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Towards Accelerated Economic Growth in Pakistan

The Eighth Annual Conference on
16-17 May 2012
Towards Accelerated Economic Growth in Pakistan:
Its Need and Feasibility

Pakistan has been in "stabilisation" mode for two decades, off and on with the support of an IMF programme. During this period, there has not been much of either stabilisation or economic growth, and this state of affairs might continue unless there is a redirection of the country’s economic policies and development programmes. In the meantime, other neighbouring economies – India, Bangladesh and Sri Lanka – are galloping or proceeding on a pretty decent clip.
Domestic politics, poor law and order situation and a state of general insecurity obviously deter private investment and growth, but accelerated economic activity and rising living standards could conceivably help to abate some of the causes of the unrest in Pakistan. Certainly, reduction of fiscal deficit and bringing down inflation may be more feasible in a growth setting, as the experience of some countries shows. Perennial stabilisation programmes lose their credibility over time as general public ceases to take official policy pronouncements seriously and as resentment mounts against policies that spell hardship for general public. 
Experience shows that in some cases social tensions indeed eased with rapid economic expansion, while, in other situations, civil unrest and violence do not appear to impede economic progress. Malaysia and Mauritius, for example, went through serious ethnic/religious unrest during the 1960s, which abated as these countries embarked on a path of rapid industrialisation and economic growth. On the other hand, the experience of Brazil and Mexico suggests that economic growth can be maintained despite rampant gang killings and drug wars. Some 35,000 persons are believed to have been killed in Mexico’s drug wars during the last four years; Brazil's record of casualties from the endemic gang wars is no better.
These examples are not meant to make light of Pakistan's own troubles, which are serious and pose grave existential threat to the country.  Nevertheless, the experience suggests that it might be possible for the Pak economy, despite its many problems, to grow faster; and if that happens, the country’s social and political problems – rooted as they are in poverty, unemployment and inequity – might also ease.  
The next Lahore School Conference on the Management of the Pakistan Economy – to be held 16-17 May 2012 – will be devoted to exploring whether and how the performance of Pakistan economy might be improved. Specifically, discussions will focus on examining the likelihood and feasibility of achieving a significantly higher growth rate for the economy, approaching perhaps 8 per cent a year within the next three to five years.
That there is a general recognition that “business-as-usual” approach to economic management cannot continue and that the country’s economic performance must improve is evident from the spate of recent policy discussions, academic research, and government pronouncements.  The Planning Commission’s report – Pakistan: Framework for Economic Growth (May 2011) – is especially noteworthy, both because it was the product of extensive deliberations among the country’s leading experts and because it represents an important official call for a new policy direction. The Lahore School conference aims to take this discussion forward by bringing in other perspectives and points of views on how our country might emerge out of its current economic and financial difficulties and join the league of other rapidly growing Asian economies, where it was once a leader.  
Topics for discussion
The question of the need and feasibility of accelerating Pakistan’s economic growth rate covers immediate barriers to be overcome before an improvement in economic performance can materialise as well as the longer term structural issues that must be addressed to sustain economic growth.  The conference programme is structured to allow discussion on both these sets of concerns. The selected topics encompass what may be described as the immediate challenges and constraints that must be faced or overcome if the Pakistan economy is to grow more rapidly. These include addressing the issue of macroeconomic imbalances (the fiscal and trade deficits) as well as relieving other constraints on investment and economic growth, notably, the acute power shortage.  In this context, the issue of unemployment and poverty will also be addressed, as it provides both the reason and imperative of why a redirection in policies and investments is needed.
The discussion on “means and channels” through which accelerated growth could be sustained will include international competitiveness, regional trade relations as stimulus to economic growth, and promotion of investment activity and enterprise development.  Please see the Conference Calendar for details of the programme.  In what follows, salient issues under each of the six sessions at the Conference are discussed. The issue of provincial devolution will also be addressed since it involves both policy and its implementation.

(1) Towards a Heterodox Strategy for Stabilisation and Economic Growth for Pakistan
Conventional approach to stabilisation consists of fiscal retrenchment and tightening of monetary policy.  This is intended to compress domestic demand, which unavoidably adversely impacts on economic growth.  Demand compression policies work reasonably well when an economy is overheated, i.e., when the economy has come to face physical capacity constraints. Otherwise, economies tend to get trapped in stagflation, which appears to be the current situation in Pakistan.
A paper presented at last year’s Lahore School conference initiated a discussion on policies that might allow the Pakistan economy to break out of this trap. At the next conference, this discussion will be revisited and an attempt made to arrive at a consensus among experts on the redesign of the country’s macroeconomic policy. The first session will therefore be devoted to a discussion of the so-called “heterodox policies”.  The papers for this session should seek to: (i) clarify the meaning and implications of heterodox policies; (ii) establish that heterodox policies will be appropriate for Pakistan; (iii) bring out the trade-offs between inflation and economic growth; and (iv) discuss the risks the country might face in adopting a heterodox approach.  Of particular importance will be a discussion of the experience of other developing economies (notably, Turkey, Malaysia, and Indonesia) that brought inflation under control while pursuing growth-enhancing policies.
(2) Economic Growth-Employment-Poverty Nexus
Alleviating poverty and unemployment are a major impulse behind a search for policies to accelerate economic growth, but how economic growth, employment generation, and poverty reduction impact on each other is not a straightforward process.  In the second session of the conference the links and relationships between the three policy goals will be elaborated. The papers for this session should examine the experience of Pakistan and other countries and explore the neoliberal hypothesis of “trickle-down”, i.e., increased income inequality in a high growth setting could be tolerated as rising incomes of the upper-income groups would tend to pull up the incomes of the lower-income groups through demand and supply channels.  The papers should also examine the possible trade-offs as well as synergies between employment generation policies and the country’s international competitiveness, a subject to be discussed on the next day.

(3) International Competitiveness for Sustainable Growth
Mounting balance of payments difficulties have tended to thwart economic growth in Pakistan and have necessitated recourse to the IMF for help.  The question arises how and whether this might be avoided in the future.  Could an exchange rate policy be devised towards this end, as many economists argue?  Should Pakistan close its capital account and re-impose controls on capital movements? Is this feasible? Would that be desirable or effective?
While exchange rate depreciation might temporarily give a country a competitive advantage in foreign markets, international competitiveness depends essentially on the speed of productivity improvements through adoption of new technologies and moving up the value chain. For a country to remain competitive is a continuous struggle, since producers in other countries do not sit still but continue to seek ways to make technological improvements in products and production processes.  However, while it has become somewhat of a fad subject, countries have found it difficult to go beyond the rhetoric.  Competitiveness calls for a major shift in the business culture and reorientation of business and government efforts towards innovation, product quality, improving business practices and, not least, enhancing worker skills.  The papers for this session should aim at: (i) assessing the “competitiveness gap” that Pakistan needs to overcome; (ii) reviewing current efforts at strengthening competitiveness and suggesting improvements; (iii) identifying notable dynamic Pakistani businesses/industries to illustrate feasibility of improvements elsewhere; and (iv) proposing areas where the government and business might collaborate towards making domestic industry internationally competitive.
(4) Pakistan’s Strategic Importance and its Trade Relations
Pakistan is in an economically dynamic region with good prospects of sustained economic expansion in the future. It entered into a bilateral trade agreement with China some years ago, and is moving to improve trade relations with India. It has also been seeking to reach a trade agreement with the Gulf States. At the same time, Pakistan’s geographical location makes it a conduit for the foreign trade of landlocked Afghanistan and offers the prospect of giving warm water access to the Central Asian republics. The issues to discuss in this session are: (i) How improved trade relations with the two most dynamic economies – China and India – could be made to help Pakistan move towards a period of accelerated growth? (ii) What measures the country might take to ensure that domestic industry gains in competitiveness rather than weakens, and ultimately collapses, in the face of increased competition, as has happened already in some domestic industries? (iii) How Pakistan might position itself to take advantage of trade links with Central Asia, even as the Afghanistan war and the troubles within Pakistan persist?
(5) Immediate Constraints and Longer-Term Triggers for Economic Growth

The power crisis is the single most important factor hampering domestic production and investment. Unless this constraint is removed, it is unrealistic to expect the Pak growth rate to accelerate or, if somehow achieved, for it to be sustained. Physical capacity in the power sector has obviously not been kept up with the rising demand, but the current crisis is exacerbated by financing and payments difficulties, i.e., the problem of the so-called “circular debt”.  The latter in turn is a direct consequence of the state of public finances as well as questionable contractual arrangements with the private sector power suppliers.  The power issue has been debated for several years in Pakistan but the problem remains unresolved.  Apart from elucidating the relevant issues, the paper on this issue should aim to develop fresh ideas on the way out of the current impasse.

Economic growth ultimately depends on the growth in private investment and the success of domestic enterprises in competing in the world market.  In fact, economic success seems to be synonymous with the emergence of successful domestic firms, whether it is Samsung or LG in Korea, Hutchinson Whampoa or Sinochem in China, and Tata or Reliance Industries in India.  The striking feature of the era of rapid economic growth in Pakistan – the 1960s – was the emergence of large firms in industry, banking and insurance within a rather short span of time.
What makes firms to thrive, grow, and compete is therefore central to an understanding of the process of catch up of the poor with the rich countries. A firm’s performance depends primarily on the drive and entrepreneurship of its managers and owners, whose decisions with respect to investment in plant capacity, worker training, marketing, R&D, etc., determine the pace of technological improvements.  While there is no satisfactory explanation for the factors determining the supply of entrepreneurial talent, it is evident that some national environments are more congenial to the rise of dynamic entrepreneurship and successful firms. 
Some of the underlying issues in the subject matter of this session will have been discussed in the earlier session on international competitiveness.  This session will focus essentially on steps needed to achieve a quantum leap in private investment activity (domestic as well as foreign) and promote domestic entrepreneurship in Pakistan. The papers for this session should aim to draw lessons from the experience of domestic firms that have grown to emerge as big players in the domestic economy.
 (6) Making Provincial Devolution Work
The organization of the public services has remained largely unchanged since independence with local administrative services the weakest both in terms of organisation and capacity. Adapting to the new configuration of responsibilities and workload at the local level presents not only a major organizational challenge to the civil service; it also calls for the translation of organizational changes into viable administrative practices.  An integral part of the process would be  the accountability of civil servants to local elected bodies.
The devolution of subjects to the federating units, earlier in the federal and concurrent lists, poses a major challenge to the provinces in terms of their readiness, resolve and ability to effectively undertake the devolved responsibilities. The quality of policy making and governance at the provincial level will largely determine the degree to which the benefits of devolution reach the citizen. There are legal, administrative, financial and capacity issues to be addressed in making the 18th amendment work as well as considerations of collaboration and coordination with the federal government in many areas of national concern. Papers on the subject will address the imperatives of translating the devolution initiative to improved policy outcomes. Experiences of federations in the region would offer a useful comparative perspective
Papers will discuss administrative models for effective administrative support to devolved local government.

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posted by S A J Shirazi @ 10:45 PM,


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