Economic thinking deficit

PAKISTAN’S economic managers and policy gurus realise the importance of the growing services sector in the country. Through trade policy announcements they have repeatedly extolled the virtues of promoting trade in services.Last year the commerce minister observed: “The services sector is important for our economy because it generates employment, contributes to … GDP and is a significant driver of economic growth. Trade in services accounts for over 20 per cent of world trade and is therefore of critical importance for us.”The services sector has indeed emerged as the main driver of economic growth in Pakistan — as also in the rest of the world. As noted by the Pakistan Economic Survey 2008, this sector has provided much-needed support for sustaining a relatively high economic growth rate. Exceptional performance of the financial sector has helped the economy remain close to a high growth trajectory.The Survey proudly notes: “The services sector surpassed the growth target of 7.1 per cent and grew by 8.2 per cent in 2007-08 as against actual achievement of 7.6 per cent in 2006-07. The services sector has made a contribution of 74 per cent to … GDP growth. The services sector has been an important contributor to Pakistan’s economic growth over the past five years growing at an average of 7.3 per cent annually since 2003-04. The continuing buoyant trend, even while growth in the Agriculture and Manufacturing Sectors [sic] has been slowing, implies that the services sector in Pakistan has remained relatively insulated from the challenges faced by the rest of the economy and has been better able to cope with them.”An important feature of the services sector is a notable rise in its share in foreign direct investment in recent years. In particular, liberalisation and privatisation policies helped the finance and communication sub-sectors fetch a major part of the rising foreign direct investment inflows in the country. According to the State Bank of Pakistan, the share of foreign direct investment in the services sector has exceeded that in non-service sectors consistently for the last three years. The contribution of the services sector to GDP growth has also exceeded that of agriculture and industry for the last three years.However, despite the phenomenal growth of the services sector, the Pakistan Economic Survey indicates that the country’s current account deficit widened to $11.6bn during July-April FY08 against $6.6bn in the comparable period of FY07, showing an increase of 75.6 per cent. Even when compared to the size of the economy, the current account deficit was substantially higher at 6.9 per cent of GDP during July-April FY08 as against 4.6 per cent for the same period FY07.The deterioration in the current account deficit mainly emanated from the sharply rising trade deficit along with increase in net outflows from the services and income account. The services account deficit widened by 44.2 per cent during July-April FY08 to reach US$5.6bn. Relatively high import growth and a decline in export of services contributed to this deterioration. However, the strong growth in current transfers on the back of impressive growth in remittances almost entirely offset the deficit in the services and income account thereby leaving the trade deficit as the fundamental source of expansion in the current account deficit.An analysis of the result of development of trade in services in Pakistan through the perspective of various government agencies indicates an incongruity between the economic growth generated by the services sector and the foreign exchange decline caused by the services account deficit. This is symptomatic of the economic mismanagement prevalent in the country.Pakistani economic managers remain primarily focused on foreign investment as an instrument of growth and, other than paying lip service to the process of indigenisation, have done little to spur the engine of domestic growth. Inasmuch as their policy regarding the development of the manufacturing sector was flawed, their policy in respect of the growth of the services sector is equally unsound.The policy of privatisation, liberalisation and deregulation has been adopted and implemented mindlessly by the government at the behest of international financial institutions. The opening up of the financial sector through conditionalities imposed by international financial institutions is a case in point. By doing so, Pakistan has lost out on its ability to negotiate mutually advantageous trading terms and is now left to seek credit for its ‘autonomous liberalisation’.International trade in services is sought to be promoted through the General Agreement on Trade in Services (GATS), which provides for ‘progressive liberalisation’ and not just liberalisation. Members of the World Trade Organisation are required to enter into successive rounds of negotiations with a view to achieving a progressively higher level of liberalisation. The process of progressive liberalisation is required to be advanced in each such round through bilateral, plurilateral or multilateral negotiations directed towards increasing the general level of specific commitments undertaken by the members under GATS. There is flexibility for individual developing country members to open fewer sectors, liberalise fewer types of transactions and progressively extend market access in line with their development situation.This is the strategy that should have been followed by Pakistan. But Pakistan chose to go through the process rapidly and that too in the more strategic sectors such as finance.By not only liberalising and deregulating the financial sector but also privatising and selling major banks to foreign entities, the government has certainly achieved enhanced growth in the financial sector. The resulting conducive environment has enabled the foreign owners of banks and other financial institutions to recover their investments in Pakistan through huge spreads in interest rates and uncontrolled consumer financing to the detriment of local depositors and consumers.A similar phenomenon exists in respect of the telecommunications sector with the ensuing detrimental effect on the foreign exchange reserves of Pakistan because of enormous dividend payouts. The stock exchanges have also been vying for and receiving their share of foreign portfolio investment despite the attendant risk of enhanced volatility in the country’s already unstable capital market.According to the Statistics Division, the total export of services was $2,123,706 against the total import of services amounting to $6,347,072 at the start of this year. Despite the long-term vision (Vision 2030), a medium-term development programme, the annual budgetary process including periodic economic surveys, a plethora of policies framed by multiple finance, investment, trade and planning ministries as well as legislative recommendations and oversight, the economic managers have landed Pakistan in an economic mess.Under the circumstances, one cannot but conclude that the services account deficit is not only an indication of the financial deficit but is also representative of the deficit in economic thinking in the country.

Courtesy: Daily Dawn Lahore