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Human Resource Development (HRM-627)

Lesson 42

MACROECONOMIC PROFILE OF A COUNTRY:

EXAMPLE ECONOMY OF PAKISTAN

INTRODUCTION

This report is a brief attempt to analyze the overall economic performance of Pakistan since 1950s to the

current times. The future policy implications are based on the data analysis presented in this study.

METHODOLOGY

I have largely used the data provided by the web site of State Bank of Pakistan. In most of the cases I have

used data for all the decades starting from 1950s. Data for each year for the following macroeconomic

indicators was collected:

1. GDP formation

2. Gross Capital formation

3. National Savings

4. Area and production of core crops

5. FDI

6. Balance of Trade

7. Industry Division

8. Human Capital formation

9. Debt Servicing

Data set was then divided into 6 parts according to the following schedule:

1. data for 1950s (1950-1959)

2. data for 1960s (1960-1969)

3. data for 1970s (1970-1979)

4. data for 1980s (1980-1989)

5. data for 1990s (1990-1999)

6. latest data (2000-2004)

Averages for the above-mentioned macroeconomic indicators were then calculated for all the decades and

presented in the attached graphs and tables.

The macroeconomic indicators of Pakistan economy are also compared with similar indicators of other

Southeast Asian countries, some African countries, Asian Tigers and other developed countries.

DATA ANALYSIS

GDP

The breakup of Pakistan GDP has changed over the decades. In 1950s, nearly half of the GDP was accounted

for by the agriculture sector and the contribution of industry and services was 13.09 and 38.37 per cent

respectively. As we can see from graph 1 the breakup of GDP has been shifting towards industry and services

and the last 5 years' break down is 23.3%, 23.79% and 52.83% for agriculture, industry and services

respectively. This trend indicates less dependence on agriculture and more emphasis on industry

(manufacturing) and services.

Gross Capital Formation

The physical capital formation mix has also changed for Pakistan over the years. The mix has shifted more

toward the private than the public sector.

National Savings

There is little change in the public/private mix of savings and even now about 88% of the national savings are

accounted for by the private savings.

Area and Production of Core Crops

This is related with three core crops of the country, i.e. Food including wheat, rice, maize, gram, bajra, barley,

moong, mash and masoor, Cotton and other crops like sugarcane, rapseed, mustard, sesame and tobacco. A

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comparison of area of cultivation in thousand hectares and the produce in thousands of tones provides us with

the yield or produce/hectare figure. The figures show a persistent increase in the produce/hectare or yield over

the decades for all the three items.

Foreign Direct Investment

FDI as a per cent of GDP has increased from 0.164% in 1950s to 1.068% currently. This means an increase of

about 550% in the inflow of FDI over the last 56 years and seems like a great achievement but I will consider it

again in the section "Pakistan Economy: A Comparison" later in this report.

Balance of Trade

1950s is the only decade where the average figures for balance of trade are positive. After that the economy has

shown a persistent negative balance of trade with a predominant downward trend.

Industry Division

Data shows the distribution of employed persons by industry division for mid years of the last four decades i.e.

1965, 1975, 1985 and 1995. This data for year 2004 depicts the same for the latest scenario.

Data also represents the percent of persons employed in agriculture (along with forestry and fishing),

manufacturing, and commerce and service sectors. We can see that the overall employment in commerce and

services has increased, from 9 and 9.41% to 14.8 and 15.01% respectively, but there is a decline in employment

in the agriculture sector from 58.65% in 1965 to 43.05% in 2004. In manufacturing sector the employment has

actually decreased from 14.48% in 1965 to 13.73% in 2004. This is an interesting finding and in my opinion

reflects a failure on the part of successive governments to stimulate the industrial growth in the country.

Following are the urban/rural (UR) ratios of employment in the above mentioned sectors from 1965 to date.

Following picture emerges:

Industry Div. 1965

1975

1985

1995

2004

Agriculture

0.11

0.08

0.11

0.09

Manufacturing 2.57

2.76

2.62

3.11

2.64

Commerce

4.81

4.78

3.95

3.08

2.83

Services

3.7

3.72

2.75

2.73

2.42

The UR ratio has declined for the agriculture, commerce and service sectors over the years which mean that the

share of rural population's employment has increased in these sectors. But a reverse trend is seen in the

manufacturing sector where the UR ratio has actually increased from 2.57 in 1965 to 2.64 in 2004, showing that

this sector has not created as much jobs for the rural population as it has done for the urban populace. That

probably accounts for increasing income-poverty in Pakistan over the years.

Human Capital Formation

The overall and male and female literacy rate has increased in Pakistan.

All forms of educational institutions (primary, middle & secondary schools and colleges and universities) have

increased in numbers but the number of vocational institutions has decreased by 36%. This is a striking finding

and probably explains Pakistan's rising unemployment as the masses do not have access to institutions where

they can learn different vocational skills and get absorbed by the employers. The human capital formation, in

terms of productive and trained personnel, in Pakistan has therefore suffered and we have produced many

educated and literate people who cannot find jobs relevant to their educational backgrounds.

For the number of people served per registered doctor in the country from 1950 to 2004, the trend is

downwards and should indicate improvement in health services to the masses but the real picture can only be

deciphered by analyzing the split of urban and rural population's access to registered doctors.

Debt Servicing 1990 - 2003

Debt servicing as a % of GDP, current expenditures and total revenues peaked in the years 1997-2000. The

main reasons for this accumulated debt can be described as follows:

· The rising trends in the non-development expenditures (debt servicing and defense).

· The persistence of low growth rate of economy also compelled the successive governments to resort

to external debt. Throughout the decade of 1990s, Pakistan's growth rate remained under 5%.

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Economic mismanagement and corruption by the civilian governments resulted in the loss of public

exchequer. In order to fulfill their agendas, the civilian governments resorted to external debt.

Current Changes in Macroeconomic Indicators

Pakistan has made considerable progress in achieving macroeconomic stability in the recent years. This is

evident from a robust increase in GDP growth rate, falling inflation, decreasing fiscal deficit and debt, increase

in exports, tax revenues, FDI, and foreign exchange reserves. The current government should be

complimented on these achievements but there are areas of concern shown by this data in the form of

decreasing remittance and more alarmingly increasing poverty and unemployment. The rising population and

lack of employment opportunities create persistent unemployment problems in the country.

Pakistan Economy: A Comparative Analysis (Focus: Southeast Asia)

Pakistan is well placed in terms of per capital GNP growth and life expectancy at birth but her infant mortality

rate has decreased slower than rest of the Southeast Asian and other developing countries of the world.

Comparative Analysis of FDI flows in Pakistan

Pakistan's FDI in-flow, as compared with other countries shown in the table, has increased very sluggishly.

Pakistan Economy: A Comparative Analysis of HDI & GDP per capita

The latest data compare Pakistan with rest of the world as of today and clearly show that Pakistan's economy,

in terms of HDI and GDP PC, is only above that of Sub-Saharan African countries like Sierra Lone and Niger.

CONCLUSION & DISCUSSION

Based on the above data analysis, following is a summary of the important findings:

1. less dependence on agriculture and more reliance on commerce and services with a slight fall in the

share of manufacturing sector

2. more contribution of the private sector in physical capital formation and national savings

3. a persistent improvement in the agricultural yield or produce/hectare

4. an increase in FDI in-flows which is comparatively very low in the international perspective

5. a persistent negative balance of trade

6. a decline in employment of rural population in the manufacturing sector

7. an improvement in literacy rate and public access to health services but a decrease in the vocational

institutions in the country

8. a rising debt burden

9. substantial economic progress in the recent years (probably best after the 1960s decade)

10. Pakistan's lethargic economic performance against the rest of the world especially in the area of

human capital development

Pakistani government has made substantial economic reforms since 2000, and medium-term prospects for job

creation and poverty reduction are the best in nearly a decade. Government revenues have greatly improved as

a result of economic growth, tax reforms introduction and corruption control in the Central Board of Revenue.

Pakistan is aggressively cutting tariffs and assisting exports by improving ports, roads, electricity supplies and

irrigation projects.

Liberalization in the international textile trade has already yielded benefits for Pakistan's exports, and the

country expects to profit from freer trade in agriculture.

A perception of stability in the nation's monetary policies has contributed to a reduction in money-market

interest rates, and a great expansion in the quality of credit, changing consumption and investment patterns in

the nation. Pakistan's domestic natural gas production, and its significant use of CNG in automobiles, has

cushioned the effects of the oil-price-shock of 2004-2005. Pakistan is moving away from the doctrine of import

substitution and, is now pursuing an export-driven model of economic growth.

In 2005, the World Bank reported that

"Pakistan was the top reformer in the region and the number 10 reformer globally making it easier to start a

business, reducing the cost to register property, increasing penalties for violating corporate governance rules,

and replacing a requirement to license every shipment with two-year duration license for traders."

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Pakistan's Economic Growth Model

Pakistan has tinkered with multiple economic strategies over the past 60 years.

During 1950s and 1960s Pakistan basically followed a linear growth model with stress on import substitution

and industrialization. Pakistan was described as being on the verge of an economic take-off but it changed after

the 1965 and 1971 wars with India.

1970s witnessed nationalization of the industry by the government and lack of incentive for the private sector

to grow but large scale public projects like steal mill formation and building of strategic "silk route" were under

taken.

In the 1980s, the generous financial support from the West and the acceleration in the inflow of remittance

from the Middle East, helped stimulate economic growth. The GDP growth increased from about 5% in late

1970s to 6.6% during 1978 1988 periods.

In terms of growth model followed, we witness a strategic shift from the "socialist" policies of nationalization,

and the large public sector to denationalization and a greater role assigned to private sector in the growth

process. The following incentives were offered to the private sector:

· low interest credit

· duty free imports of selected capital goods

· tax holidays and

· accelerated depreciation allowances

Three constraining factors during 1980s explain the failure to maintain this growth rate later:

1. low domestic savings

2. low rate of exports and most importantly

3. inadequate investment in social and economic infrastructure

And not surprisingly when the cushion of foreign loans and debt relief was withdrawn at the end of the Afghan

war, the underlying structural constraints to GDP growth began to manifest and the country entered into a

protracted economic recession in the 1990s.

During 1990s, political instability, the use of public office for private gain and the worsening law and order

situation had a significant adverse effect on private investment and GDP growth.

In my opinion, until recently, Pakistan has blindly pursued growth in GDP without investing in the

development of human resources, specially the women. At best this type of growth can be classified as close to

classical linear models of growth as Pakistan was chronically stuck at the pre-take off stage.

RECOMMENDED FUTURE DIRECTION

The future course of direction for Pakistan economy needs to involve the following measures:

· to document and assess the large informal economy present in the country

· to invest aggressively in improving social indicators and human development indicators

· to pursue continuity in the economic policies regardless of the ever changing political and

governmental personnel

· to aggressively pursue population growth rate control programs

· to curb corruption and lethargic attitude and performance of the public sector

· to promote and facilitate the exports of value added products and to control the inflow of luxury

imports by focusing more on importing primary inputs

· the key to ensuring Pakistan's future macroeconomic stability lies in strengthening the poorly

functioning institutions and in controlling lawlessness and corruption

· good governance seems the only way forward for putting Pakistan on path of a respectable economic

future

Research Limitations

The following research limitations were encountered in the preparation of this report:

· breadth and scope of the topic

· paucity of reliable and consistent data

· lack of time to vigorously analyze the international comparison of Pakistan economy with other

countries

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References

1. http://en.wikipedia.org

2. http://hdr.undp.org, HDR 2005

3. http://undp.org

4. http://sbp.org.pk

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