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For inclusive growth

Can growth be inclusive in Pakistan? A historical review of Pakistan’s economy reveals that the country achieved a reasonable growth rate of about five per cent that lasted four decades — 1950 to the 1980s. Starting from the 1990s, growth started to dwindle to 4.6 per cent. It surged to as high as 7.3 per cent during 2003-07 but dropped again to three per cent during 2008-12.

This pattern is not inclusive in nature and has led to increased inequalities in society. It has made policymakers and practitioners realise that there is a dire need to address key structural distortions in the economy and move towards a growth pattern that provides more opportunities, particularly to the marginalised segments.

These boom-bust growth cycles have created a non-conducive environment for businesses and the industrial policy has failed to revive the manufacturing sector in particular because of its heavy reliance on subsidies and ad hoc policy arrangements. The benefits even in periods of high growth did not trickle down to the marginalised and resulted in a lopsided development.

In order to address these issues and make growth inclusive and sustainable, there is a need to improve our understanding of growth determinants.

The definition of inclusive growth implies a direct link between the macro and micro determinants and captures the importance of structural transformation for economic diversification and competition. The main instrument to achieve this is assumed to be employment generation and improvement in productivity.

The idea therefore looks at ways to strengthen the productive resources and capacity of the individual on the labour supply side as well as ways to open up new opportunities for productive employment on the labour demand side. Inclusive growth analytics focuses on policies that should be implemented in the short run but for sustainable inclusive growth in the long run.

Based on this premise, in Pakistan, instead of simply addressing macroeconomic imbalances, we must also look at the micro-level issues including improving productivity in agriculture and manufacturing as well as the services sectors that play a pivotal role in absorbing the fast-growing labour force and addressing poverty. In parallel, we can work on improving the public service delivery and financial markets to improve local consumption.

Particular attention also needs to be given to the phenomenon of growth without social welfare. A recent study by the United Nations Development Programme carried out in all provinces of Pakistan in 2010 showed that Multiple Deprivation Indices (MDI) deteriorated in all cities except the provincial capitals.

Expenditure on education declined from 2.2 per cent of GNP in 2005 to 1.8 per cent by 2012. Likewise, expenditure on health as a ratio to GNP declined from 0.6 per cent in 2005 to 0.3 per cent in 2012. A regional comparison in terms of human development indicators reveal that Pakistan lags far behind in the infant and under-five mortality rate e.g. the infant mortality rate in Pakistan is 63.26 per 1,000 live births which is quite high in comparison to India (45.57), China (16.06), Indonesia (27.95), Bangladesh (50.73), Sri Lanka (9.70) and Nepal (44.54). Similarly, the under-five mortality rate is also dismal at 86.5 per 1,000 children compared with India (62.7), China (18.4), Indonesia (35.3), Bangladesh (47.8), Sri Lanka (16.5) and Nepal (49.5).

This deterioration reflects misallocation of public resources resulting in regional disparities and inequalities. The solution lies in effective spending of limited public resources that benefits the marginalised. With fiscal deficit reaching 8.5 per cent of GDP due to rise in non-development expenditure and reduced development expenditure, this becomes a challenge. Pakistan’s tax-to-GDP ratio is 9.2 per cent, one of the lowest in the region that has an average of 15.5 per cent and as a consequence, limits the fiscal space.

The solution lies in transforming the stagnating economy to a dynamic one with thriving businesses that improve the country’s tax base. Only then will fiscal space and domestic investment increase, resulting in employment and ensuring inclusive growth. Against this backdrop, policymakers must think of innovative solutions for reviving the economy and using resources optimally. For example, data indicates that about 60 per cent of Pakistan’s population directly and indirectly relies on the agricultural sector despite its low contribution to GDP.

The key to improving the standard of living and reducing poverty lies in reviving this sector through improving productivity, introducing technology, and ensuring access to financial services and agriculture insurance. Untargeted subsidies should also be rationalised and the tax base increased to create the fiscal space needed to invest in reviving the manufacturing sector and to promote human development.

The writer is acting country director, UNDP Pakistan and PhD candidate in political economy at the Institute of Social Studies, The Hague.

Jean-Luc Stalon, "For inclusive growth," Dawn. 2012-12-20.