Aziz Goes For Growth
By Nayyer Ali, MDShaukat Aziz’s first budget as Finance Minister has put forth an ambitious target for tax collection. Many critics believe it is unreachable and that Aziz’s budget will be unsuccessful. But they miss the most important part of Aziz’s policy mix, which is a solid push towards increasing the growth rate of the economy. If this is successful, all the other problems take care of themselves. There is nothing wrong with Pakistan’s economy that 10 years of 7% growth can’t fix. The issue is how to achieve that.
For a country at Pakistan’s level of development 7% growth is not an unreasonable target. Many of the East Asia’s successful countries managed growth rates that high during their years of hypergrowth. South Korea and Taiwan would get above 10% in their best years. Labor force growth alone will increase the economy by 4% a year, and increased education and capital investment can add the other 3-4% per year, as long as the investments are made. The key is that the government allows the economy to function as efficiently as possible.
If Pakistan can achieve 7% growth for 10 years, its economy would double in size and the standard of living would rise about 70% (population increase takes up the balance). The share of debt as a fraction of the economy would be reduced substantially, and allow less of the government budget to go to debt servicing. For this to happen Pakistan does not have to pay down its debt, it just needs to stop or substantially reduce new borrowing. Extending far into the future, if Pakistan can sustain 6-7% growth for 6 decades it will have an economy as large as the current American one.
Aziz has done several things to foster growth. His significant increase in education spending (about 30% this year) will not raise growth immediately, but will pay huge dividends over the next 10-20 years, especially if he continues to substantially raise education spending in the next 2 years. The Finance Minister has also moved to cut tariffs on many imports and pursue a strategy of export promotion. A huge bumper crop of wheat, partly the result of an increase in the support price paid to wheat farmers, will allow Pakistan to export 1 million tons of wheat this year. The government is targeting 10 billion dollars in total exports for this year, and they should push strongly to get exports to rise 15% a year for the next decade. There have also been incentives granted for information technology and software exports.
Other important measures include an announced intention to carry out large-scale privatizations of government owned businesses. This is very important, as governments tend to be bad business managers and the companies are unresponsive and inefficient. Anyone who has dealt with PTCL or WAPDA would probably concur. Finally, there has been a major reform of the tax system. Many taxes that inhibited growth such as the wealth tax and income taxes on the lower middle class have been reduced or abolished. The new tax system will emphasize the GST or national sales tax. There will also be a real agricultural tax to support the provincial budgets.
What should we look for to judge the success of Aziz’s intended program? First, look to see how long Aziz lasts. If Musharraf ever fires him, it probably means that economic reform has come to an end. Secondly, look for follow-through on the privatization of the banks and PTCL. PTCL is to offer only a 10% stake to the public initially, but I bet Aziz would like to sell it off entirely. Government proceeds from privatization could actually be a good way to pay off debt. Finally, look to see how successful the government is with implementing the GST and agriculture tax. If it fails on either of these two, then it is time to be concerned about the future success of Pakistan’s economy.