Dynamics of High Economic Growth

By Zafar-ul-Hassan Almas

http://epaper.dawn.com/ArticleText.aspx?article=09_07_2007_605_003

ACCORDING to the Pakistan Economic Survey 200607, the economy continued its buoyant pace of growth for the fifth year in a row and the growth averaged seven per cent per annum during the last five years.
Economic growth has been widely shared by industry, agriculture and services on the back of a new investment cycle supported by strong growth in domestic demand and credit expansion.
The State Bank of Pakistan (SBP) had responded to the strong growth and rising inflation by increasing nominal interest rates. Successive hikes in policy rates during the last two years have led to higher interest rates across the spectrum, but higher inflation means that real interest rates remain low and their dampening effect on growth remained minimal.
A distinct feature of this year’s growth is that robust domestic demand underpinned the economic growth, with consumer demand and investment responding to real low interest rates thanks to higher inflation, and rising real incomes as shown by higher real growth in per capita income by 5.5 per cent during the last five years.
Per capita income is a deceptive term in the elite class economy. There is definitely a debate about the nature of this high growth in terms of inclusiveness. There may be different opinions on how the fruits of the growth are distributed but the fact remains that the current year’s growth is driven by investment.
For the most part of its history, Pakistan’s economy has been like a plane flying on one engine — domestic consumption. Analysts had fretted that was detrimental to the economy in the long-run, and the contribution of investment — the other big engine — would have to be increased. Expanding investment has been a major and increasingly important driver of economy’s growth for the last three years. Its share in driving growth this year has surpassed consumption for the first time in economic history of Pakistan.
The relative importance of expanding consumption as a source of overall economic growth has lost substance. Investment-driven growth requires the output of machinery and equipment, and the inputs to produce them, to grow much more rapidly than the output of consumer goods. Rapid growth of output of investment goods increases the demand for energy disproportionately but also generates employment and reduces poverty.
The current energy crisis may have negative implications for investment prospects in medium to long- term. One area where growth prospects have not fully exploited is net exports or export-led growth. It is also critical to bridge saving-investment gap.
The savings-investment gap slipped into negative territory in 2004-05; the difference between the two was 1.6 per cent of GDP at that time. The negative savings-investment gap marked the reversal of a three-year trot when national savings were higher than the investment. This is evident from the change in the current account which has slipped into the red at five per cent of GDP in 2006-07 after three years of surplus (2001-02 to 2003-04). Some inherent weaknesses in the structure of our economy have prevented export-led growth. And economy remained more or less investment-led and consumption-led.
Realigning our economy in a manner consistent with ever changing demand patterns takes time and money. Only by foregoing consumption (increased savings), can we provide entrepreneurs with the funds they need to invest in the production of new goods and services.
Besides a faster growth in exports is needed to make total demand less sensitive to rising domestic real interest rates and indebtedness, secure productivity gains as a result of competition on the international market, and relax the foreign exchange constraints for imports. It means firing another engine of export-led growth..
One disappointing aspect of current higher growth is its job creation capacity. The current growth momentum is driven by less labour intensive sectors like financial businesses, telecommunications, production of durables, mergers and acquisitions, privatisation, and last but not the least technological up-gradation.
All these sectors are not creating enough jobs and in some cases resort to retrenchment..The gulf between haves and have-nots has definitely increased as is reflected in government statistics.
Putting more people in productive and sustainable jobs lies at the heart of inclusive growth. All segments of society should get benefits of higher growth though more active segments get more of it. But inclusiveness, primarily, depend on the success in achieving and maintaining higher growth over a long-term. This requires more discipline and strong political commitment from ruling elite which might not be possible in our social fabric.
The vicious circle of poverty and low growth can be transformed into virtuous circle of demographic dividend by optimising human capital. The formidable challenge is to provide a comprehensive policy framework to harness the dormant talent pool of our work-force and entrepreneurs to position the economy on a sustained highgrowth trajectory.
Infrastructural inadequacies continue to constrain the full potential for economic development, pick up in investment and buoyant exports. Last two Public Sector Development Programme (PSDP) have acknowledged the importance of speedy provision of quality infrastructure as a policy stimulus.
Substantial resources are earmarked for this area but still we are not getting proper value of money because of leakages in the system and weak monitoring. Pakistan’s growth prospects are crucially intertwined with the rapid development of physical infrastructure such as power, roads, ports, and airports, and efficient delivery of services.
The current electricity shortages are manifestation of poor planning on the part of the government and inadequacies of power adversely affecting not only the output of large industries, but also irrigation in agriculture and other economic activities. Such power shortages are also affecting productivity of the labour force. Economic Survey 2006-07 is unable to provide possible GDP losses as a result of these power shortages.
Next year’s prospects for 7.2 per cent growth target crucially depend upon the responsiveness of production sectors to the electricity shortages and the amount of productivity losses. We need to align our macroeconomic framework with demand for energy and resources and plan for them on long-term basis. The current policy is tilted towards shortrun and ad hoc measures for shortterm gains.

Source: Dawn Newspaper