LOW GDP GROWTH-A SEQUEL TO ECONOMIC STAGNATION

SHAMSUL GHANI
(feedback@pgeconomist.com)
July 4 - 10, 20
11

The Pakistan Economic Survey 2010-11 statistics (for 9 months of FY-11) suggest that the real GDP growth during FY-11 is likely to be around 2.4 percent against 3.8 percent attained during the previous year. The main contributor, as usual, is services sector, which has grown at a rate of 4.1 percent. Contributions from the manufacturing and agriculture sectors have been three and 1.2 percent respectively.

This is a demoralizing situation and reflects badly on our textbook economic policies that have stifled an otherwise burgeoning economy.

WORLD ECONOMIC INDICATORS 2010

ECONOMY

RANK BY GDP PPP

POP MILL

GDP PPP BIL $

GDP NER BIL $

PER CAPITA GDP PPP 000 $

REAL GDP GROWTH %

LABOR FORCE MIL

UNEMP
%

INF CPI %

PUBLIC DEBT % OF GDP

BROAD MONEY (M2) BIL $ 

World

-

6928

75000

63000

11.2

4.9

3200

8.8

*

59

74000

US

2**

313

14700

14700

47.2

2.8

154

9.7

1.4

59

11000

China

3

1337

10100

5900

7.6

10.3

780

4.3

5.0

17.5

4500

Japan

4

126

4300

5500

34.0

3.9

66

5.1

-0.7

226

6200

India

5

1189

4100

1538

3.5

10.4

478

10.8

11.7

56

853

Russia

7

139

2223

1465

15.9

4.0

76

7.6

6.7

9.5

318

Brazil

9

203

2172

2100

10.8

7.5

104

7.0

4.9

61

645

South Korea

13

49

1500

1000

30.0

6.1

25

3.3

3.0

24

473

Indonesia

16

246

1000

707

4.2

6.1

117

7.1

5.1

26

131

Australia

18

22

1200

1200

41.0

2.7

12

5.1

2.9

22

617

Taiwan

19

23

822

431

35.7

10.8

11

5.2

1.0

34

618

Iran

20

78

819

357

10.6

1.0

26

14.6

11.8

16

72

Thailand

25

67

587

319

8.7

7.8

39

1.2

3.3

42

284

Pakistan

28

187

465

175

2.5

4.8***

56

15.0

13.4

50

65

Malaysia

30

27

414

238

14.7

7.2

12

3.5

1.7

53

201

Philippines

34

102

351

189

3.5

7.3

39

7.3

3.8

57

56

Singapore

41

5

292

223

62.1

14.5

3

-

2.8

102

179

Vietnam

42

91

277

104

3.1

6.8

46

2.9

11.8

57

64

Bangladesh

45

159

259

105

1.7

6.0

74

4.8

6.1

39

45

Sri Lanka

69

21

107

50

5.0

9.2

8

5.4

5.6

87

11

NOTE: UNEMP: UNEMPLOYMENT, INF: INFLATION, POP: POPULATION

PPP: Purchasing Price Parity; NER: Nominal Exchange Rate; *CPI Developed World 2.5%; Developing World 5.6%

** European Union ranks first on the basis of cumulative GDP of EU countries; *** Actual 3.8%

At a time when South Asian economies are outperforming the developed economies, the dismal progress our economy has been showing after the contrived removal of a stable, though autocratic, government speaks volumes about the corrupt economic and political culture the country has been dragged into. The central bank has put its policy shutters down and is busy at 24/7-single-window that takes care of government infinite borrowing needs with no questions asked. The economy is begging for release from the stifling grip of regressive policies, but no one is prepared to talk sense.

Short-term objectives of political and economic groups are high on the agenda. The changed global environment and our economic policy deficit have made our economy bereft of sense and direction. Till 2007, we were working on an 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 alternative work plan. If it has to be production-led growth, then what measures have been taken to achieve it? If it has to be export-led growth, then what incentives have been given to the businesspersons to increase output at a manageable cost? 

Has it to be an exorbitantly high benchmark interest rate? We have neither been able to control 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 signals too strong to be ignored.

Instead of taking stock of our strengths and weaknesses, our economic managers have blindly followed foreign prescriptions. With an undue emphasis on structural shift program, the performance of our agriculture and manufacturing sectors got derailed. Agriculture sector growth, after touching the peak of 6.5 percent in 2004-05, came down to one percent in 2007-08. After improving to four percent in 2008-09, it slid back to 0.6 percent in 2009-10.

The FY-11 estimate of 1.2 percent is also very discouraging for an economy that boasts of its agro strength. Similarly, the manufacturing sector growth, after touching the peak of 15.5 percent in 2004-05, slid to a negative 3.7 percent in 2008-09. Resulting from the low base factor, the growth of 5.5 percent in FY-10 gave a misleading   impression of a strong comeback. The current year estimate of three percent proves that point. The erratic performance of the two important sectors of real economy testifies the total lack of economic planning  The foreign recipes are either based on the actual experience of highly developed economies or are designed by the free- market brains to exploit weaker economies. 

Alan Greenspan, the ex-US Fed chairman and a free-market economist mentions in his book The Age of Turbulence: "The most encouraging aspect of productivity growth is how remarkably stable it has been for the last century and more. Over much of that period, a substantial boost in U.S. productivity reflected the shift of workers from farms to urban factories and service establishments." Commenting on India's economic performance, he suggests further opening up of markets and a speedy shift of workers from agriculture fields to factories.

We need not to follow such advices. We should rather focus on revitalizing our agriculture and manufacturing sectors by loosening our excessively tight monetary policies. Our economy has huge potential and it should be allowed to expand. A drastic cut in interest rate and resumption of credit flow to the business and industry are the immediate steps the government and the state bank should take. The inflation factor is likely to expand our GDP size substantially. We can jack up our debt size without disturbing the debt to GDP ratio.

Our public debt to GDP ratio is not as alarming as it is often shown to be. To boost the economy, we can go for monetary expansion as our broad money to GDP ratio is quite low in comparison to other regional economies. The extended and expanded money supply, however, should not be misused. The economy will grow only when this additional supply is put to productive use.