Between peril and promise

What is the state of Pakistan`s economy? Or, perhaps of greater relevance, the broader state of the `union`? Each year, the highly-regarded and widely followed annual report of the State Bank of Pakistan attempts to credibly answer the first of the two questions.

With a large, competent team of economists at its disposal, and a degree of independence that needs to be protected, it produces a far more credible document than its Ministry of Finance counterpart, the Pakistan Economic Survey.

(However, the Ministry of Finance needs to be commended for the occasional forthrightness it does manage to show, given the resources at its disposal and the environment in which it operates.) Nonetheless, like its counterpart (but mercifully not to the same extent) the SBP report suffers from one limitation: by virtue of its mandate, it is usually tactical in nature, too focused on the per-formance of the fiscal year gone by. Hence, despite the overwhelming challenges that Pakistan`s economy faces, the SBP annual report starts with an almost soothing assurance of `modest improvement` and `broad-based` arowth in the economy.While, to SBP`s credit, longer-term issues and challenges are mentioned, such as the trend of declining fixed investment and the water challenge, these are presented as stand-alone sections or one-off fragments of analysis, and are not woven into a single narrative of growing structural weaknesses and institutional decay that are already generating serious ramifications for the wellbeing of Pakistan`s citizens.

As such, there is virtually no credible narrative that the politicians and other power elites are hearing about with regardtothe consequences ofinacnonon the reforms front, barring occasional newspaper columns or the odd presentation at some forum. (The only formal exceptions were the Nine-point plan for economic revival presented to the cabinet by Shaukat Tarin in 2009, and the similar New Economic Agenda launched by the Pakistan Business Council in 2011; unfortunately, these failed to gain traction.) This is clear from the business-as-usual approach of all political parties in power.

The lack of a credible economic roadmap, and the inability to build a casefor reform into the fourth year of his tenure,is an abjectfanure on the part of the finance minister and on the part of the Planning Commission, which should have graduated from a third draft of its `growth framework` and produced a more meaningful and usable policy document by now.

As permanent players or stakeholders, politicians have much to lose from an unstable and increasingly difficult-togovern Pakistan and much to gain from the opposite. Earning rents from a growing economy where ordinary citizens are experiencing rising per capita income (the so-called Suharto model named after the late Indonesian leader, whose family and friends benefited massively from corruption and cronyism) is a relatively more acceptable alternative to the Pakistan of the 1990s, or of today.

Hence, politicians can be a natural reform constituency, despite their Swiss bank accounts, Spanish villas and Canadian passports, if they act in theirown enlightened self-interest that goes beyond the short term. For this to happen, I believe, someone will have to get the message across in a credible, wellreasoned and non-sensationalist manner that the house is on fire.

(Unfortunately, even non-politicians have refused to see the writing on the wall. In 2005, I cautioned the then prime minister, Shaukat Aziz, not to dismiss the Failed States Index out of hand, as its methodology was not unsound, and that it did raise the red flag on many fault lines that had been ignored for too long.

His tongue-in-cheek response through an interlocutor was amusing as much as disappointing. Similarly, in 2009, Carlos Silvani, an internationally acclaimed expert in reform of national tax collection agencies, and I, tried to impress upon the chairman of the Federal Board of Revenue that the tax situation was an emergency and required a war effort.

His response: the `house is not on fire.`) So what are the most worrying economic trends and long-term challenges that need to be highlighted, not just for parliament but for all stakeholders including civil society? At the risk ofrepeating myself from previous columns, here is my list of trends in Pakistan`s economy that should concentrate our minds now: 1. A long-run, secular trend of declining economic growth While most of the developing world, including sub-Saharan Africa, has increased its rate of economic growth impressively over the past two decades or so, Pakistan`s economy has lost momentum.

From a long-run growth rate of around 5.5 per cent that was the envy of developing countries, Pakistan has been averaging 4.5 per cent since 1990 and close to three per cent for the past five years. The 3.7 per cent rate of GDP growth in 2012 which the finance minister has celebrated should be seen in this context: it is 33 per cent lower than what Pakistan had achieved for nearly four decades in the past, and less than half of what is required for labourabsorption.

As a result, per capita income has beenexpanding at sharply lower rates than in the past. In fact, since 2000, per capita income in developing sub-Saharan Africa (excluding South Africa) has overtaken Pakistan, and was roughly 21 per cent higher by 2011.2. Investment rates at historic lows Equally of concern is the fact that fixed investment by the private sector has sunk to its lowest level in Pakistan`s history. This does not portend well for the economy`s ability to grow in a sustainable fashion and create millions of needed new jobs.

3. A growing informal economy and a shrinking formal sector Mistakenly celebrated by many commentators as a sign of the economy`s `resilience`, the growing informality is pointing to perhaps the most worrying of all trends the near-complete collapse of the institutional framework of the state. If this trend continues, the state will disappear into irrelevance leaving no policy `handle` to improve the economy.

I have briefly touched upon some of the long-run trends in the economy. In a subsequent piece, I will detail the dire economic challenges Pakistan faces. •

The writer is a former economic adviser to the government, and currently heads a macroeconomic consultancy based in Islamabad,