Special topics in development

New growth framework has an element of inclusive growth or not?

Submitted by: Maria sajjad

Bsc (Hons) economics

2-31-2011

The planning commission of Pakistan has formulated a new growth framework which states that unlike the old models where the determinants of economic growth were the external sources and the public sector, this new growth framework is based on the endogenous growth model, where the quality of the investment should complement the efforts in improving the quality of investment. Here in the new growth framework private sector acts as a growth driver and the public sector along with it helps in the implementation of the market reforms in order to improve competitiveness. The new growth strategy is of the view that the major investments should be in human-capital. The government should facilitate and act as a cornerstone in facilitating the private sector in investing in the human capital. Moreover the framework suggested that Pakistan should focus on the economic growth of softwares, that is the increase competitiveness, everywhere, redefine governments role in markets, promote investments on the basis of innovation and entrepreneurship, exploit the huge potential of a large domestic market, make cities and regional clusters the locomotives of growth, and enhance connectivity. Secondly in the older models we have seen that the increased role of public sector in the market is always seen as the main indicator of economic growth but its not like this, according to this new framework Government should not be involved in markets, except to regulate misbehavior, reduce transaction costs and promote competition Our past and present growth strategies view global indicators that measure competitiveness and cost of doing business as beyond our control. By minimizing government intervention and making productivity endogenous, we will be able to look beyond labor and capital accumulation to accelerate growth and improve risk-adjusted returns. To this end, we will identify reforms needed to develop competitive, innovative and efficient markets.

Now the question is that, does this New growth framework has the element of inclusive growth that refers to the idea that both the pace and pattern of growth are critical for achieving a high, sustainable growth record, as well as poverty reduction, the inclusiveness a concept that encompasses equity, equality of opportunity, and protection in market and employment transitions is an essential ingredient of any successful growth strategy. Here we emphasize the idea of equality of opportunity in terms of access to markets, resources, and unbiased regulatory environment for businesses and individuals. The inclusive growth takes in account and demands the pro-poor policies that take a long term perspective as the focus is on productive employment rather than on direct income redistribution, as a means of increasing incomes for excluded groups. In my point of view the new growth framework to a large extent does not contain the element of inclusive growth, it does reflect the element of growth in it but the kind of growth that would take place through that strategy would not be benefiting all or in short inclusive in nature. Am not entirely against the new framework but I think that Pakistan is not yet ready to undertake these kinds of strategies which are basically more applicable to the rich-countries with least income disparities. According to the new growth strategy the growth is to going be market-led and not government led and private sector is going to be the main driver of growth. Admittedly some issues raised about some sectors can only be solved through privatization while on the other hand some sectors are better off if they are left to the government sector. Privatization will prove to be one of the biggest tests for Pakistan. Privatizing can be either harmful or helpful for the economy. In the past we have seen the result of privatization in Pakistan. The results were not so productive. First of all public institutions are meant to provide services to the general public and has kept this as their first preference. They dont keep profit as their first motive. So

in this way if the private sector is given the edge then as we know the private investor takes in account of their personal profit so in that way everyone is not benefited equally and there might be growth in the country but its pretty skewed. With the ever growing competition in the private markets how exactly will the private firms provide service to the public where it faces losses for e.g. providing services to the district in Baluchistan which might not be financially feasible but that does not mean we stop providing that service. It might not be as productive or it might not add more to the GDP or growth that means if the growth is market-led, these areas where there are not enough chances for the growth will be neglected and that would increase the levels of inequality. Now secondly what about the employees of the institution. The question is that how exactly they plan to handle the oversize employee body. Privatization will further increase the class differences, which might create unemployment and would not only disturb the aim of providing services but will also affect the already crumbling economy of Pakistan. In the case of Pakistan the new growth strategy that is completely focusing on the private sector to work as a growth driver is not feasible because there are a lot of income disparities in our country, if the concept of complete privatization is applied to this country then that would clearly increase the income inequalities, where the private firms acting as the growth drivers will just be benefiting the specific class and even if the growth is taking place it wont be a pro-poor growthnot benefiting all. Some of the flaws in this growth strategy through which we come to know that the element of inclusive growth is excluded is that the Agriculture sector has been neglected in this strategy. They have proposed to eradicate the subsidies which have been provided to the agricultural sector. Agriculture sector has mostly been neglected by all previous and current policies. We know that Pakistan is an agricultural country, agriculture contributes about 24% of our total GDP

and it earns about 60 percent of the countrys total export earnings, it also provides employment to half of the population living in rural areas. The planning commission should have made a strategy which was more driven towards agriculture uplift to show inclusive growth in this sector. The finance problem is not lacking in this sector, but other major problem is a large productivity gap which includes: traditional farming practices, inefficient irrigation methods, high input costs, lack of bio-safety regulation and insufficient institutional credit for poor farmers. If such a sector is left to be dealt privately then the element of inclusive growth is excluded. Some of the public sector enterprises that are not viable for privatization in their current state need immediate restructuring. Such loss-making entities include Pakistan International Airlines (PIA), Pakistan Agricultural Storage and Services Corporation (PASSCO), Pakistan Electric Power Company, Pakistan Steel, and Pakistan Railways. The reason why they are not ready for privatization but needs restructuring is because of a basic weakness in the behavior of Pakistan's private sector which needs to be rectified if the country is to develop a vibrant economy that relates to the ubiquitous seeking of unearned profits (referred to in economic literature as "rents") through various means, such as obtaining monopoly positions, seeking excessive protection against imports, capturing government subsidies and evading taxes, securing preferential access to factors of production, etc. so due to such a behavior of the private sector the element of inclusive growth is discarded in the current scenario. Here in the new growth strategy, the strategy makers also talks about the development of creative cities, the ones that acts as the locomotives of the growth. So if the growth is market-led or private sector (profit-seeking sector) is the growth driver then it will target only those cities which will enhance the countrys growth and automatically neglect the cities which wont be

productive for the country and this will ultimately create disparities and wont be inclusive. This strategy is going to increase Inequality which breeds income disparity at all levels but mostly the lower classes of our country will bear the negative effects. This breeds frustration and resentment in the society as a whole. Socio-economic disturbances include the element of terrorism and increase in criminal activities. The new growth framework also focuses on the enhancement of innovational and entrepreneurial skills, especially in field of education. But if the educational sector is left alone on the private sector and government intervention in the market is limited then we can expect a country to enhance growth by any chance, but there will be a high inequality. Most of the people might be excluded; as we know for the provision of a private good, the factor of excludability is always associated with it. If in the case of Pakistan we compare the fee structures of public institutions with the private ones. We see that if the growth is market-led then the country like Pakistan where 17.2% of the population is below the poverty line and cannot afford to send their children to even the public institutions (with low fees) than how do we expect to devise a strategy where private sector will act as a growth driver in a country like Pakistan. More focus on the software of development and investment in the human-capital is obviously good for a country as mentioned in the new growth framework but the question arises that if the private sector is the growth driver, do we expect the growth to be inclusive? Do we expect everyone to avail the opportunities of innovations, competitiveness and entrepreneurial skills? As we know that the role of the government is redefined in this new growth framework we do not expect private sector to cater the needs of all on a lower price or no price because of the reason that private sector mainly focuses in making profit.

The new growth framework talks about one of the inclusive growth factor that is increasing the employment opportunities. But my question is that can the private sector be able to increase the opportunities for all. Increasing employment is one of the inclusive growth factor, but will it be inclusive if left alone to the private sector? Will the private sectors preferences be skewed? If so then there is the need of state to participate side by side in the creation of employment opportunities, thus making it inclusive and that everyone can avail the opportunities equally So in my point of view the factor that is lacking in this new growth framework is that, it did not keep in view the countrys characteristics, weaknesses, strengths, economic environment and history of Pakistan. Further this growth is not inclusive in nature, and such a kind of strategies are followed by a lot of countries but the difference is that those countries are rich and there are low income disparities and poverty. This current strategy that has been devised by the planning commission of Pakistan may lead to the growth but the growth will be a much skewed that will cater only some of the segments of the country automatically neglecting the majority. Public sector is important in the case of Pakistan, in order to make the strategy more inclusive I think that the growth should not be completely private led. The segments of the country that rely upon the public sector should be under the government, but there is a need to restructure them like WAPDA, railway, PIA etc. Moreover the agricultural sector is ignored in this framework, as we know that Pakistan is an agrarian country and agricultural sector is the major source of subsistence for the majority of population of Pakistan so it needs not to be excluded and should be kept in view. Public sector should be made better so that they will efficiently provide the public goods on lower or no cost to the large proportion of the population that is below the poverty line. The major focus should be to eradicate corruption that is the major obstacle in the growth. The strategy should carefully manage competition where they divide sectors according

to their capabilities. Public institutions are meant to provide services to the general public and should keep this as their first preference. The new growth framework should take in account Export orientation as a critical determinant of growth. Private sector plays a major role but the growth should not be completely market-led, the government should be intervening in the sectors that are dependent on it keeping in view the economic state of the Pakistan.