Pakistan Systematic Country Diagnostic
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Public Disclosure Authorized ISLAMIC REPUBLIC OF PAKISTAN EVELING THE LAYING IELD Public Disclosure Authorized L P F Systematic Country Diagnostic September 16, 2020 Public Disclosure Authorized Public Disclosure Authorized Acknowledgements The Pakistan Systematic Country Diagnostic (SCD) report was prepared by a team led by Silvia Redaelli (TTL, Senior Economist, ESAPV), with a core team comprising of Shabih Ali Mohib (co-TTL, Lead Country Economist, ESADR), Zehra Aslam (co-TTL, Economist, ESAMU), Gonzalo J. Varela (Senior Economist, ESAMU), John L. Nasir (Manager, IFC), Bushra Ghulam Mohammad (Strategy Office, IFC) and Persephone Economou (Senior Risk Management Officer, MIGA). The SCD builds on valuable inputs received from sector specialists across World Bank Global Practices (GPs) and Cross Cutting Solution Areas (CCSAs). The table below identifies team members representing each of the GPs/CCSAs whose inputs were key to the development of the SCD. The team would like to acknowledge the Government of Pakistan for their helpful comments during the preparation of this report. Specifically, comments were received from the Finance Division, the Economic Affairs Division, the Federal Bureau of Revenue, the Board of Investment and the Ministry of Planning Development and Special Initiatives. The team also wishes to thank various development partners and other stakeholders who participated in consultations that helped shape the SCD. The team wishes to thank the peer reviewers, Richard Record (Lead Economist, EEAM2), Reena Badiani- Magnusson (Senior Economist, EECPV) and Habib Rab (Program Leader, EECDR). The team is grateful to members of the “Pakistan SCD advisory panel” for their valuable guidance throughout the preparation of the SCD. In particular, we would like to thank Tara Vishwanath (Lead Economist, EAWPV), Kevin Carey (Practice Manager, EMNM2), Hans Timmer (Chief Economist, SARCE), Enrique Blanco Armas (Lead Country Economist, EECM2), Sudhir Shetty (former Chief Economist of the East Asia and Pacific Region, WB), Wajid Rana (Program leader of the Pakistan Strategy Support Program, IFPRI) and Shahid Yusuf (Chief Economist of The Growth Dialogue at the George Washington University School of Business in Washington DC). The team appreciates the guidance received from Hartwig Schafer (Regional Vice President, SARVP), Nena Stoiljkovic (former Regional Vice President, IFC), Illango Patchamuthu (Director Strategy and Operations, SARVP), Najy Benhassine (Country Director, SACPK), Nadeem Siddiqui (Senior Manager Afghanistan and Pakistan, IFC), Melinda Good (Operations Manager, SACPK) and Amena Raja (Senior Operations Officer, SACPK). This report would have not been possible without the excellent administrative support provided by Kiran Shahzadi, Raja Muhammad Nasir, Zulfiqar Ali Raza and Waleed Anwar (SACPK). Global Practice/ CCSA Team Members Agriculture Johannes Georges Plus Jansen Conflict and Fragility Neelam Nizar Verjee Disaster Risk Management Ahsan Tehsin, Elif Ayhan Education Juan Baron, Neelam Ejaz Energy Rikard Liden, Saadia Qayyum Environment, Natural Resources and Rahat Jabeen, Christopher James Warner, Jiang Ru, climate change Sachiko Kondo Finance, Competitiveness and Innovation Rafay Khan, Namoos Zaheer Gender Uzma Quresh Governance Clelia Rontoyanni, Raymond Muhula, Akmal Minallah Health Laura Di Giorgio Macroeconomics, Trade and investment Muhammad Waheed, Gonzalo J. Varela Social Development Najm-Ul-Sahr Ata-Ullah Social Protection Nina Rosas Raffo, D. Priyanka Kanth Transport Hasan Afzal Zaidi Urban Yoonhee Kim, Annie Gapihan, Suhaib Rasheed Water Maximilian Leo Hirn, Basharat Saeed Contents KEY MESSAGES ................................................................................................................................................. 1 SUMMARY ....................................................................................................................................................... 2 CONTEXT ....................................................................................................................................................... 17 HOW DOES PAKISTAN FARE? THE GROWTH, POVERTY REDUCTION AND HUMAN CAPITAL STORY .............................. 20 Growth and Productivity Dynamics ........................................................................................................ 20 Poverty and Shared Prosperity ............................................................................................................... 30 Human Capital ......................................................................................................................................... 37 WHAT ARE THE RISKS THAT CHALLENGE THE SUSTAINABILITY OF PAKISTAN’S DEVELOPMENT MODEL? ....................... 42 Risks to Macroeconomic Stability ........................................................................................................... 42 Fiscal and debt sustainability .............................................................................................................. 42 External sustainability ......................................................................................................................... 46 Risks to Social Cohesion .......................................................................................................................... 49 Inequality of opportunities and limited socioeconomic mobility ....................................................... 49 Gender-based inequality ..................................................................................................................... 51 Conflict and violence ........................................................................................................................... 54 Risks to Environmental Sustainability ..................................................................................................... 55 CONSTRAINTS TO GROWTH, POVERTY REDUCTION AND SHARED PROSPERITY: PAKISTAN’S “INSIDER – OUTSIDER” MODEL OF DEVELOPMENT ........................................................................................................................................... 59 Land Market ............................................................................................................................................ 61 Capital Market ........................................................................................................................................ 64 Labor Market........................................................................................................................................... 71 PATHWAYS AND OPPORTUNITIES TO SUSTAIN GROWTH, POVERTY REDUCTION AND SHARED PROSPERITY .................. 75 1. Increase Competitiveness ............................................................................................................... 78 Support Macroeconomic Sustainability .............................................................................................. 78 Improve the Business Environment .................................................................................................... 81 Support Competition .......................................................................................................................... 89 2. Promote Equity and Inclusion ......................................................................................................... 91 Improve Productivity and Environmental Sustainability of the Agriculture Sector ............................ 91 Strengthen Financial Inclusion ............................................................................................................ 93 Make Cities Work for the Poor ........................................................................................................... 94 Support Women’s Socioeconomic Empowerment ............................................................................. 95 Improve the Efficiency and Equity of Spending on Poverty Reduction .............................................. 97 PRIORITIZATION ............................................................................................................................................ 101 Top Priorities for Reform ...................................................................................................................... 101 Restoring Macroeconomic Stability .................................................................................................. 101 Improving Energy Sector Performance ............................................................................................. 102 Strengthen Public Governance .......................................................................................................... 103 Improve Management of Water Resources ...................................................................................... 104 Additional Priorities for Reform ............................................................................................................ 107 Pillar 1: Increase Competitiveness..................................................................................................... 107 Pillar 2: Promote Equity and Inclusion .............................................................................................. 108 DATA AND KNOWLEDGE GAPS ........................................................................................................................ 110 ANNEX 1: MATRIX OF SUGGESTED REFORMS