Abstract
This paper examines the extent to which Pakistan’s growth has been, or is likely to be, limited or constrained by its balance-of-payments (BOP). The paper begins by briefly considering the BOP-constrained growth model in the context of demand and supply-oriented approaches to economic growth. Evidence presented suggests that Pakistan’s maximum growth rate consistent with equilibrium on the basic balance is approximately 5% per annum. This is below the long-term target rate of a growth of gross domestic product of 7-8% per annum. This BOP-constrained growth approach provides some important policy prescriptions for Pakistan’s development policy. Real exchange rate depreciations will not lead to an improvement of the current account. Pakistan must lift constraints that impede higher growth of exports. In particular, it must shift its export structure to products with a higher income elasticity of demand and sophistication.
Highlights
Pakistan’s output growth rate since the 1960s has averaged 5.3% per annum, and 2.5% in terms of productivity growth
There was some liberalization of import restrictions but this was dependent upon the volume of aid Pakistan received at the time and many commentators argue that Pakistan’s rapid growth rate was largely the result of the amount of aid it received at that time
The implication of the shift to products with a lower products with relatively high sophistication (PRODY) is that the income level of Pakistan’s exports (EXPY) has shown a minimal increase, contrary to what can be seen in countries that are undergoing the kind of structural transformation that leads to faster growth
Summary
Pakistan’s output growth rate since the 1960s has averaged 5.3% per annum, and 2.5% in terms of productivity growth. In spite of the high unemployment and the damage this would do to investment, the remedy advocated for the BOP problem is to curtail economic growth This would certainly solve the problem as a slower growth of output would reduce the rate of increase of imports, while exports would be largely determined by the growth of world markets and unaffected by the reduction in domestic growth. In this sense, Pakistan is running into, or is experiencing a BOP constraint.
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