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Pakistan’s Economy – An Overview

Pakistan’s Economy: Challenges & Opportunities

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The Second World War left the defeated powers in shambling state – millions were dead, cities were in ruins and the economy was doomed. Within the next 20 years Japan grew its GDP ten times and Germany grew its per capita income to almost 80 percent to that of the United States of America by 1960. Today, both these countries are mature democracies and industrial cults, but this miracle, however, was a result of US support, good neighbors, better strategies and most important of all the willingness of international actors to rebuild them in order to avoid the post- ‘war to end all wars’ mistakes.

Pakistan’s Economy – An OverviewAt the same time new states were emerging on the map of the world whose economy was to be built from scratches. Unfortunately, initiation of Cold War and lack of interest of the world to focus on these small third world nation-states resulted in them being used just to create blocs and to stop the domino effect. One such country is our strategically important South Asian state of Pakistan. Although Pakistan can, too, take inspiration from these countries to grow its economy, the internal dynamics of the country as well as external politics and its relationship with the neighbors and great powers rather provide hurdles in its way to imitate what Japan and Germany have achieved.

Nevertheless, state reconstruction and state’s role in economic regulation has more to do with the political imperatives than just accessing markets, especially in today’s modern world with complex international politics.

From a state which started with being one of the top 10 fastest growing developing countries between 1960 and 1990, recording an annual average growth rate of 6 percent, to a country with collapsing economy – high inflation, deteriorating balance of payments, fast depleting foreign exchange reserves and declining value of currency – being the hallmark of 2018-19.

Despite having presumably resolved the issue of restoration of democracy with PTI being the third consecutive elected government in power, Pakistan’s economy has experienced its share of ups & downs and it is still counted among the most volatile in the region. In South Asia, capital accumulation emerges as the most important contributor to growth.

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In Pakistan particularly, factors such as open foreign investment regimes, natural resource endowment, fewer control on wages and prices, and institutional strength also play important role in economic growth and productivity. A combination of political instability and disruption of evolving democratic process, lack of continuity in policies and poor governance have contributed in making Pakistan’s economy lower in spectrum than its other South Asian counterparts.

Pakistan’s economy illustrated impressive growth over the initial decades. There has been a rather palpable shift from country’s dependence on agricultural to establishment of manufacturing industries throughout the course of its relatively shorter history. Yet as much as Pakistan’s economy could flourish through proper utilization of its geographic location for intra-regional trade and investment, the political dynamics have been limiting Pakistan to focus only on the agriculture and a handful of manufacturing industries.

Whereas with all the recent advancements and Pakistan’s recent jump from eighth to the fifth spot on the index of countries most vulnerable to climate change, its prime dependence on agriculture can prove fatal for country’s economy. Pakistan should rather take a shift from this dependence to exploring new avenues just like Japan and Germany did in the post Second World War era by taking over the automobile industry until, of course, with the new millennium and rise of China their economy started fading away.

Nonetheless, Pakistan has to meet future challenges of integration into the regional and global economy, reaping demographic dividends and moving up the ladder of technology in order to survive.

In 1960s, under Gen. Ayub Khan, Pakistan was a successful exporting country, with exports in 1965 higher than the combined exports of South Korea, Turkey and Indonesia. But in the following decade the split of land and certain nationalization policies proved to be ‘bad ideas’ for the economy which was yet to find a foothold on the ground of international markets.

The internal dynamics for this newborn South Asian state was quite different from that of Japan and Germany who were at their economic boom during the same time. Even Pakistan’s close adverse neighbor India grew largely on domestic savings and investment, while Pakistan has long financed its investment from foreign savings – loans from non-residents and bilateral and multilateral aid.

Since 1991, greater freedom was given to the private sector to own, produce, distribute and trade goods & services by the state whose role was redefined as a facilitator, enabler, protector and regulator rather than directly managing and presiding over commanding heights of the economy. Such structural reforms in areas like finance, tariff and tax regimes etc. can be taken as Pakistan’s attempt to increase total factor productivity. If such macro level issues and their micro dynamics are given due attention while formulating Pakistan’s future economic policies, the country can regain its lost position in the world of markets.

With its own share of drawbacks that are well highlighted by the Brexit, the European Union greatly helped the weaker or war stuck economies of that region along with the Marshal Plan to rebuild itself. Even if there isn’t any such plan available now in a world where the hegemonic economy of US is itself challenged by the rise of China and India, yet Pakistan can take an initiative on creating a regional cooperation among the South Asian countries in order to better utilize its land as well as its natural resources. Regional cooperation can give access to international markets with Central Asian Republics being the prime focus.

Pakistan is surrounded by resource rich countries and it should take advantage of the complementarities that can arise in through the labor market, or through trade. Regional trade can be a potential driver for growth. In this context Pakistan faces the challenge of political enmity with India and the mistrust caused by that, which hinders the cooperative talks.

Furthermore, Chinese presence in this region and its competition with India is yet another hurdle that constraints a regional trade network.

Pakistan’s Economy – An OverviewChinese investment in Pakistan through the infamous CPEC, is one of the biggest hurdles in improving Pakistan’s economy. Contrary to the prime objective of flourishing the country’s economy, this mega project is slowly eating away Pakistan’s ability to stand on its feet through putting the country in huge debts which, with current currency rate so low, Pakistan will never be able to repay.

To stop China from taking over Gwadar port, as it did in Sri Lanka and in Kenya, Pakistan must reformulate the CPEC policies in its favor to avoid further fall of Pakistan’s economy. Even so, Pakistan must learn tactics from the East Asians to improve specific sectors of state and particularly the energy sector. Just like China, Pakistan can overcome its four-decade long energy crisis through use of coal instead of using oil and gas, both of which are getting more expensive and have volatile international prices.

Pakistan’s demographic pattern shows the richness of youth and manpower this country has. Investment in human capital through improving general education and skill-set for labor force will help the country deal with the problem of poverty and will extract contribution to the overall economy.

Furthermore, the growing population poses a great challenge to the available land. Land reforms are crucial to be devised and/or revised to proper allocation of urban space which greatly impacts the state economy in long run given that Pakistan is an agrarian state. In the same context, financial and service sectors shall be improved with the raising population for a more transparent system that will attract foreign investors and help the country to improve its economy through internally available resources.

Nature of policies form a crucial part of the successful implementation of a vision. Policymakers in Pakistan should pursue sound, credible and consistent economic policies. Fragmented and parochial should give way to a more collegial and collaborative process. The state shall appoint more capable people with good vision – those who has both experience of the previous policies and can also come up with new ideas, to deal with the economic crisis.

Pakistan’s Economy – An OverviewFurthermore, political stability within the country can help Pakistan access international markets. The continuation of political stability and a predictable, orderly and constitutional transition of power from one regime to the other would add a lot of strength to Pakistan’s economic prospects.

The realization of better economic goals will depend upon sound macroeconomic policies, strong institutional and governance framework, investment in infrastructure and human development and political stability. Pakistan can take inspiration from war torn countries like Japan or Germany yet cannot follow their footsteps due to the huge different in the external circumstances as well as internal dynamics. The country has to find new ways to cope with the challenges that it faces presently and has to deal with them for its survival in the globalized world.

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Junaid Rana

Junaid has earned his expertise in International Relations & Affairs from National Defence University Islamabad after graduating from the University of Balochistan with majors in Politics and Journalism. A realist in life but liberal in thoughts, the writer keeps a keen eye on Pakistan's local politics and changing internal dynamics while analyzing its impacts on the country's role as an international actor.

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