Ishrat Husain: Comparison of Pakistani economy with Asean economies
Keynote address by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the 12th General
Council and General Body Meeting of the Asia Oceania Tax Consultants Association, Karachi,
26 November 2004.
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It is now widely accepted that the Asian economies have done extremely well in terms of economic
growth and poverty reduction during the last three to four decades or so despite the crisis of 1997.
Three decades ago, China was among the world's poorest countries with 80 percent of the population
having incomes less than US$ 1 per day and only a third of all adults able to read or write. By 2000 the
proportion of the poor (income less than US$ 1 per day) had declined to around 16 percent. Korea and
Pakistan had identical per capita incomes of $100 in 1960. Korea has now graduated as an OECD
country and reached per capita income of approximately $10,000 while we haven't even crossed the
threshold of $1,000. Asia's share in World GDP (at PPP) has risen from 24 percent in 1973 to almost
40 percent in 2003. Foreign currency reserves of Asian central banks now account for 70 percent of
the World currency reserves and financed more than half of the current account deficit of the United
States in 2003.
There was a time in the late 1960s when Pakistan's exports exceeded total exports of Indonesia,
Malaysia, Thailand and the Philippines. But, unfortunately, all these countries have moved ahead
whereas Pakistan is still struggling to reach $14 billion target. Had Pakistan maintained its economic
progress of the 1960s, its economy would have been akin to the East Asian ones and moved into the
middle income group by now. Our per capita income is still around $650 and we are stuck in the low
income category.
Whereas it took the United Kingdom almost a century, United States of America 50 years to double
their per capita incomes, most of the Asean+3 countries1 (Asean + Japan, China and Korea) achieved
this goal in less than half a century. Japan did this in 40 years, Korea in 25 years and China in
10 years. Pakistan should learn from the experience of these countries and there are many lessons
which should be followed by us if economic progress has to be sustained. The evidence on economic
development Asean+3 countries suggests some common factors which have been critical to their
success.
(a) Work ethic; discipline; trust: The foremost principle for economic progress was strong
work ethic and discipline in the work force and creation of trust among each other. The labour force, in
each of these countries, is highly disciplined, works extremely hard and carries out the orders of their
supervisors ungrudgingly. The workers mind their own business without disrupting others' work, focus
on the task given and take pride in producing results.
Trust and social capital have a positive impact on the quality of development by enhancing collective
action, mitigating risks, promoting accountability and reducing transaction costs. Korea and Japan
produce more scientists and engineers than lawyers as these countries work on the basis of trust and
avoid protracted litigation which wastes a lot of productive time and dissipated energy.
Another characteristic of East Asian economies is the reliability of contract fulfillment. When a contract
is given in China either for production of goods, delivery of services or construction of a project, you
can be rest assured that it will be completed mostly ahead of time, within the stipulated specifications
and without incurring any cost overruns. The attributes of reliability and low cost have made China the
world's largest manufacturing factory that has been able to attract almost all Fortune 500 Companies
to locate their facilities in China. Unless every single worker and manager in this country begins to
abide by his word in honouring contracts - whether oral or written - we would remain on the fringes of
the global expansion.
(b) Savings: Pakistan would have to improve its domestic saving which was amongst the lowest
in the Asia region at round 16 to 18 percent as against 30 to 40 percent in other countries. China's
domestic savings rate has consistently exceeded 40 percent providing ample resources for
investment. So is Malaysia's rate of savings 43 percent and Thailand's 33 percent. It is only when a
country does not have adequate domestic savings it has to indulge in foreign borrowing in order to
attain a modest investment. Correspondingly, East Asian countries retired, in net terms - $28 billion of
debt during the last four years. External debt-GDP ratio in China is only 13 percent, one of the lowest
among the developing countries because it relies mainly on its own savings to finance investment. In
contrast, Pakistan's low savings rate compelled it to borrow abroad. This excessive foreign borrowing
resulted in a financial crisis for Pakistan in the late 1990s as the country was not able to service its
loans. The reduced debt burden that has been recently achieved can be sustained if the national
savings rate rises consistently over time.
(c) Investment in human development: Investment in human resource development has
made a significant contribution to growth, reduction in the incidence of poverty and improvement in
social indicators in the East Asian countries. The average years of schooling in Korea are 9.6 years;
6.3 years in Malaysia and 6.0 years in Singapore compared to 3.2 years in Pakistan. The emphasis on
female education led to reduced fertility, thus mitigating the adverse effects of population pressure and
increased supply of educated labour. In Pakistan, female education rates remained dismally low with
the attendant problems of high fertility rates, high population growth rates and a low labour
participation rate. There is an urgent need to bring women in the mainstream and give priority to their
education, health care, nutrition. This will not only control the rate of population growth but expand the
base of educated and skilled labour force in the country. Almost half of the population in Pakistan is
illiterate and it is imposing a heavy drag on achievement of Pakistan's economic potential. On the
other hand, most Asean+3 countries have almost 100 percent literacy rates with high life expectancy,
low infant and maternal maternity and universal primary education. The productivity effects of such
elevated social indicators on the economies of these countries are quite obvious and productivity is the
key variable determining how fast the economy can grow.
(d) Labour force quality: Related to this phenomenon is the training and skill upgradation of
the labour force. Asian countries do not only hire educated and literate workers but provide continuous
training to these workers in acquiring new knowledge, techniques of production or improvement in
processing. In 1991, a U.S. manufacturing worker was 40 times more productive than his Chinese
counterpart. By 2000 that gap had narrowed to only 10 times. Chinese labour productivity has
increased four fold in the past decade thus lowering the unit labour cost in manufacturing. China's
wage rate is 61 cents per hour compared to the US rate of $16. Taking into account the labour
productivity differences between the two countries, the unit labour cost in China is still only $6.10 per
hour. The firms in Pakistan consider training expenses as additional costs and not investment. This
short sighted view has kept the unit cost of labour i.e. taking into account labour productivity
differentials quite high relative to China and Asean countries.
(e) Openness of the economy: Another fundamental which has served the Asean+3 countries
well is openness of their economies to trade and foreign investment. Tariffs rate are uniformly low - in
single digits - and non tariff barriers are hardly existent. Market access to these countries has
stimulated both import and exports of goods and services to the extent that in Malaysia the trade-GDP
ratio exceeds 100 percent. China and India both had almost identical level of exports of $10 billion in
the late 1970s. A relatively more open trade policy pursued by China has enabled it to increase its
exports to more than $400 billion last year while India was able to each about $60 billion. Similarly,
FDI flows are welcomed by all the Asian countries as they benefit the domestic economies in form of
new technology, better managerial skills, networking with the global supply chain and infusion of
foreign capital. FDI flows to East Asia during the last four years amounted to $208 billion. China alone
receives $50 billion annually and most foreign enterprises produce goods not only for the Chinese
markets but also for exports. 65 percent of China's increase in exports in the last ten years was
generated by foreign firms and their joint ventures.
This policy of openness makes a lot of sense. Our entire economy is $100 billion and even if we are
able to double it within ten years, it will only grow to $200 billion whereas, as world exports today are
$7 trillion and if we aim at capturing 2 percent of world trade, our exports alone will increase to
$140 billion - ten times the 2004 level. So you can see what a tremendous difference it will make in
boosting Pakistan's economy if we aggressively integrate ourselves into the world economy. This is
the way the Asean+3 countries have done it. Those who favour inward like strategies relying simply on
domestic economy and argue against exploiting the opportunities offered by globalization are, in fact,
condemning us to a perpetual state of backwardness, poverty and misery.
(f) Tax culture: One interesting feature of the development story of Asean+3 countries is the
high tax compliance by the population and low incidence of tax evasion. In the 1970s when Japan had
not yet joined the ranks of developed countries, tax recovery was almost 96 percent of the total tax
assessments. The high degree of revenue collection helps a nation to build infrastructure like roads
and highways, bridges, ports, etc. and to spend on education and health. In the absence of adequate
tax revenue mobilization, the government is unable to carry out these basic responsibilities of
development well. In Pakistan there is a widespread tendency to evade taxes by concealing incomes.
Presently, there were only 1.1 million tax payers in a population of 150 million people. This number
should be increased to at least three million. Once the tax base is broadened the tax rate can come
down from 35 to 25 or even 20 percent and the heavy burden borne by a small segment of the
population can be eased by sharing with a larger segment. As tax consultants, you bear an enormous
responsibility for the sake of the nation's cause to help plug the holes of tax evasion and maximize the
number of tax payers in the country.
(g) Role of the government: The role of the government in Asean+3 countries has been to
facilitate, guide and help the private sector in fostering economic growth and development. By
maintaining macro economic stability, by charting out a long term vision and strategic direction and by
pursuing consistent and predictable policies, the governments in these countries gave confidence to
local as well as foreign investors. The long term path chosen by China in the late 1970s under the
leadership of Deng Xao Ping is still being followed with suitable adaptation and modification despite
changes in the leadership of the Communist Party during the last two decades. The same was done
by Japan where a separate ministry called Ministry of International Trade and Industry (MITI) was
created to develop industrial strategy and vision and to assist the private sector in these industrial
pursuits and export expansion. Unfortunately, we have been changing our policies, programmes and
priorities every two to three years in the 1990s with every single change in the government giving
confusing signals to the investors, nurturing uncertainty and leading to disruption in the momentum of
economic activities. The continuity and consistency of policies since 1999 and the level playing field
created for the investors has started paying dividends as investment rate has begun to show an
upward trend.
(h) Science and technology: As a nation, we have to give greater importance to science and
technology as a tool to capture the commanding heights of the global economy and to achieve the
required level of growth of 7 to 8 percent. Korea and Taiwan (a non Asean country) sent teams to
recruit their nationals working in the United States and offered them lucrative and attractive packages
to hire them back to their countries of origin. These scientists and engineers taught at the universities
and colleges, set up research institutes, worked in the laboratories and on product development of
industrial conglomerates and trained hundreds of thousands of young men and women in the modern
tools of science and technology. The enormous progress that these countries have achieved during
the last thirty years would not have been possible without this huge investment in research and
development.
In Pakistan, we started extremely well and our educational institutions were turning out scientists and
engineers of high caliber in the 1960s but then we neglected these fields to the serious detriment to
our economic progress. It is only during the last five years that higher education, science and
technology have come back on the radar screen of the Government but it will take us some time
before we can make up for the lost time.
(i) Private sector: In Asean+3 economies the private sector was allowed a free hand in the
production, distribution and trade of goods and services. Japan did it through big industrial
conglomerates Keiretsus/Zaibatsus and so did Korea through Chaebols. Taiwan adopted a different
strategy and that was to promote industrialization through small and medium enterprises. China,
Thailand, Indonesia, Philippines and Malaysia encouraged foreign direct investment and joint
ventures. The success of these strategies can be gauged from migration of product cycle. In the 1970s
U.S. firms such as RCA and Westinghouse dominated domestic appliances markets in the world, in
the 1980s Sony, Sanyo and National of Japan took over this market, in the 1990s the production
shifted to Korea with Samsung, LG, etc. and in this decade it is the Chinese companies such as Haier
who are beginning to assert themselves. Private sector firms were responsive to changing market
conditions and took full advantage of lower costs of production in adapting to these changed
conditions. Pakistani scene after the 1970s has been riddled with inefficient and highly bureaucratic
public enterprises who were subtracting rather than adding value and causing enormous losses. It is
only more recently that the speed of privatization has picked up and private sector has been assigned
its due role.
(j) Leadership and institutions: In almost all these countries, a common feature has been
strong leadership and strong institutions that could provide the helping hand and clear direction to the
entrepreneurs, firms, farming community, exporters, businesses and delivering essential public
services to the population at large. In Korea, General Park, in Singapore Lee Kuan Yew, in Indonesia
General Suharto, in Malaysia, Dr. Mahatir Mohammad, in the Philippines General Ramos after Marcos
were the shining lights in their respective countries. Whatever their faults they took upon themselves
the responsibility to steer the course of economic development and produced tangible results for their
nations. In the absence of strong leadership or strong institutions, the difficulties are compounded and
the time taken to reach the goal post is elongated.
(k) Regional integration: Finally, the Asian economies have been recording very high growth
rates in times of turbulence in the world economy, slow down in the US and European economies and
overall stagnation. They have been able to do so because regional trade integration has insulated
them from these external shocks to a very large extent. The rising share of intra-regional trade has in
fact created a barrier against the tidal waves of adversity in world economy. This can be seen from the
differential growth in intra-regional trade in East Asia and the growth in world trade. The intra-regional
trade has grown at an annual rate of 16.4 percent between 1975-2001 while world exports have grown
at 8.2 percent per annum.
China has become a pivot around which the countries in the region revolve around. This linkage may
prove to be a liability at some future point of time if something goes wrong to the Chinese economy but
even then the trade among these countries other than China has also picked up. 30 products account
for half of the intra-regional trade. Of these, 20 are inputs for further production. The basis for
intraregional trade is that they buy raw materials and commodities from each other to make labour
intensive products for the US and European Markets. South Asia, on the other hand, is the only region
in the world where the tentacles of regional integration are least spread out and intra-regional trade
linkages hardly exist. The potential for rapid economic growth through improved trading relations in the
region is quite high but political differences have not yet allowed this potential to be harnessed. Given
the fact that this is a region which has the highest number of the poor in the world, the sense of
urgency is quite obvious but lack of political will has so far retarded the progress.
The above comparison clearly brings out that some of the important factors responsible for the
economic turnaround of Asean+3 countries were not practised consistently in Pakistan and that is why
we are left behind.
But, let me conclude on an optimistic note. Whatever progress has been achieved during the last five
years by following a set of continuous and consistent policies and reforms if it is allowed to move on
the chosen course, I am confident that Pakistan will also be able to emulate the example of the Asian
Countries. We will be able to leave a prosperous and progressive Pakistan for our children to live and
enjoy.