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Budget: The Burdens of Success

Dr.Ak mal Hussain
Newspaper: Daily Times
Dated: Tuesday, June 7 2005

The high GDP growth rate over the last two years combined with fiscal stability is suggestive of a strong economic turn around for which the government of President Musharraf can take due credit. However the policy challenge is to simultaneously sustain the high economic growth rate and at the same time restructure it for rapid poverty reduction. In this context four structural features of Pakistan's economy need to be addressed urgently: (1) The continued low investment and savings rates as a percentage of GDP. The gross fixed investment/GDP ratio which is an indicator of capital formation continues to stagnate at 15.3 percent this year, being slightly lower than in the year 1999-2000 when it was 16 percent and substantially lower than the average for the period 1978-88 when it was 16.8 percent. This suggests that the observed growth in the manufacturing sector is essentially due to improved capacity utilization rather than establishment of new production units. Similarly the sharp increase in the growth of agriculture is due to timely rain fall rather than the necessary investment and institutional change for sustaining agriculture growth. (2) The second policy challenge is to restructure GDP growth for rapid poverty reduction. This requires an increase in the weight not of consumer durables (as has happened in the last two years) but in the weight of the incomes of the small farm sector (especially milk) and small scale industries. (3) The narrow export base and its continued concentration on low value added products which results in balance of payments pressures building up to threaten the sustainability of growth. This has indeed happened this year as the current account of the balance of payments has shifted from surplus to deficit, requiring increased foreign financing. In the short term respite can be obtained by an annual increase of at least three billion US dollars of foreign private investment (Can this happen given the law and order situation as it stands?). In the medium term the solution lies in export diversification, for which establishment of an institutional structure is needed rather than mere tax incentives. (4) The doubling of the inflation rate this year is indicative of the inadequate production base to respond to increased demand generated through the government's fiscal and monetary policy. This again requires building institutions for training the labour force and creating the environment for establishment of new production units. In their absence higher growth with inflation will result in increased inequality and poverty.

The budget this year unlike the 1990s has commendable strategic focus in terms of the allocations for improved irrigation infrastructure, and increased emphasis on education and health. However for these allocations to be translated into increased disbursements and concrete outcomes, a major programme for institutional capacity building will have to be undertaken. In short, it is precisely the economic turn around achieved by the Musharraf government that has changed the policy challenge from budgetary allocations to institution building for sustaining economic growth and restructuring it in favour of the poor.



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