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Is the Economy Really Growing

Is the Economy Really Growing? | Khurram Husain

ALL is not what it seems. The budget and the Economic Survey have come wrapped in a tale that doesn’t hold together very well under close examination.

Consider the narrative the government has rolled out in its midpoint budget. The finance minister claimed in his first year of rule he averted a default. In second year he stabilised the macroeconomic foundations of the country. And now, in his third year, his budget will aim for growth.

The government claims that the growth rate has risen from 4pc last year to 4.24pc this year. Next year they claim they will take this to 5.5pc, and hit the target of 7pc by 2018, the year when their term ends.

Fair enough. But has the economy really been stabilised? Is the revival of growth that the government is touting as real as the numbers make it out to be?

A closer look suggests otherwise. Consider where this growth has really come from. Of the three main sectors of the economy — agriculture, manufacturing and services — only services exceeded last year’s performance by any appreciable margin.

Has the economy really been stabilised? Is the revival of growth that the government is touting as real as the numbers make it out to be?

Agriculture accelerated from its performance last year by a marginal 0.2pc. Even here, the important crops showed very sluggish performance with growth rates around 1pc. Most of the growth in agriculture came from livestock, forestry, fishing and cotton ginning, each of which is very difficult to measure and have historically been used to jack up growth numbers. The regime of Pervez Musharraf was likewise jacking up the livestock numbers in the days when their growth ‘miracle’ was sputtering to a halt, back in 2007.

Manufacturing slowed down considerably from last year, coming in at 3.6pc from last year’s 4.5pc. A closer look reveals that large-scale manufacturing and power and gas experienced large slowdowns, whereas construction and small-scale manufacturing kept pace with last year’s performance. The only subsector to see a jump was mining and quarrying.

Within large-scale manufacturing, the picture was even more mixed. Automobiles and iron and steel products saw massive jumps in their output, which is evidence of elevated levels of consumption, which also shows up in continuously elevated growth in electronics where consumers are on a buying spree the second year running, and an ongoing boom in construction which has clocked in 7pc growth this year and last. Pharmaceuticals also saw a large jump.

Major declines were seen in textiles and fertiliser, which the government attributes largely to gas shortages.

In services too, a skewed trend is visible. This is the only sector to see any meaningful growth, going from 4.4pc last year to 5pc this year. The largest jump in this subsector came from general government services, which leapt from 2.9pc to 9.4pc. The other jump came from financial services, whose growth rate increased by two percentage points.

All other subsectors under services declined except for housing services, which remained constant at 4pc last year and this year.

So it looks like much of the growth touted by the finance minister has come from the record profits made by banks on the back of heavy lending to government, from sudden increases in livestock, from large quantities of cotton being ginned, from a tremendous expansion in general government services, and from elevated levels of consumer spending and from an expansion in mining and quarrying activity, wherever this may have occurred.

This is a pretty random list if you think about it. None of these sectors have anything to do with each other, so it’s not clear what “broad-based growth” they’re talking about in the opening chapter of the Economic Survey.

Just consider, for instance, that if there is such a large increase in cotton ginning, why is the rest of the textile sector showing a declining growth rate? Where did all this ginned cotton go? There is only one customer for ginned cotton in Pakistan and that is cotton spinning. How can it be that one section of the cotton chain is booming while the rest of it is showing a steep fall in its growth rate?

Consider also the overall picture of the economy that these figures paint. People are spending more, these numbers tell us. They are buying cars and appliances.

There is a house building and construction boom under way. We can see these trends with the naked eye even, where appliance stores and shopping malls are packed and the roads are full of the latest models of locally assembled cars and newer varieties of used cars and swanky new buildings are being built everywhere.

Some amount of job creation surely accompanies such activity. Construction, for instance, creates jobs rapidly, but also wraps them up equally rapidly once the project is completed so the quality of this employment is nothing to write home about.

But overall, the wheels of the economy remain jammed. In some places, we see wild swings in the growth rates of key subsectors, like railway which grew 131pc this year compared to 233pc last year, prompting the authors of the Survey to say that “government is working in right direction to turn around the economy”.

Whatever growth there is appears to have been fed by government spending, with people preferring to spend rather than save and companies preferring to defer investment decisions. Next year they intend to ramp this whole scene up further with a hike in development spending of 27pc, the single largest hike in any component of the budget. So expect to see far more elevated levels of spending and consumption next year.

The big problem with this model of growth is that it doesn’t last. The government appears to be counting on the China projects to build the foundations of future growth, but what is needed is more attention to domestic industry, and more focus on encouraging savings rather than consumption to fuel future investments. Towards these goals, the budget has little to offer.

The writer is a member of staff.


Twitter: @khurramhusain

Is the Economy Really Growing? | Khurram Husain

Published in Dawn, June 11th, 2015

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