What’s wrong with Pakistan’s Economy?

What’s Wrong with Pakistan’s Economy?

M.H. Rehman

Economy of a country has, over the years, assumed greater significance than ever before. Contrary to the historical view of military might, modern-day nations are seen through the prism of economic strength. It also follows that technological advancements in all spheres of life in general, and in arsenal, in particular, have made research, development and acquisition of modern-day arsenal expensive, leading to the situation where only a strong economy can give rise to and sustain a formidable military. The fall of the USSR is the most cited example of crumbling of a militarily strong nation under the weight of a withering economy. Against this backdrop, the significance of a strong economy for Pakistan cannot be overemphasized and, therefore, the economic quagmire the country finds itself in over the last couple of years is a matter of grave concern for all and sundry.

Economic crisis of Pakistan is neither new nor simple; it is a result of an accumulation of problems over the last three decades in wide-ranging areas – from mismanagement to corruption, neglect of innovation in agriculture sector to criminal apathy towards efficient storage and use of water, and rapid population growth to failure in making the population productive through sufficient industrialization. Continued neglect of constructing water reservoirs, shifting to efficient irrigation systems and emphasis on water conservation has led to a situation where Pakistan is now among countries facing severe water scarcity. It not only has serious consequences for life in the country but also repercussions for agriculture, livestock development and affordable power generation. Agriculture has been suffering due to lack of irrigation water, below-average rains, soil erosion, degradation of agricultural lands due to overuse, reliance on antiquated methods and decrease in total land under cultivation as cities sprawl and agricultural land is converted into residential areas, mostly unplanned dwellings whose faulty sanitation system mars the land quality of nearby areas as well. The country faces drought and desertification as well. According to Sustainable Land Management Project, Ministry of Climate Change, 51 percent land of Pakistan is under desertification, 80 percent of country’s land is arid or semi-arid, and these lands are home to two-third of the population. On average, the country sees two to three years of drought every decade. Policy and governance response to these alarming indicators is zero. The country is home to one of the most rapidly increasing populations around the world. No matter what the government may do, resources and opportunities will always be outpaced by the number of mouths to feed and the number of people seeking employment, if population keeps increasing at such high rates.

Economic challenges are a combination of these problems plus other factors. Pakistan’s economy is heavily dependent on the political situation, which more often than not remains precarious. Since the ouster of former Prime Minister Mian Muhammad Nawaz Sharif after a Supreme Court order in July 2017 to that effect, businesses in the country have been in a constant slump, investments have dried up, local manufacturing has been decreasing every passing day, leading to lesser exports and hence an ever-growing trade deficit, which has created a serious balance of payment problem for the PTI government that took over in August 2018. It has subsequently led to plummeting rupee value and fast depleting foreign exchange reserves. Despite government’s efforts to increase exports by further allowing rupee to depreciate and increasing import duties, exports have not increased significantly for two reasons. One, the country’s industrial base is heavily dependent on imported machinery and raw materials while the share of domestic value addition is not significant in exported goods, which means higher import duties hurt exports. Two, there is a time lag of all macroeconomic decisions to take effect – exports cannot increase overnight. At the same time, only one factor (depreciated currency in this case) is not sufficient to increase exports. At a time when the country continues to face an acute energy crisis with load management of both electricity and gas, industries find it next to impossible to reach optimum production levels. Highest energy tariffs in the entire region means that the comparative advantage is in favour of our competitors.

Economic growth requires healthy and sustained investments. Ease of doing business, enabling socio-political environment, skilled labour, affordable factors of productions, easy taxation and access to markets are prerequisites for investment. Pakistan, unfortunately, lags on all these indicators. According to the World Bank, Pakistan ranks 136^th in the Ease of Doing Business Index with a score of 55.31. It needs to be mentioned here that the ease of doing business score captures the gap of each economy from the best regulatory performance observed on each of the indicators across all economies in the Doing Business sample since 2005. An economy’s ease of doing business score is reflected on a scale from 0 to 100, where 0 represents the lowest and 100 represents the best performance. The ease of doing business ranking ranges from 1 to 190. For comparison, it may be noted that China ranks 46^th in the world with a score of 73.64, India ranks 77^th with 67.23 score while regional average score of 56.71 is also higher than that of Pakistan. One healthy sign for the country, however, is that it has registered somewhat improvement in the overall score of ease of doing business in 2019 compared to last year’s score of 52.78, with the Resolving Insolvency indicator recording the maximum increase of 14 percent.

Lack of skilled labour is a serious challenge. In early 2019, Federal Minister for Education had termed it the biggest challenge facing the government in terms of its policy for youth. “Each year, around 2.5 million people enter the local job market while most of them lack basic skills necessary to meet the demands of the local industry,” said the minister. With a futuristic view and taking into account the heavy reliance the country has made on economic boost from CPEC, significance of skilled labour increases manifolds yet, at the same time, the current situation appears gloomy. Pakistan’s annual demand for skilled workforce in the local market is more than 1 million people while the system produces only 445,000 skilled labourers. And, if we include the requirements of CPEC-related projects and international job market, the total annual demand reaches up to 2 million. It raises genuine questions on readiness as well as capacity of the country’s institutions to contribute to CPEC full scale. As it stands now, either many of the CPEC projects would not be able to yield envisaged dividends owing to a lack of skilled labour or the demand-supply gap would be filled by foreign workers – not a positive outcome for the country in either scenario.

And it is a double-edged sword. On the one hand, unemployment rates are high while industries do not find enough skilled workforce, on the other. Research on skills required in the market and imparting those skills to unemployed youth would address both these problems. Adoption of an approach that encourages technical and vocational education, especially among the target population, would not only have increased literacy rates but would also provide the country with people having better skillset, for they would learn them from qualified instructors at proper educational facilities rather than learning-by-doing at street shops. The number of technical and vocational training institutes is inadequate and many of the existing are deprived of even basic infrastructure, teachers and tools for training. This has created a deficiency of skilled workers in all trades essential for industrial growth, as a result of which foreign investors don’t find the Pakistani labour market conducive to making large-scale manufacturing investments.

Situation of highly-educated technical experts is also not satisfactory. Improving academia-industry linkages has been an eagerly debated topic for decades now; however, owing to a sheer lack of governmental focus and an enabling environment, and an industry that has been more in a fledgling state rather than being strong and stable enough to experiment with local innovations, this debate has not yielded significant results. Business startups, incubation centres and industry-specific research have been tried by some higher education institutes but with limited success. It can be argued that academicians have not been able to offer viable business models and commercially feasible solutions to local industries under the specific needs and peculiarities of local market. Majority of research is based on international literature and very few researchers vie for primary data for obvious reasons of data and literature availability, cost and time constraints. Nonetheless, for higher education to fully yield result, it has to be translated into practical solutions for local businesses. Fields such as agriculture, livestock, dairy, manufacturing in general and small scale manufacturing in particular especially the value addition sector, services sector, information and communication technology, engineering, alternate and renewable energy sources, water conservation and treatment, waste disposal have vast potential for such solutions and can significantly contribute in reviving Pakistan’s economy on sound lines.

The fix is as complex as the problem and will require an approach in which apparently separate steps reinforce one another. Agriculture sector needs improvements in yield per unit area, efficient irrigation and enhanced resistance against insects. This can come from research and innovation at universities, which in turn can be encouraged and supported by creating a mechanism of shared dividends from better crops and higher agricultural revenues. Efficient irrigation would save precious natural resources i.e. water from wastage and soil from erosion. Better agricultural yield can mean availability of food at lower cost that would increase real income of consumers, allowing them to divert their spending on other items, which can have a higher multiplier effect. It can also increase agricultural exports as well as provide domestically grown quality raw materials for industries thereby easing some fraction of dependence on imports. Plus it will augur well for value addition sector, graduating our export goods from raw materials to at least basic manufacturing. The dream of import substitution can also be realized by moving along these lines; better agriculture, value addition and targeted manufacturing, which is the process of focusing on industrialization in fields where the country holds comparative advantage based on factors such as raw materials, labor intensity, innovation level and market share and demand.

The approach, where various arms of the government tasked to improve economy work in silos with little or no interconnectivity and resultant synergies, will do no good, as the experiences from the past have shown. More importantly, the government machinery will have to be trimmed down from the current bulky, over staffed and complexly procedural setup to a smart, efficient, less wasteful, results rather than procedures oriented and effort rewarding business like concern. Economies do not build in days nor decline over short periods. The key is to identify what has gone wrong and avoid repeating the same mistakes. It’s not going to be a sprint; it will require persistence, perseverance and patience of a marathon.

The writer is a Fulbright alumnus, presently serving as Deputy Secretary in the Federal Government.