Explaining Pakistan's high
            growth performance over the past two decades : can it be
            sustained : Explaining Pakistan's high growth
            performance over the past two decades : can it be sustained
Using standard statistical growth
            analysis, the author shows that Pakistan's growth is
            the result of: (a) rapid capital accumulation.
            Pakistan's investment rate was relatively low but its
            fixed investment rate grew steadily in the 1970s,
            stabilizing at about 17 percent of the Gross Domestic
            Product (GDP) in the mid-1980s; (b) growth of the labor
            force, which offset a tendency toward capital intensity of
            production; (c) more competition from external trade; and,
            (d) a policy of economic liberalization since 1978. Pakistan
            was able to sustain high growth and avoid a financial crisis
            - despite large deficits - because real interest rates on
            debts were substantially negative in the 1970s, so
            debt-to-GDP ratios continued to decline. But real interest
            rates turned positive in the 1980s. If Pakistan continues to
            have fiscal deficits of the same magnitude as in the past, a
            financial crisis will quickly emerge. Pakistan cannot avoid
            a debt crisis by creating money. Higher inflation will hurt
            resource allocation and income distribution. To guard
            against reduced growth, weakened export performance, and
            higher real interest rates, Pakistan should reduce its
            fiscal deficit to below 4.5-5 percent of GDP and phase out
            quasi-fiscal deficits. Pakistan needs more balanced use of
            fiscal, monetary and exchange rate policies. Putting the
            burden of external adjustment fully on the real exchange
            rate, as Pakistan tried to do in the past, is inconsistent
            with improvements in external balance. Real exchange rate
            depreciation imposes capital losses on the stock of external
            debt. The real exchange rate should be set at an appropriate
            level, and monetary and fiscal policies should be used to
            adjust demand. A substantial adjustment effort will be
            needed to increase domestic savings and investment rates.
            National savings should increase from 14 percent of GDP to
            20-22 percent of GDP. Raising public revenues and reducing
            public investment should focus on areas (such as physical
            infrastructure and human development) that promote private
            investment, economic growth, and equity. To contain the
            fiscal cost of domestic borrowing, Pakistan has pursued a
            policy of financial repression, which has repressed the
            private credit and investment needed for long-term growth.
            Also needed is more rapid progress in human capital
            development, especially investments in women's health
            and education. To complete internationally in manufacturing
            requires more skilled production and a better educated
            workforce than Pakistan has had.