Universally accepted norms of achieving a balanced and sustainable economic growth of a country are its GDP growth rate, level of private and government consumption, private and public sector investments, net exports and level of employment. These all components of macro-economic presently, are being guided under ‘rational expectational theory of neo-classical school of economics contrary to Keynes framework of economic analysis, which advocates rigidness in all economic behaviors relating to production, pricing, inflation and employment.
Neo-classical model has emphasis on expectational behavior of all economic agents towards success of an economic activity, but this approach has lost grounds after recent global financial and economic turmoil. Abrupt rise in prices of all assets and subsequent rapid fall does not seem consistent with philosophy of rational expectational behavior. In this context one can justifiably assume that expectations of market agents were based on the exploration of past market trends in different economies.
Further behavioral approach under neo classical economics does not have mutual common end. The goals of economic life have preference on material and financial gains. Economic managers of the countries and even individuals respect laws and property rights rather than moral norms and are guided by financial incentives rather than virtue. “This mentality in turn aggravates growing inequality situation apart from causing financial instability and environmental crisis” as stated by Nobel Loretta Amartya Sen.
Wrong forecasts relating to investment and spending decisions during last two decades even in developing countries including Pakistan resulted in investment mostly in consumer items like electronic goods, automobiles and a sizable amount going to construction, speculative trading in landed property and stock exchange etc due to liberal bank financing done during this period resulted in piling of stocks of unprofitable goods/products with corporations and also at household level, thus resultantly dwindling investments, growing volume of non performing loans, reduced allocations of bank financing for private sector, contraction of real economic activity and abrupt rise in unemployment level.
Under this situation corrective measures taken by both developed and developing countries are more or less in line with Keynesian equilibrium model, which explains simultaneously total production, interest rate, prices and inflation and impact of change in any of these variables on level of employment and wages in conjunction with demand side stimulus. But under present global scenario Keynesian equilibrium formula with emphasis on demand side need to be modified by making adjustments on supply side capacities thus stimulating process of production, which holds good in context of low income developing countries facing galloping inflation and high unemployment rate.
To address this situation in context of developing countries, Pakistan in particular where apart from low capital investments absence of infrastructure and increasing disturbed peace situation on both eastern and Western borders are responsible for under activity there is need to augment capital spending substantially giving priority to development of needed infrastructure for all sectors of economy to boost up economic activity and also to lessen the adverse impact of COVID19 on socio economic life of the country. This will generate employment opportunities on continuous basis, thus arresting growing poverty and bringing in balance between supply and demand sides and ultimately will reduce inflationary pressure.
No doubt Public Sector Development Program (PSDP) budget allocations of Rs.1324 billion approved by National Economic Council (NEC) out of which Rs 650 billion going to provinces under NFC award is a step in right direction. Apart from each provincial government’s own development programs allocation of Rs.650 billion from Federal development budget for development of infrastructure like dams, irrigation projects, alternate power projects, cold storage facilities in rural areas and network of roads linking villages to markets will stimulate growth both in agriculture and industrial sector, which in turn would give boost to service sector. It will also lessen the colossal loss done to economy due to onslaught of COVID pandemic. Apparently this development program and budgetary proposals announced for 2020-21 are in line with Keynesian approach, which advocates for capital formation by reducing non development expenditures on the part of government and restraining consumer by raising tax / tariffs on luxuries and items of little utility and providing incentives to entrepreneurs in all sectors of economy. Sizable allocations to provinces according to their share in NFC award will help removing existing disparities regarding both on going and to be undertaken development projects, which is apparent from high rate of unemployment and poverty in smaller provinces of Balochistan and Khyber Pakhtunkhwa, but despite this initiative of public sector capital spending high unemployment rate galloping inflation and poverty would persist unless and until steps are taken to prompt private sector to invest in development projects in all sectors of economy. Present allocations of Rs 72.5 billion expected from Private sector does not match what is expected from all the provinces. In view of increasing burden of public debt, exceeding 80% of GDP a holistic approach is essential for inculcating culture of self-reliance at all levels.
By ensuring congenial business doing environment, private sector can be motivated to invest in all segments of agriculture, manufacturing and service industries. Particularly to motivate small investors to make capital investments in micro businesses and SME sector incentives like tax holiday for at least five years and easy access to institutional credit must be ensured. This will help achieving accelerated GDP growth rate, substantial employment opportunities and eradication of poverty. In recent years both indigenous and foreign private investments have declined considerably.
According to Economic survey Report of 2009-2010 Foreign Direct Investments (FDI) has reduced by almost 30% during the current fiscal year, whereas indigenous private sector’s fresh capital investments growth rate declined by 0.6% against last year figure. No doubt private sector has adequate propensity to save and invest, but due to absence of safe business doing environment particularly due to invasion pandemic and growing political conflicts, bulk of savings are being invested in government securities and financial products offered by various assets management companies for better returns.
Despite sizable allocation of credit for private sector, funds have not been availed in full due to high cost of borrowings and unfavorable business doing environments. Accordingly growth rate of all sectors of economy except manufacturing remained much below last year’s performance; a dismal capital formation was achieved during the current fiscal year. In agriculture sector either due to drought conditions or untimely rainfall and irregular water supply and also use of low quality seeds and fertilizers due to abrupt rise in prices of these items yield of all the crops remained much below targeted volume of production.
On the other hand developed economies affected by global recession curtailed their imports from developing countries, which were main suppliers of both agriculture and manufactured products. Resultantly in almost all the low income agrarian based economies both agriculture and manufacturing sectors failed to achieve desired growth rate or rather have engulfed in stagnant economic situation.
For achieving macro-economic stability all the low income South East Asian economies need to promote bilateral and multilateral trade relations in the region. Similarly diversification of export markets and products; particularly targeting whole of Asian markets would give fillip to both agriculture and manufacturing industry. Most importantly trading relations with India and China- gradually emerging as economically advanced nations will prompt use of new technologies by entrepreneurs in Pakistan, resulting in accelerated growth of all sectors of economy.
SME sector particularly agro-based small and medium size industries, which are labor intensive need special incentives with regard to supply of utility services, low cost institutional credit and also at least 5 years tax holiday for new entrants. No doubt State Bank of Pakistan’s tive to regulate and promote SME and Micro finance sectors through special credit and guarantee schemes and collateral free loans upto Rs.5million and prudential regulations enforced keeping in view particular business environment of these sectors will give due support to financing banks as well as borrowers for giving boost to micro businesses and SME sector.
Most important is the energy problem, which must be addressed under public and private joint initiative for putting in place alternate energy producing projects on urgent basis with a target set to remove energy shortage within two-year time.
The firm commitment of both public and private sector to go about country’s socio economic development program strictly according to above discussed strategies will boost up capital formation, GDP growth rate, raise employment level significantly and most importantly eradicate poverty, all being basic ingredients of Keynes macro-economic framework with a component of social welfare as agreed upon under Sustainable Developmental Goals (SDGs) giving priority to handling environmental crisis adversely impacting socio economic life on the globe.