Emerging Economies
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A presentation was arranged on the above topic in the Prime Minister Secretariat. The speakers were Economists from Goldman Sachs who covered the growth prospects of BRIC and N 11. BRIC is acronym for Brazil, Russia, India and China and N11 cover other 11 emerging markets including Pakistan. The key theme that came out of the presentation was that Pakistan is a laggard and is not doing enough to be considered a high growth economy.
BRICS
Near term growth of an economy is driven by Demand and Long term sustainable growth is driven by Supply of factors of production. The Goldman Sachs Model is based on two main factors, Labor Force and Physical Infrastructure. They have developed an Economic Growth Scores that covers,
Ð* Macro Stability: Inflation, Fiscal Deficit and External Debt
Ð* Macro Conditions Openness, Investments, Savings
Ð* Technology
Ð* Human Capital
Ð* Political Conditions
Their conclusions are,
Ð* China will become second largest economy in the world in the next 25 years and largest by 2050 and will be followed by India and USA
Ð* China will not be able to sustain its 10% growth due to ageing population
Ð* Today, the largest economies (in size) are also the richest (per capita income). This will not be the case in 2050 as per capita incomes of China and India will still be less than half of USA.
Ð* Large but not so rich population of China and India will keep demand for Consumer Goods and Commodities very high. The threshold income after which demand explodes is US$3000/annum. Almost 2bn people will join this income threshold in the next few years.
Ð* As Per Capita Income rises, Exchange Rate converges to Purchasing Power Parity (PPP). For e.g., per capita income of Pakistan on exchange rate basis is close to US$900 but on PPP basis is US$3000. This gap will narrow with rise in per capita income on exchange rate basis, as the prices of goods in services in Pakistan will be closer to those in USA.
Pakistan
Pakistan does not come out too well on Goldman Sachs framework. Amongst the Next 11, Pakistan barely performs better than Bangladesh and Nigeria and far below countries like Thailand, Indonesia, Philippine, Turkey etc The long term sustainable growth rate for Pakistan was 5.1% pa.
Ð* Pakistan scored poorly in Infrastructure spending. Ironically, the only criteria in which Pakistan performed better than comparable economies were in Rail Network!!
Ð* Spending on Education is less than half of what others are spending
Ð* Gross Capital Formation (16-18%) is far below 25% average
Ð* Savings of 16-17% are again far below the average
Ð* Pakistans macro indicators (Deficit, Inflation end External Debt) are relatively better
For Pakistan to sustain 8% growth, it will need to
Ð* Spend 3-4% of GDP on physical infrastructure and at least 4% on education.
Ð* Role of private sector in infrastructure spending will have to be increased
Ð* Incentives