Global macroeconomic fundamentals seem edgy. This is so because the world has failed to get its groove back in the aftermath of the 2008 subprime financial crisis. The global economy seems to be in a liquidity trap as economic fundamentals increasingly appear to be inelastic to policy responses. The levels of growth witnessed in the pre-crisis period are not the same anymore. Free market Capitalism has often shouldered the blame of increased market liberalism, leading to volatility in the markets and a subdued market sentiment. If the free market world has on one hand seen immaculate wealth accumulation, it has on the other hand, been ensnared by periodic exogenous shocks. The world of free trade has never been without the facility of such shocks. We have witnessed a spate of booms and busts, since the inception of the gold standard and the rise of American free market in the last quarter of the 19th century.
A blacksmith takes a break from work at a foundry in Lahore
According to a recent report published by the United Nations Department of Economic and Social Affairs, most global economies have shifted to a lower growth trajectory. The world gross product as per this report is estimated to be 3.1 percent, marginally better than the figures reported in the preceding year. Economies which were more exposed to the US and Europe in terms of their export driven growth strategies have suffered significantly. A strong US recovery holds the key for major economic blocs around the world. The US economy is expected to show minor signs of improvement, likely to expand by 2.8 percent in 2015. However major growth blocs have emerged on the global macroeconomic stage in the aftermath of the financial crisis. The world has witnessed divergent growth. Major emerging market players including China, India and Brazil have turned inwards as part of a widespread belief of decoupling themselves from the US economy. The strategy to an extent has borne fruit. The sovereign wealth funds of the Middle East have also begun to explore diversification out of the US markets. As Warren Buffet outrightly claims, diversification is the key towards sustainable growth in the short to medium term. However, as the US gets back on its feet once again, it should stand to benefit more from stronger emerging markets. In the midst of these global developments, the UN report highlights that South Asian economies are finally realizing their true economic potential, save for certain geopolitical issues like terrorism, which has become a regional concern. The report notes that South Asia’s economic growth is set to reach a four year high of 5.4 percent in 2015. This is true, courtesy a resurgent Indian economy which supposedly accounts for 70 percent of the region’s economic output. Other regional economies like Bangladesh and Iran are also likely to grow in the forecast period.
Pakistan's labor markets will see robust growth as China transitions to a service-oriented consumption economy
But where does Pakistan stand, given these favorable upswings in the region? The report not so surprisingly puts Pakistan at the bottom of the South Asian economies due to its fragile macroeconomic fundamentals, subdued fixed investment and shortage of domestic savings. Pakistan’s estimated growth for 2015 is lower than 5 percent, which is lower than other countries in the region. The dynamics of this moderate growth are mostly domestic, courtesy a government which lacks the vision for major economic reforms and ongoing security concerns which is increasingly making Pakistan an unpopular destination for foreign investors. Despite these challenges, there is a silent free market revolution in Pakistan. This means that although Pakistan’s short term outlook does not look all too promising, its medium to long term outlook is extremely positive. Pakistan is touted to benefit and be a very important player in South Asia’s economic emergence. As China and India turn inwards and try to strengthen their consumption spending, Pakistan is likely to benefit through spillover growth. It is clearly not in India’s interest to jeopardize Pakistan’s economic prospects as an unstable Pakistan on the border will also prove a bane for them. Pakistan’s labor markets are likely to see robust growth in the coming years as China in particular transitions to a more service oriented consumption economy. China has the capacity to sustain lower growth as it focuses more on lifting the quality of development domestically. This in turn means more opportunities for regional development and trade. Demand for more infrastructure projects in Pakistan will be more a result of a decoupled Chinese economy from the US than a committed local government. The effects of regional globalization will soon begin to blanket Pakistan’s massive labor force potential. There is robust demand for Chinese denominated debt by foreign investors, meaning China’s reliance on inward growth is gradually gaining currency with international investors, who are also looking for diversification and higher yields. As China restructures itself through investments in sectors leading to long term sustainable growth, it would require more regional trade and cooperation. This eventually will lead to an upsurge in private investment activity in Pakistan in both small scale and large scale infrastructure projects. The interest shown by the Chinese Three Gorges investment company in Pakistan is a good case in point. The Chinese Development Bank is also showing interest. According to a recent statement by Morgan Stanley’s Chief Investment Strategist, Dr David M Darst, Pakistan is likely to realize its true potential in the coming years, courtesy its demographics, which are suitably positioned for an economic take off.
A fully recovered US economy will also bring greater benefits to Pakistan
In the midst of these developments, a fully recovered US economy will also bring greater benefits to Pakistan through foreign investments in the region mainly in the services sector. For now all major governments in the South Asian region must fully focus on regional development through instigating widespread reforms in every sector. The fruits of regional globalization and a fast changing global economy could possibly be multiplied through a committed leadership. It is here that Pakistan lags behind, despite its private sector potential. With external forces already working in Pakistan’s favor, all that the government must attempt to do is to provide a system of governance that facilitates foreign investment.
