Savings unable to keep up with growing private investment: ADB

In the private sector, private savings in Pakistan have been unable to keep up with growing private investment during the recent high growth years. In the government sector, the tax revenue effort has stagnated and deteriorated as government spending has increased, partly spurring the current high growth, said ADB experts.
In a Project report on "Economic Transformation in Pakistan and Macroeconomic situation" ADB experts observed that this situation has led to a serious fiscal deficit problem. These two deficits naturally have led to large external current account deficit. Indeed, exports plus net factor income from abroad (the latter made up mostly of remittances from overseas workers less foreign debt interest payments) have fallen as percent of GNP in recent years as imports have increased substantially due to the country's high growth.
ADB analysis indicates that Pakistan's main macro challenges in the short to medium term are: (i) To reduce the fiscal deficit by rationalising spending and increasing the tax effort (rather than cutting vital public expenditures in social and economic services).
Efforts must be directed toward reorienting poorly targeted subsidies and bloated public sector expenditures, and raising revenues by broadening the tax base meaningfully. This will free fiscal resources.
(ii) To reduce the growing and large current account deficit. Ideally, this should be done by increasing exports (in particular their quality) and by reducing nonessential/luxury consumer imports. It is also hoped that the financing of the significant current account deficit will rely in the future less on volatile 'hot money' (portfolio flows) and loans, and more on foreign direct investment and productive grants/aid; (iii) To increase private savings so that they finance to a larger extent private investment. Private savings will only grow if income per capita grows significantly, and if the share of consumption (about 70 percent of GDP) declines.
ADB report indicated that Pakistan has registered an average growth rate of 5.5 percent during 1960-2007. However, in per capita terms, and due its relatively high population growth, Pakistan's performance has been less successful, and between the mid 1980s and the early 2000s, the country's per capita growth rate showed a marked downward trend. Since 2001, however, this trend has shifted and it has improved substantially. Policy makers' objective is to maintain this good performance in the medium term.
Achieving this objective, however, is not easy, as the economy faces two problems. One refers to the recent macroeconomic performance. During the last few years, there has been an accelerating erosion of the country's macroeconomic stability. Growth has relied on expansionary private and fiscal sectors and a contractionary external sector. This makes the current growth model unsustainable. The second problem refers to the underlying path of structural transformation of the economy. It is such that it is very difficult to transit to a higher and sustainable growth path along the lines of the successful East and Southeast Asian economies. Nevertheless, while challenging, the situation is not irretrievable, ADB experts pointed out.
ADB experts said that in the medium to long-term macroeconomic stability is a necessary, but certainly not a sufficient condition, for a country's development. The latter consists in the upgrading and diversification of the production and export structures. Only the countries that succeed in this endeavour manage to achieve high and sustainable growth rates, and ultimately develop.
The development literature is filled with empirical evidence and examples that show that successful development in a country like Pakistan entails passing through different stages, where the essence is the transfer of resources from the less productive sectors of the economy (agriculture in general) to the more productive sectors (industry and services in general).
At one point, manufacturing (and industry in general) must take the lead in the growth process, as this sector is characterised by increasing returns to scale. Likewise, development is accompanied by technological and scale upgrading of the products produced in the economy, especially in the manufacturing sector (as the successes of People's Republic of China [PRC], Japan, the Republic of Korea and Taipei, China the show). Finally, the literature also shows that the successful countries enter a phase of fast export growth during which they manage to upgrade their export structures significantly.