Why Pakistan’s economy has stagnated, while Bangladesh and India have made rapid progress

A review of Pakistan’s economic data for this century triggers utter gloom. On almost all key indicators, the country has either regressed or stagnated even while Bangladesh and India have made rapid progress.

Pakistan must grow at 6% to 7% annually to absorb its youth bulge, but it has done so only twice (2003-2005) in the 21st century. However, inflation has exceeded that level in 12 years, piling misery on the poor. The industrial sector usually absorbs the youth bulge.

Unfortunately, it has stagnated at around 20% of the GDP for decades while the service sector has grown from around 50% to 60%. Many poorer states achieve growth via exports. Pakistan’s exports have fallen from 15% of GDP in 2003 to around 10%. Foreign direct investment aids growth too. But it has fallen from 3.7% of GDP in 2007 to 1%.

Pakistan only attracts high FDI via close ties with big powers like the United States or China, while its neighbours attract it even without such ties. Around 80% of FDI since 2000 has gone into non-exportable sectors that do not directly give foreign earnings. Overall, investment has fallen from 16.8% of GDP in 2005-2006 to 13% now. But consumption constitutes nearly 75% of GDP, which is very high compared to the fast-growing Asian Tigers.

The issues of slow growth are upped by external and fiscal deficits. Pakistan had a current account surplus only three times this century but high deficits exceeding 3% of GDP six times. The external deficit is kept in check by remittances, the only key indicator that has grown from less than 2% of GDP in 2000 to 8%. But while FDI and exports boost industry, remittances largely fuel high consumption and reflect family separation.

A fiscal deficit occurs annually and has exceeded 5% of GDP in most years since 2000. The tax-to-GDP ratio has fallen from 13% in the 1990s to 10%. Health and education expenses are stagnant at around 3% and 1% of GDP. Debt servicing as a ratio of tax revenues has steadily increased. The defence outlays-to-GDP ratio has fallen but remains among the highest globally. Public debt has increased from around 60% of GDP in 2010 to nearly 90%.

Thus, only remittances show a positive trend. The picture is bleakest under Imran Khan’s Pakistan Tehreek-e-Insaf as outcomes fall below even the modest pre-2018 levels on almost every major indicator. Even worse, the peaks early this century were achieved via close but unreliable US ties, which gave long-term problems of terrorism that wiped out fleeting economic gains.

The last century was no better, with stagnancy in the 1950s, 1970s and 1990s and short-term growth in the 1960s and 1980s fed by US ties that gave rise to high inequity, the 1971 war with India and long-term extremism in the 1980s.

Establishment’s grip

So why can Pakistan not even match its neighbours with similar history, location and culture? Many may point to corruption and dynastic politics. But Pakistan’s neighbours have those too. Bad policies by both military and civilian regimes seem a more plausible cause.

Every few months, some global or national institution proudly trots out a glossy report providing grandiose policy options. But they mostly gather dust. So the issue is not ignorance of correct policies. The puzzle is why can the state not adopt good policies and the private sector good strategies for growth?

This reflects overall societal incompetence in the public and private sectors compared even with Pakistan’s neighbours. A comparison with them shows that the cause is not corruption and dynastic politics, which they also have, but our evolution as a security state under the vice-like grip of our deep state. This evolution has produced political instability as civilian prime ministers never complete terms and must share power with the defence establishment. The perverse patronage politics Pakistan sees today was deliberately created by former President Muhammad Zia-ul-Haq to control politics.

Social retrogression as fake dogma has been unleashed by certain elements to control society, resulting in extremism, docility, risk aversion, lack of innovation and a general societal dumbing down. Pakistan suffers from foreign dependence in currying favours with big powers to checkmate India. Meanwhile, big businesses run by the security establishment allegedly benefit generously from state favours while the state thrives on external largesse and the private sector on state largesse instead of quality and innovation. All this chokes economic vitality. A stagnant economy thus reflects a stagnant society.

Pakistan is now told it will pivot from geo-security to geoeconomics. Alas, those trained in security cannot deliver on the economy. Those part of the problem cannot be part of the solution. Also the massive damage inflicted on the social and political fabric of society over 40 years will take ages to undo even if the establishment loosens its grip. Thus, anyone expecting rapid progress in Pakistan will be disappointed.

This article first appeared in Dawn.