Khaliq Kiani (Dawn News)
SHELVING the 10th five-year plan (2010-15) even before its launch, the Planning Commission led by Dr Nadeem ul Haq has come up with a fresh growth strategy draft.
The paradigm shift focuses on economic growth led by the private sector, prioritising investments in software ( efficiency, innovation and entrepreneurship) and capitalising on demographic dividends rather than spending on hardware (infrastructure, roads, bridges and buildings).
The draft New Growth Framework is seen critical in changing the Planning Commission’s historic role in formulation of perspective, medium-term and annual plans based on saving-driven approach, where growth rates were arbitrarily set and incremental capital to output ratios were used to generate requirements in key sectors of economy.
Under that approach, it was assumed that Public Sector Development Programme (PSDP) will crowd-in private investment.
Such plans, the framework draft argues, did not work because markets were not well developed; take off did not materialise into sustained growth due to inferior quality of investments and inadequate resource mobilisation.
There was a continuous reliance on foreign resources and existing framework did not endogenise elements such as innovation, creativity and learning.
The new growth strategy argues that most of the five-year plans were shelved due to regime changes. The successive plans could not yield envisaged results not necessarily because of planning failures but because of frequent policy changes and non-implementation.
The new strategy focuses on the need to apply modern theory to promote sustained high growth rates. The growth should be market-led and not government-led and the private sector should be the main driver of growth. If allowed to, the market will generate innovations, entrepreneurship, transformation of cities and youth employment.
The government should move away from activities that compete with the private sector. It should provide public goods – wherever the social rate of return is higher than the private rate of return— and it should administer a well- designed and transparent set of rules governing private economic activities.
The old growth model with its emphasis on public investment has not yielded the level of economic growth the country needs. Second, with the public finances ina binding constraint, government simply cannot undertake large-scale capital expenditure.The PSDP will continue to decline while foreign financing is not assured.
The new approach represents a shift of emphasis in several dimensions. The new regime should develop the software of economic growth, increase competitiveness everywhere, redefine government’s role in markets, promote investments on the basis of innovation and entrepreneurship, exploit the huge potential of a large domestic market, make cities and regional clusters the locomotives of growth, improve governance and better public service delivery, and enhance connectivity.
It projects that the country’s population to reach over 351 million by 2050. Number of those aged 0-14 years would start to stagnate after 2035 (due to fertility decline), but the numbers of working age group (15-64 years) and the elderly (65 and above) would continue to increase.
It is the increasing numbers in the working age group that provides an economic opportunity to the country.
By 2050, more than 236 million people would be in the working ages, a huge increase from 110 million in 2010. Demography started providing this opportunity to Pakistan in the early 1990s.
How would all these huge numbers be provided employment? With the current level of human capital, it may be a looming disaster. Ageing of the labour force is another factor.
The number of new entrants or younger workers would start to stagnate by 2040, while the number of older workers would continue to increase.
In order to counter this trend, strong reforms are required not only to put the existing unemployed back to work but also to absorb the new comers in the labour market. The long-run labour force growth is being estimated at 3.6 per cent annually.
With an employment elasticity of 0.45 per cent, it will take a GDP growth in excess of eight per cent annually to absorb the incremental changes in labour. If not, the coming demographic changes will imply rising unemployment, shortage of assets and difficulties in competing with neighbours.
The new growth strategy deviates from the old planning regime on six dimensions:
First, hardware versus software of economic growth: Although the gap between the two competitors has narrowed considerably, current approach focuses on building physical infrastructure. We continue to fare poorly against our competitors on the software aspects/inputs critical to growth. We need to learn from global experience and generate sustained productivity and efficiency by emphasising the quality of investments in physical and human capital productivity, and performance has to be measured in both the public and private sectors.
Second, dominant role of public investment versus markets: Public investment has for a long time been incorrectly viewed as the main source of economic growth. Policymakers have emphasised policies that crowd out private investments. Government should not be involved in markets, except to regulate misbehaviour, reduce transaction costs and promote competition.
Third, exogenous versus endogenous competitiveness: Our past and present growth strategies view global indicators that measure competitiveness and cost of doing business as beyond our control. By minimising government intervention and making productivity endogenous, Pakistan will be able to look beyond labour and capital accumulation to accelerate growth and improve risk-adjusted returns. To this end, Pakistan needs to identify reforms needed to develop competitive, innovative and efficient markets.
Fourth, government incentives versus entrepreneurship: Government policy favours specific sectors or sub-sectors through protection and subsidies. It also emphasises the importance of commodity producing sectors and continues to support non-competitive industries. The enabling environment for investment should maximise gains from new ideas and open up opportunities for entrepreneurs. A new approach should incentivise innovation and entrepreneurship, which, in turn, will make growth more inclusive.
Fifth, new role for cities: Current development strategy views cities mainly as suburban clusters with an appended industrial park.
Re-zoning cities so that they become dense centres of diverse and creative activity to facilitate commerce and economic activity in several areas but especially in retail, distribution, transport, leisure and entertainment.
Construction will increase quickly in cities with new zoning laws that enable repressed but productive activities. More construction will create jobs for the poor and become an essential mode of inclusive growth.
Sixth, quantity versus quality of service delivery: Increasingly, public service delivery has become costly and lacks in quality partly because governance has been found wanting in several areas. Efficient public service delivery with coordination between various government institutions and service providers is much needed. Asking for consumer feedback will provide an ongoing mechanism for assessing the impact of reforms.
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