Business Recorder's 1st February, 2010 issue ran the preamble on the captioned article. Its thrust was that our economic managers have mindlessly persisted with a manifestly bankrupt trickle-down theory of economic development promoted by Washington institutions (WB/IMF).
This model focuses on demand suppression via heavy currency depreciation, fiscal cutbacks, monetary restraint, and subsidy elimination. Its implementation has condemned us to the highest central bank discount rate in the world, a rapidly depreciating currency, spiralling fuel prices, industrial collapse, and rising unemployment.
And worst of all, pricey credit's greatest victim is our most competitive agricultural sector that could generate large surpluses, which would, in turn, lower commodity prices and reduce inflation. In other words, what we really needed was the exact reverse, ie a dose of supply side economics.
Macro and micro outcomes to date were cited to demonstrate that these WB/IMF recipes have never worked in the past and are unlikely to do so now. Thus, despite our enviable endowment of natural resources, we are vying with the likes of Somalia for leadership of failed states, whereas by rights, we should have been leading the pack of Asian Tigers that lead the league tables of countries with the highest rates of sustained GDP growth.
Yes, corrupt and inept politicians, fissiparous religious messiahs, and brain-dead uniformed Shoguns have done their bit in our chronological slow-death as a viable nation-state. But, had we been blessed with economic vision of a single Lee Kwan Yew, a Cheng Xiao Ping, or a Mahatir Mohamed, events could have taken a different turn. Though it is, perhaps, too much to hope for such a visionary to emerge from our simian milieu at this late stage, we can certainly learn a lesson or two from the practical wisdom of these seers.
The dominant trait distinguishing all three was their capacity for clear thinking uncluttered by received economic orthodoxies. Accurately assessing their respective nation's inherent strengths and weaknesses, they were all able to hit upon sensible development strategies best suited to their specific needs.
Lee Kwan Yew leveraged off his highly educated and motivated populace to mould Singapore into a pre-eminent global entrepot; Mahatir melded Malaysia's copious natural resources with the enterprising spirit of his people for rapid economic growth; and Deng Xiao Ping unbottled the vast agricultural potential of China's countryside to generate huge surpluses for use in subsequent industrialisation.
Their respective models of development had four distinguishing features that are totally at odds with our failed model:
1 They were able to control population growth (though in the case of China not without draconian "One Child" per family laws). This ensured that with stable populations, they were able to divert a much higher proportion of available resources towards development rather than feeding a burgeoning number of mouths. In our case, a total lack of population planning has condemned us to a huge burden on available resources.
[Of course, my pet theory on this issue is that our economic managers, much less our cerebrally challenged politicians and praetorian guard, did not fully comprehend the invidious power of exponential growth (the ex symbol in mathematics). For example, had our population's annual net growth (births minus deaths) since partition been a more sedate 1.6%, we would have numbered a mere 95 million today; but since our average exponential growth rate over the past 62 years was 2.6%, we now number 185 million souls...unnecessarily doubling the number of mouths to feed! Clearly, Deng Xiao Ping knew a thing or two about the devastating effects of an extra 1% exponential growth! While on the subject of population, readers are encouraged to scan the archives for undersigned's series of articles entitled "Pakistan shining" that appeared in these columns two years ago.]
2 They were all able to actively promote a culture of high rate of savings by ordinary citizens; between 35% and 45% of disposable incomes (in terms of policy initiatives on this score, our successive governments have been conspicuous by their absence; consequently, our national savings rate has never gone beyond the 10-12% range);
3 This savings pool powered large infrastructure investments (translating into annual GDP growth of 7-11% based on the country-specific ICOR (incremental capital output ratios) without significant resort to foreign capital...a feat our economic managers deem undoable; and most importantly,
4 They made sure their largest infrastructure investment was in health and education (12-25% of GDP), the bedrock of future GDP growth...the last priority of our economic managers, who deem 2.5% of GDP for this endeavor as excessive.
Since fear of the unknown keeps us committed to diligently following the failed recipes of WB/IMF, our GDP growth will barely keep pace with population growth for the foreseeable future...at approximately 3% per annum; a rate that was derisively dubbed the "Hindu rate of growth" with reference to India before Manmohan Singh, in the garb of finance minister came on the scene in the early '90's. And although India's internal rate of savings have been significant at around 25-30% of GDP, for the last two decades, the country's economic managers have consistently invested at a rate of 35%-40% per annum to achieve high GDP growth rates.
Their economic success has, in turn, pulled in foreign capital by the hundreds of billions of dollars boosting the country's FX reserves to well over USD 280 billion, nearly 20 times our number which, unfortunately, is predicated on passing the begging bowl around reluctant donors.
It is, therefore, high time we acknowledged the futility of our failed development model and adopted a new paradigm. The logic of "Where we are" (detailed in the preamble), "where we want to go" (join the above-mentioned countries on a high growth trajectory), and "how to get there" (to be discussed) must be clearly enunciated.
The World Economic Forum's Global Competitiveness Index (GCI) 2009-10 produced by Professor Klaus Schwab, is an excellent starting point.
In it, he identifies 12 principal drivers of global economic growth that broadly separate the world into three broad categories:
1. Factor driven economies (the erstwhile low-income countries, including ours),
2. Efficiency driven economies (middle income countries, like China today), and
3. Innovation driven economies (largely the developed OECD world).
For each of the above mentioned groups matching drivers of economic growth are identified respectively as:
i. Institutions, infrastructure, macroeconomic stability, and health and primary education.
ii. Higher education and training, goods market efficiency, labour market efficiency, financial market sophistication, technological readiness, and market size. And
iii. Business sophistication and innovation.
My point in mentioning key ingredients of this report is that we should realise our limitations as a basket case economy and focus our energies in improving the basic factors listed for the first group instead of spreading our meagre resources on economic drivers that are more relevant to the other two groups. For instance, it makes no sense to spend billions of rupees on higher education while starving primary and technical instruction that could promote employable skills like those of plumbers, electricians, mechanics, and masons. These skills will, for the next couple of decades, stand us in better stead than all the Harvard and Oxford Ph.Ds we can produce.
Let us briefly review where we stand in terms of progress on the four pillars of competitiveness relevant to our factor driven economy, and attempt to give each factor a score on 0 to 10 (non-existent to excellent) scale to underline the distance on the road to improvement we still have to travel.
First pillar: institutions
The institutional environment is determined by the legal and administrative framework within which individuals, firms, and governments interact to generate income and wealth in the economy. Though we were fairly endowed in this factor at partition, we have over the years successfully destroyed most of our institutions. Excessive bureaucracy and red tape, overregulation, corruption, dishonesty in dealing with public contracts, lack of transparency and trustworthiness, and the political dependence of the judicial system (though there is now a glimmer of hope) have imposed horrendous economic costs on businesses and damaged the process of economic development.
Proper management of the public finances, accounting and reporting standards, transparency for preventing fraud and mismanagement, ensuring good governance, and maintaining investor and consumer confidence are also paramount. Clearly, we have a long way to go in resurrecting all our public and private institutions.
Second pillar: infrastructure
Extensive and efficient infrastructure is an essential driver of competitiveness. It is critical to ensure the effective functioning of the economy, as it is an important factor determining the location of economic activity and the kinds of activities or sectors that can develop in a particular economy. Well-developed infrastructure reduces the effect of distance between regions, with the result of truly integrating the national market and connecting it at low cost to markets in other countries and regions. Effective modes of transport for goods, people, and services - such as quality roads, railroads, ports, and air transport - enable entrepreneurs to get their goods and services to market in a secure and timely manner, and facilitate the movement of workers to the most suitable jobs.
Economies also depend on electricity supplies that are free of interruptions and shortages so that businesses and factories can work unimpeded. Finally, a solid and extensive telecommunications network allows for a rapid and free flow of information, which increases overall economic efficiency by helping to ensure that businesses can communicate, and that decisions made by economic actors take into account all available relevant information.
Except for acceptable level of telecommunications, all our other modes of communications are today in shambles and need urgent attention.
Third pillar: macroeconomic stability
Stability of the macroeconomic environment means a stable trade and current account balance giving a stable exchange rate, fiscal and monetary restraint with a minimal budget deficit and manageable foreign and domestic obligations. These are important for business and, therefore, important for the overall competitiveness of a country. The government cannot provide services efficiently if it runs high current account deficits and has to make high-interest payments on its past debts.
Running fiscal deficits with a galloping money supply limits the government's future ability to react to business cycles. Firms cannot operate efficiently when inflation rates are out of hand. With suicide bombings galore, rapid currency devaluation, and inflation eating into the vitals of our economy, macroeconomic stability is still a far cry for us.
Fourth pillar: health and primary education A healthy workforce is vital to a country's competitiveness and productivity. Poor health leads to significant costs to business, as sick workers are often absent or operate at lower levels of efficiency. Investment in the provision of health services is thus critical for clear economic, as well as moral, considerations.
In addition to health, this pillar takes into account the quantity and quality of basic education, which increases the efficiency of each individual worker. Moreover, workers, who have received little formal education can carry out only simple manual work and find it much more difficult to adapt to more advanced production processes and techniques. Lack of basic education can, therefore, become a constraint on business development, with firms finding it difficult to move up the value chain by producing more-sophisticated or value-intensive products.
To conclude then, it should be clear that for an economy with the foregoing characteristics a development model that attempts to do a bit of everything has not, and will not work. We need to adopt a home-brewed model that best leverages off our stage of development and takes account of our strength in natural resources while promoting a grassroots culture of high savings for investment.
Part III of this series will address these [email protected]
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