Is there a Growth Model?
A country with over 230 million people cannot be governed at the whims of a few men in uniform. Some provide the example of China in support of their case for an authoritarian rule. The ideological debate in Pakistan, if there is one, tends to oversimplify the issues with liberal use of the jargons such as democracy and dictatorship, neo-liberalism and socialism.
Capitalism played a critical role in making America the richest and most powerful country in the world. Admittedly, there is not just one market model. There are striking differences between the Japanese version of the market system and the German, Swedish, and American versions.
China and South Korea chose the path of state-directed growth despite the differences in their political systems. It is wise to remember the reasoning – associated with among others, the Indian Nobel Prize-winning economist Amartya Sen – that the question of whether democracy encourages or retards development is part of a false distinction. Democracy and institutional development are part of the development and so are not to be judged as drivers of it.
Historically, Japan followed a slow but steady course toward a democratic culture and initiated Asia’s first modernization program. South Korea and Taiwan followed an authoritarian route for decades after the Second World War before moving towards democratization in the 1980s. China has been a one-party state but so has North Korea. Hence, it is difficult to argue whether democracy or authoritarianism alone can explain Japan’s remarkable success or China’s miracle.
Some Pakistani intellectuals like Hamza Alvi attributed Pakistan’s problems to an “overdeveloped state” – a legacy it has inherited from the colonial-era government. However, this is true for many countries including South Korea, Taiwan, and Singapore. Perhaps, even that theory does not offer a sufficient explanation of why Pakistan could not evolve as a tenable state and failed to develop.
How Asia Works: Success and Failure in the World's Most Dynamic Region, written by Joe Studwell, is structured around the argument that the key to economic success in Northeast Asia has been a combination of land reform, export-oriented industrialization, and strategic state intervention in the economy, while the key to failure in Southeast Asia has been the failure to implement land reform, the reliance on commodity exports, and the absence of effective state intervention.
Studwell makes valid points notwithstanding the criticism of the book that it oversimplifies the factors that drive economic development, ignoring the role of cultural factors, geopolitical considerations, and global economic trends in shaping the economic trajectories of different countries. For example, the book's narrow focus on state intervention as the key driver of economic growth fails to account for the role of private enterprise and entrepreneurship in fostering innovation and competitiveness, such as in South Korea, which produced global brands such as Samsung and Hyundai.
Ha-Joon Chang, a Korean economist at Cambridge University, is a leading advocate of state-led development but even he accepts that “both democracy and markets are fundamental building blocks but we need to balance them.”
A globally-renowned economist William Easterly, who worked for the World Bank for sixteen years, maintains that global poverty has largely been viewed as a technical problem that merely requires the right “expert” solutions. According to him, experts recommend solutions that fix immediate problems without addressing the political oppression that created the problems in the first place. They address the symptoms of poverty but ignore the true cause: the absence of political and economic rights.
Yuen Yuen Ang, a leading expert on China, maintains that there is no one-size-fits-all right model for development. Particular solutions for market promotion vary over the course of development, within countries, and even within the locales of a single country.
Joseph Stiglitz has been a fierce critic of global financial institutions such as the IMF. However, he maintains that abandoning globalization is neither feasible nor desirable. ‘Globalization has also brought huge benefits –East Asia’s success was based on globalization, especially on the opportunities for trade, and increased access to markets and technology.” Stiglitz believes that the problem is not with globalization, but with how it has been managed.
It has also become more challenging to simply copy the manufacturing-led export growth models from the 1980s due to an array of issues. There exists an international rules-based order which makes it difficult to erect high tariff barriers. Moreover, automation in manufacturing coupled with the rise of artificial intelligence, anti-globalization trends and Pakistan’s relatively uneducated and low skilled workforce all stand as obstacles towards such a strategy.
The vehicle for change in the early stages of development in China, Japan, South Korea, and Taiwan was a series of land reform programs that involved distributing land and empowering the farmers.
Dercon, one of the world’s leading development economists, argues that the answer lies not in a specific set of policies, but rather in a key ‘development bargain’, whereby a country’s elites shift from protecting their own positions to gambling on a growth-based future. Despite the imperfections of such bargains, China is among the most striking success stories.
Throughout the Chinese Cultural Revolution, political ideology took priority over the economy. After Mao’s death in 1976, an internal power struggle ensued between Mao’s supporters and those who thought that the dominance of the political ideology posed an existential threat to the party and the state. In 1978, Deng Xiaoping emerged as the architect of the reforms that put economic development as the top state priority.
China’s success was especially remarkable because in the two decades prior to 1979 growth in per capita terms had been 2.8% a year (still higher than Pakistan’s recent 25 years average), in contrast to the 8.5% a year in the subsequent four decades.
China started with what were fundamentally governance reforms. That was still state-led development, but the Chinese state had to change fundamentally how it governed the economy. Initially, the economic structure was not changed; what changed was who could make decisions.
The vehicle for change in the early stages of development in China, Japan, South Korea, and Taiwan was a series of land reform programs that involved distributing land and empowering the farmers. In general, the traditional landlord-tenant relationship was abolished, and a new class of self-employed farmers emerged as an outcome of the land reforms process.
Both China and Vietnam have been ruled by strong and well-organized communist parties. China had built powerful public administration structures over a very long period of its history. However, even in China, some of the biggest companies (like Tencent and Alibaba) are privately owned.
Both China and Vietnam opened the doors to foreign private investors and benefited. In 2020, China overtook the U.S. as the world’s top destination for new foreign direct investment. In 2020, Vietnam was among the 20 top countries in the world in terms of FDI attraction with US$28.53 billion. The figure rose to US$31.15 billion in 2021, which stood at US$27.72 billion in 2022. In Vietnam, the average GDP generated in the FDI sector makes up 19.8% of the GDP of the whole economy. It employs nearly 5 million laborers and produces 42% of the total profit of the business sector.
In Indonesia, rulers and elites have had tendencies like what we see in Pakistan. Indonesia is the largest country in Southeast Asia; whether you look at it by the size of its economy, population, or sheer landmass. It’s a very far-flung country made up of some 17,000 islands and is home to the world’s largest Muslim population and fourth largest overall. Indonesia’s economy relies heavily on exporting commodities, such as palm oil, coal, and nickel. Indonesia has come a long way from 1998 when its economy contracted by 13 %. Despite its population growth rate of 1.2%, its real GDP per capita grew at 3.8% per annum (twice that of Pakistan) during the past 20 years.
The military establishment has demonized, and has criminalized politics to a degree that, save for incompetent and corrupt individuals or creations of the establishment, few wish to participate in. The people yearn for change, but Pakistani military and political leaders seem to excel in only one game: the pursuit of power.
Indonesia did not have a strong and competent state, like China’s, that could align itself easily to act in a determined, persistent way to drive growth and development. After the removal of Indonesia’s military dictator General Suharto’s family from power in 1997, Indonesia gradually moved to a more accountable democratic system. There was too much contestation, and too many different interests at play in Indonesia. So, to achieve success, the state had to withdraw from regulating the economy too rigidly, opening up and letting market forces play a bigger role. Following the fall of Suharto in 1997, governance structures underwent sweeping reforms, with four constitutional amendments revamping the executive, legislative, and judicial branches. Chief among them is the delegation of power and authority to its 38 provinces.
While governance reforms incorporating deregulation of decision making, agriculture reforms, infrastructure, export orientation, and urban growth are useful ingredients for growth in any country, we should be careful before jumping to the conclusion that a state-led development would always work elsewhere by just copying what China or Vietnam did. Ultimately, any growth strategies that Pakistan adopts should balance democracy, markets, and state-led development in a broader international context to achieve long-term economic prosperity and development.
I would like to emphasize that there is no silver bullet that can solve Pakistan’s crises. I wish it were as simple as some or many would like to believe. The challenges are formidable but not insurmountable. This section, while acutely conscious of this reality, provides a comparison with some other countries that faced far worse situations. It also notes the need to address some of the issues on a priority basis. I don’t pretend that they will solve all the problems but given the gravity of the crises, prioritization of immediate policy initiatives is warranted as a practical matter.
Pakistan's political leaders agree that political stability is necessary to move forward, and that the military's interference in politics is the principal reason for Pakistan's failure to evolve as a functioning democracy. However, the distinction between the military and civilian politicians is partly false. Every major political leader in Pakistan has been willing to cooperate with the military for the sake of getting into power. Since the political leaders view the military, not their voters, as the source of power, they pay little attention to improving governance and reform.
The military establishment has demonized, and has criminalized politics to a degree that, save for incompetent and corrupt individuals or creations of the establishment, few wish to participate in. The people yearn for change, but Pakistani military and political leaders seem to excel in only one game: the pursuit of power.
Good governance and inclusive institutions have become popular buzzwords following the publication of the influential book Why Nations Fail authored by Daron Acemoglu and James Robinson. However, Oxford’s Stefan Dercon has termed it as a “deeply pessimistic agenda for change or how change may be supported if history is to blame: countries appear to be told to buy ‘buy yourself a better history’.”
China, South Korea, Taiwan and more recently Indonesia and Bangladesh did not have inclusive political and economic institutions when they started their reform programs. Korea was widely criticized for promoting ‘crony capitalism’ of Chaebols. China, after the destruction wreaked by the cultural revolution, hardly had strong institutions to deliver the kind of take-off it achieved post-1979.
Bangladesh with its volatile, violent, and corrupt politics was once described by a U.S. diplomat as a basket case – a phrase later popularized by Henry Kissinger – still, it survived and moved ahead, its current difficulties notwithstanding. In Bangladesh, infant mortality is 26 deaths in 1,000 live births, lower than the 28 in India. Female literacy is 72%, higher than India's at 66%. The female rate of labor force participation is 36%, compared to 20% for India.
Areas of Immediate Policy Initiatives
A practical implication of Pakistan’s vulnerabilities is that its economic, political, defense and foreign policy issues have become entangled and complex. That we must rid ourselves of the current elite bargain and shift to a development bargain is critical, such that we are able to adequately respond to growing priorities of our state in the horizon.
These priorities are as follows: external debt restructuring, energy security, food security, and technology and education. Concurrently, we need to take urgent measures to build capacity of the government institutions, because without it, no policy implementation would have a reasonable chance of success, no matter how good it might look on paper.
The topmost priority for Pakistan and its foreign policy should be to persuade China, the IMF and the Paris Club of creditors to start debt-restructuring negotiations. There is no way Pakistan can hope to meet its external debt obligations of around $75 billion during the next three years, so reprofiling or restructuring its external debt is essential. Any further delay in starting this process will only aggravate the country’s economic problems – by then, even the IMF bailout and some more loans from friendly countries will not be enough.
China is Pakistan’s largest bilateral creditor with about $30bn in total debt, which represents around 30 per cent of the country’s total external official debt. In addition, Pakistan owes $1.1bn to Chinese Independent Power Plants (IPPs) for electricity purchases. Last December, the Pakistani government agreed to repay this debt in installments. But this is likely to have displeased the IMF, which in August 2022 expected the government to renegotiate its power purchase agreements. Pakistan tried to renegotiate but China refused.
Pakistan is squeezed between IMF demands and Chinese interests. Rescheduling debts will provide some relief, but who will bite the bullet first? China or the international financial institutions that are owed $41bn?
No sector of the economy is more important at the current juncture than power generation and distribution. The price of electricity feeds into everything, and the escalating cost has a crippling effect on ordinary lives and all economic activity.
Pakistan’s energy sector is particularly vulnerable to exogenous shocks and rising input costs due to the country's reliance on imported fossil fuels. In 2021-22, about 61% of the power came from fossil fuels, 24% from hydro, 12% from nuclear, and a pittance — 3% — from renewable energy such as wind, solar and biomass. In 2022, U.K. renewables provided 38% of the country’s electricity generation. Coal remained the most important energy source for electricity generation in Germany in 2022. Around one-third of the electricity generated in Germany came from coal-fired power plants, but wind power was the second most important energy source in Germany last year with a share of 24.1%.
Pakistan faced a massive energy crisis even before the floods, as its energy import costs skyrocketed due to soaring global commodity prices. Islamabad paid $4.9 billion for its LNG import bill alone for the year ending June 2022.
The privatization mantra for fixing the woes of the power distribution sector is common but suffers from a major conceptual flaw. It is hard to find private sector investors with deep pockets who have the resources to invest in the distribution sector, which would require large investments.
Pakistan’s flawed energy policies lie at the core of the recent economic crises and rising circular debt. According to Kamal Munir, pro vice chancellor of the University of Cambridge, the World Bank, IMF and many advisers to the government have been at the forefront of creating the myth which suggests that the energy crisis is essentially a product of user subsidies, stealing of electricity and distribution losses. The reality is that, rather than users, it is the producers who are being generously subsidized and that is where the government will have to intervene if they wish to ever reverse the rot. Dogma is not healthy, be it of leftists or that of market fundamentalists. The latter would do well to remember that even in South Korea and Singapore, electricity generation and distribution is largely under control of state-owned entities. The reason is simple: energy security.
Pakistan may need to take extraordinary steps to find a sustainable solution to the energy crisis. I do not see a sustainable resolution without a major state intervention aimed at taking over the private power generation by buying the equity at market prices and replacing the foreign currency debt with local currency debt. This may entail negotiations with China at the highest levels of the government. Besides restructuring of the existing power sector, investment in solar, wind, hydro, and nuclear energy sources will be needed. Pakistan’s fiscal policies are anti-investment because they directly or indirectly encourage investment in low productive areas such as property. It is difficult to attract investment in productive sectors unless these policies are radically changed. If they are not, Pakistan is doomed to sink deeper into the quagmire of debt.
The privatization mantra for fixing the woes of the power distribution sector is common but suffers from a major conceptual flaw. It is hard to find private sector investors with deep pockets who have the resources to invest in the distribution sector, which would require large investments. It would be more practical to ask the provinces to accept the responsibility of power distribution and fund, at least in part, the distribution companies through better collection and provincial resources. The governance of regional power companies should involve private sector capital and expertise through listing them on stock exchanges as South Korea has done.
Climate Change and Food Security
Weather events are increasingly occurring with greater frequency and severity in temperate and tropical regions. The extreme weather in the region has made all major and minor crops extremely vulnerable to climate change.
An average Pakistani household spends 50.8% of monthly income on food. This makes them particularly vulnerable to shocks, including high food prices. With food inflation running at the annual rate of over 40%, food security is of utmost relevance to most Pakistanis. A national nutrition survey 2018 showed that 36.9% of the population faces food insecurity. Primarily, this is due to limited economic access by the poorest and most vulnerable group of the population – particularly women – to an adequate and diverse diet.
On the other hand, crop agriculture productivity in Pakistan has declined over the last 25 years at an average annual rate of –1.15% while its population has been increasing at the rate of around 1.8% per year.
Food security is also linked to energy security. Vaclav Smil is one of the world’s top environmental scientists and was named by Foreign Policy magazine to its list of Top 100 Global Thinkers. He believes that “for decades it will be impossible to adequately feed the planet without using fossil fuels as sources of energy and raw materials.”
Hence, ensuring long term supply of natural gas must be a cornerstone of energy and food security policies. Iran is the second biggest supplier of natural gas to Turkey after Russia. Pakistan needs to attach the highest importance to securing natural gas from Iran and should make it a top foreign policy priority to seek sanction waivers from the United States.
Education and Technology
Why must education and technology be the top most national priority both in the immediate future as well as in the long term? We can look onto the rest of the world for answers.
Between 1909 and 1949, when the U.S. economy doubled its gross output per hours of work, 88% of that increase was attributed to technological advances by Robert Solow, a Nobel Laureate and a Professor of Economics at the Massachusetts Institute of Technology. Furthermore, Edward Fulton Denison, a distinguished American economist, came up with the following allocation for U.S. economic growth between 1929 and 1982: 52% due to advances in knowledge, 16% due to improved resource allocation (labor shift farming to industry) and 18% due to economies of scale.
On the other hand, India’s homegrown instant payment system has remade commerce and pulled millions into the formal economy. The scan-and-pay system is one pillar of what has been described as the country’s “digital public infrastructure,” with a foundation laid by the government. It has made daily life more convenient, expanded banking services like credit and savings to millions more Indians, and extended the reach of government programs and tax collection. The use of technology cannot be expanded at mass scale without increasing literacy levels.
Once one of the poorest countries following the Korean War in the 1950s, South Korea rebuilt its economy from scratch. With barely any natural resources available, the only asset that Korea has had to rely on is its people, who have acted as a cornerstone of the extraordinary economic growth known as the Miracle on the Han River. The country’s number one focus was to elevate education, and within just 10 years following the Korean War, illiteracy plummeted from 78% to 4%. Education played a similar role in Taiwan. By the late 1980s, vocational training (mostly focused on manufacturing) constituted 55% of tertiary education in Taiwan, while less than 10% of students took humanities subjects.
With regard to education, the Covid-19 pandemic has accelerated a global digital and data-driven transformation, with digital technologies now being leveraged for work, leisure, and learning. Digital literacy has become almost as important as traditional literacy. Bangladesh is reaping the benefits of a higher literacy rate and reducing gender-based discrimination. Bangladesh is the second largest source of online workers, according to a study by the Oxford Internet Institute (OII), a multidisciplinary research and teaching wing of the University of Oxford. The result of the study put Bangladesh just below India and on top of the United States. India, the largest overall supplier of online laborers provides 24% of the total global online workers followed by Bangladesh with 16% percent and the US with 12%.
Pakistan’s current system is designed to serve the upper and upper middle-income classes. Their children normally take O and A levels exams and can apply to foreign universities. The rest are condemned to live as second-rate citizens. This wall built around protecting class interests must be brought down.
Additionally in Bangladesh, the UNDP’s Aspire to Innovate (a2i) initiative is providing training on digital literacy to thousands of female entrepreneurs, and through their teacher's portal, more than 200,000 female teachers now have access to high-quality online educational materials.
In comparison, Pakistan greatly contrasts with other actors when it comes to education. Vietnam spent 4.9% of its GDP on education in 2011-20 according to the National Institute of Educational Sciences. As a % of GDP, it is more than 3 times that of Pakistan. Average years of schooling in Pakistan is 5.2 vs 10.4 in Malaysia which spends 4% of GDP on education. A private sector solution even in urban areas will not work. It has not worked even in Kuala Lumpur or Singapore. Except for a few institutions, Pakistan’s education system is a disaster. Four out of five children in Pakistan cannot read by age 10. According to one academic – Dr. Ayesha Razzaque – “we are witnessing the gradual breakdown in internal and external governance of universities.”
Pakistan must use technology to reduce adult illiteracy and revolutionize the primary and high school education system. It must launch this effort on a war footing to achieve a 90% literacy rate within 10 years. Pakistan’s total spending (federal and provincial) on education is 1.4% of its GDP, compared to India’s 2.9%, and an average of 4% of the GDP in South Asia, Africa, and Latin America and around 3.5%-4% in the developing countries of Southeast Asia.
Following the adoption of 18th amendment in the constitution in 2010 provincial governments have increased their education budgets but have failed to mobilize resources and increase revenues. Provincial and local governments must raise revenues by (a) increasing tax collections from agriculture sector and (b) imposing taxes on property. The federal government should eliminate tax exemptions to the rich and divert a portion of revenues, as raised, directly to the local governments. Tax reform must include proper taxation of and its collection from the real estate sector; a reform that has been avoided by all governments and the military’s top brass. This is one of the biggest distortions in the economy and must be removed.
Education boards at divisional level should have the primary responsibility for managing primary and high schools. The transition to a new system would have to be gradual but this should be ensured through legislation, if necessary. These boards should have representation from district administration, teachers, and parents.
The recruitment of teachers should be decentralized with responsibility transferred to the divisional boards. However, all teachers should be required to sit for a common exam to test if they meet minimum standards. The federal and provincial governments should set up an independent body with the exclusive task of conducting these exams.
To meet this ambitious goal of reducing literacy, teachers will need to be trained at a mass scale and the existing teachers will need to upgrade their skills given the abysmal quality of education. Pakistan should enter strategic partnerships with countries like South Korea, Japan, Singapore, and Australia and seek assistance.
A word on our curriculum: Pakistan’s current system is designed to serve the upper and upper middle-income classes. Their children normally take O and A levels exams and can apply to foreign universities. The rest are condemned to live as second-rate citizens. This wall built around protecting class interests must be brought down. The class issue has been clouded by the debate on the instruction in mother tongue. This is not such a complex issue. One just must visit Dalian province in China or state-run schools in Singapore to understand why. They teach both English and mother tongue. Given the information explosion in the new digital world, children without good English language proficiency will be at a disadvantage, perhaps forever. If we want to have an egalitarian system, no child should suffer from such a disadvantage. The provincial and the local governments will have to take the lead if Pakistan is to win the war against illiteracy with an explicit goal of achieving 90% literacy rate within 10 years.
Decades of mismanagement, political manipulation and corruption have rendered Pakistan’s civil service incapable of providing effective governance and basic public services. The country’s civil servants are widely seen as unresponsive and corrupt, and bureaucratic procedures cumbersome and exploitative. The military has done little to build or improve capacity, regardless of their intentions. Whatever the motives, Pakistan’s wealthy never bothered about institutional capacity because they operated through informal power networks linked by social, family, and economic connections. In the process, the institutional capacity has steadily hollowed out over decades.
Ruling elites everywhere want to dominate the system and extract benefits – but enlightened elites, for example in many Asian countries, have also been wise to invest in people. Pakistan’s ruling elites have proven to be notoriously short-sighted and, in the pursuit of short-term gains, have hurt their own long-term interests. Pakistan has become a very difficult country to govern.
Until and unless a movement emerges that represents the people’s aspirations to create a genuinely democratic state that works for the people and not just for the ruling elites, Pakistan’s chances of survival in its current state are slim in the context of history.
The iconic Chinese leader Deng Xiaoping while visiting Shenzhen in 1992 made the widely cited statement that “Singapore’s social order is rather good. Its leaders exercise strict management. We should learn from their experience, and we should do a better job than they do.” Since then, over 55,000 Chinese officials have been sent to Singapore on almost a monthly basis to receive training about good governance. Only a great leader like Deng could be so humble and wise as to request a tiny country like Singapore to train Chinese bureaucrats.
Local institutes in Singapore exemplified by Nanyang Technological University (NTU), National University of Singapore, and the Civil Service College have been extensively involved in this knowledge transfer process by providing customized education programs for Chinese officials, covering subjects ranging from economic development, public administration, housing and grassroots politics to urban planning and anti-corruption. As the then Vice President Xi Jinping highlighted in 2011, “Tens of thousands of Chinese officials at various ranks have been to Singapore for visiting and studying,” and “this has played an important role in promoting bilateral relations and China’s construction for modernization.”
Can Pakistani leaders show even the tiniest bit of humility and far-sightedness compared to that of Deng Xiaoping who demonstrated it by asking Singapore to train Chinese civil servants?
The key lesson from the success stories in Asia is sobering and simple: It is the people, stupid. Invest in people and empower them, especially women.
The advice about educating and investing in people may disappoint those who are looking for a grand plan or a charter of economy. But the fact is stark: the citizens have to come forward. However, for a movement to succeed in Pakistan’s current conditions, it must and has to involve, mobilize and relate to the masses and not just the educated few. It is therefore the need of the hour that citizens, males and females, and especially the young, introspect about Pakistan’s failures since its independence, shun conspiracy theories and dogma, stop waiting for a messiah, and take charge of their destiny. They must force the ruling elites to strike a development bargain that makes economic development the number one national priority and makes achieving 90 percent literacy rate within 10 years as the most important goal. This can be done through the use of technology and knowledge transfer from countries like Singapore, who can help with training of both civil servants and teachers.
Until and unless a movement emerges that represents the people’s aspirations to create a genuinely democratic state that works for the people and not just for the ruling elites, Pakistan’s chances of survival in its current state are slim in the context of history. 75 years may be history in the context of our times but in the context of history, it is just a heartbeat.
Shall Pakistanis rise to the challenge posed by the current crises, or they would let the opportunity pass? It will depend on the collective will and effort of the people and those sensible among the ruling elites whether Pakistan would end up like Afghanistan, Iran, or North Korea or whether it can make progress like South Korea, Indonesia, or Malaysia have. These nations rebuilt their countries from the ruins of armed conflicts and civil wars that they experienced during and after the colonial era. Can Pakistanis do that?