Pakistan’s economy is undocumented but vibrant

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Pakistan’s economy is undocumented but vibrant​

By Yasir Ameen - Jun 23rd, 2012

Karachi: Pakistan’s economic system is facing serious challenges including the worst energy crisis, mounting fiscal pressure, increasing volume of domestic financing, war on terror, law and order situation.

However the socio-economic situation was not bad as if seen in European state, State Bank of Pakistan’s third quarterly report “The State of Economy” released highlighted on Friday.

The energy shortage in Pakistan entails economic and social costs; low investment that is undermining future growth; issues with law and order; and the neighboring war in Afghanistan have taken its toll on the socio-economic situation of the country and common man.

Pakistan’s economic data appears to suggest two things: first, that Pakistan has fallen behind its neighbors in South Asia; and two, even this below potential growth is quite impressive when seen in the context of the challenges mentioned above.

There is a growing sense that Pakistan’s undocumented economy (the informal sector) is vibrant, and that official data understates the level of economic activity that can be seen. In effect, there seems to be a disconnect.

The plight of EU economies

This disconnect becomes more obvious when one observes the economic plight of EU countries, which are barely able to contain the fall-out of the debt crisis that could threaten the very existence of the Euro.

Since countries like Greece; the UK and Spain are now officially in recession have curtailed consumer demand that resulted closure of small businesses.

A slump in demand for luxury services like restaurants; cinema and overseas travel and a reduction is retail volumes and normal traffic flows; construction activity slows down; and a growing number of unemployed mingling with a shrinking number of buyers in markets and shopping malls.

But all these economic turmoil were not seen in Pakistan. It is a fact that the informal sector in Pakistan is buoyant, and is generating jobs; incomes; and demand for goods and services. This, in turn, is spilling over into the real sector that is documented.

Hence there are clear signs that construction is up, which is helping ancillary sub-sectors like steel; cement; chemicals; wood; glass; paints; etc.

The blessings of undocumented economy

Many would argue that a vibrant informal sector is a blessing, as it is driving formal economic activities, and keeping Pakistan from a full blown recession as seen in Europe.

Furthermore, the increasingly precarious social safety net that is stoking public anger in Europe, may not be relevant in Pakistan where the extended family and community steps in to take care of the elderly, the unemployed, and the destitute.

While social institutions like the extended family; mosques; neighborhood charities; ethnic/community organizations; etc., are robust and sustainable sources of social and economic uplift, the role of the state (beyond official safety nets) cannot be eliminated.

More specifically, physical infrastructure and other public goods (e.g. security; law enforcement; judicial services and contract enforcement; recreational spaces; etc.) would be under-supplied by private organizations, which are required to promote sustainable economic activities.

If the mindset of absolute self-sufficiency becomes more entrenched, it may segment the economy.

The growing strength of Asian countries in the global economy, seeking larger markets that allows for economies of scale and specialization is necessary for economic prosperity.

In this context, Pakistanis must accept documentation and the need to pay their taxes because this is the state has the resources to create and maintain the type of the platform needed for higher and sustained economic growth.

Pakistan