The elite in Pakistan and its prosperous Diaspora have a living standard and a life style that were totally unimaginable half a century ago and would not have materialised to this degree in a United India. Yet, the well to do and the governing elites have failed in their social responsibilities.
Tax collection is pitiably low. Public education is a mess. Population control was seriously neglected. Corruption is rampant. The balance between defence and development became increasingly distorted starting with the disastrous 1965 war with India. Pakistan has missed many rounds of export opportunities. There has been no broadening or deepening of industrial and export structures over time. Governance and law and order have been on a downward slide for quite a while.
Yet it is rather amazing that Pakistan has somehow important achievements to its credit despite many miscues and missed opportunities. They are:
-- Pakistan's population is six fold larger than at independence but still the average living standard has grown threefold in sixty years - a rate somewhat above the average for developing countries though of course not at all matching East Asia and China

-- There is a vibrant and growing female presence at all levels of society and I can feel it in the present audience
-- There is a free and fairly fearless media though perhaps not sufficiently critically informed and objective
-- The civil society is increasingly active though its potential has yet to be exploited fully.
-- There is a large and prosperous Pakistani Diaspora that can be an important source of capital and know-how.
-- Last but not least, the country has the mixed blessings of a nuclear deterrent and a strong defence.
Still the negatives dominate today. How can we set things right? What can learn from our past? That is a big subject. I will confine myself to recounting the lessons of experience from my professional life extending over half a century and touching more than a couple of dozen countries.
First, demographic matters a great deal. Here I must recognise Pakistan Institute of Development Economics' pioneering work in the field right from the beginning though it did not make a dent in policy that it should have. The result is that Pakistan's high growth rate of population of 3 percent per annum for over three decades seriously affected the level and sustainability of growth in per capita income. More importantly, high population growth has contributed to an abysmal record on social and human development and persistence of poverty at a high level despite an agricultural sector that performed reasonably well for long periods. Of course, low level of tax revenues, high level of spending on defence, and poor governance of the large public education sector are also responsible for the low level of human development in Pakistan. But if population growth rate had been only half a percent lower per annum over Pakistan's history, its population would be 25 percent lower than it is today. I believe the political, economic, and social landscape would then have been vastly different and the deep divisions in the society would have not reached the magnitude that they have.
Fortunately, population transition has begun: the growth rate of population has come down to 1.8 percent per annum. However, fertility rate is still high 3.6 compared to Bangladesh (2.4) and India (2.6). In terms of policy action, focus should be on the high fertility rate of 4.5 in rural areas through continued acceleration of women's education and availability of family planning services. In general and especially in rural areas, continued policy efforts to encourage reduction in birth rates will help increase savings, reduce poverty and make it easier to improve social indicators.
My second and rather obvious point is that no nation can enjoy rapid growth without increasing level of its savings and investments. Pakistan's gross fixed investment rate had touched an all time record of 20 percent of GDP in 1964-65 - in the good old days.
In the last year 2010-11 the rate of gross fixed capital formation was only 13 percent of GDP. National savings are also pitiably low despite the large inflow of worker remittances though I must add that savings may be somewhat understated because of capital flight. If proper allowance is made for depreciation of capital, net annual additions to nation's capital stocks are at present only 2-2.5 percent. This trend if continued is unlikely to sustain a growth rate of GDP of more than 3-3.5 percent per annum.
China and India have investment to GDP ratio of 50 and 35 percent respectively and their net saving rates are a multiple that of Pakistan. Amidst a great deal of poverty and high inflationary pressures, it may seem strange to talk about the high level of household consumption in Pakistan. But the fact is that on purchasing power parity basis China had a per capita income more than two and a half times that of Pakistan in 2009 but its per capita household consumption was less than 20 percent higher than in Pakistan. India had a per capita income 25 percent higher than that in Pakistan in 2009 but the household consumption level per capita was similar in both countries.
The fundamental reason for low savings and high consumption is that neither the political leadership nor the society in general has given high priority to making sacrifices for the future. Given these attitudes, the large foreign assistance and external borrowing have been often used to substitute for domestic mobilisation efforts.
A more general lesson learnt from my development experience is that foreign assistance and advice cannot be the drivers of high growth. Foreign aid is important but secondary. The countries that benefited most from World Bank advice and assistance, in my experience, were those that knew where they wanted to go and were willing to make tough choices to achieve their goals. I would put China, Korea, Turkey, Poland, Indonesia, and Malaysia in this category. At the other extreme, Pakistan has received vast sums of foreign funds, but has yet to find a strong and viable growth path.
We need foreign assistance, external borrowing, and large foreign private investment but unless this is combined with a strong domestic resource mobilisation effort, just as in the past, high growth would not be sustainable.
Large savings and investments, however, cannot occur in a climate where confidence in country is shaky and future appears uncertain. I feel that good governance, rule of law and strong national institutions can be even more critical than economic strategy and policies. Economists, including myself, have come to this conclusion belatedly and have generally neglected issues of structure and mechanics of governance.
On the economic strategy side, Pakistan's biggest failing has been a repeated failure to adopt an export-oriented strategy in a setting where an almost explosive growth in international trade has been a major driver of economic growth. We did not learn from what was happening in East Asia or even Turkey. I would also like to point out that there has been no important case of rapid economic advance in recent history that has not relied on exports as an engine of growth.
Looking back, one of the biggest disappointments of my career has been the failure to persuade to Pakistan policymakers - to whom I had good access - to adopt an export-oriented strategy. I started talking about this issue with General Ziaul Haq and Ghulam Ishaque Khan in late 1970s well before China entered the global economy in a big way.
In the three decades since 1980, Pakistan share in world manufactured exports at 0.16 percent has grown only a little while the share of major developing countries has grown fourfold, with China showing the most dramatic increase from 0.8 percent to 15 percent and India increasing its share from 0.5 percent to 1.4 percent. Equally important, China and India, essentially continental economies have exports to GDP share of 37 and 25 percent respectively whereas Pakistan's exports account for only around 12-13 percent of GDP.
It is late but not too late. This is a difficult time for the world economy. Policy mistakes, exuberance, and excesses have endangered fairly steady growth both in the US and Europe. The effects of the deep financial crisis of 2008 are still hindering US economic revival especially as the distress in the housing market continues. The uncertain future of Euro is casting a deep shadow and great uncertainty on the entire global economy.
The next few years are likely to bring about major changes in the way globalise financial system is managed and regulated. Hopefully, the immediate deep eurozone crisis will be resolved with strong political will. I believe firmly, however, that unprecedented expansion of international trade that has been a key factor in the unprecedented economic advances made in the world in the last half century will continue. While major changes in the international financial system, introduction of appropriate regulation and safeguards, and much greater international co-operation on financial issues are necessary and would take place, the world trading system will emerge relatively unscathed from the present crises. Exports as an engine of world growth will survive because of the considerable gains that continuing international division of labour based on ever evolving comparative advantage promises.
Dr Nadeem-ul-Haque, the Deputy Chairman of the Planning Commission, probably would not agree with me on this and on the importance of export development. But I am convinced that it will be disastrous to slow down the integration of the world economy especially in light of widespread poverty in South Asia and Sub-Sahara Africa, the two regions that are likely to provide, because of population dynamics, most of the increase in world labour force over the next few decades.
Let me elaborate. Over 2010-30, 75 percent of the projected net increase in the world working age population of 900 million would come in equal parts from SSA and SSA. These regions have per capita income in PPP terms of only $2000 and $3000 respectively as compared to the per capita income $40,000 in high-income countries.
Further, shifts in comparative advantage are likely. China that exports 40-45 percent of their gross manufacturing output would undoubtedly face the need to shift its emphasis from exports to consumption because of rising labour costs.
So Pakistan must focus on export development especially on trade with its neighbours. Opening with India would be an important first step. If US can seriously aim at doubling its exports in five years surely Pakistan can do it too. The fact that Pakistan's presence in key markets and commodities internationally is miniscule - with the important exception of textiles- means that its gaining additional market share would not make ripples in most cases.
Rapid export development would require strengthening our competitiveness through both maintaining a realistic exchange rate and in the longer run even more important increasing the pace of productivity advances. We have often resisted the depreciation in the nominal exchange rate of the rupee sometimes considering it an issue of national prestige. For instance, this was the case when Pakistan refused to devalue in September 1949 when the pound Sterling devalued in relation to the US dollar. Consequently our rupee appreciated significantly in relation to the Indian rupee and ensuing trade deadlock lead to a collapse of large regional trade with India.
In the current circumstances, when annual inflation rate in Pakistan is in double digits when the world rate of inflation is only 2-3 percent, gradual nominal devaluation is absolutely necessary to keep up our competitive edge. In the longer run, however, competitiveness can and must be strengthened through rapid improvements in factor productivity. The average growth in factor productivity over a long period of forty five years was only 1.2 percent per annum, slightly lower than and substantially lower than the TFP growth in high performing economies in East Asia.
In agriculture there have been only two periods of rapid productivity growth: the green revolution in the late 1960s and the break- through in cotton in the 1980s. Our industrial and export sectors are not diversified and have missed out in new areas like electronics, information technology and services. Our dominant textile and clothing sector does not enjoy economies of scale; as a result of tax and regulation relatively few really international scale factories exist. Last but not least, labour factor productivity is low because of low level of human development. The need for increasing total factor productivity is paramount because in the near future investment rate is unlikely to rise to 25 percent of GDP necessary to ensure 7-8 percent growth per annum.
The agenda for improving factor productivity is self-evident and should include at least four major elements:
-- Raising the level and effectiveness of education expenditures
-- Expanding expenditure on research and development especially in agriculture
-- Diversification of both agriculture and industrial sectors
-- Removing obstacles that stand in the way of firms attaining global size and expertise I need not dwell on the lags in education. Means years of schooling in Pakistan in 2010 was 4.9 years and we all know the quality was poor. The expected years of schooling are also low at 6.8. Since we sometimes aspire to be another Korea, let me mention that the Korean number for mean year of schooling is 11.6 years and its expected years of schooling is 16.8 years.
Research and development is another area requiring attention. There is no reason why in agriculture we should not the country with the highest productivity per acre in wheat grown under irrigation. As an interim objective, we should emulate Indian Punjab.
Finally, I want to mention two additional factors that have determined and shaped economic outcomes across the globe. These are dealing with economic shocks and maintaining macroeconomic stability.
On the first, Pakistan's record in dealing with economic shocks, both positive and negative has been abysmal. In my experience, there is a tendency for poorly performing economies to treat positive shocks such as improvement in terms of trade as permanent while treating negative shocks such an oil price increase as temporary.
In Pakistan in the early 1950s we blew away a fortune in windfall earnings of foreign exchange from the Korean commodity boom on most ill advised and unsustainable liberalisation of consumer goods imports including luxury cars. In the 1980s we directed the huge inflows of worker remittances towards expansion of public spending especially defence spending by non- bank borrowing at high real interest rates and pushed the debt burden problem to the 1990s. On the negative shocks, after the sharp oil price increase in 1973, we failed to make full energy price adjustments for nearly a decade and thus destroyed a well functioning WAPDA of the 1960s - relying on Middle Eastern friends for financing energy subsidies. We repeated the mistake of postponing oil price adjustments again in mid 2000s, compromising a good economic record and creating grave problems that are still with us today.
On the second point, Pakistan has been fortunate in having relative price stability for long periods. There were only relatively short periods of double-digit inflation in the mid-1970s and mid 1990s. Thus a sharp rise in inflationary expectations has never been a major factor in monetary instability. However, Pakistan now is in the fifth year of double-digit inflation, which is being clearly fuelled by large government borrowing from the banking system. We are clearly in dangerous waters. The current account balance of is worsening and rupee is under pressure. My international experience has taught me that macroeconomic stability is important for growth as well as equity. Once confidence in a currency is blown away, it is very difficult to restore it.
So much for economics! There is not much I have said that will be news to this distinguished audience. The most troubling aspects of our economic picture relate to issues of governance, deep divisions in society, and existentialist threat from the militants. The society seems to be at war with itself. Economic improvements can help but they cannot provide the whole answer for a fundamental turn towards a modern and moderate society.
Like many others, I do not quite see how we will get on to a better trajectory. But better relations with the neighbours and cleaner and more efficient government will be good starts. Despite the odds, I remain confident about Pakistan's long term future. As I said in closing chapter of my recent memoirs "in a decade, Pakistan might surprise both itself and the world at large not only surviving with its present borders intact, but also turning a corner in a very significant way towards a modern, moderate and rapidly growing state."