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Macroeconomists for the Poor

Four critical ingredients that Pakistan needs to rev up its economy and realize its potential

Muhammad Waheed's picture

Economic Growth in Pakistan is expected to accelerate from 4.0% in 2014 to 4.5% in 2016. What are some reasons for this moderate improvement and how could it unlock its potential to grow even faster in the future so that more of its people can benefit from and contribute to greater prosperity?

How is Pakistan doing? There has been an improvement in Pakistan’s economic environment due to lower domestic and external risks. Foreign exchange reserves have increased to an appropriate level given the size of Pakistan’s imports. Pakistanis working abroad sent home about $18.5 billion in FY2014/15 which contributed to financing the trade deficit. Government efforts to stabilize the economy have been greatly aided by the decline in international oil prices which has significantly reduced the import bill. Fiscal policy has also become more prudent, although further efforts will be needed to safeguard the hard-earned stability.

Pakistan needs to invest more to address the country’s challenges. The positive economic environment provides Pakistan with an opportunity to address structural bottle necks that are holding Pakistan back from realizing its immense potential, which is bolstered by a large, young and growing population. However, the country’s development outcomes have not kept up with its income growth and significant public and private investments are critical to realize the aspirations of its population and improve the country’s competitiveness.

The share of investment to GDP remains minimal at 15%, about half of the South Asian average at 30% and one of the lowest in the world. This means not that enough infrastructure is being built, people don’t have access to sufficient levels of energy and water, the quality of schools and hospitals are not optimal.  More worryingly, private investment as a share of GDP has been declining and stood at less than 10% in FY2014/15. Several factors are contributing to this low investment level.  

Long Absence Does Not Necessarily Kill Love

Zahid Hussain's picture

It is said short absence quickens love, long absence kills it.  This is not always true in reality. One case is remittance behavior of long-term migrants. The remittance literature argues that the amount of remittances sent by migrants to their countries of origin declines through time. Reunification of families or breakdown of family ties underpins such behavior. However, the empirical evidence is not all supportive. The passage of time does not significantly influence migrant remittance behavior. Remittances are maintained at high levels over long periods. This allays concern that economies dependent on remittances will face foreign exchange shortages and falling living standards as remittance levels fall because of reduced migration rates and decline in migrants' willingness to remit over time.

What is the Bangladesh experience?  One way to judge is to look at the remittance behavior of Bangladesh diaspora abroad. There is no reliable data on the number and location of Bangladeshi diaspora members. A recent ILO report–Reinforcing Ties: Enhancing contributions from Bangladeshi diaspora members--estimates the number of Bangladeshi migrants living permanently in the United States and Europe at around 1.2 million.

The Remittance Multiplier in Action

Zahid Hussain's picture
David Waldorf/World Bank

In introductory macroeconomic class, students learn the theory of the multiplier and many interesting counterintuitive notions such as the paradox of thrift and the balanced budget multiplier based on the multiplier process.  Essentially, the multiplier multiplies because one person’s expenditure is another person’s income of which they spend a fraction, which in turn becomes another person’s income, of which a fraction is spent and the process eventually converges with subsequent increments to income getting smaller and smaller.

How does the multiplier process work in reality?  The Refugee Migration Movement Research Unit (RMMRU) in Bangladesh has recently completed the first phase of a longitudinal research on the impact of external and internal migration on income and poverty in Bangladesh. The research is based on a survey of 5084 external, internal and non-migrant households from 102 villages.  Among others, one of the most interesting is their findings on the impact of external migration on local level development through remittances and expenditure behavior of remittance recipients. Note that since the mid-1970s, Bangladesh has participated mostly in the short-term international labor markets of the Gulf and other Arab countries, as well as South East Asian countries. Over the last ten years, an average 500,000 workers have migrated abroad for work each year. Currently, an estimated 8 million Bangladeshi workers are on short-term migration abroad.

In 2013 the short-term international migrant (STIM) households on average received Tk 251,400 (over $3100) as remittance. The maximum amount received was Tk 4,400,000 and the minimum was Tk 6000.  The study found international migration plays a significant role in reducing poverty. Only 13 percent of the STIM households were below the poverty line, compared with 40 percent of the non-migrant households. The survey particularly covered those groups that were either below poverty line, experienced occasional deficits, or ‘break-even’ situations at the time of their first international migration.

The Bangladesh Remittance Story Reaffirmed

Zahid Hussain's picture

The Bangladesh Bureau of Statistics (BBS) has just released a Survey on the Use of Remittances. The survey provides interesting update on the demographic and economic characteristics of the 8.6 million Bangladeshi workers currently working abroad. Conducted during 12-23 June 2013, the survey enumerated 9,961 Remittance Receiving Households (RRHs) from all the seven divisions of the country.

Overall, the survey mostly reaffirms findings from previous surveys and studies about migration and remittance behavior of Bangladeshis.

Who are the migrants?
The overwhelming majority (97.4 percent) of migrants are males, married (67.1 percent), Muslims (97.8 percent) most of whom (78.2 percent) are less than 39 years old with majority (61.5 percent) having less than ten years of education.

The majority (over 57 percent) of the migrants have been staying abroad for over 5 years and a significant (22.3 percent) proportion (largely from Sylhet) have been staying abroad for over ten years. Most (91 percent) work as blue colored labor in Saudi Arabia, UAE, Malaysia, Oman, Kuwait, South Korea and Singapore.  Most of them (87.8 percent) received no formal training before leaving the country.

Can political stability hurt economic growth?

Zahid Hussain's picture

Mumbai traffic, India. Simone D. McCourtie / World Bank
The standard definition of political instability is the propensity of a government collapse either because of conflicts or rampant competition between various political parties. Also, the occurrence of a government change increases the likelihood of subsequent changes. Political instability tends to be persistent.
Economic growth and political stability are deeply interconnected. On the one hand, the uncertainty associated with an unstable political environment may reduce investment and the pace of economic development. On the other hand, poor economic performance may lead to government collapse and political unrest. However, political stability can be achieved through oppression or through having a political party in place that does not have to compete to be re-elected. In these cases, political stability is a double edged sword. While the peaceful environment that political stability may offer is a desideratum, it could easily become a breeding ground for cronyism with impunity. Such is the dilemma that many countries with a fragile political order have to face.  
Political stability is by no means the norm in human history. Democratic regimes, like all political regimes, are fragile. Irrespective of political regimes, if a country does not need to worry about conflicts and radical changes of regimes, the people can concentrate on working, saving, and investing. The recent empirical literature on corruption has identified a long list of variables that correlate significantly with corruption. Among the factors found to reduce corruption are decades-long tradition of democracy and political stability. In today’s world, however, there are many countries that combine one of these two robust determinants of corruption with the opposite of the other: politically stable autocracies or newly formed and unstable democracies.

Some see political stability as a condition that not only precludes any form of change, but also demoralizes the public.  Innovation and ingenuity take a backseat. Many seek change in all sectors of life--politics, business, culture--in order to have a brighter future through better opportunities. Of course change is always risky. Yet it is necessary. Political stability can take the form of complacency and stagnation that does not allow competition.  The principles of competition do not only apply to business. Competition can be applied in everything – political systems, education, business, innovation, even arts. Political stability in this case refers to the lack of real competition for the governing elite. The ‘politically stable’ system enforces stringent barriers to personal freedoms. Similarly, other freedoms such as freedom of press, freedom of religion, access to the internet, and political dissent are also truncated. This breeds abuse of power and corruption.

Vietnam, for example, is controlled entirely by the ruling party. The economy is one of the most volatile in Asia.  What once was thought of being a promising economy has recently been in distress. Vietnam’s macro economy was relatively stable in the 1997-2006 period, with low inflation, a 7 to 9 percent total output expansion annually and a moderate level of trade deficit. But Vietnam could not weather the adverse impact from the 1997-98 Asian financial turmoil, which partly curbed the FDI flow into its economy. Starting in late 2006, both public and private sector firms began to experience structural problems, rising inefficiency, and waste of resources. The daunting problem of inflation recurred, peaking at an annualized 23 percent level for that year.

The perils of competition

Zahid Hussain's picture

Promoting competition is considered the best available option for increasing economic well-being. The recent global financial crisis prompted policymakers to reconsider basic assumptions, but the virtues of competition were not among them. However, gone are the days when practitioners slept sound thinking the economy, if left alone, is self-correcting.

The limitations of competition as a force for universal good are well-known. Consumers can be inadequately informed, making it possible for firms to take advantage of them. The intrinsic difficulty of matching skills to positions and the costs associated with moving jobs may make workers stay with abusive employers. More basically, in a world where people have imperfect information and workers can’t always leave their employer, firms may be able to respond by cutting corners and abusing consumers and workers.

Is the problem with competition itself or the legal and informal institutions that yield this type of competition? The answer depends in part on one’s ideological lens—namely the belief of competition existing outside a regulatory framework, necessitating governmental intervention in the marketplace versus the belief that regulatory forces help create, define, and nurture competition in the market, necessitating improvements to the legal framework if competition is failing.

Some policies that supposedly restrict competition are justified for promoting competition. Intellectual property rights, for example, can restrict competition along lets say the use of a trade name. But the argument is that intellectual property and antitrust policies complement, rather than conflict, one another in promoting innovation and competition.

Life will surely be more stressful if we needed to compete for everything. Cooperation is often more relaxing. Society and competitors at times benefit when rivals cooperate in joint ventures to address collective needs. Competition can make people less cooperative, promote free-riding, and reduce contributions to public goods, thus leaving society worse off.

The point is not all forms of competition are beneficial. Just as athletic contests distinguish between fair and foul play, the law distinguishes between fair and unfair methods of competition. Bangladesh’s garment industry is a contemporary case in point.  The collapse of Rana Plaza in Bangladesh brought to the fore the pathetic state of working conditions in many factories serving the global supply chains. The structure of the supply chain itself—the relationship among regulators, buyers, suppliers, and workers—is fundamentally related to these problems. 
The practice of subcontracting is routine in Bangladesh’s garment industry. The prevalence of competitive indirect sourcing strategies has resulted in a supply chain driven by the pursuit of nominal cost minimization. It has increased risks for business and workers by undermining prices, wages, working conditions, and investment in productivity and quality. The apparel units engaged in sub-contracting are mostly non-compliant particularly in paying wages and maintaining safety standards.

Question is why do compliant factory owners take recourse to such sub-contractors? Major global buyers see Bangladesh as a market where they can obtain the most competitive prices for a high volume of lower end products. Consequently, they set low price targets. The manufacturers compete for large orders by undercutting each other, further driving down the prices. They make delivery commitments far in excess of their capacity to produce without breaching compliance. When prices are dramatically driven down, the natural tendency of a garment manufacturer is to manage their unit at a least cost with regard to overheads and wages. The pressure to drive these down arise inevitably.

Nepal's Paradox: When Good is Not Good Enough

Johannes Zutt's picture

Nepal needs to fix its budget process, remove hurdles to infrastructure development and cut down excess liquidiity.

At first glance Nepal’s economic fundamentals appear sound. Economic growth this year is expected to recover to 4.5%, after a lackluster FY13. On the fiscal and external fronts, indicators are well in the green. This year again, Nepal is likely to be the only country in South Asia to post a budget surplus (0.3% of GDP). Continued growth in revenue mobilization and higher grants will more than make up for the increase in government spending. In FY14, public debt is expected to fall below 30% of GDP, and Nepal’s risk of debt distress may fall from a “moderate” rating to “low”.

Unlike other South Asian countries, Nepal has remained largely unscathed by global monetary tightening, reflecting its limited integration into global financial markets as well as its healthy external balances. Nepali analysts often highlight the growing trade deficit as a cause for concern, but remittances (projected at over 30% of GDP) should push the current account to a comfortable surplus position of 2.4% of GDP.

The only apparent dark spot is inflation, which remains stubbornly high. With inflation close to double digits in January (year-over-year), it appears unlikely that the NRB’s target of 8.5% will be reached.

In short, Nepal appears to be doing well.  Many European countries today can only dream of posting similar growth, fiscal or debt numbers. So what is the problem?

Where is India's economy heading?

Ulrich Bartsch's picture

The India Economic Update 2012 will be discussed online.Ulrich Bartsch, the World Bank's outgoing senior country economist for India, will lead a 24-hour live chat on the World Bank India Facebook page. He and other experts will be discussing the Bank's latest India Economic Update. The chat will begin Wednesday, Oct. 10, at 4:30 p.m. India Standard Time (7 a.m. Eastern Daylight Time in the United States). Here, he provides a sneak preview.

India’s economic growth has slowed to a pace not seen since the beginning of the 2000s. At the same time, the current account deficit has reached a record high. We project growth in the current fiscal year to reach around 6%, a slowdown from the already low 6.5% growth in the previous year. This growth projection is predicated on an improving domestic and external environment, but the risks for a worse outcome are high.

More Foreign Direct Investment in Retail for India?

Bingjie Hu's picture

Recently, India has seen a heated debate on the entry of foreign direct investment (FDI) in the country’s $400 billion retail market. In November 2011, the government proposed a policy change to open up the country’s multi-brand retail segment -- for retailers such as Wal-Mart and Carrefour. Foreign investors were to be allowed to own up to 51 percent of a multi-brand retailer if they invested at least $100 mn, with half spent on infrastructure development in India. Within weeks of the announcement, the government suspended the decision amid protests from opposition parties and small shopkeepers citing concerns over large scale job losses, especially in the small, unorganized retail sector.

What is FDI?

Foreign direct investment (FDI) refers to the net inflows of foreign investment to acquire a lasting management interest (more than 10 percent of voting stock) in a domestic company. In 1997, the government permitted 100 percent FDI in the wholesale cash and carry trade, in which customers arranged the transport of goods from wholesalers and paid for goods in cash (not credit), on a case-by-case basis.