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Our economic development paradigm
- II
By : MIAN ASIF SAID
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ARTICLE (February 09 2010): Business Recorder's 1st February, 2010 issue ran
the preamble on the captioned article. Its thrust was that our economic
managers have mindlessly persisted with a manifestly bankrupt trickle-down
theory of economic development promoted by Washington institutions (WB/IMF).
This model focuses on demand suppression via heavy currency depreciation,
fiscal cutbacks, monetary restraint, and subsidy elimination. Its
implementation has condemned us to the highest central bank discount rate in
the world, a rapidly depreciating currency, spiralling fuel prices,
industrial collapse, and rising unemployment.
And worst of all, pricey credit's greatest victim is our most competitive
agricultural sector that could generate large surpluses, which would, in
turn, lower commodity prices and reduce inflation. In other words, what we
really needed was the exact reverse, ie a dose of supply side economics.
Macro and micro outcomes to date were cited to demonstrate that these WB/IMF
recipes have never worked in the past and are unlikely to do so now. Thus,
despite our enviable endowment of natural resources, we are vying with the
likes of Somalia for leadership of failed states, whereas by rights, we
should have been leading the pack of Asian Tigers that lead the league
tables of countries with the highest rates of sustained GDP growth.
Yes, corrupt and inept politicians, fissiparous religious messiahs, and
brain-dead uniformed Shoguns have done their bit in our chronological
slow-death as a viable nation-state. But, had we been blessed with economic
vision of a single Lee Kwan Yew, a Cheng Xiao Ping, or a Mahatir Mohamed,
events could have taken a different turn. Though it is, perhaps, too much to
hope for such a visionary to emerge from our simian milieu at this late
stage, we can certainly learn a lesson or two from the practical wisdom of
these seers.
The dominant trait distinguishing all three was their capacity for clear
thinking uncluttered by received economic orthodoxies. Accurately assessing
their respective nation's inherent strengths and weaknesses, they were all
able to hit upon sensible development strategies best suited to their
specific needs.
Lee Kwan Yew leveraged off his highly educated and motivated populace to
mould Singapore into a pre-eminent global entrepot; Mahatir melded
Malaysia's copious natural resources with the enterprising spirit of his
people for rapid economic growth; and Deng Xiao Ping unbottled the vast
agricultural potential of China's countryside to generate huge surpluses for
use in subsequent industrialisation.
Their respective models of development had four distinguishing features that
are totally at odds with our failed model:
1 They were able to control population growth (though in the case of China
not without draconian "One Child" per family laws). This ensured that with
stable populations, they were able to divert a much higher proportion of
available resources towards development rather than feeding a burgeoning
number of mouths. In our case, a total lack of population planning has
condemned us to a huge burden on available resources.
[Of course, my pet theory on this issue is that our economic managers, much
less our cerebrally challenged politicians and praetorian guard, did not
fully comprehend the invidious power of exponential growth (the ex symbol in
mathematics). For example, had our population's annual net growth (births
minus deaths) since partition been a more sedate 1.6%, we would have
numbered a mere 95 million today; but since our average exponential growth
rate over the past 62 years was 2.6%, we now number 185 million
souls...unnecessarily doubling the number of mouths to feed! Clearly, Deng
Xiao Ping knew a thing or two about the devastating effects of an extra 1%
exponential growth! While on the subject of population, readers are
encouraged to scan the archives for undersigned's series of articles
entitled "Pakistan shining" that appeared in these columns two years ago.]
2 They were all able to actively promote a culture of high rate of savings
by ordinary citizens; between 35% and 45% of disposable incomes (in terms of
policy initiatives on this score, our successive governments have been
conspicuous by their absence; consequently, our national savings rate has
never gone beyond the 10-12% range);
3 This savings pool powered large infrastructure investments (translating
into annual GDP growth of 7-11% based on the country-specific ICOR
(incremental capital output ratios) without significant resort to foreign
capital...a feat our economic managers deem undoable; and most importantly,
4 They made sure their largest infrastructure investment was in health and
education (12-25% of GDP), the bedrock of future GDP growth...the last
priority of our economic managers, who deem 2.5% of GDP for this endeavor as
excessive.
Since fear of the unknown keeps us committed to diligently following the
failed recipes of WB/IMF, our GDP growth will barely keep pace with
population growth for the foreseeable future...at approximately 3% per
annum; a rate that was derisively dubbed the "Hindu rate of growth" with
reference to India before Manmohan Singh, in the garb of finance minister
came on the scene in the early '90's. And although India's internal rate of
savings have been significant at around 25-30% of GDP, for the last two
decades, the country's economic managers have consistently invested at a
rate of 35%-40% per annum to achieve high GDP growth rates.
Their economic success has, in turn, pulled in foreign capital by the
hundreds of billions of dollars boosting the country's FX reserves to well
over USD 280 billion, nearly 20 times our number which, unfortunately, is
predicated on passing the begging bowl around reluctant donors.
It is, therefore, high time we acknowledged the futility of our failed
development model and adopted a new paradigm. The logic of "Where we are"
(detailed in the preamble), "where we want to go" (join the above-mentioned
countries on a high growth trajectory), and "how to get there" (to be
discussed) must be clearly enunciated.
The World Economic Forum's Global Competitiveness Index (GCI) 2009-10
produced by Professor Klaus Schwab, is an excellent starting point.
In it, he identifies 12 principal drivers of global economic growth that
broadly separate the world into three broad categories:
1. Factor driven economies (the erstwhile low-income countries, including
ours),
2. Efficiency driven economies (middle income countries, like China today),
and
3. Innovation driven economies (largely the developed OECD world).
For each of the above mentioned groups matching drivers of economic growth
are identified respectively as:
i. Institutions, infrastructure, macroeconomic stability, and health and
primary education.
ii. Higher education and training, goods market efficiency, labour market
efficiency, financial market sophistication, technological readiness, and
market size. And
iii. Business sophistication and innovation.
My point in mentioning key ingredients of this report is that we should
realise our limitations as a basket case economy and focus our energies in
improving the basic factors listed for the first group instead of spreading
our meagre resources on economic drivers that are more relevant to the other
two groups. For instance, it makes no sense to spend billions of rupees on
higher education while starving primary and technical instruction that could
promote employable skills like those of plumbers, electricians, mechanics,
and masons. These skills will, for the next couple of decades, stand us in
better stead than all the Harvard and Oxford Ph.Ds we can produce.
Let us briefly review where we stand in terms of progress on the four
pillars of competitiveness relevant to our factor driven economy, and
attempt to give each factor a score on 0 to 10 (non-existent to excellent)
scale to underline the distance on the road to improvement we still have to
travel.
First pillar: institutions
The institutional environment is determined by the legal and administrative
framework within which individuals, firms, and governments interact to
generate income and wealth in the economy. Though we were fairly endowed in
this factor at partition, we have over the years successfully destroyed most
of our institutions. Excessive bureaucracy and red tape, overregulation,
corruption, dishonesty in dealing with public contracts, lack of
transparency and trustworthiness, and the political dependence of the
judicial system (though there is now a glimmer of hope) have imposed
horrendous economic costs on businesses and damaged the process of economic
development.
Proper management of the public finances, accounting and reporting
standards, transparency for preventing fraud and mismanagement, ensuring
good governance, and maintaining investor and consumer confidence are also
paramount. Clearly, we have a long way to go in resurrecting all our public
and private institutions.
Second pillar: infrastructure
Extensive and efficient infrastructure is an essential driver of
competitiveness. It is critical to ensure the effective functioning of the
economy, as it is an important factor determining the location of economic
activity and the kinds of activities or sectors that can develop in a
particular economy. Well-developed infrastructure reduces the effect of
distance between regions, with the result of truly integrating the national
market and connecting it at low cost to markets in other countries and
regions. Effective modes of transport for goods, people, and services - such
as quality roads, railroads, ports, and air transport - enable entrepreneurs
to get their goods and services to market in a secure and timely manner, and
facilitate the movement of workers to the most suitable jobs.
Economies also depend on electricity supplies that are free of interruptions
and shortages so that businesses and factories can work unimpeded. Finally,
a solid and extensive telecommunications network allows for a rapid and free
flow of information, which increases overall economic efficiency by helping
to ensure that businesses can communicate, and that decisions made by
economic actors take into account all available relevant information.
Except for acceptable level of telecommunications, all our other modes of
communications are today in shambles and need urgent attention.
Third pillar: macroeconomic stability
Stability of the macroeconomic environment means a stable trade and current
account balance giving a stable exchange rate, fiscal and monetary restraint
with a minimal budget deficit and manageable foreign and domestic
obligations. These are important for business and, therefore, important for
the overall competitiveness of a country. The government cannot provide
services efficiently if it runs high current account deficits and has to
make high-interest payments on its past debts.
Running fiscal deficits with a galloping money supply limits the
government's future ability to react to business cycles. Firms cannot
operate efficiently when inflation rates are out of hand. With suicide
bombings galore, rapid currency devaluation, and inflation eating into the
vitals of our economy, macroeconomic stability is still a far cry for us.
Fourth pillar: health and primary education A healthy workforce is vital to
a country's competitiveness and productivity. Poor health leads to
significant costs to business, as sick workers are often absent or operate
at lower levels of efficiency. Investment in the provision of health
services is thus critical for clear economic, as well as moral,
considerations.
In addition to health, this pillar takes into account the quantity and
quality of basic education, which increases the efficiency of each
individual worker. Moreover, workers, who have received little formal
education can carry out only simple manual work and find it much more
difficult to adapt to more advanced production processes and techniques.
Lack of basic education can, therefore, become a constraint on business
development, with firms finding it difficult to move up the value chain by
producing more-sophisticated or value-intensive products.
To conclude then, it should be clear that for an economy with the foregoing
characteristics a development model that attempts to do a bit of everything
has not, and will not work. We need to adopt a home-brewed model that best
leverages off our stage of development and takes account of our strength in
natural resources while promoting a grassroots culture of high savings for
investment.
Part III of this series will address these issues.
mianasifsaid@gmail.com
Copyright Business Recorder, 2010
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