Pakistan has never achieved impressive growth rates in its history with the highest rate (average) achieved in the 1960s of 6.8 percent (attributed to the Korean War that enabled the country to increase exports significantly), plummeting to 4.8 percent in the 1970s (Pakistan’s pro-capitalism pundits blame Z A Bhutto’s nationalization policy and land reforms), and rising to 6.5 percent in the 1980s (liberalization and reforms are credited) but ignored is the fact that the Soviet invasion of Afghanistan (that ended in February 1989) saw a significant rise in pumping of cash into the Pakistan economy by Western governments led by the United States though it was increasingly in the form of loans instead of grants.
In the 1990s the growth rate was 4.6 percent and during the 2000s the average rate was 4.3 percent as per the Economic Survey. More recently in 2020-21 the growth rate rose to 5.8 percent - on the back of a very low rate of negative 0.9 percent the year before and rose still further to 6.1 percent in 2021-22.
The State Bank of Pakistan (SBP) press release correctly maintained that the rise was due to continued reliance on consumption (that had contracted significantly during Covid-19 lockdown), amid sluggish improvement in productivity (which implied consumption was being met by a decline in inventories rather than a rise in productivity) keeping the country vulnerable to adverse developments in the global economy.
In 2022-23, growth plummeted to 0.3 percent. And in the ongoing year growth is expected to be no more than 2 percent as per the International Monetary Fund (IMF), 1.8 percent as projected by the World Bank though the SBP projected a growth of 2 to 3 percent in its Monetary Policy Statement dated 29 April 2024 with government officials insisting that the budgeted growth of 3.5 percent has not been revised downward.
The question is what growth model(s) has been supported by different administrations and what, if any, are the policy commonalities between military and civilian administrations, including during the tenure of the three major national political parties with significant rhetorical differences in their economic narratives? The disturbing answer is that the cyclical malaise suffered by the economy, necessitating an International Monetary Fund (IMF) bail-out package (Pakistan will begin negotiating the twenty-fourth programme this month) continues to this day.
The reason is the country’s productive base has varied but little over time and remains largely reliant on agriculture for inputs - cotton (textiles/bed wear/carpets), livestock (leather), sugar (sugarcane) - and raw material imports (car parts to enable the assembly of local plants). In recent years’ domestic farm related inputs have struggled to meet domestic demand due to the ill effects of climate change while energy, another major input, remains hostage to massive mismanagement/corr uption/flawed contractual obligations with foreign owned Independent Power Producers (IPPs) accounting for the highest regional electricity and gas charges.
All administrations ad nauseam have supported industry by extending monetary (cheap credit), fiscal (tax holidays, and taking it to the ridiculous extreme notably granting a subsidy to export a surplus), and other subsidies (cheap electricity with the rationale that these are necessary to allow domestic industry to compete internationally) – all at the taxpayers’ expense.
The only conceivable difference from one administration to another has been the industrial sub-sector that succeeded in influencing policy. However, the number of amnesty schemes extended by all three major national parties as well as military regimes reflects one obvious fact: the elite have been given one chance after another to whiten their money without an appreciable increase in revenue collection (which has been achieved through raising existing indirect taxes as well as inflation which explains why the tax to GDP ratio has not improved over the years) or widening of the tax net as a consequence (an objective stonewalled time and again by the threat of organized resistance or constitutionally barred from taxing a sector for example income of the rich landlords is not a federal subject).
The country’s tax structure relies on existing taxes however inequitable, unfair or anomalous they are and as the budget begins to be formulated existing industry invariably points out that more and not fewer incentives will enable the government to raise the growth rate, increase exports that would lead to easing of balance of payment position and higher employment opportunities.
Subsequent administrations have used their own carrot (subsidies on utilities, tax holidays, cheap credit) and in March this year the Prime Minister announced the issuance of 66 blue passports to leading exporters, businessmen, as well as public sector companies, banks and the highest taxpayers as an incentive.
It is relevant to note that some sectors that were contractually obligated to implement indigenization failed to do so, preferring to import from the parent company. Examples are the car industry as well as the refineries.
The stick is not only the bleak picture that is painted by industry in the event that their demands are not met, but the threat of strike action that has in the past and can at present stop all activity nation-wide. The government’s stick is to threaten public exposure of the non-filers, tried in the past and failed, and more recently closing down SIMs and appropriating bank accounts – actions under litigation at present.
A growth model that is geared towards reducing dependence on external borrowings must begin to earmark at least 4 to 6 percent of GDP to education or 15 to 20 percent of total provincial budgeted outlay which would set in motion multiple beneficial outcomes in the medium to long term (15 to 20 years): (i) higher education levels can be instrumental in changing the country’s productive base to higher value added goods/services that are available domestically as well as in countries reliant on import of more skilled labour; (ii) health costs will decline massively as the importance of hygiene is understood and practised; (iii) with more widespread awareness of global technological advancements diminishing returns would be minimized; (iv) population growth rate would decline; and (v) capital would be used by all sections of society instead of mainly by the large scale manufacturing sector or small and medium-sized enterprises.
To conclude, it is time to begin to implement a growth model that is premised on improving the lot of the poor even if it is at best a decade long process rather than extending incentives to foreign investors to help the country achieve a high growth rate as the associated benefits may be minimal with 100 percent repatriation of profits. O endogenous policies must be favoured over exogenous policies.
Copyright Business Recorder, 2024
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