The PricewaterhouseCoopers (PwC) report The World in 2050, that came out a few weeks ago, forecasts Pakistan as the world`s 16th largest economy in terms of GDP by 2050, ahead of Italy and Canada.

The forecast is perceived by some to mean that Pakistan is on course to becoming a developed economy. However, a large economy is not necessarily a developed economy.

India is the world`s third largest economy, much ahead of Canada, but that does not mean it is more developed than Canada.

While development is a broader and somewhat abstract concept, a larger economy is one that has greater GDP relative to others. GDP is the total income of all individuals of a country; other things being equal, the greater a country`s population the greater its GDP. There is not much to cheer about in being a larger economy, if being larger owes to an increase in population that earns little.

PwC has projected the GDPs of 32 countries using mostly a single set of assumptions. One is that countries will follow `growth-friendly` policies. This is a big if, and what makes it even bigger is that we seem to be unsure what policies are growth-friendly and which ones are friendlier.

For example, building motorways, on which negligible cargo traf fic plies, versus putting the 25 million out-of-school children in schools which one is a growthfriendly policy and which one is friendlier? Are we following growth-friendly policies? Bear in mind that innovations like Google and Facebook are owed to human capital alone.

`Youth bulge`, ie more people entering the working age bracket than leaving it, and the level of inequality in the country are the two ticking bombs that may embarrass PwC on the projected size of Pakistan`s economy.

The PwC`s report says that a huge increase in working age population delivers a `demographic dividend`. However, this depends upon whether the young people entering the job market will manage to find a decent job. Otherwise the kind of political unrest seen in the Middle East and North Africa in recent years cannot be ruled out.

Among the countries experiencing a youth bulge and to which the scenario painted above could apply, the PwC`s report includes Nigeria, Pakistan, Egypt and Philippines.

One study suggests that Pakistan witnessed the onset of the `youth bulge`in 1990 which is likely to continue till 2045. Out of around 55 years of the bulge, half stands consumed.

With little evidence of reaping significant benefits from this youth bulge so f ar, scepticism prevails over its future potential. PwCassumes a 1.4pc per annum average GDP growth in Pakistan till 2050 due to population growth the second highest after Nigeria`s 2.3pc among the 32 countries examined by PwC. Given Pakistan`s poor record of benefiting from the youth bulge, PwC`s estimates should be significantly trimmed.

A body of literature suggests that income inequality impedes growth through various channels. The PwC report also cautions that high inequality in some countries could be a huge drag on their economies. Quoting research,it argues that1pcincrease in the income share of the top 20pc decreases GDP growth by 0.08 percentage points while a similar increase in income share of the bottom 20pc increases GDP growth by 0.38 percentage points in the following five years.

While including domestic (economic) policies as drivers of inequality, the report tells us that mass education, heavy taxation of the rich and large social transfers (from rich to poor) re duced inequality f rom 1945-1980 in a number of countries. Inequality measuredby the Gini coefficient has increased significantly over time in Pakistan. The question then is: should we expect inequality reducing policies in years to come? Our GDP in 2050 crucially hinges on this assump-tion. A buoyant economic scene is not in sync with increasing inequality and absence of policies that would curb it.

The return to four and eight years schooling factored in by PwC is 13.4pc and 10.1pc respectively. Studies, undertaken exclusively on Pakistan, show a much lower return on primary and secondary education.

Terrorism has not significantly affected the majority of the 32 countries examined by PwC. Therefore the report does not account for its adverse impact on the economies. But Pakistan is bearing the impact even today. The projections regarding Pakistan need to be revised accordingly.

All this is not to say that Pakistan has no economic potential at all evaluating such potential requires a separate column. This piece only suggests that regardless of what the current economic scenario is, PwC`s forecast seems exaggerated as it does not account for specific growth-constraining conditions at home. It does not, therefore, afford an opportunity to celebrate.

The writer is a researcher at the Pakistan Institute of Development Economics.
idreespide1@gmail.com Twitter: @khawajaidrees11

This story was originally published by Dawn, Pakistan

By Idrees Khawaja
Aug 18 2016 (Dawn, Pakistan)

THE ‘catch-up’ hypothesis in economics holds that per capita income in poor countries will eventually catch up with the per capita income of rich countries. Although China, some East Asian and Latin American countries have experienced a modicum of ‘catch up’ over the past half a century, a large number of states have been less fortunate. Research into reasons for the failure of ‘catch up’ suggests that poor countries remain poor primarily because their institutions, or systems, are poor. A narrative on how some of Pakistan’s institutions constrain the country’s economic growth follows.

Idrees Khawaja

Typically, candidates contesting national elections have to spend their own money on electioneering. This allows only the rich to contest. Having invested heavily, candidates are then induced to recover their investment once in power. Not only does this encourage corruption, it also severely shrinks the pool from which to select the best leaders. Both constrain economic growth.

The importance of national preferences, emanating from the grass-roots level through the institution of local bodies, is well established. However, the dilly-dallying on holding local bodies’ elections in Pakistan, and the transfer of real power to these bodies, speaks of our averseness towards local government. To the extent that inclusiveness in agenda-setting encourages growth, we lack the institutions to achieve this sort of participation.

The allocation of funds within provinces themselves is largely discretionary — some regions receive the bulk while others remain starved. Starved regions lack the resources to build the physical infrastructure and human capital necessary for economic growth. Moreover, skewed distribution contributes to poverty in deprived regions — the grievances and sense of injustice which arise then leading to conflict among regions. A whole body of literature on how conflict constrains growth exists, but one fact is particularly noteworthy — terrorist recruits usually come from deprived regions, and ‘sleeper cells’ or ‘safe havens’ are often located in such regions. The imbalance in resource distribution, therefore, constrains national growth in more than one way.

Ample evidence suggests that smaller administrative units are conducive for growth. India has created 13 new states since its independence. We created none, despite strong demands. Why? What is the institutional difference in this context? In India, it is the Lok Sabha that decides on the creation of new states — the local state government from which the new state is to be carved out has no role in the decision. In Pakistan, the concerned provincial assembly must pass a resolution for the creation of new province. This is unlikely to happen, as nobody wants to cut down their own empire. Our poor institution for creating new provinces impedes growth.

With regard to education, Pakistan’s education system in general and medium of instruction in particular is pro-rich; the rich go to private schools and the poor to public schools. Private schools focus more on developing proficiency in English and our job market is also biased in favour of those with better English proficiency. Consequently, the rich secure white-collar jobs while the poor must contend with blue-collar employment — the result of which is social inequality and conflict, well documented in relevant literature as prohibiting growth. Moreover, seeing little returns on education, the poor opt out of schooling. The pool from which to select quality labour shrinks. The negative impact on growth is obvious.

The importance of knowing actual population statistics for public planning cannot be overemphasised. Nonetheless, successive governments have delayed censuses for political purposes beyond the mandated 10-year period. The absence of an institution that can force the government to hold a national population census constrains growth.

Similarly, volumes can be written about how poor institutions that run throughout our bureaucracy — policing, judiciary, urban planning, land titling, healthcare, national bud­­­geting etc — impede economic growth. The list is endless.

Emphasising institutional reform to boost growth has one significant advantage over other alternates — quite often it does not require much money. Neither addressing skewed distribution of resources, nor empowering local bodies in true spirit, are expensive exercises. We would not have to run around helter-skelter with a begging bowl.

However, reforming institutions calls for political will. In the short term, this at times may be seen as shooting oneself in the foot, eg electoral reforms. A long-drawn advocacy, with pen and voice, can lay the groundwork for institutional changes. To understand the importance of advocacy, and the risk of ignoring it, one should examine the developments of the French Revolution and Egyptian revolution of 2011, both of which were deeply rooted in indigenous advocacy. One succeeded eventually, the other remains to be seen — but in both cases seismic institutional changes were long overdue and, once in motion, did not come about easily.

The writer is a researcher at the Pakistan Institute of Development Economics.

idreespide1@gmail.com

Twitter: @khawaja_idrees

This story was originally published by Dawn, Pakistan

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