A leapfrog strategy

By Shahid Javed Burki

Having performed reasonably well over the last year and a half, could Pakistan increase its GDP growth rate by a notch or two over the next decade or so? Could the current rate of GDP increase, estimated at about 5.2 to 5.5 per cent over the last eighteen month period, increase to 7 to 8 per cent by the end of this decade? In other words, could Pakistan join the league of high performing countries in Asia?

This group includes not only the tiger economies of East Asia, some of which like Korea, Taiwan and Singapore have joined the ranks of the industrial countries in terms of the structure of their economies. The group also includes China - a country that has seen a rate of economic growth that can only be described as "breathless." And perhaps also India.

Since 1975, China's GDP has increased sixteen-fold - a rate of economic expansion that has no equal in human history. In 2003, its GDP increased by 9.1 per cent.

China today is an economic workhorse and, if the present trends continue, it is destined to become the world's largest economy over the next two decades. In terms of purchasing power parity, the size of the Chinese economy may outpace that of the United States by the year 2025.

With China galloping, the Indian economy has also begun to trot. Since about 1991 when the then administration of Prime Minister Narasimha Rao began to demolish what had come to be called the "licence raj," the Indian economy has built up a momentum of growth that is likely to be sustained well into the future.

Over the last dozen years, the India GDP has increased at an annual average rate of 5.5 per cent, about two and a half times the rate of increase in the country's population.

This means that an average Indian is about twice as well-off now as was the case in the early 1990s, the start of the current period of reforms. If this rate of growth is maintained for another two decades, India could become the world's third largest economy by 2025, behind the United States and China.

The question I want to address today is whether Pakistan could also become another rapidly growing Asian economy. My answer to this question is a simple one.

There is absolutely no reason why Pakistan should not, once again, be a high growth economy as it was in the 1960s and the 1980s. In those two decades, Pakistan's GDP increased at the annual rate of 6.7 and 6.3 per cent respectively, much higher than the growth rates in India during the same periods.

Those growth rates in Pakistan could not be sustained since they were based on exogenous factors, in particular the availability of enormous amounts of external capital. In other words, the process of growth was not internalized as was done by East Asia and China and is now being done by India.

It is only with the adoption of a clearly articulated strategy of growth and by finding domestic resources for sustaining it that Pakistan will be able to achieve its potential - which, I believe, is a GDP growth rate of 7 to 8 per cent a year. What should be the nature and content of this strategy?

Pakistan could follow one of the three models that have been tried successfully by the various Asian countries. The first of these is the model that produced the "miracle economies" of East Asia.

Also called "tigers" and "cubs," these economies essentially tapped the large export markets available in the industrial world. This strategy essentially duplicated what Japan had done in the 1950s and 1960s.

In following export led strategies, the industrial sectors in the miracle countries were guided by the state which identified areas into which they could expand. The industries that were being helped were almost always privately owned.

Nonetheless, the state not only helped industries identify markets abroad, it also got the financial sector to lend large amounts of money to the chosen industries at below market rates.

In the parlance of economics this was called "directed credit" - credit provided by banks to industries at the direction of the state. This connection between industry and finance proved remarkably successful but it also led to the financial crisis of 1997-98.

What came to be called "crony capitalism" worked for a while but had to be adjusted once the financial crisis exposed its weaknesses. This has been done successfully and the East Asians are back on the high growth trajectory - something few analysts expected at the peak of the crisis.

The other model that Pakistan could follow was pursued by China. It focused on developing the human resource by providing all people - boys and girls, men and women, and residents in all parts of the country - with free education and health.

This human resource development occurred in an environment of authoritarian management of the economy and of the political system. Either by design or purely because of pragmatism, the Chinese, starting in the 1970s, released the enormous energies of this well-educated and healthy labour by gradually loosening political and social controls they had placed on them.

First agriculture and then small scale and privately owned industries responded to these incentives. The rest, as they say, is history.

Then there is the Indian model. What is today known as the "Indian way" was not a well thought out strategy initially. In fact, the explicit Indian strategy for development adopted by the country's first generation of leaders achieved a result exactly the opposite to the one intended.

It constrained growth rather than accelerate it. In the period between the mid-fifties and the mid-eighties the Indian economy chugged along at what came to be called the "Hindu rate of growth" - a growth rate of some 3 to 3.5 per cent a year. The model being followed now is the product of a series of accidents and ad hoc decisions.

It has at its foundation Prime Minister Jawaharlal Nehru's decision taken in the 1950s to set up half a dozen institutes of technology. When these institutes began to produce thousands of engineers and science graduates, there were very few employment opportunities available within the state dominated, moribund, highly inefficient and stagnant industries.

A large number of graduates of the now famous IITs had to look outside India for jobs and they found thousands of them in the telecommunications, information and communication technology (ICT) industry in the West.

When, in the late 1990s and the era of dotcom explosion, the US industry ran into serious skill shortages, a significant part of this was met by labour imports from India.

Thus was created the Indian diaspora which in the 1980s and 1990s not only acquired great wealth but also considerable experience and expertise. Once the non-resident Indian community had become viable in terms of size, wealth, income, and expertise, it was able to help with the development of the ICT industry back in the homeland. Consequently, India's IT sector became one of the most vibrant in the world.

What we see in India today is an economy that is being pushed forward by skilled people and knowledge-intensive industries. India's policymakers are now confident that based on the recent transformation of the economy they will be able to get their country to climb onto the same growth trajectory on which China has been moving for a while. This, in sum, is the much applauded Indian model of economic success.

Looking at the future, but also looking back at the experience of the various successful Asian countries, what strategy should Pakistan follow? Islamabad has a menu of options available.

It could use private industry to aggressively enter the export sector, exploiting the abundant financial resources now available within the reformed financial sector.

This would mean going on the track previously travelled by the miracle economies of East Asia. But, unfortunately for Pakistan, there is not much synergy between the structure of Pakistan's industrial sector and the nature of demand in the world's large markets. Pakistan will not be able to duplicate the experience of East Asia.

Or, alternatively, Pakistan could invest massively in developing its large human resource by providing it with education, health and opportunities for skill development and knowledge accumulation.

Such a strategy could work if Pakistan had the resources but more importantly the political will. When China went on that track it saved about 42 per cent of its gross national income, a proportion about three times Pakistan's abysmally low saving rate of today.

China's human resource oriented strategy produced results after two generations - or at least a generation and a half - had been sacrificed for the sake of the future. Pakistan neither has the luxury of time nor the political will on the part of its leaders to take the country through such a grind.

Finally, Pakistan could follow the Indian approach of concentrating on the accumulation of skills and knowledge by one segment of the population. A small - small relatively to the size of the population but still numbering in the millions - highly skilled workforce could enter the growth niches available in the global markets.

This is the strategy adopted by the first administration of President Pervez Musharraf. It was championed with great energy by the then minister of science and technology, Dr. Atta ur Rahman. Unfortunately, it did not produce the promised results.

I would advocate, instead, an approach that draws a bit on the Indian experience but then moves onto an altogether different track. This two-pronged approach would still emphasize knowledge and skill development as India has done so successfully.

Based on a well equipped workforce, Pakistan could either export its abundant workforce or take part in the rapidly evolving "outsourcing" opportunities that are changing the global production system.

On the other track, Pakistan could become the hub of north-south and east-west commerce. The north-south track could link Central Asia, including Afghanistan with India and points beyond.

The east-west track could connect the western parts of China with the Arabian Sea through the ports of Karachi and Gwadur. These two tracks will cross in Pakistan and bring enormous benefits to the country.

For Pakistan to follow such a strategy, it will have to undertake large investments in improving physical infrastructure - roads, railways, ports and airports.

It will also need to develop its economy to supply this transit trade with the services it needs including insurance, finance, warehousing, processing, transshipment, etc. Modernization of the service sector that such a strategy would mean focusing on creating appropriate levels of skills within the country in a number of diverse areas.

What I have spelt out above is a strategy for sustained growth and development suitable for a country in Pakistan's situation. Pakistan could successfully exploit its large and young people to do work for the skill-short sectors in the western economies.

It could, at the same time, use its geography as a point of transit for two routes - new versions of the old Silk Route - that would allow commerce to flow from different parts of the world.

Following this two-pronged approach, Pakistan could leapfrog into the future without going through the paces of development followed by other Asian countries. But a great deal of thought and planning will need to be done to develop and implement this novel strategy. Is the Musharraf/Jamali government ready to do that?

[taken from http://www.dawn.com/2004/02/17/op.htm]

Date/Time Page Created: 12/01/2004

Date/Time Last Modified: 12/1/2004 8:30:10 AM

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