The year is 2047 and Pakistan has become an economic powerhouse and the choice destination for global investment. Bolstered in 2020s by the Chinese one belt initiative, Pakistan equipped its growing workforce with the skills required to fill 21st century jobs. As a maturing democracy, Pakistan’s political and economic climate can foster longer term planning, stepping away from crony capitalism that plagued it for most of its existence in the late 20th and early 21st Century. Now with Macroeconomic stability at the Centre, coupled with a welcoming business and regulatory environment, excellent physical and technological infrastructure and a modern, flexible and adaptable workforce, Pakistan is finally realizing its potential.
Aggregate investment is the key driver of Economic activity and is a major factor in determining where a country or state stands in the comity of nations. For an economy as richly populated as Pakistan, aggregate investment has historically remained palpably low. Growth in Pakistan has been sporadic, usually coinciding with periods of political stability. Average growth in politically stable periods has been 6.70% compared to 3.10% in periods of low growth. Low savings and low investment levels have been contributors to this trend of strutting growth, leading to a long term in decline in Pakistan’s growth potential. Political instability and inconsistent macroeconomic policies have led to a steady decline in total factor productivity, meaning that Pakistan has been unable to adequately utilize its population advantage.
Investment to GDP ratio in Pakistan has not only been low compared to its peers but has been on the decline. On the supply side, a major reason for this low level of investment is infrastructural bottlenecks, largely stemming from low public investment in these spheres. Low public investment in turn is due to limited fiscal space, which may be attributed to the complex taxation code in the country and institutional red tape resulting from inefficient bureaucracy. The institutional framework hinders not only the fiscal space, but also private investment. Overtime, Pakistan has become a difficult place for doing business. Concisely, Pakistan’s business environment has not been conducive to new investment, domestic or international, due to institutional bottlenecks, exacerbated by poor tax policies and issues of governance and security.
On the demand side, low-investment appetite is the main reason behind low aggregate investment in the economy, rather than low-savings. The primary reason for low investment demand is low returns on Investment. Given Pakistan’s current business and security environment, investors demand a much higher rate of return than they can expect to earn. As a result, investment in Pakistan remains low, especially when compared to its immediate competitors. There is a fundamental disconnect between the real economy and what is observed in the stock market, where market values of firms appear to be at much higher levels than would be warranted in Pakistan’s macroeconomic environment. A low return environment plagued by inefficiencies and lack of entrepreneurial leadership has reduced the investment appetite of both foreign and domestic investors, leading to low investment demand in Pakistan.
There is however, room for optimism especially if the government of Pakistan can undertake some key reforms. Investments as part of the China Pakistan Economic Corridor can act as a boon for aggregate Investment although the real value these investment projects will add is worth considering carefully. This collection of infrastructure projects valued at anywhere between $42-$60 billion, has been touted as the chief economic achievement of the current Pakistani government. The projects being undertaken under CPEC may fundamentally alter the infrastructural and logistical landscape of Pakistan, reducing some of the bottlenecks highlighted previously. Whether all projects under CPEC are warranted or not and whether the state undertakes policy reforms to reap the benefits from the projects are interesting questions in their own right.
How likely is this investment to change the business and economic landscape of Pakistan? Do linkages between Pakistan and China mean more investment in human capital and if so, does Pakistan have the capacity to set up Universities and training institutions to benefit from this intended investment? If returns on assets in Pakistan are so low, why are Chinese investors willing to invest such a large sum of money? On the supply side, where is the money coming from and what consequences could this have for domestic investors? Are domestic investors likely to benefit from CPEC or are they being hindered due to the preferential treatment (through tax breaks etc) being given to Chinese investors? These few questions would be important in determining the trajectory aggregate Investment takes in Pakistan in the near future.
Pakistan needs to identify a place for itself in the global supply chain and undertake structural changes to bolster these sectors. This would require medium to long term planning. Starting with taxation reform favouring these sectors, the government of Pakistan needs an overhaul of its legal and regulatory framework to make the business environment competitive vis a vis the rest of the world. In order to utilize its bourgeoning population, institutions and organizations need to be set up to prepare a workforce ready to assimilate in the identified sectors. For such medium to long term planning to bear fruition, macroeconomic stability assisted in large part by fiscal responsibility and favourable monetary policy will be a necessity.