# A HIGH GROWTH SCENARIO FOR PAKISTAN

The above scenarios point to the feasibility of improving economic performance on the margin via modest changes in a few policy areas. However, in order for Pakistan to join the group of fast-growing Asian economies, a wider range of changes are needed, going beyond what we considered in the preceding section. This section does not strive to identify what the required policy and institutional changes may be but has the more modest objective of exploring how the key growth-related macroeconomic variables – TFP, factor accumulation, savings, and investment – may need to evolve if Pakistan is to swiftly raise its growth rate from the 4-5 percent range to 7 percent.<sup>20</sup> To provide a basis for comparison, Figures 4.5 and 4.6 show the evolution of growth related variables under the _base_ scenario. As shown in Figure 4.5, throughout the simulation period, total investment and savings were close to 14 percent of GDP, including private investment at close to 10 percent and government investment at 4 percent. Given the fact that government savings initially were negative (at around -3 percent of GDP) and the foreign savings contribution modest (at 2 percent of GDP, including around 1 percent of FDI), private savings had to shoulder the bulk of the burden of investment financing especially in the initial years. A gradual increase in government savings made it possible for private savings to decline slightly relative to GDP.<sup>21</sup> Figure 4.6 shows the simulated rate of growth in GDP at factor cost and decomposes it into growth in TFP and factor accumulation.<sup>22</sup> Over time, growth in GDP and factor accumulation accelerates, gradually reducing the contribution of TFP.<sup>23</sup> Both for labor and capital, employment grows more rapidly. For labor, this reflects the effects of a combination of demography, schooling and reduced unemployment; for capital, it is due to higher investment.

The more specific features of the new high growth scenario, labeled _hi-grw_ , are as follows:

- Starting from 2013, annual growth in GDP at factor cost is 7.0 percent.

20 As suggested by López-Cálix et al. (2012, p. 11), the broader reforms needed to spur rapid growth in Pakistan during coming decades include improvements in the investment climate and in the quality of government institutions, as well as increases in private savings and investments in both physical and human capital.

21 In MAMS-based analysis, the focus is on the complete government budget, including government borrowing, and on the effects of government spending defined by function, with different being requiring different combinations of current spending and capital stocks, the latter financed by government investment. Growth may be promoted not only by functions with a large investment spending share (like infrastructure) but also by functions with a large current spending share (like education). Government savings, the difference between government current revenue and current expenditures, does not play an important role; in fact, it will almost invariably change whenever spending is reallocated between two functions, given different functional shares for current and capital spending. On the contrary, in a simpler growth model, in which growth is driven by investment in physical capital, government savings may be an important measure of the extent to which the government makes resources available for private or government investment.

22 For the growth decomposition, factor accumulation refers to the level of factor employment, not factor stocks; i.e. unemployed factors (in this case labor) are not included since they do not contribute to GDP.

> 23 Given (a) _Qt = At∙ Ft_ , where _t_ refers to year, _Qt_ is GDP, _At_ is TFP, and _Ft_ is a Cobb-Douglas aggregate of the different model factors (cf. Table A1.1), and (b) known values for _Qt_ and _Ft_ ; _At_ is defined as _Qt/Ft_ . TFP growth refers to growth in _At_ over time. The growth rates of _At_ and _Ft_ are here scaled so that they sum to the GDP growth rate.

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