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Faster Growth in Pakistan Requires a Bold Plan

December 3, 2013


A Path From "Slow" to "Grow"
  • Pakistan has been the slowest in its region to recover from the 2008-09 financial crisis, and its current growth rates are significantly lower than its most competitive neighbors, India and China.
  • By swiftly increasing GDP growth to 7 percent, Pakistan could bring unemployment down by 7.6 percent and reduce poverty by 5.5 percentage points.
  • Suggested policy actions include: reforming the power sector, boosting government revenues, diversifying exports, and simplifying business registration processes.

A new report finds that Pakistan’s huge potential for growth has been unexploited. The report’s authors advocate a bold reform strategy in pursuit of a 7-percent growth rate and generation of high-quality jobs. They examine constraints to growth in Pakistan, which has been the slowest among South Asian countries to recover from the 2008-09 financial crisis. The analysis reveals strengths and weaknesses in Pakistan’s economy and suggests ways in which the government might craft policy to stimulate faster growth that is inclusive and creates jobs.

The report sets the scene by describing critical elements influencing Pakistan’s recent economic performance:

  • Two floods hit the country in 2010 and 2011, disrupting improvement in short-term macroeconomic imbalances.
  • The country has been beset by borderline stagflation (modest growth with double-digit inflation), despite some recovery of exports and strong remittances.
  • The government has put in place unsustainable macroeconomic policies.
  • Domestic and international armed conflicts have persisted.


" Pakistan's policymakers believe that faster growth alone will cover its job needs, but this report argues that it is not only the number of growth-generated jobs that matters, but also their quality. "

Authors, Pakistan: Finding the Path to Job-Enhancing Growth

A Country Economic Memorandum

The report finds that poorly implemented structural reforms thwarted faster growth in Pakistan. Because these reforms were fragmented, badly sequenced or truncated, major labor reallocations from less productive to more productive sectors did not occur. Despite liberalization of the economy, labor productivity and total factor productivity in Pakistan have declined over the last two decades.

The report’s authors suggest that the country would greatly benefit from bolder reforms directed at stimulating growth and job-creation. By swiftly increasing GDP growth to 7 percent, Pakistan could bring unemployment down by 7.6 percent and reduce poverty by 5.5 percentage points, among other improvements. The authors advise Pakistan to begin with promoting a national vision of reaching 7 percent economic growth and creating 1.5 million more jobs (in addition to the 1.5 million required annually to keep unemployment constant) per year by the end of fiscal 2018.

Highlights from some of the policies suggested for achieving this vision are as follows:

  • Reform the power sector to improve governance, reduce subsidies and ensure gas supply.
  • Enact an emergency fiscal reform to boost revenues, mainly by eliminating tax exemptions, adopting austerity spending, and shifting to targeted subsidies and away from untargeted subsidies.
  • Restore sound macro fundamentals and sign an International Monetary Fund reform program to reactivate external financial flows.
  • Favor low real interest rates and reduce government borrowing to lower incentives for banks to crowd out private credit.
  • To promote export diversification, remove certain regulatory orders, simplify tariffs, consider special economic zones to attract foreign direct investment, and improved customs and logistics procedures at the Wagha border.
  • To improve taxation effectiveness, appoint a tax policy committee to create well-designed tax policy and eliminate tax exemptions and zero rates.
  • Simplify the business registration process, create courts to resolve commercial disputes, and enact law to facilitate corporate transparency.
  • Make the public payroll policy transparent and uniform.