BOOSTING COMPETITIVENESS

Muddassar Mazhar Malik

Over the last two decades Pakistan has had the resilience to survive against all odds. How can it succeed is the main topic of this chapter.

Despite its many challenges, during this period, Pakistan has grown at an average rate of over five per cent. As a country with a population of 175 million people today, it is important to understand that 99 per cent of the fabric of a diverse and rich culture and people can and do make a difference.

Pakistan remains open for business despite the enormous challenges it confronts. Whilst international media and policy think tanks focus on how to tackle militancy and extremism, the vast majority of the people who live and work in Pakistan today say openly that this minority does not represent them as a people and ask why the international media cannot recognise the simple fact that every Pakistani is not a militant or extremist.

During 2010 Aisam ul Haq Qureishi became the first Pakistani to reach the US Open doubles final. After losing the final, he addressed a 15,000 strong gathering at the Arthur Ashe Stadium with millions of people watching across the world. He said, ‘I want to say something on behalf of all Pakistanis. Every time I come here, there’s a wrong perception about the people of Pakistan. They are very friendly, very loving people. We want peace in this world as much as you.’ The crowd cheered and the hearts of Pakistani citizens around the world warmed to his remarks of respect for its people. In many ways, this thirty-year old was able to capture for a moment what the Pakistani diplomatic community has failed to achieve—to project Pakistan in its true light. The point is that 215stimulating economic growth in a country requires investment, which in turn requires market access to capital investment. Pakistan’s market access is severely compromised by its negative perception. Addressing this problem head on has to remain a priority for all stakeholders. That said, Pakistan’s future outlook and its strong underlying fundamentals mean that it is difficult for investors to ignore the opportunities it has to offer. What is even more important as the process of institutional re-building gains momentum, is the gradual yet distinct realisation by all stakeholders that having a clear Pakistan game plan for success is essential and sticking to the script has to be part of the game plan. If the goal is to realise Pakistan’s full potential, then putting the house in order is a fundamental pre-requisite for the success story to unfold at a time when most critics argue otherwise.

One example of such an adversity is the catastrophic floods in Pakistan in the summer of 2010—the worst natural disaster in the country’s history. These have resulted in a colossal setback to its economy. The extensive damage to infrastructure will mean years of rebuilding, and the mass displacement of people will require the rehabilitation of millions across the country. All of this will need an extraordinary amount of resources, thus compounding Pakistan’s economic woes and exacerbating long-standing challenges. Among these challenges are macroeconomic instability, an inadequate infrastructure to support business activity, poor social indicators, a deep governance deficit and limited integration into the global economy at a time when competition from China, India and other regional countries grows in key export sectors including textiles. With the world still dealing with global recession and the country struggling with the aftermath of floods, sceptics suggest that Pakistan is today less able to handle such shocks than it was ten or twenty years ago. They argue that Pakistan’s economic future is at best perilous given decades of political instability and economic mismanagement and that it is far down on the list of global capital-seeking-investment. Against this backdrop, addressing structural challenges acquires a sense of urgency and priority at all levels of government, industry and businesses. To achieve a sustainable rebound, policy priorities must be set clearly to meet the needs of reconstruction and deal with critical economic, social and political issues in the face of fierce competition, shrinking global demand 216and increasing geo-political risk. Now more than ever, it is imperative to identify what Pakistan needs to do to become more competitive and be among the winners in the coming decades. This chapter is an attempt to challenge the view of the sceptics. By focusing on the most critical policy measures needed to achieve competitiveness, Pakistan has the ability to capture the energy and dynamism of its natural advantages, accelerate growth and ‘catch up’ on the global economic stage.

Pakistan’s Potential

In 2005 Goldman Sachs formulated the notion of the Next-11 (N-11) as a group of countries that have the economic potential to become important players in the global system after the so-called BRIC, an acronym for Brazil, Russia, India and China. The N-11 though diverse in many ways was identified as rapidly developing economies with the ability to match, if not eventually overtake, the Group of Seven (G-7) countries. The main criterion was demographic—with the result that the N-11 is a group of large population countries beyond BRIC. Pakistan was identified as one among these countries owing to its size, its growing population, and its industrial base. All these factors give Pakistan an ability to produce consumer goods and have a substantial domestic market with the capacity to consume them.

The following are some of Pakistan’s main advantages, fundamental to its long-term growth. Not surprisingly, some of these are similar to those that are propelling growth and attracting global investment flows to the rapidly developing Asian economies in the region including China and India.

A resilient economy. First, despite seven changes in government in the past twenty years, Pakistan has maintained an average growth rate of 5 per cent per annum. Until recently, Pakistan was being touted as one of the most dramatic turnaround stories of the last decade. Driven by domestic demand and population growth, GDP growth averaged over 6 per cent a year from 2003–2008. This translated into an investment and infrastructure-led growth cycle fuelling expansion in the housing, health care, education, food, infrastructure, energy, telecommunications, IT and financial services sectors. This has meant that Pakistan’s economy has 217progressively moved from its traditional agricultural base to manufacturing and increasingly to services. In that sense, Pakistan’s economic structure is much closer to that of India and China, and is unlike many smaller Asian countries, which are more dependent on export growth.

Official IMF estimates of the country’s per capita income are US$1,200, which, on a Purchasing Power Parity basis, is US$2,500.

Additional estimates suggest about twenty-five to thirty million people, or one sixth of Pakistan’s population, have a per capita income on a PPP basis of between US$8,000 to US$10,000. Part of the growth is accounted for by a large and vibrant informal economy which is estimated to be at least 30 to 50 per cent of the size of the formal economy and which is growing as much as 13 per cent per annum. Pakistan’s thriving informal economy is not documented and consists of a vast network of smugglers, traders and agriculturalists. The energy and dynamism of the informal economy has, in part, been responsible for continued growth. With better documentation, this has the prospects of being channelled into formal sectors. This can help to raise tax collection and attract investment capital to roll out much needed capacity in healthcare, education, law and order and energy sectors. This will not only have a direct impact on alleviating poverty but also allow the productive economic bc1se to expand in a sustained manner.

Over the last two decades, Pakistan has undergone meaningful banking sector, tax and corporate governance reforms and has a solid financial system. Its economy is more open to trade and investment compared to countries at a similar stage of development. Pakistan’s English-speaking professional elite, a well-developed legal system based on English common law and a significant pool of overseas Pakistanis have allowed a reasonable degree of integration with the global economy. Pakistan’s business community has historically been westward looking and has also developed strong links to the Middle East and Asian economies and China. Today, over 300 foreign multinationals have well established business operations in Pakistan. The US, European Union and Japan remain the three largest foreign direct investors with new inflows emanating from the Middle East and China. Other key indicators suggest a positive growth trend—foreign remittances hit around $9 billion in 2010 218up from $984 million in 2000, foreign exchange reserves were around $16 billion in June 2010 up from $1.7 billion in 2000 and exports were $20 billion in 2010 up from $8 billion in 2000. This resilience has also been demonstrated in key capital market indicators. In 2009, Pakistan’s KSEl00 index surged over 60 per cent in a year. Pakistan was wracked by increased violence and many of its state institutions were overwhelmed by security challenges. From 1998-2010, there has been an enormous increase of over 700 per cent in the KSE100 after accounting for rupee depreciation.6 This makes Pakistan the best performing market in a twelve-year period and significantly better than the BRIC economies. Pakistan’s stock market capitalisation to GDP (PPP basis) ratio is approximately 7 per cent. This is very low compared to the BRIC economies, where market capitalisation to GDP ratio ranges from 25 per cent in Russia to 60 per cent in Brazil. This ratio is a measure of the extent of development of a country’s capital market and of the valuation of its listed assets relative to the overall size of the economy. More developed economies like Hong Kong tend to have ratios in excess of 100 per cent. This highlights the comparatively low valuations for Pakistan relative to the BRIC economies. These low valuations in turn reflect the extent of investor pessimism as well as potential upside for investors if Pakistan’s growth begins to surge. Withstanding geo-political risk. Second, Pakistan has been the victim of two major international events in the last three decades. The Russian invasion of Afghanistan resulted in a war that saw the influx of 3.5 million refugees and led to the rise of militancy in the region. The US-led invasion of Afghanistan after 9/11 compounded Pakistan’s security challenges which dealt heavy blows to its economy. In the current security situation, it has been difficult to attract foreign and mobilise domestic investment. Pakistan has not been given a preferred status for exports to the United States or the European Union, which are Pakistan’s main export markets. As a consequence of geo- political risks, Pakistan is not seen as a friendly investment destination. Despite this, Pakistan’s investment to GDP ratio has averaged 17 per cent for the last decade and is 17 per cent today after reaching a peak of 23 per cent in 2007. In many ways, Pakistan’s corporate leaders and professionals as amongst the most ‘battle hardened’ pool of managerial talent in the world with the ability to manage risk and still show growth under the most challenging business conditions. Demographic asset. Third, with a population of 175 million people, 219almost a quarter the size of Europe’s population, Pakistan is the sixth most populous country in the world. This has resulted in rapid growth in urbanisation, which presents opportunities as well as challenges. With a large and expanding workforce and relatively few people in the dependent age bracket of under fifteen and over sixty-four, Pakistan is ideally positioned to reap the demographic dividend. While Pakistan’s young population of around a hundred million is already becoming an engine of growth, its youth can become the back­ bone of its middle class that can, in turn, drive economic growth. This offers Pakistani businesses an opportunity to grow and produce goods and services the population needs. At a time when the Western world is facing the crisis of ageing populations, Pakistan has the potential for economic expansion created by a young population provided, of course, that it can be educated and empowered with the right skills. Natural Resources. Fourth, Pakistan’s landmass, equal to that of Brazil’s, is rich in natural resources, including mineral wealth and arable land. It is the world’s fourth largest cotton producer and its coal reserves—the fourth largest in the world—are estimated around 186 billion tons, which in terms of energy output is at least equal to if not more than the oil reserves of Saudi Arabia. Balochistan has one of the largest copper reserves in the world estimated at eighteen million tons of copper and thirty-five million ounces of residual gold. Pakistan is the world’s fifth largest dairy producer and increasing its exports of both milk and beef to the Middle East in addition to meeting domestic needs. Strategic location. Fifth, Pakistan’s location gives it a unique advantage. Although location is currently responsible for much of its negative image, this can be turned around. As the economic centre of gravity shifts to Asia it is situated at the crossroads of opportunity: large energy resources and one of the largest pools of liquidity in the world. For large parts of western China, Afghanistan and the Central Asian Republics, the shortest and cheapest trade route is through Pakistan. The government has been capitalising on this by creating a strategic trade and energy corridor. A major new port in Gawadar has been completed and the Singapore Port Authority has the mandate to manage it. There is a network of highways linking China and Central Asia to the port city of Gawadar. This is an important long term growth opportunity offered by 220Pakistan and has recently been reinforced by the Pakistan Afghan Transit Trade Agreement (PATTA) signed in 2010 allowing the opening up of trade through Pakistan to Afghanistan and beyond. To summarise, Pakistan’s resilience in the face of problems and its strong fundamentals give it the potential to turn into an economic success story. But it will have to surmount formidable challenges in order to do so. To capitalise on its advantages Pakistan needs to grow by 7–8 per cent per annum for the next ten years; 1 per cent growth in GDP requires a 2.5 to 3 per cent growth in the investment rate. Therefore GDP growth rate of 7 per cent will require annual investment rates of over 21 per cent as a percentage of GDP. Given Pakistan’s weak social, political and economic infrastructure, can Pakistan achieve the required investment to turn the economic corner, grow and compete globally? So the question is—what needs to be done for Pakistan to attain competitiveness and create national wealth? Where Does Pakistan Stand Globally? Any country that wants to succeed in the global economy needs to closely study competition, not to mimic but to understand how other countries have identified what works for them and how to benchmark themselves with what others do globally. The table below is from the Global Competitiveness Report, a survey conducted annually by the World Economic Forum. It is a useful tool summarising the factors on which the competitiveness of 133 countries are assessed on a relative scale. Based on the twelve pillars of assessment, Pakistan ranks 101 out of 113 countries in the 2009-2010 survey. This shines a light on the areas where Pakistan has to work to achieve greater competitiveness. What Does Pakistan Need to do to Become Competitive? Improving the competitiveness of any country is not easy and Pakistan is no exception. But its potential can be achieved if a clear roadmap is developed. This will require not just fresh ideas, public-private partnerships and foreign investment but also improving the infrastructure, developing its human capital and funding critical new technologies. A plan to achieve this will need the following: Clear vision. First, Pakistan needs a coherent vision and strategy. Attaining competitiveness is synonymous with creating national wealth. 221Owing to its geography and demography, Pakistani industry and business have the ability to become more competitive for its own domestic market and compete regionally and globally, if they act in a structured and collective manner. Experts in the field have increasingly started citing South Asia as the fastest growing region in the world. While this conclusion is driven by India’s nascent economic strength, which in turn is premised on India’s fast growing middle class, educated population base and stable politics, it is important to recognise that Pakistan possesses similar characteristics and potential. There are some key problems in evolving a clear vision. There is lack of consensus about what this vision should be. This stems from a psychological barrier in the minds of Pakistan’s public and private sector players that Pakistan cannot be globally competitive. Overwhelmed by current challenges, there is little appreciation of the economic opportunity that the country presents and how to unlock this value. Also activity across government departments and agencies is not coordinated in pursuit of the goal of attaining competitiveness. There is, for example, lack of alignment between the government’s social policies, especially education, and its economic, foreign and defence policies. Furthermore, policy inconsistencies between successive governments have left little room for the private sector to innovate and generate fresh ideas. This lack of coordination is exacerbated by an over-reliance on foreign assistance and policy prescriptions from multilateral agencies. 222Pakistan Key indicators Population (millions), 2008 …………………………… 167.0 GDP (US$ billions), 2008………………………. 167.6 GDP per capita (US$), 2008 ………………………. 1,044.5 GDP (PPP) as share (%) of world total, 2008 … 0.64 GDP (PPP int’l $) per capita, 1980–2008 Pakistan 3,000 South Asia 2,000 1,000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Global Competitiveness Index Stage of development Rank Score (out of 133) (1–7) GCI 2009–2010 ……………………………………………….101 … 3.6 Transition 1–2 1 GCI 2008–2009 (out of 134)…………………………………………101… 3.7 GCI 2007–2008 (out of 131)…………………………………………..92… 3.8 Factor driven Basic requirements…………………………………………………..114….. 3.5 1st pillar: Institutions …………………………………………………104 ….. 3.3 2nd pillar: Infrastructure……………………………………………..89 …. 3.1 3rd pillar: Macroeconomic stability…………………………..114 …. 3.8 4th pillar: Health and primary education …………………..113 …. 3.9 Efficiency enhancers………………………………………………….92 ….. 3.7 2 Transition 2–3 3 Innovation driven Efficiency driven Institutions 7 Innovation 5th pillar: Higher education and training …………………..118 …. 2.9 6th pillar: Goods market efficiency……………………………..83 …….. 4.0 7th pillar: Labor market efficiency …………………………….124 …. 3.5 8th pillar: Financial market sophistication…………………..64 ….. 4.2 9th pillar: Technological readiness……………………………104 …. 2.9 10th pillar: Market size………………………………………………..30 …. 4.7 6 Infrastructure 5 4 Business sophistication Macroeconomic stability 3 2 Market size Health and primary education 1 Higher education and training Technological readiness Innovation and sophistication factors ……………………….84 …. 3.4 11th pillar: Business sophistication …………………………….81 …… 3.8 12th pillar: Innovation………………………………………………….79 …….. 3.0 Financial market sophistication Labor market efficiency Pakistan Goods market efficiency Factor-driven economies The most problematic factors for doing business Government instability/coups …………………….. 19.2 Policy instability …………………………………………… 13.3 Corruption ………………………………………………….. 11.5 Inflation ………………………………………………………… 9.3 Access to financing ……………………………………… 8.7 Inefficient government bureaucracy ……………………….8.0 Inadequate supply of infrastructure ………………. 7.5 Crime and theft ……………………………………………. 5.4 Inadequately educated workforce ………………. 3.9 Tax rates ……………………………………………………….. 3.6 Tax regulations ……………………………………………… 3.3 Poor work ethic in national labor force …………… 2.5 Foreign currency regulations ………………………… 1.5 Restrictive labor regulations ………………………….. 1.4 Poor public health ………………………………………… 0.8 0 5 10 15 20 25 Percent of responses Note: From a list of 15 factors, respondents were asked to select the five most problematic for doing business in their country/economy and to rank them between 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings.

What can be done? Sustainability, environmentally conscious, inclusive growth from the bottom up and global competitiveness are all interconnected. Yet, much of the thinking and work being done today is not looking at the inclusive approach for growth. Policy-makers are thinking in pieces as unique problems that can be addressed separately. The overall economic, political and social canvas needs to be addressed in a coordinated fashion for Pakistan to take advantage of its growth opportunity. There are four key areas where action should be taken. First, the private sector should help generate a national debate on the need to develop a shared mindset across government, industry, the media and other key stakeholders to attain competitiveness. This will serve as a signal not only to the international community but also to the country’s public sector administration, business community and labour force that Pakistan is serious about competing. Second, the government should be willing to pull all the levers at its disposal to implement such vision. This involves creating an environment that gives foreign and domestic companies a reason to invest and stay in Pakistan. This in turn could be achieved through a realignment of tax and investment policies, especially in sectors where investment is a critical precursor to long-term structural change. Third, a global media campaign targeted at international as well as domestic investors should, be launched, highlighting the trade and investment opportunities in Pakistan and the government’s agenda of reform.

Fourth, the government’s social and economic policies including education, transport, infrastructure, energy and communications must be aligned with this vision. This coordinated approach should extend to Pakistan’s defence and foreign policies, which should also reflect Pakistan’s aspirations of rapid economic progress. Improve Governance. The problems of governance stem from the inability of governments and public sector institutions to deliver public services in the face of rising demands and expectations. As this is discussed elsewhere in this volume it is sufficient to emphasise that without improved governance, delivery systems and effective implementation, Pakistan will find it difficult to educate its 224citizens, build infrastructure, increase agricultural output and ensure that the benefits of economic growth are efficiently distributed. Improve infrastructure. Pakistan’s infrastructure constraints are evident in the present power crisis, lack of a modern railroad system, shortage of low—to middle—income housing, congestion on urban roads and main highway systems and an inadequate port capacity. There is grossly inadequate primary, secondary and higher education and healthcare facilities. Pakistani companies suffer as a consequence of these factors, for example, by experiencing production delays in exports due to limited port capacity and cumbersome customs procedures. The lack of availability of a well-trained, healthy and productive work force further inhibits business potential. In addition, poor logistics and transportation also hamper the movement of inventory between farm and market or factory and market. If Pakistan’s growth continues at an average rate of 7-8 per cent in the coming decade, this will fuel the demand for energy, transport, logistics, communication, healthcare, housing, water, education and communication. Urbanisation is also increasing. Almost a third of the population now lives in four major urban centres. A 2 per cent in- migration rate means that this number will grow by over half in the next twenty-five years. These unprecedented levels of urbanisation present challenges but can also bring opportunities as vast numbers of people can have access to information, services, communication facilities as well as standards of living which do not exist in the rural areas. Official estimates of new infrastructure requirements in terms of ports, railroads, hospitals, schools, low income housing and energy are approximately $30 billion in the next five years just to sustain current levels of growth. So there is a dual problem: the current infrastructure is inadequate and future growth is burdened by lack of resources and poor planning. Obvious examples include: the current energy shortage, which is the consequence of neglect of the power sector by successive governments, and the shortage of trained technical staff and engineers—impediments to any rapid infrastructure roll out. Lastly future growth is hampered by the challenges of security. Building dams in Khyber Pakhtunkhwa, mining coal in Baluchistan or establishing a modern port capacity on the southern coastline are all dependent on the security of human capital. 225What can be done? First and foremost, Pakistan needs to resolve its financing issues, Pakistan needs to further develop its capital markets as well as create market access for long term foreign capital inflows. A vibrant and liquid corporate bond market, the ability to source fresh equity from the domestic and international equity markets, deregulation of the insurance and pensions markets, and a stable banking system are all areas for greater focus. Previous governments have achieved some measure of success in this regard to the extent that the country was able to tap international markets for debt and also improve its international credit rating. Pakistan has also set up the Infrastructure Project Development Facility (IPDF) that needs to be better utilised to bring about more robust public-private partnerships in energy, health care, transportation, agriculture and education. It is also important to focus on infrastructure projects, which can be more easily delivered by a combination of government initiatives, foreign assistance or domestic private investment. Examples include projects for low-income housing, a modern irrigation system, high yield crops and development of human capital with particular focus on skills needed to help existing and new industries grow.

Becoming the region’s food reservoir. Even though the setback from the floods may in the near term affect Pakistan’s ability to feed itself, a country that has been self-sufficient in food should be able to effect a recovery. The country’s major agricultural products include cotton, wheat, rice, sugarcane, fruits and vegetables while its livestock and dairy resources provide ample milk, beef, mutton and eggs. It is, however, essential for Pakistan to improve its agricultural output levels and productivity. Agriculture generates around 22 per cent of the GDP while employing 45 per cent of the labour force. Almost two thirds of the population is dependent on agriculture for their livelihood—hence changing the complexion of the agricultural sector through a focused investment drive would help to radically change the complexion of Pakistan’s economy. Over the past twenty years land under cultivation has remained relatively static and yields per hectare have only improved marginally. Intensive farming and environmental degradation have resulted in soil erosion. These factors will continue to impede agricultural growth as urbanisation results in a loss of arable land. 226To enable Pakistan to become the granary of the region, not only productivity, but also scale, quality, continuity and reliability of agri-food production needs to be ensured. The world’s largest distributors of food in the region, which include Wal-Mart, Nestle, Unilever, Metro, Sears, Carrefour and Spinney can then be persuaded to increase investment in downstream production which feed agri food businesses in the region. Investment, particularly in better seeds and new technology, is required to raise yields. Second, agriculture needs to be deregulated to allow greater degree of commercialisation and economies of scale. Eliminating price controls, restrictions on inter-provincial movement of goods and strict curbs on smuggling of food products to neighbouring countries will allow greater flexibility to farmers to sell directly to the organised retail sector. Third, a comprehensive national agricultural policy needs to be evolved to offer incentives to indigenous and foreign investors. To promote sustainable R&D in the sector, that policy should encourage joint ventures between global and local companies. In particular, large local landowners should be encouraged to forge alliances to enable ‘contract farming’ which invites expertise, technology and finance with an enhanced regional market focus to boost both production and productivity. However, the current system of land holdings, price controls and lack of legal enforceability may inhibit the entry of new players, technology and expertise into Pakistan. To overcome such obstacles, a combination of removal of subsidies and public sector investment could act as a catalyst for growth. Fourth, due to the small size of farm holdings, there should be a comprehensive programme of education for farmers at the basic level about better agricultural practices, information and availability of better seeds, use of fertiliser and crop patterns. The village farmer is the key to increased agricultural productivity. Raise education standards. Pakistan’s abysmal literacy figures need to be frontally attacked by a national policy. This is discussed in the next chapter. Build a skilled work force. Reaping the demographic dividend will depend on having a skilled workforce. The present size of approximately fifty-five million people means that Pakistan’s labour force is the ninth largest in the world, and growing by at least two to three million workers 227a year. In addition to education initiatives, it is critical to unleash a parallel effort aimed at bridging the skills gap. There are several problems here. First, the skills needed for low-paid agricultural jobs are very different from the skills needed for higher­ paid jobs such as in healthcare, plumbing or construction. While vocational training centres have been established in different parts of the country, there is insufficient effort to identify and provide the skills that are needed. Second, the higher education institutes that produce doctors, engineers and business graduates are not numerous enough to churn out enough trained professionals. Some studies have shown that there is an exodus of trained manpower nearly the size of fresh incoming graduates particularly in the field of engineering. These trends are alarming and need to be reversed. This means first, a list of skills that are required across sectors should be developed. Some of these skills may be common but others may be sector specific. In this regard, the government sponsored National Vocational and Technical Education Commission (NAVTEC) can be used to upscale its programs to give technical and vocational training a quantum jump and ensure that standards of attainment improve. Second, a public-private partnership should be set up by the Ministry of Technology to bring together all the technical manpower resources in the country and use this as a pool to harness technology, expertise and ideas. These can then be commercially applied in areas and sectors in which Pakistan ought to focus to achieve competitive strength. Such a pool can also be applied to build the capacity of highly skilled technical managers needed to produce and disseminate high­ middle- and low-end technologies and products. One area where highly and technically skilled manpower exists is in the Pakistan Armed Forces. This ‘hidden’ talent reserve has a demonstrated ability to absorb and learn the use of new technologies. This resource ought to be leveraged by the private sector to ’leap-frog’. Corporate leaders could join hands with leading technology experts in the Armed Forces in a joint effort to identify those areas that could provide the basis for export driven growth in areas where the industrial sector can be transformed. A case in point is Brazil where government policy has over the last three decades helped to make Brazil among the largest exporters of defence 228technologies and equipment by combining techno­ logical expertise in their domestic auto sector with defence expertise. It is important for Pakistan to align its labour market policy with a sound policy for competitiveness in industry, agriculture and the service sector. One initiative that attempts to identify indicators on skills and wages using labour market force data is the Pakistan Employment Trends Report produced by the Ministry of Labour and Manpower in collaboration with the International Labour Organisation (ILO). More specifically the report has looked at the technical and vocational training capacity in the country and how this can improve competitiveness. The key message here is greater investment in education and training, particularly for young people and women. While government and private sector initiatives are focusing on upgrading the infrastructure in both these areas, much more needs to be done to create alignment between those industries and sectors which are being targeted for export growth and the skills and education levels which are required for people entering the labour market to be employed at levels which allow them to climb the income curve. Boost exports. Pakistan has never had a consistent, coherent and well­ articulated export-focused growth strategy. Indeed, exports are often treated as a residual after-thought once the domestic market has been catered for. This is inexplicable given that the country has had a persistently large trade deficit, which has been increasingly difficult to finance each year. While exports have been rising, economic growth, per se, has never been driven by exports. Nor has building a dynamic export sector been at the forefront of any government’s economic strategy. Although domestic demand has to remain an important cornerstone of the overall growth story and firms have to be competitive domestically to survive, the focus of policy has to shift from being inward looking to one which is outward looking, focused more on export growth than just on domestic demand. Comparison with other countries reinforce the lesson that trade openness has been an important factor in driving economic growth in successful countries. Openness has helped economic transformation. Aside from the benefits of having a more competitive environment, which induces firms to become more efficient, unblocking the access to export markets that 229were not accessible before also provides opportunities for economies of scale in industrial production. Pakistan’s export to GDP ratio is relatively low and its exports per capita are among the lowest when compared to other Asian economies. If one looks at the export mix, it is apparent that sectors that are low technology and low value are the ones that have grown. Broadly speaking exports fall into two categories: textiles and other Small and Medium Enterprise (SME) industries across different sectors such as leather, chemical, medical goods and agricultural products. The challenge for Pakistan is to diversify this portfolio by implementing policies that contribute to successfully exporting new and more sophisticated products both within textiles and the SME sectors. A closer look at textiles and SMEs is telling. Transform textiles. Pakistan is the fourth largest producer and the third largest consumer of cotton in the world. The downstream textile and garments sector, considered to be low value addition, has grown the most and today this sector represents the single largest industrial sector. It employs approximately 38 per cent of the total manufacturing labour force, supports about 1.5 million farmers and contributes about 9 per cent to the country’s GDP. It is also consistently responsible for between 50 and 70 per cent of the country’s exports. During the past several decades, textiles have attracted the highest share of total capital investment. Significant progress has been made by an increase in upstream cotton cultivation and the downstream industry has developed from being a fabric producer and yarn exporter to exporting products with a higher value added content. Problems however remain. Cotton yields lag behind those of competing countries, irrigation methods are antiquated, and cotton picking, storage and transportation facilities continue to be poor resulting in contamination of cotton. The cotton produced remains of low quality, which restricts the types of products that can be made from it. This is evidenced by the value added sector where Pakistan has visibly slid down the value chain with gains in the low value added sectors and setbacks in the higher value added segments. Globally, Pakistan’s value added segments find it hard to compete effectively with goods from China, India, Bangladesh and Sri Lanka. This is further compounded by a poor policy framework, political turmoil, and the high cost of energy and transport. Despite the existence of a Ministry of Textiles, problems are faced by producers due to the shortage of qualified, skilled labour, absence of research 230and development, weak marketing capabilities and a general apathy to address problems proactively at the official level. This situation needs to be urgently addressed. As a core industry Pakistan’s textiles have the ability to transform its economic future. The sector has been mismanaged and misunderstood for decades. Pakistan’s natural advantage as a cotton producing country has thus been undermined while nations like Bangladesh, China, India, and Sri Lanka have been able to lower costs, attain higher exports and capture world market share without cotton-growing being the backbone of their economies. While some of the large Pakistani business groups have emerged amongst the most competitive textile producers in the world, this is not true for the textile sector as a whole, which remains fragmented. The more successful groups are those that are vertically integrated and have successfully positioned themselves in foreign markets, earning a significant percentage of their export revenues from value added products. The key to transforming the textile industry is to add value to cotton by better organisation and coordination from cotton ginning to the finished product which can add a new edge to the sector’s competitiveness. This could involve policies to support the import of plant and machinery, access to favourable financing terms, support to cotton growers, incentives for proper transportation and logistics and greater focus on penetrating export markets. This would assist producers to get to the finished goods stage with greater ease and allow greater economies of scale to develop. A hypothetical example to demonstrate the payback of value addition is as follows. If Pakistan were to utilise its cotton to produce high-quality shirts and trousers its exports could surge. Pakistan produces twelve million bales of cotton each year. Each bale contains 480 pounds of cotton. The production of one shirt and trouser combined consumes approximately two pounds of cotton. If Pakistan produced nothing but shirts and trousers, and sold one trouser and one shirt collectively for $25 in the international market, then, Pakistan could earn $72 billion in export earnings each year. Pakistan’s current textile and apparel exports are $10 billion. A textile strategy which encourages value addition, could therefore transform Pakistan’s economic landscape. One step in the right direction has been the introduction of the new National Textile Policy 2009-2014 announced by the Ministry of Textiles in 2009. This establishes an investment fund that aims at incentivising investments in specific areas including modernisation of machinery and 231technology, removing infrastructural bottlenecks, enhancing skills, better marketing and use of information and communication technology. The fund provides generous sector-specific and general rebates, re-financing schemes and grants. That said, such a policy falls short on implementation, as it has not resulted in the level of capital investment required to grow value added textiles to the level where they can start to make a meaningful contribution across the board for the economy as a whole. SME Sector. Often the official pre-occupation with the textile sector blindsides the government to other ‘value added’ exports in the SME sector. Whilst textile exports traditionally account for as much as 70 per cent of annual exports, remaining exports include SME sectors including food, petroleum products, leather, pharmaceuticals, engineering goods, cement, sports goods, carpets, surgical equipment, furniture, gems and jewellery. Most of these sectors are high value added, high margin and have a higher demand propensity in export markets. The key hurdle is that they account for a smaller percentage of Pakistan’s total exports and hence command little attention from government policy-makers. SME manufacturing enterprises generate 35 per cent of Pakistan’s manufacturing output, 85 per cent employment for non-agricultural labour and 25 per cent of exports. These are impressive statistics, yet they remain in the backwater of mainstream economic policy. What is urgently needed is a sustained and vigorous policy-driven growth in these sectors with strong forward and backward inter-industry linkages using the ‘inclusive’ growth model. With labour-input, a large component of capital and output, rapid SME growth can have a salutary impact on wages, employment, living standards and alleviating poverty. Much needs to be done to achieve this outcome. The government has large bureaucracies dealing with SME in all provinces but it is unclear what they do. Surveys of activity in this sector are undertaken, sometimes as infrequently as fifteen years, and a rather imprecise growth rate is calculated. This figure is then put into the National Income Accounts and repeated year-after-year until the next survey. The growth rate of the SME sector has been determined to be as low as 2.5 per cent per annum and has averaged between 7.5 per cent and 7.8 per cent per annum for the last five years. This is not the true rate of growth of the SME sector; rather it is a ‘plug in’ number, which economic managers use, in the GDP economic 232model. In Pakistan’s National Accounts, the SME growth rate and that of large scale manufacturing together combine to yield the total manufacturing sector growth. Perhaps with more accurate documentation, it would be possible to generate a more accurate assessment of growth rates for SME. So what is first needed is more and better information on what is going on in the SME sector from which most exports emanate. Second, growth in these SME sectors can be enhanced by technology inputs, trained labour and manufacturing or service capacity to scale up production as well as the marketing expertise in order to penetrate global markets. This can create a virtuous cycle of growth, employment creation, learning about new products and development. Second, the incentive structure needs to favour exports through judicious adjustment in trade, tax, finance and tariff policies. Special incentives should be given to exporters. If this ’tilt’ is sustained, new exports can surge. An examination of the rather non-descript category of ‘Miscellaneous Exports’ in the official export data turns up some surprising high-value items that Pakistan exports to some very sophisticated markets but the amounts are small and their year-on-year growth is fairly erratic. Third, the non-price determinants of exports need to be strengthened by emulating ‘best-practice’ techniques employed by the world’s leading exporters. Fourth, domestic and FDJ proposals that are aimed at exports should be given the highest priority and placed on a fast track for approval. FDI inflows offer the best route to securing discrete upward shifts in the technological progress function in the SME sector, simultaneously bringing in better managerial and marketing skills critical for exports. Fifth, at the firm level, companies have to find a uniquely Pakistani way to develop a game plan for themselves. To be successful, Pakistani firms have to build market shares in sectors where they have the ability to produce better and cheaper goods for international markets.

The Importance of Harnessing Entrepreneurial Talent for SME

Development

According to the MIT Entrepreneurship Centre at MIT Sloan School, it is imperative for rapidly developing economies to review the importance of supporting entrepreneurship as an urgent matter of public policy. In a similar vein, an Economist Intelligence Report emphasised the importance of government investment in education and Research and Development by highlighting that ‘waves of technically trained young people—steeped in the latest theories and techniques, and honed by some of the smartest minds in science and technology—do more to raise a country’s industrial competitiveness than all the tax breaks, development aid and government initiatives put together’.

Pakistan’s SME Development Vision as spelled out by the SME policy is ‘SME-led economic growth resulting in poverty reduction, creation of jobs and unleashing the entrepreneurial potential of the people of Pakistan’. The SME policy has a vast institutional network consisting of institutions like the Small and Medium Enterprise Authority (SMEDA), the National Productivity Organisation, the Pakistan Software Export Board (PSEB) and the Competitiveness Support Fund. Whilst these organisations have developed a great deal of capacity and can launch a number of high impact programs to encourage entrepreneurship, much more needs to be done in terms of coordination, impact and results.

One of the main concerns is that growth of small and medium sized businesses is still constrained due to limited access to financing, bureaucracy, and the absence of a skilled worked force with the tool kit for setting up a successful small business. Wherever such initiatives are underway, they suffer from limited funding, uneven and insufficient government support and lack of coordination. If properly harnessed, small enterprises have the ability to increase the per capita income to a level of US $10,000 in the next ten years. Whilst an institutional network exists, some of the key initiatives that need further capacity and focus are as follows. First, set up and fund training programs for small businesses in vocational schools and universities in urban and major rural areas. Second, banks should ensure adequate funding for small enterprises, which is based on cash flow lending versus asset-based models. Third, the government should fund an early stage equity fund to provide seed capital for early stage start-up ventures where the fund is managed on a private enterprise basis which could be sector specific such as high growth information technology, human development, agriculture, services, and industry. Fourth, efforts should be directed to encourage ideas, progress and innovation through the formation of clusters. Clusters inherently evolve because of 234entrepreneurship. For example, the technology cluster in Pakistan is Lahore and the textile cluster in Pakistan is Faisalabad and Karachi. Most successful businesses in Pakistan are founded by entrepreneurs who are located in a particular area; the cluster forms around these entrepreneurs. Therefore, focusing on entrepreneurship in clusters can have a significant impact, which reinforces the idea of an inclusive growth model that involves the private sector and focuses on investing in education, vocational training and entrepreneurship.

Define a Coherent Exchange Rate Policy

A ‘stable’ exchange rate is always thought to be a reflection of how ‘well’ the economy is being managed. Indeed, governments frequently intervene in exchange rate management matters and ask that the exchange rate is kept stable in nominal terms or only fluctuates around a tight band. An appreciating exchange rate is greeted with applause. Devaluation is always deemed to be bad. The reality is more nuanced. An exporter is interested in the ‘real’ value of the dollars/he earns per unit of exports, not the ’nominal’ amount. Thus the nominal exchange rate needs to be corrected for inflation-or more specifically, relative inflation- meaning Pakistan’s inflation vis-a-vis the inflation rates of our trading partners and competitors yields a Real Effective Exchange Rate (REER). Empirical studies show that exports do respond to changes in the REER because it is an important—albeit not the only—determinant of export success. Historically, and even now, there has been a strong anti-export bias in Pakistan with the REER tending towards an appreciation, which means the exporter is getting fewer and fewer real dollars per unit of exports. If exporters see that the improvement in real export profitability is likely to be fleeting or dissipate through future inflation or by changes in government policy, they will have little incentive to export and would prefer to sell in the domestic market. One way of forestalling REER appreciation is to allow for greater downward flexibility in the nominal exchange rate so as to yield a constant on rising REER. A better way is to reduce our adverse relative inflation differential as opposed to our trading partners and competitors. However, 235this would require highly disciplined macroeconomic policies (small fiscal deficits and a tight monetary policy stance with positive real interest rates) that can be sustained over time. Unfortunately, this is something that Pakistan has not been able to do. Brief periods of price stability have given way to extended periods of high inflation rooted in lax macroeconomic indiscipline.

Successful exporting countries, specifically in Asia, and more notably China, keep the REER slightly depreciated thus giving their exporters a lasting competitive edge. China is a good example. By keeping the Renminbi at a significantly lower level than that which would be dictated by market forces and the size of China’s foreign exchange reserves, China has emerged as an unstoppable export juggernaut. Of course in following such an exchange rate regime China has come in for a lot of criticism, especially from the US, because of its large and growing trade deficit with China which the US claims robs their economy of millions of jobs.

To establish if Pakistan would benefit from a similar policy it is important to examine some of the key economic data related to exchange rates, balance of payments and inflation. For purposes of analysis, the exchange rate over a three year period, between January, 2007 and July 2010, where the Pakistani Rupee underwent significant depreciation against the US dollar and other major currencies, will be taken as an example. From a level of Rs. 60.7/USD in January 2007 to Rs. 85.6/USD in July 2010, the value of the Pakistani Rupee had eroded by 38.5 per cent. Chiefly responsible for this sharp decline was the supply side shock from global commodities, in particular crude oil which shot up from approximately $80 per barrel to $140 per barrel. Being an oil importing country, the trade deficit burgeoned to $15.3 billion while Forex reserves dropped to just $6.7 billion. Inflation hit a peak of 25 per cent as the entire consumer basket was jolted by commodity prices and massive deficit financing from the central bank. During the same period exports grew from $17.3 billion in FY07 to $19.6 billion in FY10, while imports jumped from $27 billion to $31 billion. In simple terms the increase in oil prices thus fuelled the deficit in the balance of trade and the consequent devaluation of the Pakistani Rupee.

Would a policy of forced and greater devaluation have helped Pakistan in the medium to long term scenario? The problem with such a strategy is 236Pakistan’s unfavourable terms of trade. The terms of trade is the export price index relative to the import price index and helps gauge capital inflow and outflow in terms of 100 indices. In fact, a dose examination of the terms of trade suggests that Pakistan’s terms of trade are not only unfavourable but also deteriorating for all major categories except food and live animals which improved significantly in FY09. These have declined from 73.6 in FY05 to 63.8 in January 2007 to 54.9 in nine months FY10. This indicates that in FY05, for every unit of import Pakistan exported 73.6 per cent of the index value, and by nine months FY10 export unit relative to the import unit had dropped to54.9 per cent. These figures reveal that if Pakistan devalues its currency, the incremental cost paid for imports will be more than the additional benefit earned from exports on a relative time basis.

The key point is that the Real Effective Exchange Rate (REER) is what really matters to exports rather than the nominal exchange rate. From January 2007 the Pakistani Rupee has significantly depreciated, in nominal terms, against the USD. This indicates that the PKR has weakened against the USD and thus Pakistan’s exports to the US and other trading partners should have become more competitive, as they had become cheaper in units of foreign currency. However the REER paints a different picture; it takes the nominal exchange rate, adjusted for foreign price levels and then deflates it by domestic inflation. This index had during the same period appreciated and the PKR had strengthened by 5.8 per cent since January 2007. As a result instead of Pakistani exports getting cheaper, exports have become more expensive in the international market and hence less competitive.

The primary reason for this is domestic inflation. In FY08, CPI was 12 per cent, which spiked to 20.8 per cent in FY09 before settling down to 11.7 per cent in FY10. Essentially the domestic cost of manufacturing, transporting and selling our goods abroad has risen to such an extent that it has neutralised the advantage of a weak currency.

The skewed structure of Pakistan’s imports and the infrastructural inefficiencies inherent in the domestic economy prevent Pakistani exporters from benefiting from a weaker currency. This is partly because Pakistan is an oil-importing country with 34 per cent of the total import bill attributed to the import of crude and refined petroleum. A weaker PKR means a higher import bill, higher prices for transportation (7.5 per cent of CPI basket) and energy (7.5 per cent of CPI basket) not to mention the indirect effect on perishable 237food items, house rent, recreation and other components of the inflation basket. Higher costs not only erode the margins of exporters who already suffer from power shortages, security threats and high interest rates but force them to pass on the price increase to their international customers. Given that most Pakistani exports are low value added items, they also suffer from demand inelasticity. This means that a price decrease does not increase volumetric demand by enough to offset the revenue loss from lower prices. While it is tempting to think that a policy of deliberate PKR devaluation would improve export competitiveness, the reality is that domestic inflation, supply bottlenecks and fiscal indiscipline, would result in real appreciation as witnessed over the last three years and, in fact, make exports less competitive. The solution to increasing exports lies, therefore, in stabilising the macroeconomic environment, providing adequate infrastructure and security, access to credit, investment in product quality and value addition which are longer term policy objectives, all necessary conditions to complement a policy of maintaining a competitive exchange rate. The converse of this is to keep a stable exchange rate, which is what happened during the period, 2002-2007. During this period, Pakistan saw its exports rise from $9 billion to $17 billion. A stable currency policy allowed a steady build-up of reserves and investment flows. Investment rates climbed to as high as 23 per cent as foreign direct investment felt more confident that future returns would not be eroded by a weak currency. This allowed the liquidity cycle to ease up leading to a benign interest rate environment, reduced debt servicing. All good news for GDP growth as compared to previous years where low reserves encouraging dollarisation, low investment rates and relatively low growth.

So does a successful export-driven economy mean that Pakistan needs to use the exchange rate more aggressively? The focus has to be the Real Effective Exchange Rate, rather than the nominal exchange rate. Keeping REER competitive is a necessary but insufficient condition. If Pakistan can maintain a competitive REER, Pakistan can recoup lost competitiveness by focusing on supply side issues which control inflation or it can continue to play ‘catch up’ and do what is being done now which is a constant downward adjustment of the nominal exchange rate hindering export competitiveness.

Control Inflation

There is growing consensus among central bankers that medium- to long-term price stability is the overriding goal of monetary policy. Research has shown that maintaining low and stable inflation has helped economies to grow, as businesses, households and individual consumers are able to make better investment, savings and wage contract decisions. If inflation gets out of control either due to an over­ heating of the economy or supply side factors, central banks have generally resorted to monetary tightening as a means to control inflation. This has the knock on effect of reducing aggregate demand and feeding into slower growth.

The State Bank of Pakistan (SBP)—an independent institution with full autonomy on monetary policy—has delicately balanced two opposing objectives, an anti-inflation policy and a pro-growth policy. There has been an impressive array of reforms in this regard, including the Fiscal Responsibility Act and Debt Limitation Act of June 2003, yet the reform agenda needs to be boosted further in the current macro­ economic environment.

While inflation was not an issue in 2002-2008, the current challenges are more testing. In order to achieve the 7 per cent growth trajectory the SBP needs to keep inflation low. The recent monetary tightening in response to rising inflation has not been preferred strategy, not only because it is politically unpopular but also because it results in increasing debt servicing and could result in further weakness in the currency and another bout of inflation. With Pakistan’s high debt to GDP ratio as well as a growing fiscal deficit, control of inflation becomes a pressing priority to induce confidence in the business community and public at large about future price stability. The SBP alone cannot control inflation without the presence of a coordinated fiscal policy which requires support from the Ministry of Finance. The budget announced in June 2010 was a step in the right direction as it signalled a more responsible fiscal stance by the government. This would entail the government sticking to an agenda where unnecessary current expenditures are severely curtailed along with a clear policy for revenue enhancement. Recent indicators suggest that inflation is on the rise. This has been precipitated by the government’s decision to increase electricity tariffs, fuel prices, elimination of food subsidies and the imposition of a new ‘Reformed General Sales Tax’. Further tariff increases and rises in taxation have been announced by the government, partly driven by the additional 239resources required for rehabilitation and relief for flood affectees. The SBP is also pointing to aggregate demand picking up, led mainly by public sector consumption, while prospects for aggregate supply remain weak due to energy shortages and the poor law and order situation. These developments together with the rising total debt reinforce the need to have renewed efforts to keep inflation and the fiscal deficit under control. What can be done? First and most fundamentally, the government should announce a ‘Medium Term Financial Strategy’ (MTFS) for the next five years where a coordinated fiscal and monetary policy having a target band for inflation should form a cornerstone of the government’s approach. Setting an inflation target or a band for inflation would certainly help to engender positive expectations across the economy and help to reinforce a ‘mindset’ that the government is serious about controlling inflation. Given that the vast majority of people are sensitive to rising prices, the very poor and low income groups, as well as business and industry, lose from higher input and capital costs in a rising inflation scenario.

Inflation-targeting is also an appealing choice as it has worked in both developing and advanced countries. It is not an end in itself, but a means to an end, which is achieving price stability that can be defined as low and stable inflation. The real point is to get inflation down to, in line with, or maybe even below its major trading partners and competitors. If Pakistan can achieve this, then policy-makers will not need to depreciate its nominal exchange rate and play catch-up with the adverse relative inflation differential. Getting that adverse inflation differential down is therefore key. The target range within such a context should be between 5 to 8 per cent over the next five years.

Secondly, this strategy should be supplemented by having a closely aligned industry and trade policy, and a clear policy on raising the level of productivity for capital and labour in key export sectors as well as those sectors where capacity constraints result in price increases of goods and services. Examples of these sectors would include food, housing and energy- which collectively account for over 60 per cent of the consumer price index. In particular, at a time when most nations globally are scrambling for food security, Pakistan’s government would reap significant future dividends if it were to have a strong agricultural policy to encourage investments that enhance agricultural output and productivity. Increased attention to Research 240and Development would need to be an integral part of a productivity enhancement drive, particularly in agriculture and the SME sectors, which are export oriented. This is another way of improving competitiveness, which aims at cutting unit costs by raising productivity of capital and labour. To have a stable exchange rate raising productivity in the export sector is the only way to cut costs and increase export profitability. This would not only help to curb inflation but also allow an export surplus which would help in improving long term macroeconomic indicators.

Thirdly, the official consumer price index could be reconstituted to reduce the weight of food and energy which are dependent on exogenous factors and a global pricing mechanism which is beyond the control of governments. This would leave other items in the CPI basket such as wages, rent, medical care, transportation, textile and apparel goods prices intact and would be a more significant monitor of how successful the government is in terms of achieving its inflation target.

Fourthly, to reinforce the stable price ‘mindset’, the government could enact an Act of Parliament which compels subsequent governments to adhere to a consistent policy of bringing inflation within the target band. In the context of an Act of Parliament, caveats can be structured for unexpected natural disasters such as the 2010 floods that produced a sharp increase in the price of food and other necessities, which offset the benefits of an inflation targeting policy.

Conclusion

Despite turbulent economic and political headwinds over the last three decades Pakistan’s economy has not only avoided collapse but has recorded an average growth rate of over 5 per cent per annum. Pakistan’s medium and longer-term future will be driven by key demographic and economic trends. As the focus of much international attention, Pakistan has the opportunity to push ahead on key structural reforms. Couple with a steady flow of loans, assistance and investments, this has the potential to hedge any economic downturn in the short to medium term. The list of things Pakistan needs to do is not new. Yet they are difficult things to achieve and require a clearly defined implementation framework and the full support of government bureaucracy, industry, businesses and the public at large with priority given to those measures that can create jobs to accommodate new people entering the work force each year.

241While the full extent of damage emanating from the floods in Pakistan is not known at the time of writing this chapter, billions of dollars will be required for rebuilding and reconstruction. Whilst the floods have caused much misery and devastation the disaster can act as a catalyst to formulate a clear economic vision. The need for better governance, for creating social safety nets for the poor and for accelerating growth can become pressing national issues. This, in turn, can force the government in power to become more transparent and accountable to the public. There are two scenarios that can emerge. The best-case scenario is one where economics prevails over geo-political risks, and a collective will under the leadership of a credible government is created to transform the economic landscape of Pakistan. This can result in a change in perception about Pakistan, trigger an investment cycle targeting growth in infrastructure and propel Pakistan into the 7-8 per cent growth trajectory. The second scenario is one where future growth is unstable and low. Political and geo-political instability continues to weaken an already fragile economy and investment rates remain low due to the poor internal security situation. In this scenario, Pakistan’s population, instead of being a natural advantage, could turn into a crisis if young people are unable to find economic opportunities and where unmatched expectations result in discontentment, unemployment and growing disparities between the top and bottom end of the social pyramid.

Pakistan’s record in reform and policy implementation to achieve long- term economic development has at best been marked by missed opportunities and failures. The risks of failure are much greater today than at any time in the past, but so too are the rewards of meaningful reform.