1. Rashid Amjad and Shahid Javed Burki (BOOK).pdf - Pakistan Moving the Economy Forward Edited by Rashid Amjad and Shahid Javed Burki Pakistan Moving

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Unformatted text preview: Pakistan Moving the Economy Forward Edited by Rashid Amjad and Shahid Javed Burki Pakistan Moving the Economy Forward Edited by Rashid Amjad Shahid Javed Burki Cambridge House, 4381/4 Ansari Road, Daryaganj, Delhi 110002, India Cambridge Univerisity Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international levels of excellence. Information on this title: © Lahore School of Economics 2015 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2015 Printed in India A catalogue record for this publication is available from the British Library isbn 978-1-107-10952-0 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. Contents List of figures and tablesv Prefacexi 1 Overview Rashid Amjad and Shahid Javed Burki 2 Failed Economic Promise: Lessons from Pakistan’s Development Experience Parvez Hasan 3 Economic Management Under IMF Tutelage: Key Lessons from the Musharraf and PPP Rule 1999–2013 Rashid Amjad 4 A Country and an Economy in Transition Shahid Javed Burki 1–21 22–47 48–83 84–107 5 Tackling the Energy Crisis Afia Malik 108–134 6 Exports: Lessons from the Past and the Way Forward Hamna Ahmed, Naved Hamid, and Mahreen Mahmud 135–170 7 The Future Path of Tax Reforms in Pakistan Hafiz A. Pasha and Aisha Ghaus-Pasha 171–197 Contents 8 Pakistan’s Indus Basin Water Strategy: Past, Present and Future Shahid Amjad Chaudhry 198–223 9 224–253 Economic Governance and Institutional Reforms Ishrat Husain 10 Benefiting from Foreign Direct Investment Khalil Hamdani 254–279 11 An Analysis of the Remittances Market in Pakistan Rashid Amjad, M. Irfan, and G. M. Arif 280–310 12 The Prospects for Indo-Pakistan Trade Hafiz A. Pasha and Muhammad Imran 311–331 13 Beyond the Poverty Line: A Multidimensional Analysis of Poverty in Pakistan Azam Chaudhry, Theresa Chaudhry, Muhammad Haseeb, and Uzma Afzal 14 Can the New Intergovernmental Structure Work in Pakistan? Learning from China Ehtisham Ahmad 332–357 358–392 Contributors393–394 Index395–398 iv List of figures Figure 3.1: Pakistan’s macroeconomic performance, 1999–2013 50 Figure 6.1: Manufacturing export performance (share in total exports) 138 Figure 6.2: Financial depth 150 Figure 6.3: Bank credit as a share of working capital (%) 151 Figure 6.4: Agricultural export performance (commodity share in total exports) 155 Figure 6.5: Benefits of engaging with the Pakistani diaspora (in ascending order) 163 Figure 6.6: Ranking by various dimensions of the business environment: A cross-country comparison 165 Figure 6.7: Country rankings on the LPI, 2012 166 Figure 7.1: Structure of tax administration in Pakistan 178 Figure 8.1: Western rivers: Inflow at rim stations (MAF) 211 Figure 9.1: Pakistan’s ranking in governance indicators 236 Figure 10.1: FDI inflows in the early years (USD million) 256 Figure 10.2: FDI inflows in recent years (USD million) 259 Figure 10.3: Growth of the manufacturing sector (per cent) 263 Figure 10.4: Repatriation of profits and dividends 274 Figure 11.1: Percentage distribution of overseas Pakistanis by occupation, 2001–12 291 Figure 11.2: Methods used to transfer money from abroad by rural and urban origin of migrants (per cent) 297 Figure A11.1: Trends in remittances in four selected countries (USD million)  309 v List of figures and tables Figure 14.1: China: Total tax revenue, local government revenue, and central government share of total revenue, 1985–2011 Figure 14.2: General government revenue and GDP per capita, 2012 Figure 14.3: Modified subsidiarity principles 365 368 369 List of tables Table 2.1: Export of goods and services as a percentage of GDP 34 Table 2.2: Net official assistance to Pakistan and India 36 Table 2.3: Gross fixed capital formation as a percentage of GDP 37 Table 4.1: Pakistan’s position on the Legatum prosperity index 89 Table 4.2: Pakistan’s socioeconomic performance in the global context 90 Table 5.1: Power sector performance: Some technical indicators 110 Table 5.2: Fuel cost in public and private utilities (paisas/kWh) 114 Table 5.3: Average electricity tariffs (PRs/kWh) 117 Table 5.4: T&D losses in DISCOs (%) 120 Table 5.5: Average cost of units delivered to DISCOs, 2011/12 122 Table 6.1: Country-wise share of world exports (1980–2012) 137 Table 6.2: Pakistan garment exports by major products (2012) 142 Table 6.3: Traditional and emerging SME exports 145 Table 6.4: Dimensions of the LPI: Pakistan and comparator countries 167 Table 7.1: Fiscal powers of the federal government as per the Constitution173 Table 7.2: Share of revenues from different taxes (PRs billion) vi 176 List of figures and tables Table 7.3: Tax-to-GDP ratio of Pakistan, 2000/01–2011/12 (percentage of GDP) 179 Table 7.4: Comparison of tax-to-GDP ratio and taxation structure in selected countries 180 Table 7.5: Base and rate effects on the change in tax-to-GDP ratio, 2007/08 to 2010/11 (%) 181 Table 7.6: Comparison of tax rates in selected countries (%) 182 Table 7.7: Major tax expenditures in Pakistan 184 Table 7.8: Incidence of taxes in Pakistan, 2007/08 188 Table 7.9: Revenue yield from tax reforms (with a tax base of 2012/13) 194 Table 8.1: IBIS canal withdrawals 204 Table 8.2: Seasonality in the Indus river system 205 Table 8.3: Indus basin salt balances 207 Table 8.4: Pakistan’s overall water availability, 2007/08 (MAF) 208 Table 8.5: Storage yield curves for the Indus river 212 Table 8.6: IBIS aquifer balances 2001/02 (MAF) 214 Table 8.7: Comparison of Haryana, India, and Punjab, Pakistan (per hectare)  216 Table 8.8: IBIS environmental flow requirements 219 Table 10.1: Technological content of manufactures (per cent) 267 Table 10.2: Income on US direct investment, 2009 272 Table 11.1: Official remittances from countries of origin 286 Table 11.2: Stock of overseas Pakistanis/Pakistani diaspora (millions) 289 Table 11.3:Official remittances per Pakistani diaspora/per working Pakistani (USD) 290 vii List of figures and tables Table 11.4: Percentage increase in number of workers/remittances, 2004–12291 Table 11.5: Percentage distribution of households who received remittances through hundi and reasons for not using a bank 298 Table 11.6: Migrants’ level of educational attainment and the methods used for money transfer 299 Table 11.7: Migrants’ duration of stay abroad and methods used to transfer money (per cent) 300 Table 11.8: Effects of demographic and socioeconomic factors on methods used to transfer money from abroad (logistic regression model) 301 Table A11.1: Outflow of overseas Pakistanis by occupational category (numbers) 308 Table A11.2: Percentage distribution of overseas Pakistanis by occupational category, 2001–12 309 Table A11.3: Cost, distance, and time spent on dealing with banks and the hundi system 310 Table 12.1: Trade between Pakistan and India, 2000/01–2010/11 313 Table 12.2: Positive list of items for import from India 314 Table 12.3: Pakistan’s major imports from India, 2010/11 and 2011/12 Table 12.4: Pakistan’s major exports to India, 2010/11 and 2011/12 315 316 Table 12.5: Simultaneously significant Indian exports and Pakistani imports, 2010/11 (at 4-digit HC level) 320 Table 12.6: Simultaneously significant Pakistani exports and Indian imports, 2010/11 (at 4-digit HC level) 322 Table 12.7: MFN-applied tariffs by product group in India and Pakistan  viii 323 List of figures and tables Table 12.8: Distribution of effective ad valorem tariffs on textiles in India  324 Table 12.9: 327 OTRI in a sample of Asian countries Table 13.1: Percentage of population below the income-based poverty line for the entire population 339 Table 13.2: Percentage of population below the income-based poverty line for the entire population: Rural vs. urban breakdown 339 Table 13.3: Percentage of population below the income-based poverty line for the entire population: Provincial breakdown 340 Table 13.4: Breakdown of population above the age of 20 who have not completed their primary education (%) 341 Table 13.5:  Breakdown by gender of population above the age of 20 who have not completed their primary education 341 Table 13.6: Rural/urban breakdown of population above the age of 20 who have not completed their primary education 342 Table 13.7:  Province-wise breakdown of population above the age of 20 who have not completed their primary education 342 Table 13.8: Breakdown of population by access to drinking water (%) 343 Table 13.9: Rural–urban breakdown of population by access to drinking water  343 Table 13.10: P  rovince-wise breakdown of population by access to drinking water 344 Table 13.11: P  ercentage breakdown of overall population below the multidimensional poverty line (income, education, and health)347 Table 13.12: Rural/urban breakdown of overall population below the multidimensional poverty line (income, education, and health)347 Table 13.13:  Province-wise breakdown of overall population below the multidimensional poverty line (income, education, and health)348 ix List of figures and tables Table 13.14: G  altonian regressions of intergenerational persistence: Income and education 351 Table 13.15: D  ecomposition of inequality measures due to unequal opportunities354 x Table 14.1:  ain traits of recent intergovernmental reforms in M selected countries 362 Table 14.2:  ST productivity—declining and low in comparison G with competitors 376 Table 14.3: NFC projections 2010–14 (percentage of GDP) 380 Preface Today, well into the seventh decade of its existence as an independent state, Pakistan is passing through a critical period. It is navigating a perfect storm and faces not one but several daunting challenges. Extremist forces continue to challenge the state and the Constitution. The economy remains under stress and depends on large external flows to remain solvent. The rate of population growth remains relatively high; every year, the country adds close to four million people to its large population. Its human resources are poorly developed. There are severe power shortages; apportioning the limited supply of power means plunging large areas into complete darkness several times a day and for several hours at a time. While fully aware of the depth and spread of such problems, we were equally convinced that there were enough “positives” in Pakistan’s economic and social systems to think in terms of a better future for the country. It is difficult to practice development economics without a tinge of optimism. Pakistan is richly endowed with resources that could be deployed to produce a higher rate of growth. It has the world’s largest contiguous irrigated area, for instance, and if it were to move toward the production of higher value-added crops, agriculture could become an even more significant part of the economy. The country has rich, if largely unexplored, mineral resources and traditional engineering skills that could be developed into supply chains to feed some of the large industrial production systems in the neighborhood. There is also Pakistan’s proximity to Asia’s two mega-economies, China and India—not only could it develop strong and beneficial economic relations with these two economic powerhouses, but it could also provide land routes for commerce, linking China and India with energy-rich Central Asia and the Middle East. Supportive public policies are required to make these and other “positives” work for the country. We felt that a collection of essays by a group of development scholars and practitioners was needed—one that policymakers could use in making public policy choices. In asking writers to contribute to this volume, we agreed that the following three criteria would be kept in view. First, Preface the discussion should be about the future. One could analyze the past, but only if it informed one’s thinking about the future. Second, the book would deal with a variety of topics but not venture into disciplines that were very far from economics. In other words, the proposed volume would be a book by economists on economics, but written to evoke interest among and be understood easily by a general readership. By focusing on many subjects within the broad discipline of economics, we wanted to emphasize the “micro” without neglecting the “micro”. Third, we would invite authors to present their recipes for the future, keeping in mind that Islamabad is searching for solutions to the country’s many problems. As its title suggests, this is a forward-looking book. It is also a collection of essays that discards the notion that Pakistan is inexplicably condemned to being the “sick man” of South Asia. As the volume’s coeditors, we have enough international experience between us to know that there are no permanent trends in the lives of individuals or nations. Countries have their ups and downs; Pakistan is passing through a “down”. It has enough inherent strength, however—in its people and its endowments—to pull itself out of this difficult situation. As a politician said not too long ago, a crisis is too precious a thing to waste. Pakistan is, undeniably, in a deep crisis—a fact that all its citizens recognize. What is needed at this juncture is a development paradigm that seeks to “go over” the number of obstacles that have slowed down the pace of the country’s economic and social advance. To carry the metaphor forward, these are not “speed bumps” that we need to cross by slowing down; these are real walls that block our way. We need to pull them down, not skirt around them as we have tended to do in the past. Bringing the walls down involves something economists call structural change. Policymakers in Pakistan have shied away from this, taking the easy route ahead and avoiding the economic reforms so badly needed to make the economy more productive and efficient. This structuralist approach is the main theme of this collection of essays. Reading them together—as they should be read—there are enough ideas present to help policymakers move the country forward and onto a trajectory of high, sustained, and inclusive growth. In putting this volume together, we must acknowledge a number of people and institutions that have made this book possible. First and foremost are the authors of the different chapters, who set aside their precious time to contribute to the volume and have done so purely as a labor of love and because of their commitment to improving the lives of the people of Pakistan. We must also xii Preface thank the reviewers of the manuscript, appointed by Cambridge University Press. Their suggestions were valuable and welcomed by the authors. We would also like to acknowledge the work put in by Cambridge University Press, New Delhi, in preparing this volume for publication. Our special thanks to Dhiraj Pandey, commissioning editor, Management and Economics, in steering the manuscript through its different stages and to Ranjini Majumdar, production editor, for carefully going through the manuscript and giving helpful suggestions. In preparing the manuscript, Maheen Pracha did an excellent job in editing the different chapters and her work drew praise from all the authors. Rashid Amjad Shahid Javed Burki xiii 1 Overview Rashid Amjad and Shahid Javed Burki The central question that the contributors to this volume seek to answer is how to reverse the current prolonged period of low growth and high inflation—stagflation—that Pakistan has experienced over the past five years, and to suggest and implement measures that would decisively move the economy onto a higher, more sustainable growth path. Eight key messages emerge from the studies presented in this volume: – There is an urgent need to revive investment, which has fallen dismally to 12.5 per cent of gross domestic product (GDP) in 2011/12 from its peak of 22.5 per cent in 2006/07. This could be done by improving the investment climate and removing binding constraints—especially in energy—on new domestic and foreign investment. Pakistan needs to increase its investment-to-GDP ratio to over 30 per cent over the next decade if it is to generate sufficient employment to productively employ its fast-growing labor force and compete effectively with other rapidly growing developing countries. However, in the medium term, investment may continue to be constrained by resource availability and so, in the near future, a large part of the revival of growth will have to come from exploiting unused capacity and productivity gains. – Pakistan’s economic problems are structural and not just cyclical. Deep economic reforms are needed to remove structural imbalances to increase efficiency and competitiveness, and to spur entrepreneurship 1 Pakistan: Moving the Economy Forward and innovation in the economy. Undertaking these reforms will require political will and a carefully sequenced pace of critical reforms so as to ease the burden of adjustment. – The binding constraints to Pakistan’s growth need to be overcome to revive the economy and ensure sustainable growth. These include tackling the crippling energy shortage, increasing revenues to regain macroeconomic stability and reduce the current unsustainable fiscal deficit, and ensuring the availability of water to meet the needs of the agricultural economy. – Exports should be made a major driver of economic growth. This will mean reversing Pakistan’s past poor performance in integrating with global markets—reflected in the country’s stagnant share in global exports. It will need bold steps to create and take advantage of regional trade opportunities, including trade with India. Critical to the success of this strategy will be to improve the quality of Pakistan’s human resource, which could provide the cutting edge in a highly competitive global economy. – The economy has been badly mismanaged, not just in recent years, but also over a long period of time. This has considerably hampered its economic performance and reflects poor economic decision-making, uncoordinated responses, lack of implementation, rampant corruption, and poor governance. – Pakistan must aim not only for sustained and higher growth, but also for inclusive growth such that the poor and vulnerable both participate in as well as share the gains of economic growth— allowing the benefits of development to spread to the country’s less developed economic regions. – After the passage of the National Finance Commission (NFC) award and the 18th Constitutional Amendment, a much greater responsibility falls on the federating units. The provinces will now have to play a major role in economic management and to improve the welfare of the people. This will require their greater participation in overall macroeconomic management as well as close coordination between the federal and provincial governments in formulating and implementing development plans. 2 Overview – Having alternated between the ascendancy of the state and private enterprise for decades, the country needs to settle into a mutually supportive relationship between these two components of the economy. The private sector should play the leading role in all economic activity but within a well-functioning regulatory environment developed by the government. The government’s primary role should be to provide social and physical infrastructure, support for cutting-edge research, and affordable social protection and...
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