export oriented industries.

[12] Generating capacity of WAPDA, Karachi Electric Supply Company, IPPs and thermal power at present is 11,363 MW, 1,756 MW, 5858 MW and 462 MW respectively..

Dr. A.R.Kemal, is a former Director of the Pakistan Institute for Development Economics and was recommended for the award of Sitara-e-Imtiaz on 14 August 2006.