Pakistan's economy continues to be faced with the same structural challenges that it has been grappling with for more than the last quarter of a century. What are these structural challenges?
1> Pakistan is not able to collect enough revenues to pay for the essential needs of its citizens and the requirements of the state. This has resulted in chronic fiscal deficits and over the years Pakistan has fallen into a classic debt trap where we now find ourselves borrowing to service the previous debts. The flip side of this inability to raise enough revenues is a chronic under investment in physical and social overhead capital, badly eroding Pakistan's global competitiveness. Endemic load shedding and a very poorly educated and under skilled manpower are some of the key manifestations of this under investment
2> Pakistanis do not save enough to finance the investments needed to attain the required growth rate of the economy. Therefore, Pakistan has to import capital to finance even the very low levels of Investments that we undertake. For Pakistan to absorb the youth bulge, approximately two million joining the workforce every year, we need our economy to grow at approximately 7% per annum. In order to do that on a sustained bases we need to invest between 25% and 30% of GDP. With national savings rate at less than half this level, this is a pipe dream. No country in the world can import capital at that level on a sustained bases let alone Pakistan with its massive issues of poor perception around the world.
3> The third major structural problem is that Pakistan does not produce enough goods and services of a quality and at a price demanded by the rest of the world to pay for all the imports being made by the country. As a result we have run chronic current account deficits virtually thru our entire existence. That has resulted in piling up almost 70 billion dollar of external debt and liabilities to pay for these deficits and has sent us back to the IMF every few years, as we are essentially bankrupt on the external account and have not been able to survive without periodic bailouts.
Economists will be able to tell us about the technical reasons why we have not been able to overcome these structural challenges and why it seems that the more things change the more they remain the same or even get worse. However let me talk about a couple of fundamental issues which have impeded most attempts to correct our course.
The first is the elite capture of Pakistan's economy and politics. This has resulted in all policy levers and implementation machinery being rigged in favour of the few against the many. If this was being done to rig the game in favour of the productive elements of the elite there would still be great social cost but we could potentially gain economic mileage at least in the short to medium term. However, most of these interventions have been to favour the least productive elements of society. As a result we have disincentivized risk taking and entrepreneurship and encouraged rent seeking in society. The highest rates of returns are not to those who come up with innovative ideas, takes risks and work hard, but those who know the "right" people or the ones with the worst value system.
The other perhaps even worse manifestation of this elite capture of society is the severe under investment in public goods and welfare. As a result we have one of the worst education records in the world, overall social indicators amongst the worst in the world and in many cases worse than those in many sub Saharan African countries. A poor infrastructure with a rail system that has nearly collapsed resulting in high freight costs and energy shortages resulting in devastating losses to the economy. If the wealth of those who have captured political and administrative machinery comes not from the increasing global competitiveness of Pakistan's economy but from the ability to skim money from "thekas" and other scams, why should they bother with ensuring investment in physical and social infra structure? isn't it much better from their point of view to direct even the woefully inadequate investment to feed the patronage network they have created to sustain their grip over power?
The second aspect which is an increasing barrier to our ability to overcome the structural challenges faced by us is the institutional crises in Pakistan. Over the last decades the vast majority of the institutions have suffered from a dangerous erosion of capacity. We have now come to a point where the state's ability to implement the policies it develops has become seriously questionable. The ability to enforce the writ of the state has been undermined and the state has even lost its monopoly over violence. Ask any federal minister today about the capacity of his ministry and be willing to listen to a litany of complaints. If this is happening at the apex of the system you can imagine what the situation is at the lower levels.
Years of grotesque political interference has badly politicized the bureaucracy at the cost of promotion of merit. Rule of law has withered under the assault of leadership which believes that rules are only for the weak and vulnerable sections of society. The result is weak institutions unable to cope with the complex challenges of an increasingly integrated global economy and Pakistan falling behind the rest of the world on an almost continuous bases.
The question is will we realize in time the existential crises this has created for Pakistan and make amends so that the nearly 200 million people of this land can live a life of peace and prosperity? I have been, and remain, an optimist and believe the answer to this question is an overwhelming yes. My children in their lifetime will see a Pakistan that is not only a country that all Pakistani's are proud of but one of the star economies of the 21st century. Nature has endowed Pakistan with far too much potential for it not to happen.