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Sustainable economic growth: the key factor
03-30-2009, 01:28 AM
Post: #1
Sustainable economic growth: the key factor
WORLD ECONOMIC OUTLOOK 2006

Sustainable economic growth the key factor
(An Article By Mehmood-ul-Hassan Khan)

According to this annual Global Economics Prospect WB report for 2006, economic performance in 2005 reflects a 6.6 per cent growth in Pakistan, which is appreciable despite all the integrated economic regional and global odds. In India, growth rate is registered at 7 per cent. The sustained economic growths in Pakistan and India can be attributed to increase consumption, investment, exports and industrial production in both countries. The latest World Bank also predicts that the October 8, 2005 earthquake of Pakistan has had diversified socio-economic implications for the economic growth of Pakistan. It also clarifies that despite its large magnitude the October 8 earthquake may have overall smaller economic impact.



GDP growth in South Asia (2006)

The Gross Domestic Product (GDP) growth in South Asia is predicted at 6.9 per cent in 2005, up from 6.8 in 2004. WB predicts that regional GDP is expected to go down to 6.4 per cent in 2006 due to many regional and global economic ills. The aggregate performance reflects stable growth of about 7.0 per cent. A deceleration among the region’s smaller economies from 5.9 per cent to 5.1 per cent is also expected. Higher oil prices, increased political instability (Bangladesh and Nepal) flooding in Bangladesh, and the after-effects of the December 2004 tsunami (Maldives and to a lesser extent Sri Lanka) are supposed to be the main reasons for the registered and expected slowdown in their economies. The new entrant in SAARC, Afghanistan, however, witnessed higher GDP due to favorable weather, which boosted agricultural output.



Continuity of economic reform instruments

According to the WB report, recent strong economic performance of developing countries suggest that reforms undertaken over the past decades have had a positive impact on growth trends. The economies of India, Pakistan and to some extent Sri Lanka and Bangladesh are prime examples of continued economic reforms, which are now paying the dividends.



Characteristics of Pakistan and India’s economies

Growth in Southeast Asia’s largest economies, India and Pakistan, has been broadly based. High levels of spending/consumption, investments and sustained high volumes of exports are supposed to be the main actors of both the economies. Furthermore, industrial production especially engineering (larger scale production) in both countries increased at double-digit rates. Strong investment growth and trade liberalization processes reflect an improved investment climate, and pro-business reforms also played an important part in achieving high rates of economic development in Pakistan and India. Better relations between the two countries and ongoing confidence building measures (CBMs) are also considered key factors for higher GDPs in the region. Relatively moderate increases in domestic fuel prices due to implicit and explicit price-subsidy programs also support consumer demand, investment, and regional tourism. But it is now predicted that the severe earthquake may decrease the levels of tourism in Pakistan.

Post agreement on textiles and clothing scenarios

The WB report export growth was especially strong, and many countries in the region have increased market share following the removal of quotas under the Agreement on Textiles and Clothing (ATC). The lifting of ATC quotas benefited regional trade, at least initially. India recorded 28 per cent and Pakistan registered 20 per cent growth in textile exports during the fiscal year of 2005. For Bangladesh and Sri Lanka, increased sales of clothing and textiles during the first half of 2005 are estimated to have represented between 10 and 15 per cent of their total merchandise exports in 2004 Large, but less important, gains were also registered in India and Pakistan. Nepal, however, was hit hard by the increased competition, and declines in its clothing and textile exports were equal to about 5 per cent of its total merchandise trade.



GDP growth in Southeast Asia

GDP growth is forecasted to average around 5.5 per cent during 2007-2015, reflecting a rising contribution to growth from the private sector. Trade reforms (India, Pakistan, Bangladesh) banking-sector liberalization and re-regulation (India, Pakistan), privatization, (India, Pakistan, Bangladesh) and infrastructure development (Bangladesh, Nepal) are all expected to improve the investment climate, productivity growth, and ultimately income levels. Migratory human and financial capitals can enhance socio-economic uplift in these countries as $162 billion going to new migrants, $143 billion to people living in developing countries, and $51 billion to people living in high-income countries. Pakistan received $3.9 billion and Bangladesh $3.4 billion. It is predicted that the South Asian region will receive an estimated $32 billion in remittances in 2005, a 67 per cent increase from 2001. With recorded inflows of $21.7 billion in 2004, India received the most in remittances in the world, followed by China. Pakistan also received substantial inflows of foreign direct and foreign portfolio investments in the country.



Inflation and price stability

Most of the countries in the region witnessed high levels of inflation. In Pakistan it was estimated in the range of between 8.3 and 8.8 per cent. The median inflation rate has increased from 3.1 per cent in 2004 to 6.3 per cent in 2005. Sri Lanka witnessed the sharpest advance, at an estimated 14.2 per cent in 2005 versus 7.3 the year before, partly because of the impact of the tsunami. In Pakistan, accommodating monetary policy and very fast growth were important factors in the rise of inflation.



Price subsidies

The continuation of fiscal discipline, prudent monetary policy and focusing attention on improving the infrastructure and social sector indicators clearly point to the possibility that GDP can maintain its long-term growth trajectory in the region. Price subsidies may, however, mute the impact of higher oil prices on consumer inflation. As a result, the region’s current account balance is reported to have deteriorated by 1.3 per cent of GDP in 2005.

It is predicted that the government of Pakistan may bear additional $5 billion on its oil bill in the current fiscal year. The country’s trade deficit increased by 188 per cent to $2.4 billion during the first quarter (July-September) of the current fiscal year compared to $826 million the same period last year. In Bangladesh, the authorities reacted to high-energy costs by dipping into reserves, which by April 2005 covered only 2.6 months of imports, down from 3.2 months on average in 2004. Elsewhere, better export performances limited the overall impact on these countries’ current account deficits, and stocks of reserves were much higher, about 6 months of imports in India, Nepal, and Pakistan.

The subsidization of energy prices brought fiscal positions under increasing strain because of lower taxes, reduced profits from state-run oil companies that have been forced to sell at below-market prices, and increased expenditures. As a result, governments were forced either to cut non-oil fiscal outlays or to increase fiscal deficits.



Medium and long term outlook

* Regional investment growth is expected to strengthen especially after the start of SAFTA from January 2006.

* Private-sector and infrastructure investments would be on the rise (expected scenarios of mutual trust and economic ties between Pakistan, India. End of the civil war in Sri Lanka is also making economic prospects look better in the days to come

* Regional governments may adjust the shock of rising oil prices through more taxes and high price mechanism

* Inflationary pressures are not expected to ease as quickly

* Higher average oil prices in 2006 are expected to lead to a further deterioration in the regional current account balance to 2.5 per cent of GDP.

* Strong investment inflows in the baseline are contingent upon further domestic policy reforms that strengthen the investment climate and access to international capital.

* Long-term growth in South Asia is forecast to average about 5.5 per cent during 2007-15, reflecting a rising contribution to growth.

* Trade reforms, banking-sector liberalization and re-regulation, privatization, and infrastructure development are all expected to contribute to improving the investment climate, productivity growth, and ultimately incomes.

* Private-sector investment (both domestic and foreign) is expected to contribute to improving the growth rate of potential output, buoyed by rising private savings as dependency ratios decline.

* The incidence of extreme poverty in the region, which had fallen to 31 per cent of the population in 2002, is expected to decline to less than 13 per cent by 2015.



Lessons and integrated policies for Pakistan

High levels of inflation, increasing oil prices and the earthquake October 8 may be harmful to achieve desired targets of GDP in the country. Both the major sectors of agriculture and industry are narrowly based and this is a cause for concern. The domestic national savings rates were 20.8 of GDP in 2003, which have decreased to 15.1 in 2005.

The constant widening gaps of trade deficit need to be engulfed and the overall budgetary deficit needs to be streamlined. The sharp drop in savings rates along with a rise in consumption raises a note of disquiet. The lack of pliability in the tax collection system needs to be improved immediately (tax-to-GDP ratio is at a low nine per cent and is in steady decline. Direct taxes comprise 31 per cent of total taxes, and are the equivalent of 2.8 per cent of GDP. Growth in current expenditures and external sector imbalances are not addressed properly.

It should be dealt immediately failing which the national economy may begin to suffer deviations from the current growth path. Rural poverty is on the rise in the country. The ratios of unemployment are also on the higher side. There is increase of Rs.154 billion in domestic debts and $700 million in foreign debts. The foreign reserves of SBP have also decreased by $760 million.



Conclusion

Economics works in integration. No policy can work in isolation but rather it is how each works on the presence of another. Neither can a sector be ignored to cater to another sector. It is estimated that systematic implementation of the monetary policy, immaculate monitoring of debt servicing, steady check on prices are all an ongoing process. All policies need to be devised and implemented because it is these concerted efforts that will help to reduce looming ratios of poverty and unemployment. All said and done, it is the continuity of major micro and macro economic policies and proper implementation that is the key.
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