THE latest budget is primarily aimed at putting Pakistan’s finances in order. The government has set a massive target for the Federal Board of Revenue — 35 per cent more than last year! The government is also planning to practise austerity. This budget is ambitious; if it works it may bring down the budget deficit.
This fiscal consolidation, however, will significantly check the economic growth rate. Official estimates put economic growth at only 2.4pc next year. Economic growth is the surest guarantee for job creation. According to the UN, given demographic trends, Pakistan needs 1.3 million new jobs every year!
Given the urgent need to increase economic growth to create jobs, policy options in the budget appear limited, since a major chunk of expenditure will go towards debt interest payments for the next several years. Is there any way through which the government can bring about economic growth? The answer lies in focusing on technological innovation.
The economy’s fundamental problem is its technologically backward exports — food commodities comprise 21pc of exports. The demand for the latter does not increase as economies and incomes grow in our trading partners. Consumption of wheat, rice or sugar is limited by biophysical constraints after all. However, as the economy and income grow in Pakistan, people purchase more and more imported goods like iPhones and vehicles, especially as new models appear every couple of years. This imbalance in sales and purchases is what widens the trade deficit. These weak ‘terms of trade’ are the real reason behind the perennial trade deficits that force Pakistan to knock on the IMF’s door regularly.
Pakistan needs 1.3 million new jobs every year.
The nature of exports can be transformed through sustained technological innovation. Instead of food commodities, Pakistan can export processed commodities. Instead of cotton yarn, it can export locally developed branded apparel, earning a lot more foreign exchange, even for the same quantum of exports, thereby reducing the trade deficit and unshackling itself from the IMF.
The critical role of technological innovation in increasing economic growth is not disputed. It is a key explanation for the exponential economic growth during the Industrial Revolution.
The real puzzle is why technological innovation takes root in some societies, while others are not able to make much headway.
Recently, at the Economia Festival in Trento, Italy, two economists offered solutions to the technological innovation puzzle. Joel Mokyr identified two variables that mitigate against technological innovation, stalling economic growth. He underlined corruption and political risk as significant hurdles that work against upping the rate of technological innovation. Simply, in the presence of a kleptocracy, innovators can never be sure if they can keep all the profits from their inventions. This lack of incentives makes them reluctant. At the same time, the spectre of political risk — when economic policies affect business profitability —creates disincentives for local and foreign businesses as far as investment in new technologies is concerned, thus stalling economic growth.
Daron Acemoglu, author of Why Nations Fail, argued that technological innovation and economic growth only come about if societies gain more liberty against the governing institutions that rule them. And, societies can gain more liberty by instituting robust checks and balances that keep corrupt rulers at bay — for nations that have effective accountability mechanisms, the likelihood of economic growth is much higher.
Given the urgency to focus on technological innovation and economic growth, there are two major lessons for Pakistani policymakers: first, technological innovation and economic growth will not take root unless local and foreign investors keep the gains from their innovations and investments. To do so, robust checks and balances and accountability mechanisms are needed.
The second lesson is perhaps more important and deals with political risk — when economic policy changes on a dime. Technological innovation will not take root if investors do not have confidence in the permanence of economic policies. And, given that most infrastructure projects like the Orange Train in Lahore have completion timelines extending beyond five years, there must be economic policy permanence and overlap across different governments.
The latest budget merely attempts balancing the books; job creation and economic growth must be the real objectives. Policy options for increasing economic growth have all but disappeared. Focusing on technological innovation does, however, offer a way out. What is really needed right now is a ‘charter of economy’ through which political leaders can rise above their differences and reach consensus over the permanence of economic policies for the next decade at least.