SHORT ROUNDUP OF

Economic Growth and Human Development in Pakistan- 2000-2019

SHORT ROUNDUP OF
Economic Growth and
Human Development in
Pakistan

2000-2019

Source: Based on Pakistan Economic Survey 2018-2019

&
Pakistan Demographic and Health Survey 2017-2018

June 19, 2019

 SHORT ROUNDUP OF
Economic Growth and Human Development in Pakistan- 2000-2019

Table of Contents

Section 1: Abstract 3

Section 2: Literature Review 4

Section 3: Economic Growth and Investment in Pakistan 4

Section 4: Key Human Development Indicators of Pakistan. 7

Section 5: Economic Growth and the Human Development Index 11

Section 6: Policy Recommendations 18

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Section 1: Abstract

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Section 2: Literature Review

Critical Debate: Economic Growth vs Human Development.

In his acclaimed book, “The Groundwork of the Metaphysics of Morals”, the 18th-century
philosopher, Immanuel Kant, argues for the necessity of viewing human beings as ends in
themselves, rather than as a means to other ends.1 This principle holds immense importance in the
context of analyzing poverty, progress, and planning. Human beings are the agents, beneficiaries,
and adjudicators of progress but they also happen to be, both directly and indirectly, the primary
means of all production. This dual role of human beings provides a ripe ground for confusion of
ends and means in planning and policy-making. More often than not, this takes the form of
focusing on production and prosperity as the essence of progress, treating people or the human
capital as the means through which that productive progress is brought about (rather than seeing
the lives of people as the ultimate concern and treating production and prosperity merely as means
to those lives).

In today’s day and age, the widely prevalent emphasis on the growth of real income and economic
growth as characteristics of successful development is precisely an aspect of the mistake against
which Kant had warned. This problem is crucial in the assessment and planning of economic
development. Is economic development an intermediate goal of progress and prosperity or is it the
ultimate goal? This contention might have been insignificant, had there been a one-to-one
correspondence or a causal link between economic prosperity and that of enriching the lives of the
people (human development). If that were the case then the pursuit of economic growth as an end
in itself might have been indistinguishable from pursuing it only as a means to the end of enriching
human lives. Albeit, there being a correlation between human development and economic growth,
a tight causal link does not exist.

This can be evidenced by a plethora of countries with high GNP per capita but astonishingly low
achievements in the quality of life, high rates of premature mortality, escapable morbidity, and
overwhelmingly low literacy rates. A case in point is China. Despite a 6.9% annual economic
growth rate (2017), according to a World Bank study, life expectancy in China grew by only 5.1
years totaling at 73.1 years.2 Majority of the other developing countries, such as Brazil, India or
Indonesia had a bigger increase over that span despite much slower economic growth. Similarly,
South Africa with six times more Gross National Product per capita than Sri Lanka has a much
lower longevity rate. Sri Lanka’s Gross Domestic Product valued at $87.1 Billion (USD 2017)
with a life expectancy of 75.28 years whereas South Africa’s GDP values at 349.4 Billion (USD
2017) with a life expectancy of just 62.77 years (2017).3

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Therefore, it can be claimed that economic growth as a development objective in itself makes
societal problems easier to solve but it does not guarantee better lives or better health for everyone.
This debate was first presented by the renowned Pakistani economist Mahbub ul Haq in 1972 at
the conference of the Society of International Development. According to Haq, to truly actualize
human potential, GNP must be turned on its head because it seldom reveals how people are doing,
and it is only concerned with how the economy is doing. Mahbub ul Haq advocated for economic
growth to take a pro-human development and human rights lens. Economic growth that leaves no
one behind, fosters equality of opportunity irrespective of gender, income, or ethnicity that creates
jobs, and sustains the environment, and promotes an accountable society.4

Nobel Laureate, Amartya Sen, further extended this chain of reasoning through his concept of
Development as Freedom (1999). According to Sen, human development is about the expansion
of citizen’s capabilities. Sen concedes that increase in income does contribute to the expansion of
“freedoms”, however, the contribution is limited and unequal, to say the least. The basis of Sen’s
argument is that despite “unprecedented opulence”, poverty, unfulfilled elementary needs, the
occurrence of famines, violations of political freedom, and the neglect of the agency of women
still plague society. Sen contends that the focus of development must not be to provide what people
lack but rather the removal of various types of “unfreedoms” that leaves people with little choice
and opportunity to exercise their reasoned agency.5

This conceptual lens can best be understood through an example. Malnourishment and stunting
rob children of their “capability to function”. It impairs brain development, lowers IQ, and puts
children at risk of serious diseases such as diabetes later on in their life. This in effect hampers the
children’s ability to make the most of the commodities they possess. In comparison to a healthy
child, a malnourished and stunted child will be less able to benefit from better employment
opportunities or quality education. Sen advocates that human flourishing must be the entry point
to the problem of poverty and global inequality instead of economic development.6 Sen’s work
(1999) inspired a paradigm shift in the conceptualization of the word “development” in the
policymaking arena. The much talked about Millennium Development and Sustainable
Development Goals are guided by Sen’s ideas.7

Instead of the aforementioned discussion, to reiterate, the key difference between the economic
growth model and the human development model is that the former focuses exclusively on the
expansion of income whereas the latter focuses on the multidimensional enhancement of human
choices— economic, political, social, and cultural. There is no automatic link between expanding
income and improving human welfare. A link has to be created deliberately through public policy
such as spending on key development areas such as education, health, nutrition, environmental
protection, and fiscal policy to redistribute wealth and assets.

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 Growth without Development: A Case Study of Pakistan.

The Wall Street Journal, in an article published in 2017 titled, “Pakistan’s Middle-Class Soars as
Stability Returns”. Barron’s, a leading US financial magazine, advised investors to “Forget India,
Its Neighbors are the Next Big Thing”. American economist, Tyler Owen in a Bloomberg report,
cited Pakistan’s economic progress as a pleasant surprise. The Accounting firm,
PricewaterhouseCoppers predicted that Pakistan will become the 16th largest economy in terms of
size by 2025 and Goldman Sachs included Pakistan in the ‘Next-11’ emerging markets list.

The aforementioned is a preview of the rhetoric doing rounds incredible articles related to
Pakistan’s economy. Albeit, having experienced a plethora of ups and downs, and a steep
slowdown since 2008, Pakistan’s economy has managed to deliver a comparatively stable growth
trajectory in the long run. Progressively, from the 1990s onwards, Pakistan’s growth rate has
stunted, become more volatile and unstable in comparison to neighboring fast-growing economies:
China and India. However, Pakistan’s GDP in current US dollars has more than doubled since
2006 and grown six times since the 1990s. This growth has lifted many out of poverty, curated a
burgeoning middle class, and positioned Pakistan as the 24th largest economy by size in terms of
purchasing power parity. Despite the growth, Pakistan has slipped from 119th to 147th out of a
total of 193 countries on the global Human Development Index. An estimated 83 million people
are facing multidimensional poverty, over 70 million experience food insecurity, and an estimated
6 million children are out of school.8 Pakistan’s expenditure on education is ranked as the 172nd
highest in the world while public health expenditure stands at 189th globally. 9 According to the
Economic Survey of Pakistan (2018-2019), there are 116,000 persons for every hospital bed and
6325 patients per doctor in Pakistan.10 Similarly, there is one teacher for 45 students whereas the
global average is 28 students for one teacher.

There is a disconnect between Pakistan’s economic growth performance and development progress
in the education and health sector. Political economist, William Easterly, cites Pakistan as a prime
example of “Growth without Development”. According to him the cause of this “inferior quality
of growth” is a lack of national social development paradigm. This is because of an over-reliance
by politicians and government officials alike on GDP growth as a means of stimulating social

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development. Borrowing from political economy models of growth and public service provision
stress that under conditions of high inequality and ethnic division, the elite under invests in the
human capital of the majority which leads to low public good provision. Galor and Moav 2000
relate investment in schooling by the elite to factor endowments. At early stages of development,
labor and land are abundant and capital is scarce, hence a low return to investing in mass
education.11 This underlying assumption being that skills is complementary to physical capital but
not land. Large landowners will not be incentivized to tax themselves to pay for mass education.
As development shows signs of progress and physical capital increases, the return to skill increases
and industrialist capitalist will be willing to invest in mass education to get a skilled workforce to
complement their physical capital. According to Galor and Moav 2000, Pakistan is stuck in the
first phase of development where land is abundant in comparison to physical capital and ownership
of land is highly concentrated.12 It can be that growth and development were attainable to a certain
extent with skilled managerial elite and unskilled workers, but over time this strategy ran into
diminishing returns as human capital did not grow at the same rate as other factors due to
underinvestment in education.

This analysis is consistent with the slowdown of economic growth from the mid-80s to the present.
Similarly, as far as low human capital of women is concerned, Galor and Weil 1996 state that the
economy can have multiple equilibria and Pakistan is stuck in high fertility, low women’s
education, physical capital scarcity, and low output per capita equilibrium.13 Even in purely
economic growth terms, Pakistan’s policymakers have failed at establishing a solid framework for
sustainable and inclusive economic growth. According to Pakistan’s Economic Survey (2018-
2019), total investments as a percentage of GDP were recorded at 15.4% against the target of
17.2%. The National Savings remained at 10.7% of GDP against the target of 13.1% and despite
exchange rate depreciation, exports declined by 1.9%.14 The economic growth model of Pakistan
lacks sustainability as evidenced by fluctuations in GDP growth. It can be conjectured that the
imbalance between Pakistan’s growth and its other aspects of development has caused the
economic growth of Pakistan to de-escalate. Iran offers an interesting contrasting trajectory of
economic growth and development. Despite a crushing eight-year war imposed by the US and its
allies, followed by years of sanctions during which Iran’s economy suffered badly, Iran’s HDI
value increased from 0.577 to 0.798 (+38.3%).15

This paper will take a comparative lens on the economic growth and social development trends in
Pakistan based on the figures and findings of Pakistan’s Economic Survey (2018-2019) and The
Demographic Health Survey (2017-2018). Highlighted growth and development trends in every
section will be compared with those in other middle-income South Asian countries, namely
Bangladesh and India.

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Section 3: Economic Growth and Investment

a) Recent Economic Developments:

The average growth rate of 4.2 % (2014-2018) of Pakistan’s economy and 5.5% growth rate in the
fiscal year of 2018 became unsustainable in 2019 because of macroeconomic imbalances in the
economy (Figure 1). The fiscal and current account deficits reached historically new highs both in
terms of monetary value and as a percentage of GDP in the fiscal year of 2018. Moreover, given
2018 was an election year, required adjustments on fiscal accounts and exchange rates were
delayed. Inflation and exchange rates remained fixed accelerating domestic demand. Foreign
reserves depleted and monetary borrowing increased. Moreover, the surge in domestic demand
along with high government expenditure led to an increase in imports. 16 Combining both goods
and services, imports totaled at $68 billion whereas the exports remained at a constant of $30
billion in the fiscal year 2018 (Figure 6). Consequently, the trade deficit rose to US $ 37.9 Billion
FY18 (Figure 7). The provisional GDP growth rate for the fiscal year 2019 is estimated at 3.29 %
based on 0.85, 1.40 and 4.71 percent growth in agricultural, industrial and services sectors
respectively.

In the first half of the fiscal year 2019, increase in inflation and borrowing costs albeit depreciation
of PKR, did not have a major impact on consumption patterns so much so that the percentage of
consumption in the GDP increased to $94.8% (Figure 2). A significant reason behind increasing
consumption levels is minimal saving opportunities as there is little incentive to divert resources
from consumption to savings.17 Another reason is the high rate of population growth (2.8%) and a
high age dependency ratio (64.7), both of which continue to expand consumption at the expense
of savings. Domestic savings remained at an all-time low of 4.2% of the GDP, in the fiscal year of
2019 (Figure 2). Efforts to cut down development expenditures were insufficient to offset the
minimal growth in revenues and large increases in debt servicing along with defense spending
(Figure 4). As a result, fiscal debt reached 2.7% of the GDP in the first half of 2019 and public
debt reached 73.2% of the GDP (Figure 3 & 5).

From July to April in the 2019 fiscal year, imports were valued at US $ 44.03 billion whereas they
stood at US$46.30 billion in the same period in the July-April 2019 fiscal year showing a decline
of 4.7% (Figure 6). The reduction in imports is because of the decrease in imports of furnace oil,
machinery & electric equipment, palm oil, colza seeds, and textiles. The 4.7% decrease in imports
was partially offset by the 1.9% decrease in exports compared to the fiscal year 2018 (Figure 6).
Current account deficit shrunk to US$ 11.586 billion in July-April FY2019 as compared to US$
15.864 billion in the same period last year and showed a contraction of 26.9 (Figure 8). Similarly,
July-April FY2019, foreign direct investment dropped by 51.7% (Figure 10).

Inflation experienced a steep increase in the 2019 fiscal year. During July-April FY2019, inflation
measured by the consumer price index averaged at 7.00 % against 3.77% during the corresponding

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period last year (Figure 9). Inflation took this trend mainly because of exchange rate depreciation
and higher fuel prices. It is forecasted that given depreciating foreign exchange prices and rising
input costs on the back of high utility prices is likely to maintain upward pressure on inflation
during the remaining period of the current fiscal year. Moreover, economic uncertainty prompted
foreign investors to put their investment decisions on hold. This is mainly because of the long
delay in finalizing the terms and conditions of the International Monetary Fund loan program
worth US $ 6 billion due to Pakistan’s growing balance of payment problem.18

b) Future Outlook

As the government tightens fiscal and monetary policies along with the unfavorable terms of the
loan granted by the International Monetary Fund, economic growth is projected to decelerate in
the fiscal years of 2019 and 2020 respectively. However, macroeconomic conditions are expected
to improve with structural reforms in fiscal management as a result of which from the fiscal year
2021, economic growth is expected to recover to 4%.19 Similarly, the trade deficit is forecasted to
narrow in the fiscal year 2020 and 2021 as the impact of currency depreciation, domestic demand
compression, and other regulatory measures will most likely curb imports. Apart from
macroeconomic adjustment, there is a need to implement structural reforms to put the country on
a stable growth trajectory. Other measures to ensure growth rebound are increased exchange rate
flexibility, improved competitiveness, and lower cost of doing business. On the revenue front, it
is critical to improve tax administration, widen the tax base and facilitate tax compliance.20

c) Challenges

The biggest challenge of Pakistan’s economic growth is that it is based on short term public debt
as opposed to long term productivity and investment. This debt-fueled growth is the reason why
Pakistan’s economic growth experiences boom and bust cycles every few years, making it
unsustainable in the long run.21 For Pakistan’s economy to continue to grow sustainably in the
future, it is imperative to focus on increasing productivity potential, investments, and exports to
experience real changes in the Gross Domestic Product.22 Moreover, as evidenced by
macroeconomic theory and the Cobb-Douglas production function, output is a function of capital
and labor (Y= (K, L)). The higher the productivity of labor and efficiency of capital, the greater
the output will be. The two vital components of labor productivity growth are health and education.
Therefore, it can be concluded that to increase the economy’s productive capacity, it is vital to
equally focus on prevailing health and education conditions as they are the ultimate determinants
of the labor force’s productivity. If policymakers continue to focus on capital growth alone, it will
not be long before poor labor productivity will act as a constraint to economic growth.23

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Figure 1. Source: Pakistan’s Economic Survey 2018-2019.

Figure 2. Source: Pakistan’s Economic Survey 2018-2019.

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Figure 2. Source: Pakistan’s Economic Survey 2018-2019.

Figure 3. Source: Pakistan’s Economic Survey 2018-2019.

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Figure 4. Source: Pakistan’s Economic Survey 2018-2019.

Figure 5. Source: Pakistan’s Economic Survey 2018-2019.

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Figure 6. Source: Pakistan’s Economic Survey 2018-2019.

Figure 7. Source: Pakistan’s Economic Survey 2018-2019.

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Figure 8. Source: Pakistan’s Economic Survey 2018-2019.

Figure 9. Source: Pakistan’s Economic Survey 2018-2019.

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Figure 10. Source: Pakistan’s Economic Survey 2018.

Section 3: Key Human Development Indicators of Pakistan

a) The “human perspective” in measuring development

Human Development as a conceptual lens is focused on the prosperity of the people, the opportunities
available to them, and the choices they make. It aims to capture the richness of human life rather than
the richness of the economy in which human beings live. National income measures such as the Gross
Domestic Product focus on the wealth of the nation but remain silent on the quality of life its individuals
are able to enjoy because it fails to take into account the prevailing income inequality among its people.
As a solution, Mahbub ul Haq incepted the concept of human development which focused on the progress
in people’s capabilities’ ‘to be’ and ‘to do’ what they value. The Human Development Index (HDI), based
on this human centric approach, measures development by quantifying three dimensions of human life –
education, health, and standard of living. These dimensions are employed because they decipher how
healthy and knowledge a person is, along with their standard of living in comparison to the maximum
anyone can enjoy in that place and at that time. Although this approach only scratches the surface of
development, it serves as an introductory point to a richer analysis of human development. The HDI simply
maps the progress a country has made in translating its wealth into prosperity for its people. Two
countries might be equally wealthy but have very different levels of development and vise versa. Income
inequality erodes the gains made from economic growth therefore with focus on measuring the quality
of life being led as opposed to the incomes they command. The two are inter-connected but the ability
‘to do’ and ‘to be’ what one values is so much more than just command over resources. The HDI uses a
two-tier approach. Firstly, indicators are standardized (one for each health and income, and two for
knowledge) to calculate sub-indices for the three dimensions. Then the geometric mean of the sub-indices
is calculated (Table 1). To cater for cross-country comparison, each indicator is normalized per the
minimum (“natural zeroes’) and maximum(“aspirational targets”).

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 Dimensions of HDI Indicators used to construct the HDI

Education Mean Years of Schooling

&
Expected Years of Schooling

Health Life Expectancy

Standard of Living GNI per Capita (PPP US Dollar)

Table 1. Human Development Indices and Indicators

In order to understand how successful countries have been in increasing the capabilities (freedoms) of
their populus in comparison to other regions and countries. However, most importantly, the HDI allows
for a contrast between differences in capabilities within countries and inequalities that favour some
groups over others in terms of opportunity and freedom.

b) Human Development Index of Pakistan

Pakistan ranked 150 out of 189 countries in the Human Development Rankings of 2018 and was
classified as a medium human development country. Pakistan’s HDI value is 0.562 out of 1. Between
1990 and 2017, Pakistan’s HDI value increased from 0.404 to 0.562, an increase of 39.0 percent.
Between 1990 and 2017, Pakistan’s life expectancy at birth increased by 6.5 years, mean years of
schooling increased by 2.9 years and expected years of schooling increased by 4.0 years.
Pakistan’s GNI per capita increased by about 66.2 percent between 1990 and 2017.

This implies that Pakistan did not translate its national income into human development. This can be
evidenced from the fact that the country’s ranking declined ten places when ranked based on Gross
National Income rather than Human Development. Pakistan also ranked below the South Asian regional
average HDI of 0.638. In contrast, its regional counterparts in South Asia – Sri Lanka, India and Bangladesh
performed relatively better with HDI figures of, 0.770,0.640, and 0.608 respectively. These HDI values
placed them at a higher rank than Pakistan at the 73rd, 131st, and 139th in the world development
rankings, respectively.

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 HDI Trends Pakistan, 2000-2018
0.6
0.58
0.56
0.54
0.52
0.5
0.48
0.46
0.44
0.42
0.4
2000 2010 2012 2014 2016 2017 2018

Pakistan

Figure 12. Source: UNDP, Country Notes, 2017

Figure 11compare
Table 2

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