As the late John Kenneth Galbraith remarked: “The only function of economic forecasting is to make astrology look respectable.” Of course, the statement is more in light humor and in no way implies that projections are not useful. It is always useful to identify economic trends, assess a few known and unknown global developments, and it is precisely by keeping to this notion that the council of world economists has released their recent advice on the likely global economic scenario over the course of coming months. According to it, the world economy is extremely likely to grow. It has, after all, grown every year since the Second World War, with the sole exception of 2009, the main year of the global financial crisis, when it shrank 2% at market exchange rate and remained roughly constant at purchasing power parity (PPP). The International Monetary Fund (IMF) in its latest assessment believes that the world economy will grow at nearly 4%, at PPP. This is a good starting point. It is also a remarkable one: at 4% annual growth, the world economy doubles every 18 years. So where will this growth come from?
Well, we can almost be sure that emerging economies will grow faster than high-income ones, and Asian emerging economies – those of East Asia and South Asia – will grow fastest of all. This too by the way has now been a consistent long-term pattern (in excess of 35 years). Asian emerging economies have grown faster than emerging ones as a whole in every year at least since 1980, even (though only just) in 1998, the worst year of the Asian financial crisis. The present challenge however will be that Asian growth is decelerating, largely because of China’s slowdown. But it is still expected to run at an annual rate of above 6%. Emerging economies as a whole are forecast to grow at close to 5% annually. The most important positive factor has been the decline in oil prices. An interesting blog from the IMF argues that global output could be between 0.3% and 0.7% higher in 2015 as a result. Lower oil prices help by reducing headline inflation and raising real incomes of consumers. If prices remain low, this benefit could last for a while. For now though – unless we shift to a deflationary cycle – persistently low inflation is being quite helpful. This allows the monetary authorities to remain accommodative. Lastly, as per the report, the major positive supply shock that is likely to come across will be in the shape of a significant recovery in productivity growth in crisis-hit high-income economies (Italy, Spain, France & others in Euro-zone), including the UK and US. Still, that would be a small surprise, but the real big surprise is seen to be coming from India, which is being tipped to be the world’s fastest growing major economy over the next two or even three decades. So, with the neighborhood taking off in such a big way, the question for us to consider is that what choices does it leave Pakistan to ensure that it does not lose out and its real potential is not eclipsed by its larger neighbor India?
To understand this, let’s first assess that what are the recent economic initiatives that India has undertaken that have suddenly transformed it into being billed as the economy of the future? Foremost, there has been a re-shift of focus from services to manufacturing. In its budget announced recently, the Indian leadership has taken upon itself to formulate economic policies that endeavor to increase the “share of labor in the Indian Economy”. To achieve this, they have undertaken a clever mix of financial, corporate and industrial reforms in the country to help boost investment and also the performance of the private sector. Capitalising on the traditional strength of its PSE (Public Sector Enterprises) – State Enterprises still form 25% of the Indian Corporate sector – it has devised an innovative plan to spur growth and investment by making its state enterprises to not only partner but also lead the private sector into making investments. For example, initiatives like announcing US $137 bn investment in Indian Railways, which in turn will also open up related projects for the private sector and the plan to turn around its national carrier, Air India Limited, to only name a few. Furthermore, the Modi government has vowed to cut bureaucratic red tape, open up sectors previously closed to foreign investment and ring much awaited property rights’ legislative changes that formed the biggest impediment to attracting foreign direct investment. In the finance minister’s own words, the aims are very straightforward: One, improve India’s competitiveness. Two, ease up doing business in India. Three, ensure that the share of Indian Labor increases in the Indian Economy. And four, no ‘witch-hunting’ by make taxation in India: a) Affordable (bringing down tax slab to 25%), b) Easy (no coercive or counterproductive contact with the taxpayer) and c) Based on reciprocity by the state.
In contrast, the performance of our economic managers comes across as being unimaginative, to say the least. In reality, all the touted indicators of an economy on the mend are more cosmetic in nature than being deep-rooted – a thin scratch to the surface and the shine fades away. As one dives deep into the key elements of the Pakistan economy, one realises that on the contrary it is in fact faltering and much of it has to do with misplaced governmental priorities. Fancy infrastructure projects are given priority over important areas like health, education, skill development (especially for the lower 50% of the population segment). The focus on the three most important things in an economy is missing: 1) Employment Generation, 2) Competitiveness & 3) Equitable Growth. While most countries around the globe seem to be revisiting policies to revive national manufacturing, our industry is slipping instead; exports are declining; both domestic and foreign investment is at an all time low, and the decline in exports also points towards an eroding national competitiveness. A point further highlighted by the fact that most foreign companies & financial institutions have either already exited our markets or are in the process of doing so. Even more disappointingly, two years have gone by and the ‘Big Ticket Reforms’ are still missing, and there are no signs of undertaking them any time soon either. These reforms relate to: labor reforms, corporate governance reforms (in SECP, CCP, etc), Reporting Mechanisms, law & order, police, and industrial reforms that will see to it that just like in India the ease of doing business in Pakistan also improves, bureaucratic red tape gets reduced, and taxation becomes fair cum effective.
In spite of the rhetoric on spurring GDP growth by enhanced trade, our trade management strategy not only lacks vision but also suffers from a lack of understanding on evolving global trends. For example, a strong Pakistani Rupee in a scenario of declining exports is nothing but foolhardy. Likewise, in the power sector, the real user, industry, complains that its tariff is still not regionally competitive since the government has not shared with it the fair impact of the reduced oil prices. On an even more alarmingly note the undocumented sector in Pakistan today appears to be thriving at the expense of the documented sector and by recent unofficial accounts is recording a growth in double digits. The two key sectors of the Pakistan economy, Agriculture and Banking, are misfiring and last but not least, this PML(N) government yet again appears to be repeating the mistake of its yesteryears: ignoring the importance of the small and medium sized enterprises just because it suddenly finds itself flushed with external largesse owing to some extraordinary geopolitical developments. History seems to be repeating itself!