economic growth and poverty reduction cannot take place merely on the strength of good economic policies. political stability, social cohesion, supporting institutions, and good governance are equally important ingredients coupled with a benign external environment for achieving economic success. the economy will suffer from temporary shocks, both domestic and externally induced, but will develop resilience to tolerate these shocks with minimum disruption and dislocation if these ingredients are present. so what do essential ingredients for transforming pakistani economy entail? what are the pillars on which the foundations of pakistan ’ s rapid economic development will be built in the future? pakistan's chequered and uneven record on political instability and lack of democracy has deprived the country of a long - term vision, direction and continuity of economic policies. the rapid turnover of governments and the actual and imminent threat of the dismissal of governments through extra constitutional means have certainly proved to be an inhibitor to investment, innovation and institutional development. democracy in pakistan is still interpreted in a fairly narrow sense, i. e. holding general elections and allowing political parties to compete. while this is necessary, other pre - requisites of a well functioning democracy, i. e. rule of law, civil liberties, freedom of expression, checks and balances on the powers of different organs of state and religious and ethnic tolerance have not yet taken root. parliamentary elections are not meant to provide licence to those elected to rise above the law and do whatever pleases them. separation between executive and legislature, with the latter exercising effective controls on the former, is still missing due to the entrustment of executive powers to the ruling party in the legislature. as there is no other countervailing mechanism, excesses committed by the executive have only been corrected by dismissals or extra - constitutional measures. these extraordinary steps create uncertainty and unpredictability, which are inimical to long - term economic growth. thus an effective watchdog legislature and a vigilant judiciaryenforcing rule of law including enforcement of contracts and protection of private property will obviate the need for frequent changes in the government. political parties themselves have to shift the emphasis on dialogue to broad - based strong growth rather than narrow - minded slangs and personality - oriented cults. a stable and orderly political system ingrained and practicing all the elements of democracy is the first pillar for transforming the economy. although democracy does mediate between different ethnic, religious and regional groups, pakistan has witnessed growing polarization and division along sectarian, ethnic, linguistic

4 per cent, 6. 6 per cent and more than 8 per cent. if growth remains on this trajectory and poverty targeted interventions including investment in human development are implemented, there is no doubt in my mind that we would once again see a reduction in poverty and decline in unemployment rates. what is the basis of this assertion? higher growth rate in real terms means that all households in the economy with the exception of those not in labour force or not fully employed receive higher incomes after adjusting for inflation. of course, these higher incomes accrue in proportion to the assets held by different income groups. top 20 per cent of the population receives almost 50 per cent of the national income. so they receive higher incomes than the bottom 20 per cent who get only 7 per cent of the national income. but still this segment of the population is recipient of additional income generated as a result of faster growth compared to a situation where growth is low or stagnant. higher incomes translate into increased demand for goods and services. this puts pressures on prices in the short run as there are too many people chasing a limited supply of goods and services. but higher prices also signal to the producers that there are shortages and they should enhance their production so that they can meet these shortages. to increase their production, they have to invest in new plants & machinery and employ more people. as more people find jobs, they are moved out of the ranks of unemployed and unemployment rates decline. as incomes accrue to these previously jobless or underemployed households they are lifted out of poverty and hence the incidence of poverty falls. this is exactly what happened in pakistan until 1988 / 89 and that is what is happening at present. sixty per cent of our population relies on agriculture directly or indirectly. those engaged in agriculture are not employed in the strict sense of terms as we think about employment in factories, firms, government departments, etc. in agriculture, higher incomes accrue to the landholders through higher output prices and higher productivity. farm labour also benefits as the demand for their services also rises and poverty declines in rural areas too. part of this income finds its way into demand for consumer goods. manufacturers seeing this upsurge respond by first increasing utilization of existing capacity and then expanding capacity through new investment. that is why we have seen double digit growth in investment, manufacturing production and sales and high overall growth rate of gdp. but it must also be admitted that poverty is not only a phenomenon of low incomes but that of