Framework for Economic Growth, Pakistan
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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 Core Team on Growth Strategy This framework for economic growth has been prepared with the help of thousands of people from all walks of life who were part of the many consultative workshops on growth strategy held inside and outside Pakistan. The core team was led by Dr. Nadeem Ul Haque, Minister/Deputy Chairman, Planning Commission, and included: • Dr. Khalid Ikram, Former Advisor, World Bank • Mr. Shahid Sattar, Member, Planning Commission • Dr. Vaqar Ahmed, National Institutional Adviser, Planning Commission • Dr. Talib Lashari, Advisor (Health), Planning Commission • Mr. Imran Ghaznavi, Advisor, P & D Division • Mr. Irfan Qureshi, Chief, P & D Division • Mr. Yasin Janjua, NPM, CPRSPD, Planning Commission • Mr. Agha Yasir, In-Charge, Editorial Services, CPRSPD • Mr. Nohman Ishtiaq, Advisor, MTBF, Finance Division • Mr. Ahmed Jamal Pirzada, Economic Consultant, P & D Division • Mr. Umair Ahmed, Economic Consultant, P & D Division • Ms. Sana Shahid Ahmed, Economic Consultant, P & D Division • Ms. Amna Khalid, National Institutional Officer, P & D Division • Mr. Muhammad Shafqat, Policy Consultant, P & D Division • Mr. Hamid Mahmood, Economist, P & D Division • Mr. Muhammad Abdul Wahab, Economist, P & D Division • Mr. Hashim Ali, Economic Consultant, P & D Division • Sara Qutab, Competitiveness Support Fund • Ms. Nyda Mukhtar, Economic Consultant, P & D Division • Mr. Mustafa Omar Asghar Khan, Policy Consultant, P & D Division • Dr. Haroon Sarwar, Assistant Chief, P & D Division • Mr. Hanan Ishaque, Research Officer, P & D Division Pakistan: Framework for Economic Growth Foreword The Framework for Economic growth (FEG) was an innovative, reform-based strategy for sustained growth acceleration in Pakistan. We built on recent work summarized in Acemoglu and Robinson (2012) as well as developments in complexity theory [Haque (2017), Arthur (2014), Durlauf (2012), among others] to chart a new approach to policy. The objective was to change the country's growth policy from the traditional aid-led, project-based planning approach [Haq (1964)] to one based on evolving economic evidence and thought to use reform as an instrument to build, institutions, opportunity, productivity, innovation, and entrepreneurship [Romer (1990 & 1986), Lucas (1988) and others]. As recognized in the FEG, our systems of governance had limited flexibility or capacity to absorb this change. This approach, which was and is well received in academia, remains relevant but never found traction in the government. We are printing this because it has academic and policy relevance and still needs to be read and debated. I hope that the themes in this FEG will be further expanded and developed by researchers in the country. I also urge professors to use this document in the teaching of the Pakistan economy. 3 Pakistan: Framework for Economic Growth 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 3 Pakistan: Framework for Economic Growth 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 4 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 5 Pakistan: Framework for Economic Growth 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