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Explaining Pakistan's high growth performance over the past two decades : can it be sustained ?

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  • Ahmed, Sadiq
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    Abstract

    Using standard statistical growth analysis, the author shows that Pakistan's growth is the result of: (a) rapid capital accumulation. Pakistan's investment rate was relatively low but its fixed investment rate grew steadily in the 1970s, stabilizing at about 17 percent of the Gross Domestic Product (GDP) in the mid-1980s; (b) growth of the labor force, which offset a tendency toward capital intensity of production; (c) more competition from external trade; and, (d) a policy of economic liberalization since 1978. Pakistan was able to sustain high growth and avoid a financial crisis - despite large deficits - because real interest rates on debts were substantially negative in the 1970s, so debt-to-GDP ratios continued to decline. But real interest rates turned positive in the 1980s. If Pakistan continues to have fiscal deficits of the same magnitude as in the past, a financial crisis will quickly emerge. Pakistan cannot avoid a debt crisis by creating money. Higher inflation will hurt resource allocation and income distribution. To guard against reduced growth, weakened export performance, and higher real interest rates, Pakistan should reduce its fiscal deficit to below 4.5-5 percent of GDP and phase out quasi-fiscal deficits. Pakistan needs more balanced use of fiscal, monetary and exchange rate policies. Putting the burden of external adjustment fully on the real exchange rate, as Pakistan tried to do in the past, is inconsistent with improvements in external balance. Real exchange rate depreciation imposes capital losses on the stock of external debt. The real exchange rate should be set at an appropriate level, and monetary and fiscal policies should be used to adjust demand. A substantial adjustment effort will be needed to increase domestic savings and investment rates. National savings should increase from 14 percent of GDP to 20-22 percent of GDP. Raising public revenues and reducing public investment should focus on areas (such as physical infrastructure and human development) that promote private investment, economic growth, and equity. To contain the fiscal cost of domestic borrowing, Pakistan has pursued a policy of financial repression, which has repressed the private credit and investment needed for long-term growth. Also needed is more rapid progress in human capital development, especially investments in women's health and education. To complete internationally in manufacturing requires more skilled production and a better educated workforce than Pakistan has had.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1341.

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    Date of creation: 31 Aug 1994
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    Handle: RePEc:wbk:wbrwps:1341

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    Related research

    Keywords: Environmental Economics&Policies; Achieving Shared Growth; Economic Theory&Research; Economic Growth; Banks&Banking Reform;

    References

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    1. Ijaz Nabi, 1984. "Issues in the Economics of Industrialization in Developing Countries: A Case Study from Pakistan's Light Engineering Sector," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 23(2-3), pages 311-329.
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    3. van Wijnbergen, Sweder, 1989. "External Debt, Inflation, and the Public Sector: Toward Fiscal Policy for Sustainable Growth," World Bank Economic Review, World Bank Group, vol. 3(3), pages 297-320, September.
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    7. Levine, Ross & Renelt, David, 1991. "Cross-country studies of growth and policy : methodological, conceptual, and statistical problems," Policy Research Working Paper Series 608, The World Bank.
    8. Baffes, John & Shah, Anwar, 1998. "Productivity of Public Spending, Sectoral Allocation Choices, and Economic Growth," Economic Development and Cultural Change, University of Chicago Press, vol. 46(2), pages 291-303, January.
    9. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
    10. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
    11. Haque, Nadeem U. & Montiel, Peter, 1991. "The macroeconomics of public sector deficits : the case of Pakistan," Policy Research Working Paper Series 673, The World Bank.
    12. Edward E. Leamer, 1987. "Measures of Openness," UCLA Economics Working Papers 447, UCLA Department of Economics.
      • Edward E. Leamer, 1988. "Measures of Openness," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 145-204 National Bureau of Economic Research, Inc.
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    Cited by:
    1. Looney, Robert E., 1997. "Infrastructure and private sector investment in Pakistan," Journal of Asian Economics, Elsevier, vol. 8(3), pages 393-420.
    2. Tang, Chor Foon & Tan, Bee Wah, 2014. "A revalidation of the savings–growth nexus in Pakistan," Economic Modelling, Elsevier, vol. 36(C), pages 370-377.

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