KARACHI: The State Bank of Pakistan (SBP) Wednesday said that the slow pace of economic development in Pakistan is a source of concern. However, investments in productivity would help smoothen the economic cycles and enable sustained long-term economic growth.
According to the annual report “The State of Economy Pakistan,” the downward trend in the investment-to-GDP is closely associated with declining long-term economic growth. In addition, investment as a percentage of GDP in Pakistan is not only low, but has been in a state of long-term decline and this has ramifications for sustainable long-term growth. Pakistan has not been able to sustain prolonged periods of economic growth and has faced frequent boom-bust cycles, the report said.
The report said that the declining long-term economic growth has adversely affected the country’s ability to absorb its burgeoning labor force and the repeating pattern can be attributed to a lack of investment in technology, and in human and physical capital, stock that has curtailed the productive capacity while also making its economy prone to shocks.
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A comparison with other regional countries, such as China, India and Bangladesh, shows that higher investment is linked with higher economic growth.
Another observation is that an increase in the investment-to-GDP ratio accelerates the GDP growth. Bangladesh is an interesting reference point in this aspect. Its investment-to-GDP ratio and economic growth were both lower than those of Pakistan in the 1980s.
However, as its investment rose sharply over the years, its GDP growth almost doubled, in contrast to Pakistan’s experience.
“The slow pace of economic development in Pakistan is a source of concern,” the SBP said and added if Chinese economy continues to grow by the same rate 7.7 percent, it will double its output in the next 10-years.
On the other hand, it will take over 17 years for Pakistan at 4.0 percent growth rate to achieve that feat. This slow pace of growth will further widen Pakistan’s income gap with peer countries.
According to SBP, another indicator of long-term growth is labor productivity, which in turn is affected by the level of human capital and capital investment in the country.
Labor productivity is approximated by output per worker by the World Bank. Comparison with the reviewed set of countries accentuates Pakistan’s lagging performance.
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Despite leading other countries in labor productivity till the mid-2000s, Pakistan witnessed an almost stagnation in labor productivity over the next decade. In contrast, both China and India recorded notable improvements on this front, indicating that they are more efficiently utilizing their resources than Pakistan.
Meanwhile, Bangladesh is catching up fast as well. Low productivity over a prolonged period has adverse implications for achieving progress on living standards, public and private debt, social protection systems, and the ability of macroeconomic policies to respond to future shocks.
Pakistan has recently made some inroads in improving its investment climate. Installed electricity generation has almost doubled over the past decade. That said, efforts must be made to boost labor productivity in the country.
Copyright Business Recorder, 2021
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