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Thirlwall Law: Why Hasn't Pakistan's GDP Grown Faster Than 5% Average Since 1960s?

RiazHaq

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Pakistan's economy has grown at a compounded annual growth rate (CAGR) of about 5% since the 1960s. While an average 5% annual economic growth rate is faster than the global averages, it falls significantly short of its peer group in Asia. The key difference is that, unlike Pakistan's, the East Asian nation's growth has been fueled by rapid rise in exports. History shows that Pakistan has run into balance of payments (BOP) crises whenever its growth has accelerated above 5%. These crises have forced Pakistan to seek IMF bailouts 13 times in its 73 year history. What Pakistan has experienced is BOP-constrained growth as explained in 1979 by Thirlwall Law, a law of economics named after British economist Anthony Philip Thirlwall. The best way for Pakistan to accelerate its growth beyond 5% is to grow its exports by investing in export-oriented industries.

Economic Growth Since 1960:

The World Bank report released in June, 2018 shows that Pakistan's GDP has grown from $3.7 billion in 1960 to $305 billion in 2017, or 82.4 times. In the same period, India's GDP grew from $37 billion in 1960 to $2,597 billion in 2017 or 71.15 times. Both South Asian nations have outpaced the world GDP growth of 60 times from 1960 to 2017.

While Pakistan's GDP growth of 82X from 1960 to 2017 is faster than India's 71X and it appears impressive, it pales in comparison to Malaysia's 157X, China's 205X and South Korea's 382X during the same period.



GDP Growth in Current US$ 1960-2017. Source: World Bank
Thrilwall's Model:

Thrilwall's BOP-constrained growth model says that no country can sustain long-term growth rates faster than the rate consistent with its current account balance, unless it can finance its growing deficits. Indeed, if imports grow faster than exports, the current account deficit has to be financed by borrowing from abroad, i.e., by the growth of capital inflows. But this cannot continue indefinitely. Here's how Jesus Felipe, J. S. L. McCombie, and Kaukab Naqvi describe it in their May 2009 paper titled "Is Pakistan’s Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth" published by Asian Development Bank:

"The reason is straightforward. If the growth of financial flows is greater than the growth of GDP, then the net overseas debt to GDP ratio will rise inextricably. There is a limit to the size of this ratio before international financial markets become distinctly nervous about the risk of private and, especially in less developed countries, public default.7 If much of the borrowing is short-term, then there is danger of capital flight, precipitating the collapse of the exchange rate. Not only will this cause capital loses in terms of foreign currency (notably United States [US] dollars) of domestic assets owned by foreigners (the lenders), but it will also cause severe domestic liquidity problems. This is especially true of many developing countries as overseas borrowing by banks and firms is predominantly denominated in a foreign currency, normally US dollars.8 As the exchange rate plummets, so domestic firms have difficulty finding domestic funds to finance their debt and day-today operations, often with disastrous consequences."


Savings and Investment:

There's a strong relationship between investment levels and gross domestic product. The more a country saves and invests, the higher its economic growth. A State Bank of Pakistan report explains it as below:

"National savings (in Pakistan) as percent of GDP were around 10 percent during 1960s, which increased to above 15 percent in 2000s, but declined afterward. Pakistan’s saving rate also compares unfavorably with that in neighboring countries: last five years average saving rate in India was 31.9 percent, Bangladesh 29.7 percent, and Sri Lanka 24.5 percent..... Similarly, domestic savings (measured as national savings less net factor income from abroad) also declined from about 15 percent of GDP in 2000s, to less than 9 percent in recent years. Domestic savings are imperative for sustainable growth, because inflow of income from abroad (remittances and other factor income) is uncertain due to cyclical movements in world economies, exchange rates, and external shocks".

Summary:

Pakistan's average economic growth of 5% a year has been faster than the global average since the 1960s, it has been slower than that that of its peers in East Asia. It has essentially been constrained by Pakistan recurring balance of payment (BOP) crises as explained by Thrilwal's Law. Pakistan has been forced to seek IMF bailouts 13 times in the last 70 years to deal with its BOP crises. The best way for Pakistan to accelerate its growth beyond 5% is to grow its exports by investing in export-oriented industries.

Related Links:

Haq's Musings

South Asia Investor Review

Pakistan's Debt Crisis

Can Pakistan Avoid Recurring IMF Bailouts?

Pakistan is the 3rd Fastest Growing Trillion Dollar Economy

CPEC Financing: Is China Ripping Off Pakistan?

Information Tech Jobs Moving From India to Pakistan

Pakistan is 5th Largest Motorcycle Market

"Failed State" Pakistan Saw 22% Growth in Per Capita Income in Last 5 Years

CPEC Transforming Pakistan

Pakistan's $20 Billion Tourism Industry Boom

Home Appliance Ownership in Pakistani Households

Riaz Haq's YouTube Channel

PakAlumni Social Network


 

RiazHaq

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21X Remittance Growth Since Year 2000:

Remittance inflows from Pakistani diaspora have jumped 21-fold from about $1 billion in year 2000 to $21 billion in 2018, according to the World Bank. In terms of GDP, these inflows have soared nearly 7X from about 1% in year 2000 to 6.9% of GDP in 2018.


Pakistan Remittances in Millions of US Dollars. Source: World Bank

Meanwhile, Pakistan's exports have declined from 13.5% of GDP in year 2000 to 8.24% of GDP in 2017. At the same time, the country's import bill has increased from 14.69% in year 2000 to 17.55% of GDP in 2017. This growing trade imbalance has forced Pakistan to seek IMF bailouts four times since the year 2000. It is further complicated by external debt service cost of over $6 billion (about 2% of GDP) in 2017. Foreign investment in the country has declined from a peak of $5.59 billion (about 4% of GDP) in 2007 to a mere $2.82 billion (less than 1% of GDP) in 2017. While the current account imbalance situation is bad, it would be far worse if Pakistani diaspora did not come to the rescue.

Summary:

Pakistan's average economic growth of 5% a year has been faster than the global average since the 1960s, it has been slower than that that of its peers in East Asia. It has essentially been constrained by Pakistan recurring balance of payment (BOP) crises as explained by Thrilwal's Law. Pakistan has been forced to seek IMF bailouts 13 times in the last 70 years to deal with its BOP crises. This is happened in spite of the fact that remittances from overseas Pakistanis have grown 21X since year 2000. The best way for Pakistan to accelerate its growth beyond 5% is to boost its exports by investing in export-oriented industries, and by incentivizing higher savings and investments.

 

CrazyZ

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Pakistan's economy has grown at a compounded annual growth rate (CAGR) of about 5% since the 1960s. While an average 5% annual economic growth rate is faster than the global averages, it falls significantly short of its peer group in Asia. The key difference is that, unlike Pakistan's, the East Asian nation's growth has been fueled by rapid rise in exports. History shows that Pakistan has run into balance of payments (BOP) crises whenever its growth has accelerated above 5%. These crises have forced Pakistan to seek IMF bailouts 13 times in its 73 year history. What Pakistan has experienced is BOP-constrained growth as explained in 1979 by Thirlwall Law, a law of economics named after British economist Anthony Philip Thirlwall. The best way for Pakistan to accelerate its growth beyond 5% is to grow its exports by investing in export-oriented industries.

Economic Growth Since 1960:

The World Bank report released in June, 2018 shows that Pakistan's GDP has grown from $3.7 billion in 1960 to $305 billion in 2017, or 82.4 times. In the same period, India's GDP grew from $37 billion in 1960 to $2,597 billion in 2017 or 71.15 times. Both South Asian nations have outpaced the world GDP growth of 60 times from 1960 to 2017.

While Pakistan's GDP growth of 82X from 1960 to 2017 is faster than India's 71X and it appears impressive, it pales in comparison to Malaysia's 157X, China's 205X and South Korea's 382X during the same period.



GDP Growth in Current US$ 1960-2017. Source: World Bank
Thrilwall's Model:

Thrilwall's BOP-constrained growth model says that no country can sustain long-term growth rates faster than the rate consistent with its current account balance, unless it can finance its growing deficits. Indeed, if imports grow faster than exports, the current account deficit has to be financed by borrowing from abroad, i.e., by the growth of capital inflows. But this cannot continue indefinitely. Here's how Jesus Felipe, J. S. L. McCombie, and Kaukab Naqvi describe it in their May 2009 paper titled "Is Pakistan’s Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth" published by Asian Development Bank:

"The reason is straightforward. If the growth of financial flows is greater than the growth of GDP, then the net overseas debt to GDP ratio will rise inextricably. There is a limit to the size of this ratio before international financial markets become distinctly nervous about the risk of private and, especially in less developed countries, public default.7 If much of the borrowing is short-term, then there is danger of capital flight, precipitating the collapse of the exchange rate. Not only will this cause capital loses in terms of foreign currency (notably United States [US] dollars) of domestic assets owned by foreigners (the lenders), but it will also cause severe domestic liquidity problems. This is especially true of many developing countries as overseas borrowing by banks and firms is predominantly denominated in a foreign currency, normally US dollars.8 As the exchange rate plummets, so domestic firms have difficulty finding domestic funds to finance their debt and day-today operations, often with disastrous consequences."



Savings and Investment:

There's a strong relationship between investment levels and gross domestic product. The more a country saves and invests, the higher its economic growth. A State Bank of Pakistan report explains it as below:

"National savings (in Pakistan) as percent of GDP were around 10 percent during 1960s, which increased to above 15 percent in 2000s, but declined afterward. Pakistan’s saving rate also compares unfavorably with that in neighboring countries: last five years average saving rate in India was 31.9 percent, Bangladesh 29.7 percent, and Sri Lanka 24.5 percent..... Similarly, domestic savings (measured as national savings less net factor income from abroad) also declined from about 15 percent of GDP in 2000s, to less than 9 percent in recent years. Domestic savings are imperative for sustainable growth, because inflow of income from abroad (remittances and other factor income) is uncertain due to cyclical movements in world economies, exchange rates, and external shocks".

Summary:

Pakistan's average economic growth of 5% a year has been faster than the global average since the 1960s, it has been slower than that that of its peers in East Asia. It has essentially been constrained by Pakistan recurring balance of payment (BOP) crises as explained by Thrilwal's Law. Pakistan has been forced to seek IMF bailouts 13 times in the last 70 years to deal with its BOP crises. The best way for Pakistan to accelerate its growth beyond 5% is to grow its exports by investing in export-oriented industries.

Related Links:

Haq's Musings

South Asia Investor Review

Pakistan's Debt Crisis

Can Pakistan Avoid Recurring IMF Bailouts?

Pakistan is the 3rd Fastest Growing Trillion Dollar Economy

CPEC Financing: Is China Ripping Off Pakistan?

Information Tech Jobs Moving From India to Pakistan

Pakistan is 5th Largest Motorcycle Market

"Failed State" Pakistan Saw 22% Growth in Per Capita Income in Last 5 Years

CPEC Transforming Pakistan

Pakistan's $20 Billion Tourism Industry Boom

Home Appliance Ownership in Pakistani Households

Riaz Haq's YouTube Channel

PakAlumni Social Network


Economic growth is driven by a combination of population growth with human development, assimilation and development of technology (ie. industrialization, robotics, etc), and good financial policies (strong savings, efficient allocation of capital, sound monetary and fiscal policies).

Pakistan has struggled in all these areas. I would say most of past growth has been driven by population growth with some low level human development with some low level assimilation of technology.

Financial policies have been a complete disaster. Too much influence by incompetent politicians (both PPP and PML) and indifference by past military leaders (with the exception of Ayub Khan). Hopfully PTI, SBP and COAS can work together toward sustainable economic growth.
 

FuturePAF

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What war ? Fighting fourth rate Afghan warlords ?
It’s not which war, but the instability these conflicts cause to the rule of law (to some extent), the war economy created, and internal divisions these conflicts cause.

Similar to the instability the wars in Europe since the fall of the Roman Empire, until there is a consensus on the rule of law and just rights for the masses, people are not able to be as productive as possible.

Sweden is a good example of a nation that turned itself around from a similar state It was once a major military power in Europe, but after over stretching itself in a series of conflicts, it pulled back, embraced neutrality and focused on economic development.

Imran khan is trying to bring about similar reforms as to what happened in Sweden in the 19th century, more or less. He was always against conflict with Afghanistan and argued that negotiations would have been a better option. Had he been listen to, it would have saved everyone involved so much blood, treasure, and lost years. Even the push by Imran khan for Kashmir to be resolved as per the wishes of the Kashmiri people is in an attempt, in part, to not be pulled into a war unless absolutely necessary, so that the nation can focus on economic development, a large increase in exports and payback it’s debts to fund the welfare state he envisions.

 

PakPrinciples

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Meanwhile, Pakistan's exports have declined from 13.5% of GDP in year 2000 to 8.24% of GDP in 2017. At the same time, the country's import bill has increased from 14.69% in year 2000 to 17.55% of GDP in 2017. This growing trade imbalance has forced Pakistan to seek IMF bailouts four times since the year 2000. It is further complicated by external debt service cost of over $6 billion (about 2% of GDP) in 2017. Foreign investment in the country has declined from a peak of $5.59 billion (about 4% of GDP) in 2007 to a mere $2.82 billion (less than 1% of GDP) in 2017. While the current account imbalance situation is bad, it would be far worse if Pakistani diaspora did not come to the rescue.
My views still haven't changed on this but who knows maybe I'm wrong.

Nawaz Sharif and Musharraf's economic liberalization in the late 90s and early 2000s destroyed the countries economy and we need to reverse course on the changes they made.

The drop in tariffs resulted in a loss of tax revenues hence why Pakistan's tax to GDP ratio declined from the approximately ~13-14% of GDP they stood at before to ~10% levels they've stood at for years now:

Tariff Rate, Applied, Weighted Mean, All Products:


Tax to GDP ratio:


That's a massive loss in revenue since approximately 2001 and meant the country's leadership had even less to re-invest in the economy whether we're talking subsidies for local manufacturers to help them grow or building critical infrastructure like power plants particularly those that utilized domestic fuel sources like Thar Lignite which could have saved us billions like when global crude oil prices skyrocketed from 2008-2014 during PPP's term.

Then Musharraf signed the FTA with China, which no single government after him has challenged, which delivered on none of the promises made regarding it and we saw our trade deficit with the Chinese expand 50% in the first 5 years subsequently we went from relatively balanced trade to burgeoning year on year trade deficits:



It made no sense to sign the FTA with China in 2006, and still makes no sense to keep it, when that year approximately 50% of our exports were textiles and China's textile industry in 2006 was larger than Pakistan's entire economy combined which meant that the only thing Pakistan could ever export to the Chinese were raw materials for use in their industries:

China Imports 1995 to 2018.png


All the while we're importing more and more value added products like computers, televisions, smartphones, etc... killing our own domestic brands and manufacturing already struggling due to a lack of government support in the form of subsidies. With the lowered tariffs and free trade agreements past government took away any protection they had and that explains why Pakistan has progressively ranked lower on the economic complexity index over the years:

ECI Index Pakistan.png


My view is simple:
  1. Reinstate tariffs to the maximum allowable level we can, as per WTO rules, for key products/industries but keep them low to non-existent for imports of capital equipment for use in domestic industries and raw materials particularly those we can't source from within Pakistan (ex. phosphate rock).
  2. Cancel all our FTA's
  3. Increase the FBR's budget so they can hire the staff, buy the third party services and purchase the equipment and properties they need to do their job effectively and get much needed revenue into the government. My estimate is that they've been chronically underfunded for decades and need a budget increase by 500-1400% yearly just to do their job properly but to make up for years of neglect it'll need to be increased even more.
  4. Forget financing social services/welfare programs like healthcare and education for now and put the money into industry.
Imran khan is trying to bring about similar reforms as to what happened in Sweden in the 19th century, more or less.
I personally don't see it this way.

Imran Khan and the PTI aren't helping they're just making things worse through increased social welfare spending when every spare rupee should be going into building up local industry.

What Khan is doing seems to be no different from what past governments did through subsidies that feed local consumption rather than putting every rupee into manufacturing to reduce imports and increase exports.
 

nahtanbob

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I personally don't see it this way.

Imran Khan and the PTI aren't helping they're just making things worse through increased social welfare spending when every spare rupee should be going into building up local industry.

What Khan is doing seems to be no different from what past governments did through subsidies that feed local consumption rather than putting every rupee into manufacturing to reduce imports and increase exports.
if the social welfare is into education and health of the citizens of Pakistan it is worth it.
without an educated healthy population there is no economic growth
 

FuturePAF

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My views still haven't changed on this but who knows maybe I'm wrong.

Nawaz Sharif and Musharraf's economic liberalization in the late 90s and early 2000s destroyed the countries economy and we need to reverse course on the changes they made.

The drop in tariffs resulted in a loss of tax revenues hence why Pakistan's tax to GDP ratio declined from the approximately ~13-14% of GDP they stood at before to ~10% levels they've stood at for years now:

Tariff Rate, Applied, Weighted Mean, All Products:


Tax to GDP ratio:


That's a massive loss in revenue since approximately 2001 and meant the country's leadership had even less to re-invest in the economy whether we're talking subsidies for local manufacturers to help them grow or building critical infrastructure like power plants particularly those that utilized domestic fuel sources like Thar Lignite which could have saved us billions like when global crude oil prices skyrocketed from 2008-2014 during PPP's term.

Then Musharraf signed the FTA with China, which no single government after him has challenged, which delivered on none of the promises made regarding it and we saw our trade deficit with the Chinese expand 50% in the first 5 years subsequently we went from relatively balanced trade to burgeoning year on year trade deficits:



It made no sense to sign the FTA with China in 2006, and still makes no sense to keep it, when that year approximately 50% of our exports were textiles and China's textile industry in 2006 was larger than Pakistan's entire economy combined which meant that the only thing Pakistan could ever export to the Chinese were raw materials for use in their industries:

View attachment 669656

All the while we're importing more and more value added products like computers, televisions, smartphones, etc... killing our own domestic brands and manufacturing already struggling due to a lack of government support in the form of subsidies. With the lowered tariffs and free trade agreements past government took away any protection they had and that explains why Pakistan has progressively ranked lower on the economic complexity index over the years:

View attachment 669669

My view is simple:
  1. Reinstate tariffs to the maximum allowable level we can, as per WTO rules, for key products/industries but keep them low to non-existent for imports of capital equipment for use in domestic industries and raw materials particularly those we can't source from within Pakistan (ex. phosphate rock).
  2. Cancel all our FTA's
  3. Increase the FBR's budget so they can hire the staff, buy the third party services and purchase the equipment and properties they need to do their job effectively and get much needed revenue into the government. My estimate is that they've been chronically underfunded for decades and need a budget increase by 500-1400% yearly just to do their job properly but to make up for years of neglect it'll need to be increased even more.
  4. Forget financing social services/welfare programs like healthcare and education for now and put the money into industry.


I personally don't see it this way.

Imran Khan and the PTI aren't helping they're just making things worse through increased social welfare spending when every spare rupee should be going into building up local industry.

What Khan is doing seems to be no different from what past governments did through subsidies that feed local consumption rather than putting every rupee into manufacturing to reduce imports and increase exports.
PTI and Imran khan are trying to build the right environment to attract FDI. Local industry hasn’t been growing so bringing outside investors is the only other option. In the mean time, government spending will help build up a work force that can staff these new SEZ. Local consumption also needs to be maintained or even more people will be unemployed. It’s all a balancing act in hopes the SEZs take off.
 

Indos

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Actually export lead economy is not the only option to achieve good growth. Indonesia is more on domestic consumption lead economy and Pakistan can also follow the step as both countries have similar huge population.

Here is the data that show it.

Indonesia's comeback is the strongest among Asian countries' hardest hit by Asian Crisis 1997

South Korea's GDP in 1998 : USD 374.2 Billion
Thailand's GDP in 1998 : USD 113.7 Billion
Indonesia's GDP in 1998 : USD 95.45 Billion
Malaysia's GDP in 1998 : USD 72.17 Billion

South Korea's GDP in 2019 : USD 1.630 Trillion (4.3x larger than 1998)
Indonesia's GDP in 2019 : USD 1.112 Trillion (11.6x larger than 1998)
Thailand's GDP in 2019 : USD 529.1 Billion (4.6x larger than 1998)
Malaysia's GDP in 2019 : USD 365.3 Billion (5x larger than 1998)

Compared to Bangladesh which was not affected by the crisis

Bangladesh' GDP in 1998 : USD 49.98 Billion
Bangladesh' GDP in 2019 : USD 302.5 Billion (6x larger than 1998)


Actually this is @Pirupiru post. I posted here because it shows some relevance with the topic.
 

CrazyZ

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@RiazHaq

Actually export lead economy is not the only option to achieve good growth. Indonesia is more on domestic consumption lead economy and Pakistan can also follow the step as both countries have similar huge population.

Here is the data that show it.

Indonesia's comeback is the strongest among Asian countries' hardest hit by Asian Crisis 1997

South Korea's GDP in 1998 : USD 374.2 Billion
Thailand's GDP in 1998 : USD 113.7 Billion
Indonesia's GDP in 1998 : USD 95.45 Billion
Malaysia's GDP in 1998 : USD 72.17 Billion

South Korea's GDP in 2019 : USD 1.630 Trillion (4.3x larger than 1998)
Indonesia's GDP in 2019 : USD 1.112 Trillion (11.6x larger than 1998)
Thailand's GDP in 2019 : USD 529.1 Billion (4.6x larger than 1998)
Malaysia's GDP in 2019 : USD 365.3 Billion (5x larger than 1998)

Compared to Bangladesh which was not affected by the crisis

Bangladesh' GDP in 1998 : USD 49.98 Billion
Bangladesh' GDP in 2019 : USD 302.5 Billion (6x larger than 1998)


Actually this is @Pirupiru post. I posted here because it shows some relevance with the topic.
Indonesia has had far more foreign investment and has some big tourist hubs. Pakistan can not rely on these. A trade surplus and good remittances are our best path to a healthy balance of payments.
 

Nike

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@RiazHaq

Actually export lead economy is not the only option to achieve good growth. Indonesia is more on domestic consumption lead economy and Pakistan can also follow the step as both countries have similar huge population.

Here is the data that show it.

Indonesia's comeback is the strongest among Asian countries' hardest hit by Asian Crisis 1997

South Korea's GDP in 1998 : USD 374.2 Billion
Thailand's GDP in 1998 : USD 113.7 Billion
Indonesia's GDP in 1998 : USD 95.45 Billion
Malaysia's GDP in 1998 : USD 72.17 Billion

South Korea's GDP in 2019 : USD 1.630 Trillion (4.3x larger than 1998)
Indonesia's GDP in 2019 : USD 1.112 Trillion (11.6x larger than 1998)
Thailand's GDP in 2019 : USD 529.1 Billion (4.6x larger than 1998)
Malaysia's GDP in 2019 : USD 365.3 Billion (5x larger than 1998)

Compared to Bangladesh which was not affected by the crisis

Bangladesh' GDP in 1998 : USD 49.98 Billion
Bangladesh' GDP in 2019 : USD 302.5 Billion (6x larger than 1998)


Actually this is @Pirupiru post. I posted here because it shows some relevance with the topic.
To create a strong domestic market at home one need a strong population background with sufficient demand to cater domestic industry. Pakistan so far indeed very lack to nurture their own population, especially in universal education and universal healthcare system which in turn create a strong working population to create middle class market. Their human development index show us Pakistan not giving much attention to this one.
 

GWXP

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First reason: low savings rate means low investment rate and low GDP growth rate

Second reason: lack of domestic energy sources forces Pakistan to spend its limited hard currency reserves to import oil and gas and no dollars are left for import of capital equipment----this dependence on imported energy, which dries foreign reserves hinders economic growth of Pakistan

Third reason: bad business climate---institutional reforms are required
 

Nike

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Indonesia has had far more foreign investment and has some big tourist hubs. Pakistan can not rely on these. A trade surplus and good remittances are our best path to a healthy balance of payments.
We build the confidence for FDI to come from scratch, they are not Natural resources freely come to us. Investment came from investor who willing to open up business and seeks profit for their companies and Indonesia struggle so hard and competes with the like of Singapore, Malaysia, Vietnam and Thailand to attract more FDI. Tourism too, we need to build up all the infrastructure to attract foreign tourist, giving much attention toward detail such as hygine, cleanliness even promotional campaign to attract foreign visitor willing to spend their holiday here in Indonesia.

Pakistan if willing to double or multiple the efforts can do wonder. You know, Pakistan actually lies in more strategic points than Indonesia. You are close enough to rich Gulf countries, close to China, close to Central Asia states in which they are not that poor enough to begin with, had abundant natural resources, and so on, the internal and external market lies open for Pakistan to grab actually.
 

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