Real income growth lags behind Asia(Pakistan’s per capita GDP growth has been one of the lowest in Asia)

Real income growth lags behind Asia
By Yousuf Nazar
Pakistan ranks as the seventh most dangerous country after Iraq, Sudan, Israel, Russia, Nigeria, and Columbia in a 121-nation study by the Economist Intelligence Unit.While such rankings can be subjective (it may be the 10th or 11th), this is not good news for the government which claims that Pakistan has made unprecedented economic progress during its tenure, recording one of the highest GDP growth rates.The reality is Pakistan’s per capita GDP growth has been one of the lowest in Asia and below the average of all low-income countries during 1999-2005, when measured in purchasing power parity terms as per the data in the World Bank’s Development Indicators released on April 15, 2007.The government uses statistics to make claims that cannot stand simple logical test and independent validation. For example, it cites the rise in per capita GDP to $833 in 2006 to support its claim that incomes have doubled in the past 6-7 years and Pakistan will soon become a middle-income country. This is simply misleading. The analysis based on the World Bank’s statistics reveals the true picture of the economic growth in Pakistan relative to the other developing countries.A widely recognised indicator of the level of prosperity is gross domestic product (GDP) on purchasing power parity (PPP) basis. Since nominal prices of different goods and services vary from country to country, this method of measurement neutralises those nominal differences by comparing what a similar basket of goods and services would cost in different countries. Hence, GDP measured on purchasing power parity basis is considered a more accurate measure of income level and standard of living.As shown in the graph, Pakistan’s yearly per capita income growth rate was only 4.62 per cent during 1999-2005 and lagged behind not just India’s 7.3 per cent but also that of similar developing countries with large populations, like Indonesia, Turkey, and the Philippines. These growth rates were derived from GDP per capita data on purchasing power parity basis, as published by the World Bank.While one-year data should not be used to comment on longer term trends, the above data for the six years belies government’s claims about one of the highest growth rates in the world and confirms the belief that the benefits of growth during the recent years have been somewhat eroded by a persistently high inflation. It is only logical that Pakistan with one of highest inflation rates in the developing world should see a slower growth in the real incomes and living standards when the rest of it is growing at 6-7 per cent with lower inflation averaging about 4-5 per cent compared to Pakistan’s 8-9 per cent. Hence these indicators are unlikely to change materially in one or two years.Other important World Bank development indicators (2005) also confirm the view that Pakistan remains behind its peers as shown below:Among this select group, Pakistan has the lowest per capita income in purchasing power terms, the lowest primary school enrolment rate, the highest infant mortality rate, the lowest electricity consumption per capita ( a measure of progress as well as industrialisation), and the highest level of military spending as a per cent of GDP. This is not surprising except for one indicator. Contrary to the widely held view among apologists and supporters of military dictatorships, the real per capita income is not only higher in India but the gap has increased since 1999. In that year, India’s per capita income was 25 per cent higher than Pakistan’s and in 2005 it was 46 per cent higher in purchasing power parity terms.This is not to say that Pakistan has not made any progress but to put it in a more realistic perspective beyond a narrow set of indicators like GDP growth, bank lending, consumption, foreign investments, etc. Progress in GDP growth terms has been good for most periods when military ruled the country. Yet, after the end of every military regime, the so-called progress turned out to be a bonanza that benefited a few at the expense of critical national development priorities while exacerbating social and regional polarisation.Assuming the elections will be held as per schedule even though the possibility of the imposition of emergency or even martial law cannot be completely ruled out, it is an appropriate time to judge the performance of this regime in the context of Pakistan history that has revolved around a debilitating cycle of military intervention, half-hearted reforms, failure, demoralisation and breakdown. We now appear to be passing through the disenchantment and demoralisation phase.Hitherto friendly international media has turned negative and some leading American papers have commented editorially on the gravity of the crisis. The New York Times in its May 23 editorial commented, “A succession of uniformed dictators has misruled Pakistan for more than half of its 60-year history. All have advertised themselves as great friends of Washington, but all have fanned extremism while discrediting America's reputation among ordinary Pakistanis. There is no security with General Musharraf. The United States belongs on the side of Pakistani democracy.”Never mind the crisis, the prime minister’s statements about the state of the economy and its prospects appear to be oblivious of worsening macro economic indicators and of growing anxiety in the street and the ‘bazaar’. It is claimed this year’s GDP growth will touch seven per cent, but the credibility of the government’s statistics is seriously questionable.According to its own data, inflation and exports target are going to be missed, development spending level is way short of target, current account deficit is forecast to reach 5.5-6 per cent of the GDP, and large scale industrial production growth has slowed down to eight per cent compared to 10 per cent in 2006, notwithstanding the fact the Federal Bureau of Statistics has not released quarterly manufacturing data after the first quarter of the current fiscal year as it did in the past.The stock market continues to rise, charges about manipulation notwithstanding, but the foreign investors’ buying has reduced to a trickle (about $5 million during May) after hitting a peak of $112 million during March 2007 and dropping to $52 million in April. Government borrowings have almost trebled to Rs212 billion during the current fiscal year from Rs73.5 billion last year. The crowding out of the funds to the private sector, accompanied by a more than 100 basis points increase in the average lending rate during the past year, cannot but negatively affect the growth in the next twelve months.Given the below average growth in rural areas and the concentration of 50 per cent of the urban population in the six largest cities to which bulk of the so-called ‘trickle down” seems to have been taken place; the high food inflation, growing income inequality and ostentatious consumption have only served to alienate the lower and lower middle income groups from the current regime.According to a public opinion poll conducted by the International Republican Institute (IRI) in March 2007, the economic issues received a much higher intensity of responses than did the non-economic issues with 92 per cent of Pakistanis terming inflation as the most important issue followed by unemployment (85 per cent). The country needs to face more fundamental questions of far reaching implications in the coming months in what is supposed to be an election year. The opposition parties should offer concrete and comprehensive programmes to address core economic issues instead of merely criticising the government for its failures.With the growing political uncertainty, the economic growth in Pakistan faces greater risks compared to its Asian competitors given its much higher dependency on foreign exchange flows including remittances, investments and aid in that order. The foreign investors’ buying of stocks has slowed, the privatisation programme is in trouble and the property market in Karachi is quiet. The biggest risk is the General will use the spreading disorder and the actions of an increasingly assertive judiciary and lawyers' community as justification to tighten the autocratic grip on power. This may cause the foreign capital flows to dry up, trigger a fall in stock and property markets, exacerbate the current account position, and increase pressure on an over-valued rupee to depreciate.A beleaguered administration is not in a position to impose new taxes and may find it difficult to contain the budget deficit at the current level. Neither it can afford to make big cuts in the development expenditure and is therefore likely to borrow more or print money. This will keep the upward pressure on interest rates to the detriment of the overall economy.Even if the General manages to come out of this crisis, it may come at a cost of sharing increased power with the politicians with his authority considerably weakened in the process. In this scenario, although the overall direction of the economic policies is unlikely to change, the uncertainty will not disappear as any alliance between the generals and the ‘liberal’ parties may serve to unite the rest of the opposition and provoke them into challenging the government with even greater force. In any event, a greater period of uncertainty seems to lie ahead and will continue to cast its long shadow on the economy until the current crisis resolves.yousufnazar@yahoo.com