Inaugural address.
Shahab-ud-Din, Makhdoom
It is with great pleasure that I inaugurate the Eleventh Annual
General Meeting of the Pakistan Society of Development Economists.
I have noted with satisfaction the contribution this Society has
made over the years to add to our knowledge about the importance of
development economics, and particularly in comprehending adequately the
multi-dimensional character of the development process and for framing
fruitful policies to accelerate the rate of economic development. Above
all, it has given an institutional shape to the meaningful dialogue
between professional economists and policy-makers. I am delighted to see
such a large number of distinguished economists from all over the world
participating in the Society's deliberations. Only the best results
can be expected to come out of such objective discussions about some of
the highly topical economic issues of our time. I wish to extend my
appreciation to the Society for providing such an effective platform to
economists, demographers, and anthropologists.
Today, we stand witness to an unprecedented change in the world
economic order. The world economy has finally emerged out of the shadows
of a deep-seated recession; and the world GDP is expected to grow at the
rate of 3.3 percent in 1995 as opposed to 2.2 percent in 1994; and the
expected growth of world trade in 1995 at more than 7 percent per annum,
as it was in 1994, offers a sharp contrast to the 1980s. Inflation has
been brought down even though the rate of unemployment remains
unacceptably high. And the news is not good for the "47
least-developed countries", mostly in Africa, whose growth
performance continues to be below average; a very large number of people
eke out a precarious existence below the poverty line. Thus, the gap
between the rich nations and the poor nations continues to widen. The
North-South inequities are very much there even as the world economy
exhibits signs of strong growth. The remedy is no longer a simple
dialogue between an affluent North and a poor South with a one-point
agenda about increasing the size of the flow of aid from the former to
the latter. Instead, the nature of the North-South relationship has
become more complex, mainly because Japan and East Asia are now
competing with the North as net exporters of capital, which to some
extent bespeaks a profound transformation in the world trading system.
To comprehend this new pattern of relationships in the international
economic scene, and to give it a new sense of purpose and direction,
regional trading blocks like the EEC, NAFTA, and APEC have been formed.
Notwithstanding some advantages of such baikanisation of the world
economic system into trading blocks, this kind of response to the new
challenges is essentially protectionist, and represents a second-best
remedy. Another, more hopeful, development is the creation of the World
Trade Organisation (WTO) as part of the GATT--brokered Uruguay Round
Agreement, which has now been ratified by most developed and developing
countries. Whatever else may be said about the Agreement, one thing is
absolutely clear: the Agreement consciously seeks to promote a
rule-based, multilateral, and non-discriminatory world trading system
through the WTO, which will function on the basis of a qualified
unweighted majority voting, and in which the membership of the OECD countries will be only 1/3rd of the total membership. Also,
long-neglected issues have been addressed: like the OECD agricultural
protectionism, the newer threat of aggressive unilateralism of the
United States, and the rapid increase in the incidence of non-tariff
barriers in the OECD countries, especially against textiles and clothing
mostly exported by the developing countries.
Thus, new opportunities are opening up for international economic
collaboration, on the basis of equality rather than a special and
differential treatment to the less developed countries. International
competition for the developed and developing countries will be more
fierce as hiding behind the walls of the tariff and non-tariff barriers
becomes more difficult under the WTO rules. New restrictions like
environmental standards may be imposed on the exports of the developing
countries; and intellectual property rights may be guarded much too
jealously by the developed countries. All this poses difficulties for
the developing countries, which will have to learn rather quickly to
adjust to the harsh realities of the post-Uruguay Round era by growing
faster, by emphasising the quality of output and not just its quantity,
by being innovative and resourceful, and by taking fuller advantage of
the rising volume of international trade and investment. On points of
dispute with the developed countries, the developing countries must be
ready to fight legal battles within the framework of the WTO-which is
certainly good news for the lawyers of the world!
I would now like to talk about how Pakistan has fared in the recent
past. Pakistan's economy revived somewhat in 1993-94; and some
economic indicators registered a modest improvement despite the many
domestic supply-side shocks. Notwithstanding the repeated failure of the
cotton crop because of the virus and pest attacks, the GDP growth, which
had decelerated to a record low of 2.3 percent in 1992-93, has still
managed to recover to about 4.0 percent; agriculture has registered a
growth rate of 2.6 percent as compared to a negative growth of 5.3
percent last year; the growth of the manufacturing sector was only
marginally above the growth rate achieved last year. Above all, there is
a greater accent now on financial discipline and on efficient management
of the economy. The federal and the four provincial governments have, by
and large, adhered to the expenditure restraints prescribed, even though
at the expense of the much-needed public sector development activities.
The demand management policies of the Government have worked: the budget
deficit has fallen from 7.9 percent to 5.8 percent of the GDP, and the
current account deficit has been reduced from 7.1 percent to 5 percent
of the GDP in 1993-94. Also, while exports have not increased much,
imports have increased at an even slower rate, which has reduced the
trade deficit. This, coupled with a greater inflow of foreign
investment, has enhanced the foreign exchange reserves from US$ 347
million at the end of 1992-93 to US$ 2,285 million at the end of
1993-94. These developments have moderated the rate of depreciation of
the par value of Pakistani currency vis-a-vis the US dollar and other
world currencies. But, all this has not been enough to moderate the rate
of inflation, which was 11.2 percent in 1993-94, significantly higher
than the inflation rate of 9.3 percent in 1992-93. This is mainly
because the commodity-producing sectors have not yet recovered to the
extent desired.
Unfortunately, the winter of our economic discontent is not
expected to be over soon even as we battle against macro-economic
instability. The cotton output is expected to be 7.5 million bales as
against the target of 9.5 million for the year 199495. This Will affect
the performance of agriculture and manufacturing significantly; so the
GDP growth rate will be restricted to well below the historical trend
rate of 6.0 percent or so. Also, the measures taken to "open
up" the industrial sector of the economy, though essential to
remove the many distortions in the goods market, have increased a few
key relative prices, something that will continue to happen in the
future as well. Yet another difficulty flows from the reforms which seek
to improve the effectiveness of the money market by making a shift from
direct regulation to indirect controls and a greater reliance on the
market forces. The main financial liberalisation policies are aimed at
liberalising the interest rates, reducing the controls on credit,
enhancing the competition and efficiency in the financial system, and
strengthening the supervisory framework. This contrasts sharply with the
earlier regime of direct controls on interest rates movements, domestic
credit controls, high reserve requirements, segmented financial markets,
absence of well-developed money and securities markets, and commercial
banks serving as captive institutions. But the new regime also means
that the government has voluntarily traded the greater predictability of
direct monetary management for the uncertainties of the market. All this
inevitably makes anti-inflationary policies somewhat ineffective at
least in the short run. But it is hoped that as the process of
structural adjustment is completed, as the commodity-producing sectors
respond more positively to greater domestic and foreign investment, and
as the money market starts behaving more rationally, inflation may yet
be brought down to about 7 percent or so during the next year.
Ladies and Gentlemen: Having outlined the broad features of the
emerging macro-economic scenario, I now list a few basic challenges of
economic management.
* At the centre of economic reforms lies the task of maximising the
long-run growth possibilities of the economy. The rate of economic
recovery must be fast enough to attain and surpass the trend growth rate
of the GDP of 6 percent plus. Without this happening, the goal of
macro-economic stability will remain elusive; and problems like
unemployment and poverty will continue to remain intractable. To this
end, the rate of investment must be increased substantially. Some of
this additional investment is likely to flow from the domestic private
sector, but a lot of it must come from foreign sources, for which we
will have to compete in the world market.
* In the area of macro-economic management, we need to mobilise
adequate tax resources and control public expenditure. The fiscal
problem has remained difficult so far because of a narrow tax base,
which in turn complicates the task of rationalising the tax rate
structure and simplifying the tax administration. A failure to raise
enough tax revenue also makes the recourse to domestic and external
borrowing inevitable, so that the legitimate non-development
requirements can be met and enough allocations can be made for
development expenditure. Due mainly to these endemic fiscal
disabili-ties, the goal of balancing the budget has remained as distant
as ever. While the budgetary deficit was expected to drop from 5.8
percent of the GDP in 1993-94 to about 4.0 percent in 1994-95, there are
indications that this target may not be achieved (mainly because of the
shortfall in revenue collection).
Another difficulty flowing from the same source is that tariff
rates cannot be brought down quickly enough--even though substantial
progress has been made in this direction. While a shift from trade taxes
to domestic yalue-added taxes lies at the heart of a successful reform,
the potential tax revenue shortfall from a reduction in the tariff rates
impedes this process.
* To translate a higher growth rate of the GDP into a greater per
capita availability of goods and services, the rate of population growth
must be brought down by a more effective family planning programme, by
reducing the under-5 mortality rate, which still remains high in
Pakistan, and by raising the present woefully low levels of female
education. Success on these fronts will not only maximise per capita
income but will also make the life of the ordinary people more cheerful.
* Yet another problem area relates to the inadequate progress made
to improve significantly the so-called "human development"
indicators--e.g., raising the literacy rate and increasing the longevity
of life and access of the ordinary people to such basic facilities as
potable water and sanitation--which are the requirements to put man at
the centre of economic development.
Ladies and Gentlemen: I now outline the basic features of an
adequate response to the new challenges that our economy faces.
* In order to accelerate the rate of economic growth well above the
historical rate of 6 percent plus, it is absolutely essential that a
dynamic balance is achieved between the growth rates of the agricultural
sector and the manufacturing sector in such a manner that while the
growth rate of agriculture is raised to about 5 percent or so, the
manufacturing sector must rise at the higher rate of 8-10 percent on a
sustainable basis. This needs to be done in order to deepen the process
of structural transformation, and to make it irreversible. Yet another
essential element of this high growth rate strategy is to increase the
rate of investment to about 25 percent; and to increase the efficiency
of investment by raising the total factor productivity.
* On the supply side, a strong programme incorporating a widespread
availability of family planning services is required to accelerate the
rate of fertility decline. For the majority of the rural population, the
lack of access to such services is hindering the success of the family
planning programmes. The data from all the fertility surveys clearly
indicate a strong unmet demand for contraception in both urban and rural
Pakistan.
* Successful economic management also requires taking steps to
reduce the incidence of unemployment, especially open unemployment.
According to some estimates, the open unemployment rate is already
nearing the 6 percent mark. A substantial part of the solution lies in
accelerating the growth rate of the economy, especially of the
agricultural sector, where about 50 percent of the total labour force is
engaged; but a series of ancillary employment-generating programmes will
have to be launched too. Above all, substantial investment will have to
be made in efficient labour-intensive production techniques, which, in
turn, would necessitate making adequate allocations to R&D
expenditures both by the public and the private sectors.
* Yet another element of an effective policy response is to make
the process of fiscal reforms irreversible-by efficient and equitable
resource mobilisation, by rationalising the size and composition of
public expenditure, and by keeping an optimal balance between the
development and non-development expenditures. Also, the large size of
domestic and external debt must be managed carefully, and the tax
administration should be made simple and efficient. As I have noted,
some modest progress has already been made along these lines. However, a
lot remains to be done. And for this a bipartisan national commitment is
required.
* Finally, I must emphasise the need to take decisive steps to
enhance the level of human empowerment in our society, to improve the
quality of governance, to reduce the gender gap, and to put an end to such inhuman practices as child labour and bonded labour, which darken
the face of Pakistani society.
Ladies and Gentlemen: What I have said so far adds up to a very
tall order, and requires a balanced and determined approach to the task
of economic development, as well as a firm commitment to raising the
standard of living of the people.
With these words, I inaugurate the Eleventh Annual General Meeting
of the Pakistan Society of Development Economists.
