WEB DESK
The World Bank (WB) on Friday said that Pakistan’s economy can grow sustainably only if the country introduces reforms that can enhance productivity while better utilizing resources in dynamic activities, and of more productive uses of talent.
This was contained in a new report launched on Friday titled Economic Memorandum on Pakistan: From Swimming in Sand to High and Sustainable Growth, A Roadmap to Reduce Distortions in the Allocation of Resources and Talent in the Pakistani Economy.
The report focused on growth in Pakistan, and on key aspects why it has been unable to do so thus far:
- Productivity,
- Capital, and
- Talent accumulation
Productivity is crucial in accounting for differences in standards of living across countries and time.
In addition, and particularly at the level of development of Pakistan, factor accumulation, investment, and human capital, also matters.
Talent and resources
The report finds that the country’s inability to allocate all its talent and resources to the most productive uses which stunts economic growth.
The World Bank report presented evidence of how productivity systematically stagnates across firms and farms.
In manufacturing and services, most of the productivity stagnation is related to firms losing efficiency over time.
The report also shows a systematic decline in agricultural productivity, as well as a strong link between elevated temperatures and rainfall variations and productivity.
Pakistan’s current GDP is on decline
Over the past two decades, the report noted that Pakistan’s per capita GDP growth has been low.
Periods of relatively fast growth have been interrupted by the accumulation of external vulnerabilities that tend to result in balance of payments crises, leading to abrupt halts to growth.
A model of growth that is driven by consumption and government expenditure rather than by investment and exports is at the core of Pakistan’s growth challenge.
As identified in 2019 in Pakistan@100: Shaping the Future (2019) report, to become an upper middle-income country by its centenary in 2047, Pakistan needs to accelerate and sustain growth at 6% to 8% per year.
Three years later, and hit by the disruptive effects of the COVID-19 pandemic, Pakistan, the report said, has diverged further from that outlined path.
Thus, achieving the objective of reaching upper-middle-income status by 2047, will require returning to a path of sustained and focused structural reforms.
Reduce female employment gap with Bangladesh
The report noted that Pakistan can accrue GDP gains ranging between 5% and 23%, solely by closing the female employment gap relative to its peers, depending on the extent of implementation of complementary labor market policies.
About 7.3 million new jobs would be created if Pakistan were to close its female employment gap with Bangladesh, and the share of workin-age women in employment would increase from its 2018 level of 22% to 34%.
Pakistani exports small, struggle to grow
Pakistan showed lower-than-average proportions of very large firms. In the export sector, this is especially apparent.
International evidence shows that ‘export superstars’ are the ones driving export growth and diversification.
However, on average, exporters in Pakistan are small. For example, an average Pakistani merchandise exporter ships $1.4 million worth of merchandise a year.
By contrast, the average Bangladeshi merchandise exporter ships $3.8 million.
Untapped FDI potential, estimated at $2.8b annually
Pakistan’s untapped FDI potential is estimated at around $2.8 billion per year.
Tapping that potential would lead to more than doubling current inlow levels. This estimated untapped potential FDI does not imply a ceiling but rather what would be expected given Pakistan’s characteristics, and average policies and implementation capacity.
However, attracting export oriented, or efficiency enhancing FDI will require active policies to reduce trade costs, streamline the regulatory environment, and reduce policy uncertainty.
Currently, the type of FDI in Pakistan is mostly inward oriented, with limited productivity spillovers to the rest of the economy.
Evidence presented in Chapter 6 shows that in Pakistan there are positive but limited productivity spillovers from FDI in upstream sectors.
ABC of growth
The underlying framework of analysis and orientation of public policy recommendations is what is known as the ‘ABC’ of growth.
This ‘ABC’ implies improving allocative efficiency of resources and talent, encouraging business-to-business connections and spillovers, and strengthening firms’ capabilities.
Public policies oriented to create an enabling environment around these three pillars will be powerful in boosting sustainable growth.
Efficient allocation of talent and resources
The efficient allocation of talent and resources, and the business-to business interactions leading to spillovers and the conditions to upgrade capabilities, are limited by economic distortions (or market failures) that inhibit the growth process, sometimes making it as difficult as swimming in sand.
Pakistani exporters smaller than Bangladesh
The report’s co-author Zehra Aslam commented that, “Firms in Pakistan struggle to grow large as they grow old. A young formal firm in Pakistan that has been in operation for 10 to 15 years is about the same size as a firm that has been in operation for more than 40 years.”
“Similarly, an average Pakistani exporter is less than half the size of one in Bangladesh. This shows a lack of dynamism amongst Pakistani firms, compared to better functioning markets, where firms either grow or exit.”
