Pakistan’s Economic Potential

Pakistan’s Economy General Overview

An economy is a complex structure of consumers and producers which have beneficial role for
each other. Pakistan economy is mixed type of economy which has three major sectors i.e.
agriculture, industry and services. The contribution of these sectors into the economy is given as
agriculture contributing 21% of the GDP; industrial share is 20.9% while services sector share is
57.7% of the GDP. Abundance of natural resources, human capital, excellent geographical
location and hardworking masses are the strengths of Pakistan economy. Low literacy, lack of
awareness, shortage of capital, less regard for rule of law and institutions, inefficient and ritual –
ridden social system and corrupt political environment, dominated by non-progressive elements
of tribal sardars, feudal lords, extractive corruption, elite capture, non-productivity, non-
democratic norms are some weaknesses of Pakistan economic system.

Pakistan‘s economy has also developed an unhealthy dependence on foreign aid because of two
weaknesses - its inability to produce and distribute sufficient economic surplus domestically and
the state‘s inability to mobilize and distribute adequate domestic resources to meet the
population‘s needs and earn foreign exchange to survive the dictates of a ruthless globalized
IMF-World Bank run capitalist economic order. These weaknesses have been created and
perpetuated by the narrow interests and rent-seeking behavior of the country‘s political and
economic elites and exacerbated by policies imposed by the IMF, WB and other institutions. At
the core of these structural weaknesses are the rentier/clientelism logic of the state1, the
stagnation of the economy‘s industrial base, a broken and regressive tax system, crippling
inequalities in land and resource distribution, falling productivity and longstanding neglect of

1
Those countries that derive a substantial share of national revenues from renting indigenous natural or strategic resources to
external clients. In Pakistan’s case, country’s geo-strategic location has been leveraged for securing military, economic and
political aid and support from global and regional powers. This has meant a persistent prioritization of military security (it has
valid reasons and compulsions to do so) over development goals like economic security, employment and education; an
orientation that has, ironically, substantially undermined the physical security of society and the state over time. Further,
Pakistan has also tried to earn rents from its vast supply of unskilled labor through state-promoted migration particularly to
Gulf states – a phenomenon known as global labor arbitrage - which has led to a partial dependence on remittances for growth
from the 1970s onward. The Pakistani state’s rentier logic is perpetuated within the country through networks of patronage
that permeate all aspects and levels of state, society and economy. These dynamics of clientelism mean that government
oversight in the pursuit of the protection of the working population’s rights and interests has consistently been subordinated to
the needs of more powerful clients. So, for instance, massive deposits of coal in Thar, and the gold and copper of Saindak
and Reko Diq in Balochistan are exploited largely by state elites in conjunction with multinational firms.
workers, and unregulated banking and energy sectors that the state has failed to leverage for
public benefit. Understanding and overcoming these challenges in consideration of their history
and political economy, rather than a solely ‗technocratic‘ understanding of the economy, is
essential to coming up with an economic strategy for self-reliance, economic sovereignty and
public welfare in Pakistan.

Multiple studies have confirmed the failure of structural Adjustment Programs (SAPs) by IMF
and their severe negative consequences for inequality, poverty and public welfare. According to
research by Haroon Jamal (2003), during the 1988-1999 ‗structural adjustment‘ period, poverty
incidence increased from 24% to 30% and inequality increased from a Gini coefficient of 0.34 to
0.38.8. Zaidi (2008) notes that per capita income actually decreased in PPP (purchasing power
parity) terms from $2890 to $1890 in the decade between 1992 and 2002. An impact evaluation
of structural adjustment programs between 1981 and 2001 found that SAPS adversely affected
the macroeconomic variables of the country, including an overall deterioration in real per capita
income and a huge increase in unemployment.

However, Pakistan‘s real estate market is one of the most unregulated and least transparent in the
world, leading to it becoming a favored destination to park ill-gotten wealth and engage in
speculative investment. For years, the state maintained a ‗no questions asked‘ policy about the
source of capital in the sector, without any meaningful taxation introduced until 2014. Even
today, despite the sector boasting assets estimated at over $700 billion, the sector garners barely
Rs. 23 billion in annual tax.

Sectors in Pakistan’s Economy

The share of different sectors in the economy has been changed much since independence.
Pakistan has also a large pool of human resource which can be turned into productive one by
adopting a wise policy. Now the agriculture is sharing almost 21% in GDP which was more than
50% at the time of creation of this state in 1947. Whereas, the industrial and services sectors
have gained in their share in GDP up to 20.9% and 57.7% respectively from 8.03% and 39.3% in
1947. The trade account remained in deficit during most of the years in history and is still in the
same condition due to more dependence on imports. The excessive dependence on imports and
shortage in energy sector has also disturbed our foreign exchange reserves. The continuous
devaluation of Pakistani rupee was also result of these economic problems. Public debt, to
manage the economy, is rising sharply as it reached more than 60% of GDP. It is evident from
the above discussion that Pakistan‘s economy has a lot of problems, so an integrated economic,
social and political framework is needed to bring Pakistan out of this imbroglio.

Agriculture Sector

Agriculture sector is the only largest sector of our economy, contributing 21% of gross domestic
product, employing 44% of total labor force, sharing 65% of exports and supporting expansion
of industries by supplying raw materials. . Agriculture holds such a pivotal position in our
economy that if in some years agricultural output falls, everybody feels the pinch. In rural areas
about two-third of population lives and their livelihood turns around allied activities and
agriculture.

Even though Pakistan has one of the largest livestock bases, the country does not feature in
significant places for processed milk production and is almost absent in sectors of cheese and
other high-end dairy products. So is the case in other areas; one hardly finds any food brands
originating out of Pakistan. Moreover, farmers get very low prices for their produce while
consumers have to purchase at much higher prices while a huge sum of money is lost somewhere
in between.

Something needs to be done to change this situation. Agritech and agripreneurs could be game-
changers in the future economy of Pakistan. This, however, warrants a change in perspective and
requires a focus towards agriculture to provide an enabling environment that fosters productivity,
technology deployment, value addition, market mechanisms and agribusinesses. There is a need
to bring the private sector, capital, youth, labour, technology and entrepreneurship to the farms.

The current government has announced an agriculture emergency support programme to the tune
of Rs 300 billion. I suggest allocating just 10pc of this package, i.e. Rs30bn to a new initiative
titled the green-tech revolution, which would be aimed at agribusiness start-ups (agripreneurs)
focusing on value addition, technology deployment and connecting farmers to consumers. This
fund may also support existing businesses, particularly technology companies to develop tools
and products for agriculture.
Industrial Sector

The most distinctive feature of a modern developed country is its strong industrial base. If a
country lags in industrial growth, it cannot hope to make progress in other fields such as
agriculture, transport, energy or education. It is the manufacturing sector, which can provide
employment opportunities to rising population. Manufacturing is the second largest sector of
Pakistan economy, with 21% share in GDP. It employs 14% of total labor force. Rate of growth
of this sector during 2014- 15 was very low at 3.62%.

During past two decades the government has privatized many industries so private sector has
become dominant in industrial sector. The government has established a Small and Medium
Enterprises Development Authority (SMEDA) to help and solve the problems of SMEs.

Services Sector

Services sector of Pakistan economy is quite a large sector as it contributes to the extent of 58%
in the GDP. It has many sub-sectors like transportation, communication and storage, retail and
wholesale trade, insurance and finance, housing services (ownership & dwelling), general
government services (Public administration & defense) and many other private services. All
these sub-sectors have vital role in the economy of Pakistan. Generally, without services sector
economy of any country cannot run. This sector absorbs the major labor force of the country.
Other sectors of the economy are strongly related with the services sectors: it provides necessary
inputs to agricultural and services sectors. It also creates the linkages with other countries.
Employment share of services sector is increasing. This sector is also a major source of revenue
as almost 26% of revenues are collected from this sector. There are great opportunities in
services sector for unemployed persons. It not only reduces the poverty, but it also improves the
quality of life. By increasing investment and trade, this sector leads to the economic growth and
competition.

Knowledge based Economy

The recent history of global economic and export development could be tracked in four phases -
starting with agriculture, moving on to industrialization and then services towards the end of
previous century, but now the world is in the knowledge-economy phase.
Business Dictionary (2010) defines knowledge economy as:

―Economy based on creating, evaluating, and trading knowledge. In a knowledge economy,

labour costs become progressively less important and traditional economic concepts such as
scarcity resources and economics of scale cease to apply‖.

World Bank (2008) document states regarding knowledge economy,

―For countries in the vanguard of the world economy, the balance between knowledge and
resources has shifted so far towards the former that knowledge has become perhaps the most
important factor determining the standard of living – more than land, than tools, than labour.
Today‘s most technically advanced economies are truly knowledge based.‖

World Bank highlighted the four pillars for knowledge economy are:

1. Economic and Institution management

2. Education and Skill

3. Information and Communication Infrastructure

4. Innovative System i.e. Research

The knowledge economy focused on the production and management of knowledge in the frame
of economic constraints, or to a knowledge-based economy. In another meaning, it refers to the
use of knowledge technologies to produce economic benefits. The essential difference is that in a
knowledge economy, knowledge is a product, in knowledge-based economy, knowledge is a
tool. In this way, brain attains a status of resource, ideas and thoughts are considered the
products and the money so earned – knowledge money or economy.

It may be somewhat presumptuous to benchmark Pakistan in terms of a knowledge-based

economy given its very poor basic human resource indicators. A large part of the labor force is
illiterate. In 2003-04 around 48 per cent of the population 10 years of age and above was
illiterate of which males were 36 percent and females 60 per cent. The mean years of schooling
for adults over the age of 15 was 3.9 years compared to 8.5 for the Philippines, 6.5 for Thailand
and 5.1 for India. One-third of the labor force in 2003-04 had an education level below matric.
Till recently Pakistan had ignored or given very little emphasis to higher education, science and
technology and research and development. In Pakistan tertiary enrolments (per cent of
population age 17-23 years) levels are about 4 per cent compared 10.5 per cent in India and 28.2
per cent in Malaysia. On the index of availability of scientists and engineers, Pakistan‘s rank is
61 out of 93 countries. In 2000 Pakistan had 100 scientists and engineers per million population,
compared with 149 in India, 350 in China and 500 in Malaysia. In terms of services expenditure
on higher education, especially science subjects, this has only recently starting going up with an
eventual target of 2.3% per cent of GDP by 2020- which is lowest in the region. The contribution
of software development and services still remain very low. Even in financial services Pakistan‘s
performance has been mixed and its share in exports almost negligible.

Clearly all these indicators point to the fact that in terms of a knowledge-economy Pakistan
clearly comes out rather poorly in comparison with its South Asian neighbour India and even
more sharply in comparison with some of the fast growing South-East Asian economies.

More than 50% of Pakistan‘s gross domestic product (GDP) is composed of services but with a
significantly less policy focus in the form of government support programs and subsidies.

One finds it hard to find a link between continued protection, in the form of tariffs and subsidies,
and efficiency/ output of certain industrial sectors. In order to create a logical linkage, why not to
link such an incentive structure with efficiency, output, contribution to employment generation
and exports. Another missing link is that exports are not even 10% of GDP but probably 90% of
fiscal and policy incentives are geared towards the exporting sectors. A potential mitigation for
the two aforementioned missing links would be to recognize the economic output potential and
put policy focus towards sectors under the knowledge economy.

Due to the changing nature of global supply chains, traditional exports (mainly textile and
agriculture) of Pakistan would not be sustainable in the medium to long term, let alone meet the
anticipated growth targets. Global markets and consumer trends are changing very rapidly,
therefore banking on growth of textile exports may not qualify for a forward-looking and
sustainable approach.
Why Pakistan should utilize its full potential for knowledge based Economy?

Here we must try to differentiate between two sets of issues. The first is the need to improve on
Pakistan‘s rather poor basic human development indicators i.e. literacy, education and skill
levels of its work force and social infrastructure. This in itself would lead to significant increases
in productivity and improve competitiveness of its economy. But trying to move into the
knowledge economy is clearly much more than this. Reverting to the OECD indicators it means
transforming the structure of the economy such that the manufacturing sector and especially the
export sector produces high and high to medium technology-intensive products.

Knowledge economy could be a perfect alternative. First, Not only due to low resource
requirements, but more so due to efficiency, agility, ease of delivery (mostly online), ever
expanding global marketplace and availability of raw material (human resources).

Second, that competitiveness in the global economy is closely dependent on investment in

knowledge and in remaining at the frontier of new technology, producing new products and
improving the quality of existing ones.

Third, this is a significant ―endogenous‖ factor in determining economic growth and raising
productivity. For developing countries that are not on the technological frontier, larger initial
stocks of human capital thus enable them to adapt new ideas and acquire technological
capability. It also accelerates the need for continuous learning to keep up with the pace of
change.

In simple terms, Knowledge based economy is the innovation and commercialization of ideas.
Google, Apple, Netflix and Alibaba are just a few products of knowledge economy. A point to
be noted is that information technology (IT) is part of the knowledge economy, but it should be
used as a platform and not as the final product. In other words, the potential value lies in ideas
that are materialised by essentially using IT platforms.

In Pakistan, the IT sector is somehow thriving, with or without government support. It provides a
fertile ground for using this platform to nurture ideas and come up with world-class knowledge
products. Why did it not happen thus far if the ground is fertile? Here comes the missing link,
which needs to be provided through government policy support.
Almost an absence of any reward mechanism and support infrastructure pushes the brilliant
brains of Pakistan towards finding opportunities for themselves in the form of jobs in overseas
markets, thus resulting in export of factories (brains) rather than products that would yield much
higher returns over a longer period of time. Pakistan needs to keep the talent and utilize that for
internal growth and development.

Strategies to enter Knowledge based global economy

1. Government of Pakistan may consider, establishing Pakistan Innovation Fund (PIF) to

provide a supporting platform for knowledge economy growth in the country. This fund
will serve not only as a financing mechanism to reward innovation but also as a
supporting framework to commercialise in national and international markets and an
aggregated platform.
2. It does not require huge seed funding, which could be allocated from deep pockets of the
Export Development Fund of Pakistan. In due course, the fund will become self-
sustaining as a result of a cost and profit-sharing structure with innovators.
3. Another supporting effort, in this regard, would be to change the mindset of commercial
diplomats of Pakistan and draw their focus towards gathering, analyzing and transferring
global trends towards knowledge economy producers/ innovators in Pakistan.
4. Institutional support mechanisms will certainly help the micro, small and medium
enterprises engaged in knowledge economy.
5. Higher education with enrolment at the tertiary level increasing from around 4 per cent
(17-23 age group) to 8 per cent in 2010 and 20 per cent in 2022 with efforts focused at
enhancing quality and encouraging private sector involvement and ensuring continued
increase in funding until 1 per cent of GNP is devoted to this sector.
6. Skills development to make Pakistan‘s labor force globally competitive including re-
introducing technology streams in secondary education to gradually aim for enrolment
figures of 50 per cent.
7. Science and technology and research and development (R&D) and to refocus efforts to
those areas considered strategic for developing a knowledge-based economy and to
encourage collaboration among public research institutions, universities and clusters of
industries
 8. Improvements in ICT infrastructure to ensure that such communications and multimedia
infrastructure is state-of-the-art and able to keep pace with rapid advances.

Pakistan may not be a well-developed country for economic efficiency and industrial output, but
it certainly has reasonable headcount with productive brains. Would it not be better to use this
advantage and export products (of brain/ knowledge) rather than the factories (brain drain)?

Potential is ―having or showing the capacity to develop into something in the future‖. We must
grow at 7 percent a year just to absorb the millions who join our labor force every year. There
was a time when we grew at more than 10 percent in a year. We have the capacity. We can do it
again. Two prerequisites: political intent and a capable team.

Reference:
Amjad, Rashid. ―Why Pakistan Must Break-into the Knowledge Economy .‖ Lahore Journal of
Economics- Special edition, n.d.

Anwar, Sofia, Muhammad Ashfaq, and Qaiser Abbas. ―Introduction to Pakistan's Economy.‖ Research
Gate, 2017.

Haq, Ikram ul, and Pervaiz Ahmad. ―Knowledge Economy from Pakistani Perspective.‖ University of
Nebraska - Lincoln University of Nebraska - Lincoln DigitalCommons@University of Nebraska -
Lincoln DigitalCom, 2012.

Mukhtar, Ahmad. Economic Potential and Priorities. 2020.

https://tribune.com.pk/story/2270666/economic-potential-and-priorities.

—. Green-tech revolution through agripreneurs . 2020. https://www.dawn.com/news/1557955/green-

tech-revolution-through-
agripreneurs?fbclid=IwAR3eb4qUosmeKzx_V3juY_nbS7iS7F5zjKyHBDXhZg4bHuqFdRop_L
U45zM.
 Annexure-1

Types of Economies

Free-Market Economies

In such economies, which are mostly capitalist economies, firms and individuals decide about
their own economic interests in a better way. Exchange of goods occurs in a competitive
environment which brings a fair price in market for goods and services.

Command Economies

Such economies are controlled by central hand (government) of the state, so these are planned,
controlled and managed centrally. The production and consumption activities are controlled to
achieve certain economic and security objectives, like sometime to save the nascent industries
and sometime to maintain a monopoly within or outside the boundaries of the country.

Free and Command Economy

This type of economy keeps the character of the both above types. It blends the elements of both
and presents a better way to cope with new emerging economic and social problems. Now a day,
even in the free market economies, state does play a restrictive role in correcting the economic
problems i.e. like monetary and fiscal policy. Other interventions are like fixation of prices,
subsidies and tariff policies. Due to these factors, most of the economies are now mixed
economies.