Only after readers understand the ABCs of Pakistan can they start to realize what is required to change the future prospects of the country. This is why Macro Pakistani aims to provide a simple understanding of economic facts and frameworks. Once readers understand the macro overview of their daily problems, they will be able to make more sense of the news. Today, most readers feel overburdened by the sensationalism of traditional news media. Specialized language regurgitating technocratic lingo or click-bait articles clutter their news feeds. We aim to address that problem by telling you All you need to know about the economy, through Bite sized digestible pieces, Curated to cut through the noise.
The ABCs of Pakistan will be a recap of earlier articles Macro Pakistani has posted. We have mentioned repeatedly how one of the major issues with Pakistan’s economy is low investment and productivity growth. Hence, for anyone aiming to understand the Pakistani economy, that is where he or she should start.
All you need to know about the economy
Economic growth is driven by growth in labor, capital or total factor productivity (TFP). TFP can be interpreted as how smartly factors of labor and capital are used. Therefore, it is the main determinant of long-term economic growth. Incidentally, in economic models, ‘A’ also denotes Total Factor Productivity.
Investment vs. growth in Total Factor Productivity (1972-2019)
The graph shows that the highest economic growth (red line) in the last 50 years came about due to high investment levels (grey bar) and TFP growth (green line) in the 1980s. Since then, contribution of investment has fallen to less than 15% of GDP and growth has stagnated. According to PIDE, over 66% of Pakistan’s growth in the last 50 years has come about due to an increase in labor and capital inputs. That leaves around one-third of growth driven by TFP. This means, most growth has come about through an increase in resources (e.g. increased labor force) rather than making those resources more efficient. Hence, productivity has stagnated across sectors in Pakistan and the country has failed to achieve sustainable growth.
Another effect of low TFP is that Pakistani goods and services have become increasingly uncompetitive in international markets. This has led to low export growth and forced Pakistan to go back to the IMF for support repeatedly. The way to increase competitiveness is clear. Invest in institutions, infrastructure, and information and communication technology (ICT) to create an enabling environment. Boost human capital and capabilities to have a productive labor market and foster an innovation ecosystem. However, Pakistan continues to lag other low-middle income countries across most of these indicators.
Global Competitiveness Index 4.0 2019 edition (rank out of 141)
Bite sized, digestible pieces
To make these comparisons easier to understand, instead of comparing to all the other countries mentioned above, let’s benchmark Pakistan against Bangladesh. Institutions and infrastructure are poor across both countries but where Bangladesh stands out is its higher focus on ICT adoption, health and skills. It invested in its people and developed its human capital base to compete against the rest of the world. In Pakistan’s case, as we learned in an earlier post, a higher proportion of GDP is spent on the military as compared to health and education, as part of the annual budget.
Public expenditure on health and education vs. military (2014-19)
The dotted lines above represent the level of military expenditure in Pakistan while the bars show public expenditure on health and education. In each of the years mentioned, the dotted line is above the bars. The first part of the ABCs of Pakistan highlighted the main structural issues. The second part, ‘B’, should show what our government plans to do about those issues. As Budget figures show, Pakistan has not only failed to prioritize investment in human development, it has also tried its best to understate military expenditures. While officially reported defense spending was 3% of GDP in 2019, military pensions, which make up an additional 0.7% of GDP, were reported under the civilian head.
Curated to cut through the noise
Mainstream media is noisy. If they try hard, audiences might be able to decipher the ‘what’ of a news story. The ‘so what’ however, is mostly missing. Even if we know the problems of Pakistan and what public officials are prioritizing, the reasoning behind is more often than not hard to find. At Macro Pakistani, we use in-depth data analysis and global benchmarks to clarify the ‘so what’. For example, most have heard of the Naya Pakistan Housing scheme. Some might even know that successive governments have tried to address the lack of low-income housing in Pakistan. In completing the ABCs of Pakistan, we will talk about the impact issues like housing have had on Consumers in Pakistan.
Private consumption of housing & household fuels in Pakistan vs. global benchmarks
As Macro Pakistani has discussed before, consumers in Pakistan have to spend an outsized amount on housing and electricity in the country. Pakistan is a consumption driven economy and one of the biggest items private consumers spend on, is housing & household fuels. Because of failure of past governments in addressing issues with housing and energy, consumers in Pakistan have to spend almost twice as much as those in other countries. If you consume more, you save less of your income. If you save less, you invest less. That is how the cycle of low investment, low productivity, low income and lower standard of living perpetuates.
The links included in this article, will provide a basic understanding of what the country is about. If the linked articles are too long, we also publish summaries as part of our weekly newsletters. If 2-minute summaries are too long, we also publish 1-minute video newsletters on WhatsApp. Macro Pakistani’s long-term aim is to democratize information in Pakistan and ensure the high levels of civic engagement in the country are channeled toward a greater sense of responsibility and accountability. We hope you join us in our journey to ensure a better future for Pakistan.
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Loved reading this. One small suggestion though: it might be better to include which theoretical model you’re using, and what its limitations are. I think you’re using the Solow Growth Model.
Hi Asad. Yes the model is Solow Growth. We referenced a PIDE Working Paper which has further details here: https://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-2020-11.pdf. Let us know if you have any further questions.
Hello Faiz! Love the initiative to create simple and effective stories based on data. Much needed given the absence of such platforms that provide knowledge on common economic issues in Pakistan. Just to let you know, the links in the article refer to pages that no longer exist. Please rectify.
Thanks Salman! We are in the process of upgrading the website in the coming few weeks. Links will be active again very soon!