SERVICES SECTOR PROPS UP GDP GROWTH

SHAMSUL GHANI (shams_ghani@hotmail.com)
Nov 23 - 29, 2009

While the economists all around the world are questioning the reliability of GDP as a true measure of economic progress, our economy seems captive to the whims of our economic managers who keep experimenting with its structure.

The ongoing decade has seen our services sector dominate the commodity-producing sector with a GDP share of more than 50 per cent throughout the entire decade. During the year 1969-70, the share of services sector was 38.4 per cent with the combined share of other sectors standing at 61.6 per cent.

The 2000-08 is marked with structural changes brought about partly by the post 9/11 inflow of foreign funds in the shape of workers' remittances, aid to fight terrorism and foreign investment, and partly by the economic policies that put emphasis on consumption-led growth. Since the upsurge in foreign investment was triggered by short term profit motives, any worthwhile capital formation could not take place. The flow was mainly utilized for portfolio investment and marketing efforts in the telecommunication sector. The excess liquidity of the banks was pumped into the cash-starved consumer market.

Higher spreads and expanded credit market made the bank profits swell to unimaginable limits. FY-05 and FY-06 proved to be the boom years for the banking and insurance sectors when unprecedented growths of 32 and 43 per cent respectively, were recorded. Freely available credit also provided impetus to the wholesale/retail, transport/communication, and ownership of dwelling segments of services sector.

GDP GROWTH AND SECTORAL SHARE

SECTOR . 2000-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09
Agriculture :A Growth (2.2) 0.1 4.1 2.4 6.5 6.3 4.1 1.1 4.7
Share in GDP 24.9 24.1 24.0 22.9 22.4 22.5 21.9 21.3 21.8
Industrial :B Growth 4.1 2.7 4.2 16.3 12.1 4.1 8.8 1.7 (3.6)
Share in GDP 23.8 23.8 23.6 25.5 26.3 25.8 26.3 25.7 24.4
Services :C Growth 3.1 4.8 5.2 5.8 8.5 6.5 7.0 6.6 3.6
Share in GDP 51.3 52.1 52.4 51.6 51.3 51.7 51.8 53.0 53.8
Trans/Comm Growth 5.3 1.2 4.3 3.5 3.4 4.0 4.7 5.7 2.9
Share in GDP 11.6 11.4 11.4 10.9 10.4 10.2 10.0 10.2 10.3
Wholesale/Ret Trade Growth 4.5 2.8 6.0 8.3 12.0 (2.4) 5.8 5.3 3.1
Share in GDP 17.9 17.8 18.0 18.2 18.7 17.2 17.1 17.3 17.5
Finance/
Insurance
Growth (15.1) 17.2 (1.3) 9.0 30.8 42.9 14.9 12.9 (1.2)
Share in GDP 3.1 3.5 3.3 3.4 4.0 5.5 5.9 6.4 6.2
Ownership/ Dwellings Growth 3.8 3.5 3.3 3.5 3.5 3.5 3.5 3.5 3.5
Share in GDP 3.2 3.2 3.1 3.0 2.9 2.8 2.7 2.7 2.7
Public Admn/Defense Growth 2.2 6.9 7.7 3.2 0.6 10.1 7.1 1.2 5.0
Share in GDP 6.2 6.4 6.6 6.3 5.9 6.1 6.1 5.9 6.1
Social services Growth 5.6 7.9 6.2 5.4 6.6 9.9 7.9 10.0 7.3
Share in GDP 9.3 9.8 9.9 9.7 9.9 9.9 10.0 10.6 11.1
GDP Growth . 2.0 3.1 4.7 7.5 9.0 5.8 6.8 4.1 2.0
GDP (A+B+C) . 100 100 100 100 100 100 100 100 100
(2007-08 - Revised; 2008-09 - Provisional)

According to the Pakistan Economic Survey, 2008-09, "The commodity- producing sector has been overshadowed by another year of exceptional growth in the services sector. The modest growth of just 2 per cent is shared between CPS (0.08) and services sector (1.92). Within the CPS, agriculture contributed 1.0 percentage points or 50.1 per cent to overall GDP growth (a significant increase from its contribution of only 5.0 percent last year) while industry dragged 0.92 percentage points or 46.1 percent to neutralize positive contribution of the agriculture sector."

SECTORS' CONTRIBUTION TO GDP GROWTH (%)

SECTOR 2004-05 2005-06 2006-07 2007-08 2008-09
Agriculture 1.5 1.4 0.9 0.24 1.00
Industry 3.1 1.1 2.3 0.45 (0.92)
Services 4.4 3.3 3.6 3.41 1.92
Real GDP growth 9.0 5.8 6.8 4.10 2.0

The changed global environment and our economic policy deficit, particularly during the last three years, have made our economy bereft of sense and direction. Until 2007, we were working on the unmistakable theme of consumption-led growth. If it was madness, then at least there was a method in it. After condemning that theme, we dumped it but never came up with any alternate workable idea. If it has to be production-led growth, then what measures have been taken to achieve it? Has it to be an exorbitantly high benchmark interest rate?

Neither we have been able to control the inflation nor have we brought down the interest rate to the regional level. The result is that the mainstay of our economy, services sector is also threatened by a sharp downturn. The recessionary trends in the telecommunication sector and a negative growth in the financial and insurance sector are sending very strong signals to fill us with panic.

According to the World Bank Development Indicators 2009, the developed economies, mainly the OECD countries get a 75 percent contribution to GDP from the services sector, while the developing economies in the South Asia region have this contribution around 50 percent. True, our services sector has been making a 50 percent plus contribution since long, but can we rely on this trend to continue. Certainly not, at least in the given situation because we can not compete with any of the regional economies in any of the economic areas, be it the rate of inflation, the benchmark interest rate, food and energy security, cost of doing business, size of capital formation etc. Under the burden of an astronomical cost of doing business, textile and LSM sectors' dwindling output poses a great challenge to our economic growth. Our agriculture sector always operates under uncertainties and its output is historically known to show staggering variances.

Perhaps, our economic managers should now huddle and construct a policy framework that ensures sustained and unobtrusive growth of all sectors of the economy. It may be good to have a performing services sector but it is equally important that agriculture and industrial sectors also keep afloat to record high, mutually exclusive contributions to GDP.