ARTICLE (December 15 2008): The global recession has not hit us exactly the same way or for the same reasons as it seems to have entangled the rest of the world, or so we are told by economic analysts. Some argue that recession has not hit Pakistan at all and the current economic impasse can be attributed entirely to mismanagement of our economic managers.
According to recently released statistics, there is ample evidence to suggest that manufacturing output is on the decline - one major indicator of recession. Pakistani manufacturing sector accounted for 25.9 percent of Gross Domestic Product in 2006-07. Or, in other words, about a quarter of our total GDP was sourced to the manufacturing sector. However, interestingly, in 2007-08 manufacturing accounted for 25.9 percent of GDP in comparison to the previous year's (2005-06) 26.1 percent.
Analysts who may allege that this decline, however insignificant, may well portend the start of a recession must note that there was a higher decline between 2004-05 and 2005-06: from 26.3 to 25.9 percent of GDP. These years were hailed by the then government of Pervez Mushrarraf as high growth years and high growth is not compatible with a recession. A closer look at the ingredients of manufacturing may provide some answers.
Manufacturing, as calculated by the Economic Advisor's Wing and contained in the annual publication titled Economic Survey, constitutes five sub-heads. First, mining and quarrying, which registered a constant contribution to GDP in 2006-07 and 2007-08: 2.5 percent. Large scale manufacturing declined from 13.4 percent to 13.3 percent of GDP between the two years, while small scale manufacturing rose from 4.3 to 4.4 percent. Construction remained constant at 1.3 percent, in spite of ongoing construction work for the quake affected families, while distribution of gas and electricity rose from 2.5 to 2.7 percent.
Considering the charges of blatant manipulation of statistics during the Shaukat Aziz era these statistics too are suspect to some extent. This is particularly relevant as government involvement in the manufacturing sector is considerable. There is evidence to suggest that public sector manufacturing - inclusive of military as well as civilian government involvement in the manufacturing sector - constitutes a significant portion of the total manufacturing sector.
In 1991 public sector accounted for about 40 percent of total manufacturing value added and absorbed around 48 percent of gross fixed investment. The total value of public sector industrial output in 1991 was 36 billion rupees (in constant 1988 fiscal year prices), but pretax profits were only 1.3 billion rupees, reflecting the inefficiencies and overstaffing prevalent in these enterprises.
To improve the efficiency and competitiveness of public sector firms and end federal subsidies for their losses, the government launched a privatisation programme in 1991. Majority control in nearly all public-sector enterprises was to be auctioned off to private investors, and foreign investors were rendered eligible buyers. In March 1992, twenty units were privatised, but by 1993 only about 30 percent of the government's target number of firms had been sold because some of the enterprises were unattractive for private investors. In 1994, the government led by Benazir Bhutto, rhetorically committed to continuing the policy of privatisation, backed down in the face of stiff resistance from the powerful public sector employee unions.
The Musharraf era was marked by privatisation of 166 units (January 1991 to February 2007). The take of the federal government from this was 475 billion rupees, a hefty 8.9 billion dollars. According to the Economic Survey between July 2007 and February 2008 - the last months of the dying Musharraf regime - UBL's divestment of 25 percent shares through a GDR fetched 650 million dollars, hailed as the biggest book builder in Pakistan's history. Thus as a result of sustained efforts to privatise large-scale parastatal units the public sector continues to account for a significant proportion of industry even today. Be that as it may it is evident that the manufacturing sector did not decline significantly as a percentage of GDP.
This situation is likely to change dramatically during the current year. The energy shortage is having major implications for industrial output; in addition the expected increase in electricity rates by April, revealed by the Special Advisor to the Prime Minister on Finance, will raise the cost of manufacturing still further and there is evidence to suggest that part of the inflationary pressures can be sourced to the inadequacy of electricity supply to the industrial sector.
This is endemic to Pakistan and therefore a decline in output raising fears of an onset of a recession cannot be attributed either to the global financial crisis or indeed the heavy subsidisation of oil and products by the previous government; but to the failure to supply electricity, a critical input, to the manufacturing and farm sector. It is precisely for this reason that the International Monetary Fund (IMF) recommends even tighter fiscal and monetary policy measures in the months to come, recommendations that are the reverse of the usual prescriptions for recession, as a means to check inflationary pressures sourced to too few goods being produced domestically chasing too much money that was generated because of a burgeoning budget deficit.
Growth rate - a measure of an economy in recession or not - declined in 2007-08, and is expected to decline further in the current fiscal year. However it is still expected to be over 3 percent - a growth rate that would be the envy of countries in the throes of the recession. All through the 1990s growth rates were very high.
The Musharraf government insisted that this was due to their investment friendly policies; however the fact that aid began to flow in the aftermath of 9/11 at unprecedented levels was perhaps a more critical ingredient of the growth rates achieved during the Musharraf era. The growth targets for the current year as well as in the following year are not high, ie under 3.5 percent, however, this growth rate is sufficiently significant to conclude that recession is unlikely in this country.
To conclude, our malaise is basic: an infrastructure base grossly inadequate to sustain even the existing output potential, a government heavily involved in manufacturing and contributing heavily to inefficiencies in the sector which, in turn, also reduces the tax revenue that can be realised from the manufacturing sector, and constant state intervention in pricing of commodities which is leading to artificial shortages and higher black market prices. At the same time the country is losing its battle with respect to providing education and health care facilities with the bulk of the annual budget allocated for servicing past debts, defence and non-development expenditure. The fault, as Caesar said to Brutus, is not in our stars or global recession but in ourselves that we remain a prisoner to underdevelopment.
. Aren’t you the same guy who never gets tired calling Pakistanis “jahel”?!
