Vietnam’s journey and lessons for Pakistan — I

The economy of Pakistan has been facing severe macroeconomic challenges for quite some time now. Gradually declining foreign exchange reserves, negative export growth, deteriorating economic growth, high inflation, increasing debt, rising poverty and a twin deficit problem is not new for Pakistan. The economy of Pakistan, from its very existence, can be characterized by volatile annual growth and declining long run economic growth patterns. All of this has led to low investment in the country, both domestic and foreign. This may be attributed to deep-rooted structural issues such as low savings and investment, under-reformed energy and power sector, barriers to trade and poor performance of state-owned enterprises. One of the gravest economic setbacks for the country’s economy has been a high current account deficit, which is a result of higher imports of goods and services as compared to the export of products. Furthermore, Pakistan has an uncertain business environment, inefficient policy making and faces major security concerns, thus placing it low on the ease of doing business index.

The figure above is a graphical illustration of the annual GDP growth rate of Pakistan from the period 1971-2021 (Source: Pakistan Bureau of Statistics)

A comparison of the GDP growth rate of regional economies in Asia from the time 2009 to 2019 revealed that Pakistan was the worst performing economy with its average GDP growth rate far behind that of its regional competitors. China and India are two of the major economies of the world, experiencing fast paced economic growth, with China focusing mainly on manufacturing and FDI-led growth, while India relies largely on its IT sector, commodities and its status as an attractive outsourcing destination of the world. Other well performing economies in the region also started off from a low point and only through proper reforms, were they able to take off towards a path of sustainable economic growth.

One such example is the economy of Vietnam. During the early 1980s, Vietnam was suffering on various socio-economic fronts. There was heavy reliance on foreign and domestic loans since the country lacked foreign direct investment and the state-owned enterprises were very inefficient. The country suffered from an unstable political environment, high debt accumulation, poor international relations and balance of payment deficit. Moreover, the economy of Vietnam was a command economy whereby the market economy was controlled by the state and there was little to no market autonomy. Reforms made by the Vietnamese government under the country’s first, second and third Five-Year Plans were not successful and the economy continued to suffer. The first Five-Year Plan (1961-1965) was a failure and issues like unemployment, low productivity of the labor force, low production of consumer goods, and small-scale production were still dominantly prevalent in the economy by the end of the second Five-Year Plan (1976-1980). The third Five-Year Plan (1981-1985) aimed towards the establishment of a newly nationalized sector and at the same time to encourage private sector enterprises. This resulted in a cartelization of rent seeking with monumentally disastrous results, according to Saeed Afridi, an IR professor at the University of Westminster.

Several factors may be attributed to the failure of the second and third Five-Year Plans, however, according to the Vietnamese, these reforms were unsuccessful because they failed to realize the existing political dynamics and elite capture within the country. Party and military elite existed in the North while military and economic elite was prevalent in the South. Although the World Bank and United Nations agreed that these were contributing factors to the failure of the reforms, major contributing factors were the wars with Cambodia and China which led to the international isolation of Vietnam. Both the second and third Five-Year Plans had undesirable effects on the economy. They led to State-led price controls, high import tariffs, currency controls and protectionist localization policies, all of which resulted in an increase in the consumer price index, hyperinflation of commodity prices, recurrent devaluation of currency and increased foreign debt seeking.

Today, Pakistan faces similar issues to those Vietnam was facing during its economic downturn. The political environment in Pakistan is very unstable, which has led to an uncertain business environment, reduced investments and slow pace of economic development. Pakistan is a poor country with high income disparity and limited resources. The country relies largely on foreign debt for its functioning and development. The country has a major trade deficit with imports far greater than exports. This, along with recurrent rupee devaluation and increased consumer price inflation, has further worsened the situation. The high political instability and lack of effective policymaking in Pakistan have further worsened the situation. The existing conditions have not only discouraged the domestic industry but have also discouraged foreign investors, leading to an overall lack of investment in the country. There has been recurrent devaluation of the Pakistani rupee, making it one of the worst performing currencies in Asia. There is high inflation in the country, leading to increased prices of consumer goods which have in turn led to a decline in the standard of living of the general public.

(To be continued tomorrow)

Copyright Business Recorder, 2021