This presentation exhibits the journey of Pakistan economy. The historical performance is exhibited and explained through contemporary theories of economics

1. Missing Economic Growth
The Case of Pakistan
Dr. Vaqar Ahmed
Advisor, Planning Commission of Pakistan
May 2011 1

2. Outline
• Growth Experience of Pakistan
• What is the Current Growth Strategy?
• Why Move Towards a New Growth Strategy?
• What is the Proposed Growth Strategy?
• Development Planning – Post 18th Amendment
2

3. Old Growth Model
(Harvard Advisory Group)
Harrrod Domar Model allowed planners to predict required savings for a
given growth target and capital-output ratio
Based on works of Harrod (1939), Domar (1946, 1957), Lewis
(1954), Rostow (1960), Kuznet (1963), Chenery (1966)
How Old Model Collapsed?
Markets not Model does not
Take-off fails Reliance on
developed so incorporate
due to poor foreign
savings are not endogenous
quality of resources as
channeled into productivity
investments savings are low
productive uses growth

4. GDP Growth (%) 1971-2009
Lower long run average growth in comparison to regional competitors
10
9.1
9
8
7 6.4
6.0 5.9
6 5.3
4.9
5
4
3
2
1
0
China Malaysia Indonesia Thailand India Pakistan

5. Investment & Savings 1971 - 2009
12 Savings rate too low to compete
Pakistan 17 with regional economies
India 22
24
Thailand 29
30
Indonesia 29
26
Malaysia 35
27
China 38
32
0 5 10 15 20 25 30 35 40
Domestic Savings to GDP Fixed Investment to GDP

6. Current Trend of Economic Growth
• Growth volatility adding to uncertainty
• Falling long run potential growth rate
• Boom bust cycles in absence of reform
10
9
8
GDP Growth (%)
7
6
5
4
3
2
1
0
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
6
No Long Term Thinking on Growth Strategy

7. 12
10
2
4
8
0
6
10
15
-5
-20
-15
-10
5
0
1961 1961
1965 1965
1969 1969
1973 1973
1977 1977
1981 1981
1985 1985
Pakistan
Bangladesh
1989 1989
1993 1993
1997 1997
2001 2001
2005 2005
2009 10 2009
-4
-2
0
2
8
4
6
10
15
20
25
-5
0
5
-10
1961 1961
1965 1965
1969 1969
1973 1973
1977 1977
1981 1981
India
1985 1985
Sri Lanka
1989 1989
1993 1993
Falling Competitiveness vis-à-vis Regional Economies
1997 1997
2001 2001
Growth Experiences Across South Asia
7
2005 2005
2009 2009

8. Structural Transformation 1970 - 2010
10 Sectoral Growth Rates (%) 60 Sectoral Shares in GDP (%)
8 50
6 40
4 30
2 20
0 10
1970s 1980s 1990s 2000-10 0
1970 2010
Agriculture Manufacturing Services Agriculture Industry Service Sector
Agriculture and Industry growth rate declining. Decade average slightly above
population growth rate. Issues for food security, unemployment and poverty
8

9. What is the Current Growth Strategy?
Growth policy by default
• Projects being multiplied Market Failure
with no available
resources
• Regulated markets and Governance
sector picking Challenges
• Lack of structural reform
9
Result: Sporadic Growth Usually Created by External Resources

10. Investment & Savings 1981 - 2010
25
20
15
10 Declining PSDP with serious quality issues
5
0
1983
2005
1981
1982
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2006
2007
2008
2009
2010
National Savings to GDP Ratio Fixed Investment to GDP Ratio
10
Development Expenditure to GDP

11. State of Public Sector Development Program
PSDP Weaknesses
• Project Governance
• Decreasing PSDP Size
• High share of brick & mortar (60% of total)
• Money Spread thin (large sectoral & regional
spread)
Prioritizing PSDP
• Projects nearing completion
• Key Infrastructure Project
• Projects for removing regional
disparity 11

12. Why Move Towards a New Growth Strategy?
• Expected long run labor force growth 3.6 % annually
• Absorbing incremental labor requires GDP growth in excess of 8 %
annually
6 Rising Unemployment 14
Real Per Capita Income Growth
12
Unemployed Labour Force
5
10
4
8
(millions)
(%)
3 6
Falling Per 4
2
Capita 2
1 Incomes 0
0 -2
2001 2002 2003 2004 2005 2006 2007 2008 2009 12

13. Approach to a New Strategy
Think Global – Act Consensus- Achieving
Local driven Balance
Need for home Consultations with
Physical Capital
grown ideas Provinces
Growth possible Meeting all segments of
during society including Human Capital
stabilization academia, civil
society, business
community
Taking stock of
local and global Social Capital
knowledge
13

14. Outline
• Growth, Investment & Savings – an Overview
• Pakistan’s Growth Problem
• Planners approach to Growth
• Past plans unveiled
• Productivity – missing link
• Advances in Scientific Literature
• The Need for Growth Strategy & Reforms
• Some Scenarios – Desired Growth Paths

15. Current Instruments of National Planning
1. Policies
2. Plans
i. Perspective Plan 10-25 Years
ii. Mid Term Plan 04-07 Years
iii. Rolling Plan 03 Years
iv. Annual Plan 01 Year
3. Transformation of plans into projects
Policies  Plans  Projects 15

16. Plan Periods in Pakistan
Plan Period
1. Colombo Plan (Six Year Plan) 1951-57
2. Ist Five year Plan 1955-60
3. 2nd Five year Plan 1960-65
4. 3rd Five year Plan 1965-70
5. 4th Five year Plan 1970-75
6. 5th Five year Plan 1978-83
7. 6th Five year Plan 1983-88
8. 7th Five year Plan 1988-93
9. 8th Five year Plan 1993-98
10. 9th Five year Plan 1998-2003
11. 10 Year Perspective Development Plan 2001-11
12. Medium Term Development Framework (MTDF) 2005-10
13. Vision 2030 2008 -16

17. Plan Periods in Pakistan
Plan Period
Playing
1. Colombo Plan (Six Year Plan) with black 1951-57
2. Ist Five year Plan boxes 1955-60
3. 2nd Five year Plan of
Neglect
Human
Excessive 1960-65
Control
4. 3rd Five yearResources
Plan 1965-70
5. 4th Five year Plan 1970-75
6. 5th Five year Plan 7 Sins of 1978-83
Planners
7. 6th Five year Plan 1983-88
Growth
(Haq 1972) Investment
8. 7th Five year Plan
without
Illusion 1988-93
Justice
9. 8th Five year Plan 1993-98
10. 9th Five year Plan 1998-2003
11. Divorce
10 Year Perspective Development Plan 2001-11
between Development
Fashions
12. Medium Term Development&
Planning Framework (MTDF) 2005-10
Implementation
13. Vision 2030 2008 -17

18. Evaluating Growth in MTDF 2005 - 10
Obsession
with
Physical
Capital
Thrust of MTDF Strategy
Where is
productivity?
Accelerating Output Growth
Upgrading Physical Infrastructure
Supporting the Private Sector
Achieving MDGs
Sector Picking  PSDP– led  endogenising productivity not possible 18

19. Revisiting Determinants of Economic Growth
Labour
Capital Technology
Economic
Growth
Productivity Management
Institutions Information

20. Pakistan Lacks Software of Economic Growth
Hardware Software
Overall Infrastructure
Quality
Country Score Global Quality of Firms
Indonesia 2.5 Innovation Education Spending
Country
(132 System on R&D
India 3.3
countries)
China 3.4
Pakistan 79 99 80
Pakistan 3.4
India 30 37 36
Thailand 5.0
Indonesia 39 44 28
Korea 5.1
Taiwan 5.4 Thailand 57 67 47
Malaysia 5.7 Malaysia 24 23 19
Hongkong 6.4 China 26 52 23
20
Source: Global Competitiveness Report

21. What about Total Factor Productivity?

22. Low Productivity Growth (1981-2030)
4.5
Pakistan’s average annual productivity growth
4.0 lower than competitors’ and projected to
remain low in future
3.5
TFP Growth Rate %
3.0 China
2.5 Viet Nam
Thailand
2.0
Korea
1.5 India
1.19
1.04 Pakistan
1.0 0.78
0.5
0.0
1981-2007 2011-20 2021-30
22
Source: Lee, Jong-Wha and Kiseok Hong (2010) Economic Growth in Asia: Determinants and Prospects.

23. TFP: Management & Organization
• The primary issue with Pakistan’s supply side:
• Not the supply of labour and Capital
• The way we organize our operations
• Organization of factor markets
• Organization of markets
• Organization of cities & communities
• Also due to slow knowledge diffusion due to:
– Lack of competition (IO models)
– Quality of human capital (Lucas Jr. 1988)
– Information (Akerlof 1970)
– Adjustment costs (Lucas 1967)
– Incentives (Mikkelson 1997)
– Institutions (Acemoglu 2003, Rajan 2003)

24. Current Productivity Gaps
• Losses of PSEs
• Over-regulated markets
• Low quality of investment
• Poorly organized urban centers
• Inefficiency – misallocation of resources due
to interventions like subsidies
• Low spending on R & D (public & private)

25. Outline
• Growth, Investment & Savings – an Overview
• Pakistan’s Growth Problem
• Advances in Scientific Literature
• Growth Strategies in Regional Economies
• H-D to Endogenous Growth and Beyond
• Designing Growth Strategies
• The Need for Growth Strategy & Reforms
• Some Scenarios – Desired Growth Paths

26. Growth Strategies in Regional Economies
Country Plan Strategy Focus
Indonesia Medium Term Plan Focus on social infrastructure for creativity
2010-14 development
Thailand 10th Plan 2007-11 Opportunities for learning, increase potential of
communities by linking them in networks
Malaysia New Economic Developing quality workforce, competitive domestic
Model (launched in economy and transparent markets
2010)
China 11th Five Year Plan Promotion of independent innovation, and enhance
2006-10 social harmony
India 11th Five Year Plan Reinforces focus on basic services such as education
(2007-12) and urban development
Bangladesh Draft Plan 2011 Effective governance, promoting innovative people
for a digital Bangladesh, creating a caring society and
enhancing regional cooperation
Philippine Medium Term Plan National innovation system, market reforms,
26
(2004-10) technology entrepreneurship and support to R&D

27. From Harrod Domar to Endogenous Growth
Theories Main Insights
Harrod-Domar Growth Model focuses on saving and the efficiency with
Model – 1940s which capital is used
Solow (Neoclassical) Allows for substitution between labour & capital.
Growth Model – Technology increases exogenously
1950s
Endogenous Growth – Competition and knowledge – related externalities
1980s imply increasing returns. Romer 1986; Lucas Jr. 1988.
Endogenous Growth – Knowledge spillovers lead to falling R&D costs
1990s resulting in further growth. Romer 1990; Grossman &
Helpman 1991
Endogenous Growth – Schumpeterian entry & exit, with entrants bringing
2000s new technologies, knowledge accumulation in cities
lead to growth. Aghion & Howitt 2005

28. Designing Better Growth Strategies
1. Growth diagnostics: what are the most
binding constraints on growth?
2. Policy design: how do we best alleviate the
relevant constraints?
3. Institutionalization: how do we
institutionalize the diagnostic/policy design
process in view of the fact that the nature of
binding constraints will change over time? 28

29. Growth Diagnostics–Binding Constraints
Intermediation
Domestic
Availability Domestic
of Finance Savings
Foreign
Infrastructure
Entrepreneurship Social
Returns
Human
Capital
Return to
Economic Coordination
Activity Market
Failure
Information
Appropriability
Macroecono
mic Stability
Govt. Failure
Contract
29
Adapted from Hausmann & Rodrik (2005) Enforcement

30. Growth Diagnostics – Binding Constraints
Intermediation
Domestic
Availability Domestic
of Finance Savings
Foreign
Infrastructure
Entrepreneurship Low incentives for “self-
Social
Returns
discovery” – information Human
Capital
Returnexternalities
to
Economic Coordination
Activity Market
Failure
Information
Appropriability
Macroecono
mic Stability
Govt. Failure
Contract
30
Adapted from Hausmann & Rodrik (2005) Enforcement

31. Outline
• Growth, Investment & Savings – an Overview
• Pakistan’s Growth Problem
• Advances in Scientific Literature
• The Need for Growth Strategy & Reforms
• Stabilization & Adjustment
• Governance & Institutions
• Markets, Entrepreneurship & Investment Climate
• Cities & Connectivity
• Youth & Community
• Some Scenarios – Desired Growth Paths

32. New Economic Growth Strategy
Short Term: Getting Back to Potential
Utilization of Macroeconomic Removing Major
Existing Capacity Stability Constraints
• Up to 50% in fertilizer, • Inflation eroding • Energy (Electricity &
auto sector, sugar, competitiveness Gas)
cement and steel • Resource Mobilization • Goods & factor markets
& Expenditure
Management
32

33. Long Term: Growth Strategy
Economic
Productivity
Discipline
Responsible Fiscal & Governance & Institutions
Monetary Policies
Market Reforms
Restructuring of PSEs Urban Management
Connectivity
Rationalization of PSDP
Youth & Community
33

34. Potential Governance Agenda
Business
Civil Service
Devolution process PSE Reforms
Reform
reengineering
Need to
Structure and Devolving Reform for Power
address
Incentives to powers, Sector Under
outdated Implementation
Attract Talent responsibilities
regulations
and resources
to lower tiers Remove
Monetized Reforms Strategy
multiplicity of
Salaries, Merit for Railways &
processing Gas Formulated
based Performance layers
Promotion, an based
d Easy Entry & Governance
Exit TCP & PASSCO to
be examined for
closing down
34

35. New Role of Government
Markets Government
Ownership Policy
of Assets
Financing Regulation
of Assets
Production &
Management
35

36. Markets & Entrepreneurship
Modernize Laws
Deregulate Encourage Domestic
& Regulations
Markets Innovation Commerce
for Markets
Wheat, Sugar Innovation
Agriculture Taxation
& through
Market Regime, Rent
Commodities Incubation
Committees Laws etc.
Exchange Centers
Review Cluster Legal System
Investment in Sectors where Strengthening for Common
New Sectors Government (e.g. Sialkot, Property
may Exit Gujranwala, Ownership
Wazirabad) (shops & flats)
Bankruptcy
Law
(legislation
drafted)
36

37. Cities as Hubs of Commerce
Modernize Laws
Address Excess
& Regulations Land Markets Property Rights
Demand
for Cities
Need to Need to
Bridge Excess Freeing
Reform Address
Demand for Government
Zoning & Issues of
Commerce, Land for
Building Titles, Taxatio
Office Space, Commercial
Regulations n Structures
Warehouses Purposes
etc.
etc.
37

38. Reforms for Connectivity
Incentivizing use
Revisiting ‘PPP’ Freight sector Aviation of ICT services
Phase 1: Partial Reducing CAA’s
Adding ‘PPP
Option analysis’
privatization + role to ICT & Customs
in PC-1 opening rail regulating
track
Reviewing Phase 2: Facilitating
‘procurement Unbundling of Auctioning of clearance of
law & rail assets and routes against goods at dry
processes’ privatization preferred ports
allocation to
PIA E-government:
Bringing land
acquisition Reduction in ‘Electronic
laws in-line import tariffs signature act’
with on modern to give cover
international trucks to the use of
norms digital IDs etc

39. Youth & Community Engagement
Youth Youth
Social Capital
Development Entrepreneurship
Empowerment Making Social
through Capital Available for Support Innovation
Representation Youth Mentorship
Social Infrastructure Framework for
Education and Skills Youth Self
(Libraries, Communi
Service Learning ty Centers etc.) Employment

40. Development Planning – Post 18th Amendment
Strategic Decentralized Results
Level Planning Planning Monitoring
Service Delivery
Review of Key Towards Provincial
Plans with
Socio-Economic Growth & Reforms
Sectoral Ministries
Challenges Strategy
& Provinces
Local and Setting
Developing Vision
Municipal level Performance
& Mission
Strategy Targets
Helping Provinces
Monitoring Key
and Line Ministries
Performance
Formulate
Indicators40
Execution Plan

41. Outline
• Growth, Investment & Savings – an Overview
• Pakistan’s Growth Problem
• Advances in Scientific Literature
• The Need for Growth Strategy & Reforms
• Some Scenarios – Desired Growth Paths
• SWOT
• Demographic Challenges
• Required Growth Rate
• Returns from Reforms

42. Pakistan Economy: SWOT Analysis
• Strength: Youth bulge
• Weakness: Governance
• Opportunity: large domestic demand
• Threat: Coordination & information failures

43. Need for Rapid Economic Growth
(i) Rapid population growth increases demand:
– Pakistan adds:
• Every 1 year a New Zealand to its population;
• Every 2 years a Switzerland;
• Every 3 years a Greece;
• Every 4 years a Chile or a Netherlands; and
• Every 5 years an Australia.
– It does not accumulate capital assets at the same pace.
43

44. Demographic change also raises challenges
Country Global Brain Quality of
• UNEMPLOYMENT without
Innovation Drain Education
adequate investment
Index System
(Out of 132
• ASSETS & SKILLS shortage Countries)
Pakistan 79 68 99
India 30 34 37
• COMPETING South Asian
Indonesia 39 27 44
countries also have young Thailand 57 38 67
populations Malaysia 24 28 23
China 26 37 52
Missing Facilities in Government Schools (2009)
Indicators % of total
Schools without Electricity 59.6
Schools without building 10.9
Schools without boundary wall 37.7
Schools without drinking water 33.9
Schools without Latrine 36.9
*NEMIS 2009, Ministry of Education

45. Growth Alternatives (2011-15)
7
Stabilization : Reform of PSEs, increase
6 resource mobilization (Average 4.7%) 6.0
5.5
5 5.0
GDP Growth Rate (%)
4 4.0 3.9
3.8
3.6
3.4
3 3.0
2 Business as Usual: Low aid-led public
investment, high Inflation (Average 3.5 %)
1
0
2010-11 2011-12 2012-13 2013-14 2014-15
45

46. Growth Alternatives (2011-15)
9
Stabilization + Reform: Market reforms
8 & productivity gains (Average 5.6%) 8.0
7 Stabilization : Reform of PSEs, increase 7.0
resource mobilization (Average 4.7%)
GDP Growth Rate (%)
6 6.0 6.0
5.5
5 5.0
4 4.0 3.8 3.9
3.4 3.6
3 3.0
2
Business as Usual: Low aid-led public
1 investment, high Inflation (Average 3.5 %)
0
2010-11 2011-12 2012-13 2013-14 2014-15
46

47. Income
Physical Productivity
Endogenous Capital, Human
Capital
Weakly
Endogenous Trade Institutions
Exogenous Geography

48. What the individual
owns:
• Assets
• Human Capital
External Constraints
• Family
Empowerment • Community (caste, religion)
• Society
• Governance
Internal Constraints
• Perceptions of own role
• Preferences
• Capacity to aspire

49. Quality
Governance
Creative Quality of Vibrant
Cities Life Markets
Energetic Youth
& Community
Thank You
Thank You 49
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