Attachment_J.3_Framework_for_Economic_Growth.pdf

PAKISTAN:

FRAMEWORK FOR ECONOMIC GROWTH

PLANNING COMMISSION

GOVERNMENT OF PAKISTAN

May 2011

GROW Pakistan

QUALITY GOVERNANCE...

…institutional strengthening

...community engagement

ENERGETIC YOUTH...

...CREATIVE CITIES

urban development…

QUALITY OF LIFE...

...human development

...VIBRANT MARKETS

...innovation...innovation...innovation...innovation

My message to you all is of hope, courage and confidence. Let us mobilise all our resources in a systematic and organised way and tackle the grave issues that confront us with grim determination and discipline worthy of a great nation. – Muhammad Ali Jinnah

The Planning Commission is pleased to present the Framework for

Economic Growth as approved by the National Economic Council in its meeting held on 28 May 2011 under the Chairmanship of the Prime

Minister of Pakistan.

Pakistan: Framework for Economic Growth 1

Commendations

The Growth Strategy is critical to Pakistan's future – in the medium term, sustained steady growth represents the only hope of addressing poverty and of boosting the livelihoods of all citizens. The strategy is correct that space must be made and maintained for private sector development and that reducing the role and improving the efficiency of government is fundamentally important. This requires deep reform rather than funding, a broad public debate and complete commitment by government.

I engaged with the Pakistan Growth Strategy at several stages, commenting on papers and meeting the Deputy Chairman and his colleagues.

--- Prof. L Alan Winters, Chief Economist, DFID

This growth framework concentrates on three key aspects. First, it encourages competitive and inclusive markets. Second, it addresses some long-term structural issues by recommending policies and reforms that will encourage productivity and innovation, promote better urban management, increase connectivity and youth engagement. Third, it outlines a vital role for the government, where it performs regulatory functions to ensure a level playing field for all economic agents, provides the basic infrastructure like water and power and national public goods—such as defence, justice, and security—that are the basic functions of a government. I have been fortunate to be a part of the strategy formulation and look forward to supporting Planning Commission in operationalising this strategy by dialogue especially with the Provincial governments, private sector and civil society.

--- Dr. Hafiz A. Pasha, Former Finance Minister and

Deputy Chairman, Planning Commission

This is a great concept paper. I hope it gets the authorisation to workout the detailed plans with the help of all the stakeholders for a sustainable and equitable economic growth.

--- Mr. Shaukat Tarin, Former Finance Minister

Pakistan has no choice but to move in this new direction because the traditional growth model with its emphasis on public investment and government involvement in economic activity has not yielded the high growth rates the country needs to absorb the expanding young labour force. Furthermore, the government faces domestic and foreign financing constraints and it simply cannot afford any longer to undertake large-scale capital expenditures. If adopted, the New Growth Framework has the potential to transform the Pakistan economy into one that can compete effectively with the other high-growth developing economies of the world.

--- Dr. Mohsin S. Khan, Former Director, IMF

Pakistan: Framework for Economic Growth 2

What has struck me most in the process of developing this growth strategy is just how much effort has been put into seeking and developing a buy-in for it from multiple and diverse stakeholders and communities. The intense and honest effort that has been invested in trying to create a national conversation around the growth strategy is remarkable, not just for Pakistan but anywhere in the world. Strategies sink and swim, not only by their intellectual content but also by the political and societal support that they command. I applaud the architects of this strategy for having worked so tirelessly in creating a base of public understanding for the economic problems Pakistan faces and a broad-based national conversation on the type of solutions that are needed.

--- Dr. Adil Najam, Professor, Boston University

I have been intimately involved with planning in Pakistan for 13 years, and with planning in Korea, Malaysia, Vietnam, Thailand, and Egypt for over 10 years. I have seen at very close hand how each of these countries responded to the specific challenges that circumstances imposed on them. I must go on record that in view of the constraints impacting on the Pakistan economy, the strategy proposed by the Planning Commission is a brilliant answer to a most difficult situation. It seeks to generate the rapid growth that is absolutely necessary; it seeks to do this with a minimum of public sector resources; it seeks to do this while increasing the productivity of the economy; and it seeks to do this in the most efficient manner. I am very proud to be associated with the present effort in Pakistan to develop a growth strategy that could help the country work its way through a most dangerous period.

--- Dr. Khalid Ikram, Former Advisor, World Bank

It was indeed a pleasure to have been associated with Dr. Nadeem Ul Haque and the planning Commission on the formulation of Growth Strategy. I appreciate the challenging task initiated by the Honorable Minister for Planning & Development Division.

--- Dr. Nuzhat Ahmed, Director, Applied Economics Research Centre, Karachi

It was indeed an honour (for me) to visit Planning Commission and be part of the team engaged in drafting the document - Pakistan: Framework for Economic Growth (also called the New Growth Strategy). The Economic plan proposed in the New Growth Strategy identifies major problems faced by the country and suggests policies to be implemented in the medium- to long-term to redirect the economy to its potential level of growth (above 7 percent per annum). The main focus of the proposed policies is, for Pakistan to achieve a sustainable growth through improving productivity and efficiency of the economic factors. I commend the growth team for completing a comprehensive document in a short period. Finally, I fully endorse the proposed economic plan under the Framework for Economic Growth.

------Dr. Ahmed M. Khalid, Professor, Johns Hopkins

Pakistan: Framework for Economic Growth 3

Foreword

Planning Commission is charged with developing growth policy and managing the Public Sector Development Program. In keeping with this mandate, I have the honour and the privilege to present the New Growth Framework (NGF)—a strategy that seeks accelerated and sustained growth and development based on economic reform and an emphasis on productivity. The NGF is based on widespread local and international consultation developing strong local ownership for a quality development strategy that is informed by the best knowledge and analysis available.

Pakistan has struggled with a chronic fiscal problem often sacrificing growth for short-term stabilisation. Examples in this regard are frequent reliance on distortionary tax and tariff policies and the instrument of first choice for controlling expenditures—a cut in development budget.

Yet, our growth policy is little more than development projects and some ‘incentives’ to industry, agriculture and exports. While incentives have hindered fiscal consolidation, sustained high growth has eluded us. Our development projects for building required human and physical infrastructure have not been able to impact growth and private investment because of continued cuts and inappropriate project selection. While the projects do generate employment and economic activity in the first instance, they lack strategic direction and coherence that is required for sustained high growth and the delivery of sustainable development benefits.

We have a young and growing population. Growth has been sporadic and inflation remains a problem. Our calculations also suggest that if we do not accelerate growth to over 7 per cent per annum on a sustained basis, the coming increases in labour force cannot be absorbed. Unfortunately, for the past four years per capita incomes have barely grown. Past data suggests that our long run growth is close to 5 per cent per annum. At this rate of growth, a very large percentage of the youth bulge will not find employment. New approach to growth is required which has the potential to sustain high growth levels remaining within fiscal limits.

Accelerating the economic growth rate and sustaining it at a high rate must therefore be treated as a national priority. And this must be achieved when resources are scarce as the country deals with a severe fiscal problem! The old paradigm of project- and government-led growth has to change. This reasoning has led the Planning Commission towards rethinking the traditional growth narrative in Pakistan.

Our “growth diagnostics” reveal several factors that increase the costs of making transactions in Pakistan. Today international indicators suggest that Pakistan has more of a software (management and productivity) problem than a shortage of hardware (physical infrastructure). The strategy emphasizes the need to reduce

Pakistan: Framework for Economic Growth 4 economic distortions; improve functioning of domestic markets; create space in cities through proper zoning; energising youth; engaging communities; inducing investment in human and social capital; and enhancing connectivity and interactivity. Vibrant cities in an enabling environment will be the hotspot for entrepreneurship and innovation, assuring better returns through improved productivity on investments for all investors. In this context it must be understood that the urban-rural divide and the classification of cities has undergone a paradigm shift through demographic changes and the new ‘cities’ of Pakistan which occupy a large part of the landscape.

I would like to acknowledge and appreciate the hard work of the Growth Team and staff of the Planning Commission which was put in towards the preparation of this national document. I extend the sincere gratitude of the Planning Commission to our partners (donors, civil society organisations, and academia) who have been a source of guidance through out this process.

Implementing the growth strategy will require serious, sustained and disciplined reform over the next few years. A process of reform beginning with the Planning Commission has been outlined. Reform is a continuing process and it needs to be institutionalised!

Dr. Nadeem Ul Haque

Deputy Chairman Planning Commission 28 May 2011

Pakistan: Framework for Economic Growth 5

Abbreviations

AERC Applied Economic Research Council ADB Asian Development Bank BASA Bilateral Air Service Agreements BV Banverket BISP Benazir Income Support Programme BOI Board of Investment CAA Civil Aviation Authority CCI Council of Common Interest CCOR Cabinet Committee on Restructuring CCP Competition Commission of Pakistan CDA Capital Development Authority CDWP Central Development Working Party CEO Chief Executive Officer CLL Concurrent Legislative List CLOT Center for Liver Disease and Organ Transplant CORFO Chile’s Technology Business and Incubation Program CPRSPD Centre for Poverty Reduction and Strengthening Social Policy Development CSR Corporate Social Responsibility DDWP Departmental Development Working Party DFID Department for International Development EDB Engineering Development Board ECNEC Executive Committee of National Economic Council EFA Education for All development index EOBI Employees' Old-Age Benefit Institute ESSI Employee Social Security Institute EU European Union FBR Federal Board of Revenue FDI Foreign Direct Investment FLL Federal Legislative List GDP Gross Domestic Product GER Gross Enrollment Ratio GIK (Page 57) Is it Ghulam Ishaq Khan Institute?

GST General Sales Tax HCM Human Capital Management HEC Higher Education Commission ICOR Incremental Capital Output Ratio ICT Information and Communication Technology IIT Indian Institute of Technology IIM Indian Institute of Management IMF International Monetary Fund IPDF Infrastructure Project Development Facility IPO Intellectual Property Office IT Information Technology IU Innovation Union JNR Japan National Railway KCR Karachi Circular Railways KCDR Karachi Centre for Dispute Resolution KPI Key Performance Indicators LECG Law and Economics Consulting Group LPI Logistics Performance Index MDG Millennium Development Goals

Pakistan: Framework for Economic Growth 6

MOC Ministry of Commerce MFN Most Favoured Nation MTBF Medium-Term Budgetary Framework MTDF Medium-Term Development Framework MTEF Medium-Term Expenditure Framework MTOE Million Tonnes of Oil Equivalent NADRA National Database and Registration Authority NAVTEC National Vocational and Technical Education Commission NCGR National Commission for Governance Reforms NEC National Economic Council NER Net Enrolment Rate NEPRA National Electric Power Regulatory Authority NGO Non Government Organisation NFC National Finance Commission NHA National Highway Authority NIA National Innovation Agency (Thailand) NIF National Innovation Fund NIP National Internship Program NTB Non-Tariff Barriers NTC National Trade Commission NTCIP National Trade Corridor Improvement Program NTN National Tax Number PaCCS Pakistan Automated Customs Computerized System PARC Pakistan Agricultural Research Council PASSCO Pakistan Agricultural Storage and Services Corporation PDF Pakistan Development Review PERI Pakistan Economic Research Institute PIA Pakistan International Airlines PIDE Pakistan Institute of Development Economics PHDEB Pakistan Horticulture Development and Export Board PKR Pakistani Rupee PPP Public Private Partnership PSDP Public Sector Development Program PSE Public Sector Enterprises PTA Pakistan Telecommunication Authority R&D Research and Development RBM Results Based Management SBP State Bank of Pakistan SECP Security Exchange of Pakistan SJ Statens Järnvägar SME Small and Medium Enterprise SRO Statutory Regulatory Order TARP Tax Administration Reform Project TCP Trade Corporation of Pakistan TFP Total Factor Productivity TVE Town And Village Enterprises TVET Technical and Vocational Education and Training UK United Kingdom UNDP United Nations Development Program UNICEF United Nations International Children’s Fund UNIDO United Nations Industrial Development Organisation USA United States of America USC Utility Stores Corporation WAPDA Pakistan Water and Power Development Authority WWF World Wide Fund YES Youth Engagement Services YSLP Youth Service Learning Program

Pakistan: Framework for Economic Growth 7

Contents

List of Figures 8

List of Tables and Boxes 9

Executive Summary 10

1 Breaking Out of Our Past 17

2 Rethinking Our Growth Paradigm 28

3 Spotlight: Productivity and Innovation 38

4 Building a Government for the 21st Century 57

5 Deepening and Maintaining Openness 74

6 Vibrant and Competitive Markets 84

7 Creative Cities 93

8 Connecting to Compete 108

9 Youth and Community Engagement 119

10 Implementation: RBM 129

Appendix – Action Matrices 136

Appendix – Consultations for Growth Strategy 145

Pakistan: Framework for Economic Growth 8

List of Figures

Figure 1 Regional Economic Growth 1961–2009 18

Figure 2 Growth Volatility: Real GDP – Coefficient of Variation 19

Figure 3 Investment and Savings as per cent of GDP, 1971–2009 20

Figure 4 Structural Transformation 1970–2010 22

Figure 5 Exports, Imports and Current Account 1980s–2000s 23

Figure 6 Per Capita GDP Growth and Poverty Head Count, 1997–2005 24

Figure 7 Projected Labour Force Size and its Composition (Millions) 25

Figure 8 Falling Incomes and Rising Unemployment, 2001-09 26

Figure 9 Pakistan: Targeted Vs. Actual Economic Growth 29

Figure 10 Binding Constraints First 32

Figure 11 Growth Accounting in Pakistan by Decades, 1961-2005 (%) 38

Figure 12 Cross Country Comparison of Labour Productivity Growth (%) 39

Figure 13 Financial Sector Indicators 2000-2007 40

Figure 14 Impact of Governance on Firm Performance 46

Figure 15 Percentage of Firms Offering Formal Trainings 49

Figure 16 Connectivity–Growth Nexus 54

Figure 17 Impact of Regulatory Quality and Rule of Law on Productivity 57

Figure 18 Reorienting the Role of Government 58

Figure 19 Directions in Reforming Governance 59

Figure 20 Budgetary Expenditures 63

Figure 21 Reformed Power Sector Structure 71

Figure 22 Pakistan Trade Liberalisation: A Story of Stalled Reform 76

Figure 23 Comparison of Logistics Performance 80

Figure 24 Pakistan: Real Effective Exchange Rate (2005=100) 82

Figure 25 Share in GDP and Growth of Domestic Commerce, 2000-10 86

Figure 26 The Most Problematic Factors for Doing Business, 2010 87

Figure 27 Time & Cost of Enforcing a Contract, 2009 (days and % of claim) 92

Figure 28 Housing Sector Issues 103

Figure 29 Governance for Cities 105

Figure 30 Issues Faced by Pakistani Youth and Global Talent Rankings 120

Figure 31 Age Distribution of Population and Education Profile 122

Figure 32 Youth Employment and Illiteracy in Selected Countries 122

Figure 33 Classification of Labour Force & Youth Unemployment (%) 123

Pakistan: Framework for Economic Growth 9

List of Tables and Boxes

Table 1 Growth, Investment & Savings 1971 – 2009 (Annual Average) 21

Table 2 Overall Infrastructure Quality (Out of 139 countries) 33

Table 3 Property Rights, Markets and Technology (Out of 139 countries) 35

Table 4 Labour Productivity by Sector, 2007 40

Table 5 Yield Gaps of Major Crops, 2008 42

Table 6 Productivity Indicators, Actual and Projected, 1981–2030 47

Table 7 Improvement in Doing Business, 2009 47

Table 8 Average Years of Schooling 52

Table 9 Subsidies by Federal Government 2005-10 62

Table 10 Losses in the Power Sector 72

Table 11 Subsidy on Gas 72

Table 12 Demand Forecast for Short-term 73

Table 13 Average Amount Saved By Business, 2009 91

Table 14 Growing Population in Cities 96

Table 15 Connectivity Scorecard Rankings 109

Box 1 Economic Growth and Social Safety 24

Box 2 Institutions Matter! 30

Box 3 Learning from Growth Experience around the World! 34

Box 4 Who is Listed at Karachi Stock Exchange? 45

Box 5 Innovation Councils 56

Box 6 Current Status of Restructuring 61

Box 7 The Four Phases of Civil Service Reform in Sri Lanka 65

Box 8 Monetisation of Perks 67

Box 9 Advantage of Large Cities – Case of Shanghai, China 94

Box 10 Major Types of Zoning Observed in Modern Cities 97

Box 11 Zoning Breakdown and Regulations in Islamabad 98

Box 12 Dubai Zoning 99

Box 13 Commercialisation of Fees in Karachi 100

Box 14 Impact of Density and High-Rise 102

Box 15 Rent Control Legislation and Disincentives for Renting Property 104

Box 16 Endogenous Growth through Connectivity 109

Box 17 Contribution of Social and Human Networks towards Growth 110

Box 18 Case Studies on Railways Restructuring 114

Box 19 Sachivalaya Vahini or e-governance in Karnataka 117

Box 20 Brain Drain 118

Box 21 Issues Faced by Pakistani Youth and Global Talent Rankings 121

Box 22 National Internship Programme 124

Box 23 Youth is a Solution, Not a Problem! 124

Box 24 Success of Orangi 125

Box 25 Post 18th Amendment of Governance of Education and Health 126

Box 26 Integrated RBM– the Malaysian Experience 133

Pakistan: Framework for Economic Growth 10

Executive Summary

Pakistan faces many challenges at the beginning of the second decade of the 21st century:

• Decades-long struggle with macroeconomic stabilisation arising from unsustainable fiscal policies

• Pressure of demography

• Legacy of economic distortions

• Battering from external events, including earthquakes, floods and a continuing longstanding low intensity conflict

• A large and loss-making public sector that impedes market development

• Low and declining productivity

• Heightened expectations of the population for a better life from a democratic government.

Our growth experience of the last four decades has been volatile annual growth and declining trend in long run growth patterns. In addition, productivity growth (a measure of efficiency) has been low in comparison to our comparators. For the last four years per-capita incomes have not increased in real terms while double-digit inflation has prevailed.

Our growth policy has been based on public sector projects and arbitrary incentives– subsidy and protection. The project selection process has considerably blunted the efficiency of infrastructure development while the system of incentives has not allowed the development of a vibrant and competitive marketplace.

This growth strategy is a new approach to accelerating economic growth and sustaining it. It has been developed with world renowned experts and all the stakeholders following extensive research and consultation. Our consultations clearly identified the need to develop a coherent approach to growth that goes well beyond projects and targets public service delivery, productivity, competitive markets, innovation and entrepreneurship.

The strategy is based on sustained reform that builds efficient and knowledgeable governance structures, and markets in desirable, attractive and well-connected locations. It recognises the severe resource constraint that the country faces and therefore focuses on ‘productivity’— improving the efficiency with which assets are used. Global indicators such as ‘competitiveness’ and ‘cost of doing business’ also highlight factors such as ‘management’, ‘innovation’, ‘quality of regulation and governance’ and ‘research and development’, as the more immediate constraints to growth. The thrust of this strategy, therefore, is to focus on the ‘software’ of economic growth (issues of economic governance, institutions, incentives, human resources, etc.)

Pakistan: Framework for Economic Growth 11 so as to provide an environment in which the ‘hardware’ of growth (physical infrastructure) could be expanded and made more productive at every level.

The strategy argues that growth drivers such as entrepreneurship and innovation could be greatly encouraged by reforming and strengthening institutions such as the civil service, legal and judicial framework, the taxation system etc. The strategy also proposes measures, such as a reform of the restrictive zoning laws, which have impeded the growth of domestic commerce and hampered the role of cities as generators of economic growth.

The aggregate of such programs would vastly improve the investment climate, reduce the cost of doing business, increasing the profitability of enterprises and encouraging them to expand. The strategy also focuses on the improvement of productivity by, for example, increasing competitiveness in the market by easing the entry and exit of firms.

In short, the strategy aims to increase investment in the country and to make investment more productive. The strategy proposes special programs to support key parts of the population, such as youth, who suffer disproportionately from unemployment.

Targeting Growth

Around 68% of Pakistan’s population is regarded as youth (under 30 years). Many of them are now coming into the labour force, increasing the size of the workforce by over 3 per cent annually. It is estimated that to absorb the youth bulge productively, Pakistan's real GDP needs to grow at an annual average rate in excess of 7 per cent.

The strategy recognises that the country cannot jump immediately to these high rates of growth from the current low growth rate of about 3 per cent per annum.

• At the first stage, efforts will be undertaken to revive the economy to its short-term potential GDP growth rate of about 5–6 per cent a year. If issues regarding energy governance are resolved and some credible macro stability reached–this could be achieved in a short time.

• The strategy also suggests deep and sustained reforms–in areas such as public sector management, developing competitive markets, urban management and connecting people and places—as a way forward for accelerating growth to above 7 per cent.

What Constrains Pakistan’s Economic Growth?

Growth diagnostics point to two important constraints to economic growth:

1. Inadequate market development, (lack of competition, tax, tariff and policy distortions, entry barriers, government involvement, poor regulation, etc.), and

2. Lack of efficient public sector management to (a) provide core governance goods such as security of life, property, transaction and contract, (b) facilitate markets

Pakistan: Framework for Economic Growth 12 and investment with informed policy and competent regulation, and (c) promote deepening of physical, human and social infrastructure.

This growth strategy is informed by the latest in economic thinking and seeks to strengthen both government and markets. It is not a ‘government versus markets’ approach but a ‘government and markets’ approach. An efficient government underpins a vibrant market. Much of the proposed reform is to get the roles of government and market in balance to develop efficiency within and between the two.

The Need for Productivity

Economic growth happens through the accumulation of labour and capital and through the efficient allocation of these assets—known as Total Factor Productivity (TFP). The contribution of productivity in the growth of Pakistan's GDP has been less than impressive. During the period 1960 to 2005, 80 per cent of the GDP growth rate in Pakistan was explained by capital accumulation and labour expansion and only 20 per cent by TFP. Labour productivity in Pakistan is growing at a comparatively lower rate than neighbouring countries. Research suggests several reasons, including market quality, poor governance, limited urban development, inadequate education, lack of competitive goods and factor markets, inadequate foreign competition and limited research and development capacity. Systems need to be built for monitoring and measuring productivity to motivate reform for sustained efficiency increases.

Building a Better Government

Our analysis and consultations have shown poor governance and dysfunctional markets to be among the most important reasons why growth in Pakistan has not achieved a sustained acceleration. Currently the government is an active player in every sector, as a direct market participant and competitor, obstructing private sector entry. The footprint of the government has been estimated to be as large as over 50 per cent of the national income, making it very difficult for the private sector to expand.

Research by the Competition Commission of Pakistan has also established that government intervention is impeding the development of competitive markets. Better government should be established following a two-pronged approach a) reorienting the role of government–which focuses on an exit from markets and deeper deregulation, and b) improving public sector management–which includes reforming civil service, improving resource mobilisation, elimination of untargeted subsidies (particularly to loss making public sector enterprises), efficient public investment through results-based management.

Deepening and Maintaining Openness

While announcing export promotion in some sectors, policy has relied heavily on import substitution in others. Consumers have paid the price for these policies, through taxation for export subsidies and through high prices and sacrifice of quality goods where import substitution policies prevail. Meanwhile, innovation and entrepreneurship have suffered as the incentives are skewed in favour of lobbyists (rent seekers) rather than reliance on competitive markets.

Pakistan: Framework for Economic Growth 13

The growth strategy advocates liberalisation of trade and investment regime to be a critical ingredient for sustained economic growth that in turn creates jobs, and raises productivity and wages. Unfortunately heavy protectionism was reintroduced in Pakistan during the second half of 2000–10, which brought back distortions in the overall trading system. Major distortionary policies adopted include (a) reversal of tariff cuts and increased tariff dispersion, (b) reversal of a number of liberalising reforms in agriculture, notably in wheat, sugar and fertilizer policies, (c) high and steeply escalated tariffs in specific industries, e.g. the auto-industry, following strengthened intervention by the EDB, (d) active use of WTO compatible regulations to restrict imports—including quasi-import licensing mechanism, (e) introduction and rapid expansion of anti-dumping practices, and (f) continuation of the long standing ban on imports from India.

The growth strategy recommends a) re-establishment of the unilateral trade liberalisation program, b) immediate abolition of the present system of distortive regulatory duties (SROs) that interfere with the tariff structure, c) maintain, de minimis, a neutral real exchange rate policy, d) immediate abolition of the ad-hoc system of quasi-import licensing being administered by EDB and various line ministries, e) thorough review of the economic justification for sectors/industries benefiting from above normal protection and/or subsidies, export subsidies, export taxes, and anti-dumping practices, and f) all economic policies including industrial and trade policies should be in line with the intentions defined in this growth strategy.

Vibrant and Competitive Markets

The growth strategy presents a clear road map for developing vibrant markets. Public enterprise reform and privatisation where necessary, will make space for increased entrepreneurship. Several markets require the government to move from producing and directly participating in markets to just regulation. For example, the current regulatory framework represses domestic commerce (retailing, warehousing, and transport) and construction and city development. Heavy government direct participation in agriculture, storage, transport, construction, to name a few, is stifling investment. Openness and city development combined with focussed public sector management would go a long way towards developing innovative markets.

Creative Cities

Almost half of the world’s population lives in cities, producing more than 80% of global GDP. Dense high-rise cities are more productive, more inclusive and offer more than suburban sprawls which our city-planning paradigm favours at the cost of agriculture and the environment. In order to make cities as hubs of commerce, our growth strategy proposes a) relaxing of zoning and building regulations to allow space for mixed-use activities, energy efficiency, and facilitate vertical expansion of cities, b) privatising unproductive state owned land, c) encouraging foreign developers to compete in the Pakistani market, and d) focusing on research and development in low-cost energy efficient construction techniques.

Pakistan: Framework for Economic Growth 14

Connecting to Compete

Commercial activity requires dense well-connected cities and communities.

Connectivity is critical stratagem of the growth framework. While our PSDP has built physical infrastructure, given significant fiscal constraints, private investors should be encouraged to participate in development projects. In this regard, rules pertaining to project approvals, land acquisition and NHA Act must be revisited in line with promoting public-private partnership. Government should also consider its current policy of rewarding the loss-making enterprises such as NLC, Railways, and PIA etc.

for their inefficiencies through consistent subsidies. Competition should also be encouraged at the domestic level by limiting regulators’ role to regulating, e.g. CAA should not be responsible for running the airports but should concentrate on policy formulation and its implementation. Commercial routes, whether railroad or aviation, where multiple operators cannot operate due to congestion or some other limitations must be auctioned instead of giving a preferential treatment to any individual operator.

In order to facilitate businesses, the country’s custom posts should be automated so that clearance time could be reduced. Custom processes at dry ports should be computerised in order to reduce congestion at the seaports.

Pakistan will have to keep pace with trends in international connectivity. This will require strong efforts. Government should also pass electronic signatures act which should provide legal cover to the use of digital IDs. The use of ICT services, if encouraged across the board in the public and private sectors can greatly reduce the costs related to transport and logistics.

Youth and Community Engagement

The youth bulge is becoming eminent in coming years and it will change the age structure of the labour force over the next couple of decades. More than a third of youth currently lives in urban areas and their share is expected to reach 50 per cent by 2030. Compared to other growing economies of the region, Pakistan has a relatively large proportion (32%) of uneducated youth mostly with no vocational and life skills, who end up in elementary occupations or remain either unemployed or inactive.

There is a need to provide for their health, education, and livelihood, and engage them in activities which convert their latent energy into positive outcomes for family, community, state and the global community. This is only possible through provision of quality basic and college education, market led skills development, instituting National Youth Service Policy Reforms, redesigning and rezoning cities to create space for youth, promoting nano- and micro-youth enterprises at local level through targeted youth entrepreneurship programs in major civic centres, promoting youth citizenship through civic engagement, promotion and continuum of youth sports and activities that encourage and support the development of active and engaged young people, National Youth Volunteer Services, programs to foster youth reproductive and general health, and establishment of Youth Service Learning Program with the help of educational institutions and civil society that integrates community and social service with academics.

Pakistan: Framework for Economic Growth 15

Implementation: Results Based Management

“Who will implement?” is probably the most frequently asked question in Pakistan.

This is so, because many good policy proposals and plans have been prepared but were never actualised. Our consultations have shown us that one reason implementation is poor in Pakistan is because plans are expected to be implemented by the very system that needs change. More often, there is no process or system in place for making change happen.

The new vision for economic growth will require:

• Periodic identification of emerging constraints to economic growth through research and dialogue with all sectors and stakeholders

• Consensus building through extensive consultations on the reforms and programmes that will be required for alleviating these constraints

• Building a system for measuring productivity and public service delivery

• Developing and monitoring quantifiable plans regularly

Under the post-18th Amendment milieu, the Planning system will exercise control over the development process through:

• Consultation, setting medium-term and annual development objectives for the government and for relevant ministries

• Identification of key economic reforms that are required for these objectives, development of quantitative indicators (which can be monitored) for these reforms and monitoring and reporting on them to government and the people

• Specifying government- and ministry-level reporting requirements for development results and their costs, to ensure accountability and track progress

• Strengthening the capacity of ministries and, by interaction and evaluation, ensuring that their strategies and services support national development priorities

• Developing capacity of planning system to act as an institution that develops and oversees the government’s reforms agenda

Six critical changes have been identified that need to be introduced to strengthen the linkage between the Planning Commission and government performance. These are:

1. Strengthen the Medium-Term Development Framework (MTDF) and the Medium-Term Expenditure Framework (MTEF) for setting medium-term priorities in line with growth strategy and reforms agenda

2. Support a unified results-based budget preparation process

3. Decentralise responsibility for projects to line ministries

4. Redefine the Planning Commission’s role and processes in respect of major capital projects

5. Establish a results-based monitoring and evaluation system.

6. Planning Commission should lead the reform and change process through identification and advocacy of critically required changes in policies.

Pakistan: Framework for Economic Growth 16

Pakistan: Framework for Economic Growth 17

Breaking Out of Our Past

‘Some men tend to cling to old intellectual excitements, just as some belles, when they are old ladies, still cling to the fashions and coiffures of their exciting youth.’ – Jane Jacobs

At the beginning of the second decade of the 21st century, Pakistan faces many challenges:

• Decades-long struggle with macroeconomic stabilisation arising from unsustainable fiscal policies

• Pressures of demography

• Legacy of economic distortions from previous policies

• Battering from external events, including earthquakes, floods and a continuing war

• Low and declining productivity

• Heightened expectations of the population for a better life from a democratic government

We need a bold new approach to seek sustainable and inclusive development and we must do this bearing in mind the resource constraint arising from our difficult fiscal situation.

Goals and Objectives

The goal is to maximise opportunity for all citizens so that they can obtain a better life through their hard work and ingenuity. Pakistan's population, until recently, was growing at 3 per cent annually, however is now increasing at an annual rate of about 2 per cent. As a result, our labour force is expected to grow at over 3 per cent annually over the coming years. To absorb this addition to the labour force, the GDP needs to grow at a rate of around 7 to 8 per cent annually and must be sustained in the coming decades.1 The growth strategy must be bold, seeking to generate opportunities— employment and entrepreneurial (self-employment) opportunities. This is the policy goal!

Recent thinking on growth indicates that growth generators need not be governments, but cities, asset classes, commodities, products, firms and people. Growth should not be difficult for those starting far behind since the recipe is long known and well established; give the vibrant young people quality education, new ideas and high ideals, strive for institutions that support free and fair markets, create a professional, well trained civil service, achieve economies of scale through a large domestic market and

1 A number of studies have shown that the elasticity of employment with respect to GDP growth is about 0.5. This means that a one percentage point increase in the GDP growth rate leads to a one-half percentage point increase in employment.

Growth strategy must be bold, seeking to generate opportunities

Goal is to maximise opportunity for citizens through hard work and ingenuity

Pakistan: Framework for Economic Growth 18 open up for trade and investment; and, keep public spending on infrastructure and social sectors limited and focused only to critical and essential projects.2

A Past of Volatile Growth and Poor Economic Governance

The history of global economic growth indicates that: a) past five decades have seen extraordinary growth worldwide, b) many developing countries sustained rapid growth for extended periods and achieved substantial increases in incomes for their populations, c) for the most part this growth came from policy reforms that provided macroeconomic stability, encouraged markets and embraced greater openness to trade and investment, d) there exist examples where high growth has been maintained for over quarter of a century (Japan 1951–88, China 1979–03, Korea 1954–98), and e) most of the extended declines in per capita income involve a collapse in governance.3

Between 1972 and 2010, Pakistan’s GDP grew at an average annual rate of about 4.9 per cent. However, our growth was volatile and showed a declining trend (Figure 1).

In contrast, other regional economies such as India, Sri Lanka and Bangladesh, showed less volatility (particularly in recent years) and more importantly the trend in growth rate in these countries was increasing overtime.

2 W Buiter and E Rahbari, ‘Global Growth Generators: Moving beyond Emerging Markets and BRIC’, Global Economics

View, Citigroup Global Markets, February 2011.

3 NH Stern, JJ Detheir & FH Rogers, Growth and Empowerment: Making Development Happen, MIT Press, Cambridge

Massachusetts, 2005.

Regional Economic Growth 1961–2009 Figure 1

Source: World Development Indicators

Between 1972 and 2010, our GDP grew at an average annual rate of about 4.9 per cent.

However, growth was volatile and on a declining trend

Pakistan: Framework for Economic Growth 19

Figure 2 further reinforces two important features of volatility of growth in Pakistan:

• First the coefficient of variation (a measure of fluctuation in relation to the average) is higher for Pakistan than that of other regional economies, particularly for more recent periods

• Second Pakistan’s variation occurs around a declining trend rate

Together these highlight increasing uncertainty in our economic outlook. In turn, this uncertainty deters investment.

Contemporary thinking in economic growth literature explains that key determinants of growth today are economic governance and human capital.4 The usual variables such as investment and savings should be regarded as endogenous to the system. This implies that we are in search of factors that allow space and freedom to invest productively. Economic growth is delivered and assets are accumulated through competitive markets and use of existing and new technology, productivity-inducing knowledge and business models.

This view in no manner understates the importance of capital formation overtime.

Figure 3 points to two important reasons for Pakistan's relatively slower GDP growth compared with countries in its neighbourhood.

• First, it has been investing a smaller share of its GDP than its neighbours. In virtually all countries in our region, the ratio of investment to GDP has shown a steady increase between 1971 and 2009

• Second, the share shows signs of decline

4 K Ward, The World in 2050, HSBC Global Research, January 2011. See also RJ Barro, ‘Determinants of Economic

Growth: A Cross-country Empirical Study’, Journal of Comparative Economics, vol. 26, no. 4, pp. 822-824 and World

Bank Policy Research Report, The East Asian Miracle: Economic Growth and Public Policy, World Bank, 1993.

Growth Volatility: Real GDP – Coefficient of Variation Figure 2

Source: Computed from UNDP Data

Key determinants of growth today are economic governance and human capital

Pakistan: Framework for Economic Growth 20

A crucial question for accelerating GDP growth in Pakistan, therefore, is how to raise the investment rate, and how to increase its productivity so that the country can derive higher output at each level of investment. These are the two critical issues that this growth strategy is designed to address.

Source: World Development Indicators

On a sustainable basis, while a certain amount of investment can be financed through an inflow of foreign resources (whether as external assistance or commercial borrowing), the bulk of investment must be financed by domestic savings. In this area also, Pakistan has performed less satisfactorily than many of its neighbours. During the past four decades (1971–2009) the ratio of fixed investment to GDP averaged only about 17 per cent, and the ratio of domestic savings to GDP merely 12 per cent. This performance compares poorly with the neighbouring countries (see Table 1).

Investment and Savings as per cent of GDP, 1971–2009 Figure 3

A sustainable basis requires bulk of investment to be financed by domestic savings and not through inflow of foreign resources

Pakistan: Framework for Economic Growth 21

The gap between Pakistan's domestic savings and its investment means that about one-third of the country's fixed investment was financed by foreign resources. The corollary to this reliance on foreign savings was that the performance of Pakistan's GDP became significantly dependent on the availability of such resources — a phenomenon that maintained boom-bust cycles. Foreign injections have on occasion led to sharp upward spikes in growth rate. However, because the resources were not channelled into productive investments, GDP growth has not been sustained beyond periods of external inflows.5

It has also been argued that there was no strong relationship between public investment and economic growth,6 but it appears that public investment did have some effect in attracting private investment.7 The episodes of slowdown in the investment rate have also been associated with frequent changes of political regimes and economic policies, and balance of payments volatility.8

How the Economy has Evolved

The economic structure has changed and way forward must seek to build on the ongoing structural transformation. Figure 4 shows that while in the past agriculture was the largest sector in the economy, today it is services. By 2010, the share of agriculture had dropped to about 20 per cent, while that of services exceeded 50 per cent. These changes have significant implications for the growth of productivity and employment. The services sub-sectors by definition are more value-added, more

5 V Ahmed and C O’Donoghue, ‘External Shocks in a Small Open Economy: A CGE-Microsimulation Analysis’, The

Lahore Journal of Economics, vol. 15, no. 1, 2010, pp. 45-90.

6 E Ghani and Musleh-ud-Din, ‘The Impact of Public Investment on Economic Growth in Pakistan’, Pakistan

Development Review, vol. 45, no. 1, 2006, pp. 87–98.

7 SNH Naqvi, ‘Crowding-in or Crowding-out? Modelling the Relationship between Public and Private Fixed Capital

Formation Using Co-integration Analysis: The Case of Pakistan 1964 – 2000’, Pakistan Development Review, vol. 41, no.

3, 2002, pp. 255–276.

8 SM Naseem, ‘Political Economy of Structural Reforms in Pakistan’, East Asian Bureau of Economic Research, Working

Papers, Bangkok, 2008.

Country GDP Growth (%) Fixed Investment to GDP Domestic Savings to GDP ICOR

China 9.1 32.2 37.9 3.5

India 5.3 23.9 22.0 4.5

Malaysia 6.4 27.4 35.0 4.3

Indonesia 6.0 25.9 29.2 4.3

Thailand 5.9 29.5 28.8 5.0

Pakistan 4.9 16.6 11.9 3.4

Growth, Investment & Savings 1971–2009 (Annual Average) Table 1

Source: World Development Indicators

No strong relationship between public investment and economic growth

Services sub-sectors are more value-added, more labour-intensive and have greater potential of growth

Pakistan: Framework for Economic Growth 22 labour-intensive and have greater potential of growth even under repressive circumstances which lead to curbing of growth in agriculture and industry.

Our ability to do business with other countries has also remained uncertain. The trade regime in Pakistan was never grounded in an overarching growth paradigm. We have seen phases of import substitutions, export orientation and revival back towards protectionism.

• Figure 5 illustrates the near-stagnancy in the structure of the trade sector. Exports and imports as a percentage of GDP have not changed much in the past three decades. In fact, the ratio of exports to GDP has declined from the average levels seen in the 1990s.

• Within the structure of exports it has been difficult for the industrial sector to diversify away from textile manufactures—which again were low-value-added.

• Pakistani exports are narrowly concentrated geographically, which makes them vulnerable to economic crises in economies such as the United States and the European Union.

• Finally, policy in Pakistan sought to boost exports through controls on domestic market. These controls included examples such as curbs on domestic consumption, resource utilisation and allocation and market development.9

9 NU Haque, ‘Beyond Planning and Mercantilism: An Evaluation of Pakistan’s Growth Strategy’, Pakistan Development

Review, vol. 45, no. 1, 2006, pp. 3–48.

Structural Transformation 1970–2010 Figure 4

The trade regime in

Pakistan was never grounded in an overarching growth paradigm

Source: Economic Survey of Pakistan, various issues

Exports have failed to diversify

Pakistan: Framework for Economic Growth 23

Inclusive and Sustained Growth is a Policy Imperative!

Pakistan must get on to a path of high and sustained GDP growth as soon as possible.

The size, growth, and age distribution of the country's population demands this. Every year Pakistan adds the equivalent of a New Zealand to its population; every two years, a Switzerland; every three years, a Greece; every four years, a Chile or a Netherlands;

and every five years, an Australia. And of course, while it adds these populations, it does not add the assets and institutions of these countries.

Another important reason for the country to get onto a sustained high-growth path is the objective of alleviating poverty. Rapid increase in the GDP has proved to be a necessary (even if not sufficient) condition in every country that has managed to reduce poverty by a substantial amount. However, it is not only a high rate of growth that is required, which must also be sustained. As was discussed previously, the bulge in Pakistan’s working age population is likely to continue for at least 30 years, and these additional numbers need to be provided employment.

It is evident from Pakistan’s recent growth experience that growth has caused a significant change in poverty levels. Between 1996-97 and 2001-02 low growth in per capita GDP resulted in an increase in poverty, which started to decline sharply as per capita income grew during the period 2004-05 to 2005-06 (Figure 6).

Exports, Imports and Current Account 1980s–2000s Figure 5

Source: Economic…