Economic development

It is generally believed that overall development of a country emanates from success on four fronts namely; political, economic, social and technological. The category selected for this paper is Economic Development for which several models exist in this world.
This paper will briefly, yet critically, review these models along with their usefulness in economic growth and will also present a case study from Pakistan with the basic theme that an accelerated economic growth is the crying need of today. The major thrust selected in this respect is learning from success stories of selected countries of the world covering all the five continents of the world.
Leading theories of economic development Till now six leading theories of economic development have been developed. Salient features of these theories are listed and briefly explained below:
1. The Linear-Stages Theory
a. Rostow's stages of growth
- 1950s, 1960s
-- Five stages were identified
-- the traditional society
-- the precondition for take-off into self-sustaining growth
-- the take-off
-- the desire to maturity
-- the age of high mass consumption
b. The Harrod-Domar Growth Model
-- Direct economic relationship between the size of the total capital stock (K) and total GNP (Y).
For example, if three dollars of capital are always necessary to produce US $1 stream of GNP, the capital output ratio will be 3 to 1. It follows that any net additions to the Capital Stock in the form of new investment will bring about corresponding increases in the flow of national output GNP.
2. Structural change models (1970s) Through the Lewis Theory of Development two actions were identified:
a. Traditionally overpopulated rural subsistence sector characterised by Zero Marginal Labour Productivity-Surplus labour.
b. A highly productive modern urban industrial sector in which labour from the subsistence sector is gradually transferred. The speed with which expansion occurs is determined by the rate of industrial investment and capital accumulation in the modern sector.
3. The international dependence revolutions (1970s) Dependence and Dominance Relationship to Rich countries saw three types of models:
a. The Neo-colonial Dependence Model: Rich and Poor Country Relationship.
b. The False Paradigm Model: Faulty and inappropriate advice provided by well-meaning but often uniformed, biased and ethnocentric international expert advisors from developed country assistance agencies and multinational donor organisations.
c. The dualistic development thesis:
-- World: Rich and Poor National
-- Developing Countries: Pockets of wealth within a broad area of poverty.
4. The new classical counter revolution (1980s) Supply Side Macroeconomics (Lafer's Curve)
The following three aspects were emphasised:
a. Privatisation of public corporations
b. Deregulation
c. Free Markets
5. The new growth theory (Emerging Fifth Approach) (1990s)Emphasis was given on:
a. The new dynamic theory of North-South Trade with imperfect competition
b. The rediscovery of human resource analysis
c. The new economics of environments and sustainable development
6. New economy (21st century)
The world is in dire need of entrepreneurial revolution. The widespread use of micro-credit, development of small and medium enterprises and use of various financial instruments for alleviating poverty continues to strengthen the rise of New Economy. In this background, this piece reviews the following aspects:
I. Names of "new economy"
II. The Rise of "new economy"
III. Manifestation
IV. Entrepreneurial spirit spurred
V. Changing trends
VI. New thinking
VII. US impact
VIII. Measurement of new economy in US
The above aspects have been briefly reviewed below:
a. Names
"New economy" has many names. Some call it "New Brand Economy". Others call it "Network Economy". "Information Economy" is another term used. All these terms connote the same meaning.
b. The rise of new economy
It is generally believed that the term "New Economy" was first noticed in 1969 when guru of management, Peter Drucker, talked about "Knowledge Worker".
The other school of thought is that the above term was coined late in 1990s. This was generally understood in terms of USA and developed countries where transformation was noticed from industrialised world for producing wealth to service economy.
Moreover, after the WTO regime, globalisation of business grew and with the 150 plus countries which joined the WTO, export and import businesses grew. Based on various World Development Reports including that of 2008, the trend of global exports is captured in the following box:
GLOBAL EXPORTS TREND

=================================

Year         $T        Percentage

                           Growth

---------------------------------

2000        6.35              100

2001        6.16               97

2002        6.46              102

2003        7.48              118

2004        7.48              118

2005       10.39              164

2006       12.06              190

2007       13.90              218

2008       16.30              256

=================================

Currency fluctuations have been a matter of great concern. The fall of US dollar against euro and yen has been keenly watched. With pressures of negative balance of payment, developing countries exchange rates have been declining.
Based on discussions held in World Economic Forum held in January 2008 in Davos, Switzerland, Central Banks do not seem to have effective control on inflation. This view was shared by 53% participants of the above Forum.
Simultaneously, contemporary developments in business and the economy have been taking place and thus the new economy has been emerging.
c. Manifestation The following points highlight the manifestation of new economy:
I. NASDAC is generally seen as a rival to New York Stock Exchange.
II. The focus is on the financial market.
III. High rates of IPOs have been seen in recent times.
d. Entrepreneurial
The rise of new economy has seen spurring the entrepreneurial spirit. This is highlighted by the following factors:
I. Facilitation of E-commerce.
II. Payment of good wages.
III. Fall of prices every year.
IV. Reduction of cost.
V. Increase in productivity.
VI. Cut in inventories
VII. One fourth to one third increase in growth in various sectors of the economy.
e. Changing trends There is a global shift and two conspicuous trends have been seen. This includes the following:
1. Information technology Information technology has been driven by the some tools namely, fax machines, personal computers, cellular phones, Modems, Internet, digitalization of information, words, picture and data.
2. Globalisation of business The WTO regime has been instrumental in the globalisation of business. This trend has been strengthened by market forces, freezer trade and widespread deregulation.
The older order was pealing in need for restructuring and the new order has been having a lesser impact of bureaucracy and watering down of middle management.
f. New thinking The concept of "new economy" has wider connotations. This includes the following:
I. Outsourcing
II. Business Process Outsourcing (BPO)
III. Business Process Re-engineering
Some believe that the new economy is wishful thinking by Wall Street hipsters. Nevertheless, the debate is generally related to the new economy.
g. US impact The US economy was earlier impacted by growth of housing and autos. Now IT is driving the new economy. On an average, eleven new IT companies are being established each week in Silicon Valley in California, USA.
h. Measurement of new economy in US For measurement of the impact of the new economy, five categories consisting of seventeen (17) indicators have been identified. The above five categories include the following:
I. Knowledge Jobs.
II. Globalisation through Export Orientation and Increase in Foreign Direct Investment (FDI).
III. Economic Dynamics and Competition.
IV. Transformation to Digital Economy.
V. Technological Innovation Capacity.
A case study from Pakistan
Pakistan emerged on the political map of the world as a sovereign nation on August 14, 1947. The founder of Pakistan, Quaid-e-Azam Muhammad Ali Jinnah, had visualised Pakistan to be a vibrant and economically stable country with prosperity spread across the board. However, Pakistan had a chequered history in her economic development performance. The following Box shows historical performance of GDP growth:
Pakistan GDP Growth

===========================

Year      Percentage Growth

---------------------------

1960's                  6.8

1970's                  4.8

1980's                  6.5

1990's                  4.6

2000's                  4.8

===========================

Source: Calculated from various Pakistan Economic Surveys.
The decade of the 1950s was the formative and initial years of Pakistan. However, it manifested tremendous growth during 1960's due to significant participation of the private sector in the economic development. In one year, she achieved a growth rate of 8.3% which put Pakistan number 2 in her performance in Asia after Japan, which attained rank number 1 in GDP growth. However, the 1970s were the beginning of nationalisation of 32 industrial concerns, banks, marketing and distribution companies in oil and insurance companies. Its economic growth declined. Decade of 1980s was partial denationalisation.
The 1990s were politically disturbed times as political governments kept on changing periodically. The government in power, with military influence, paved the way for restoration of democracy in the early part of 2008. Unfortunately, in the year 2008-09, GDP growth was 1.2% mainly due to low performance in agriculture, high food prices of imports and high oil prices touching an all-time peak at US $147 per barrel. However, there was GDP growth of 4.1% during 2009-10.
The forecast figure of GDP growth during 2010-11 was targeted at 4.5%. Due to the misfortune of Pakistan, she was hit by heavy floods which devastated the economy of the country on the agriculture front and physical infrastructure was massively destroyed. Therefore, as against the above forecast, the realistic forecast of GDP growth of 2010-11 is estimated between 2%-3%. Due to International assistance, participation by the Pakistanis (expatriates and residents of Pakistan) and the contribution of the government, rehabilitation work is continuing and with determination, the nation is forging ahead.
Three constituents of Pakistan's GDP are agriculture (22%), industry (26%) and services sector (52%). Agriculture constitutes four components namely; livestock (50%), major and minor crops (46%), fishing (2%) and forestry (2%). Pakistan manufacturing sector also consists of industries, minerals, electricity and construction. Services sector constitutes physical, social, financial and intellectual components.
Right now, the country is struggling to develop a sound strategy for her economic development in all the above components of GDP. However, this paper concentrates on learning from abroad. Therefore, the niches successfully used in sample countries of all the five continents of the world have been shared in this paper as part of experiential learning.
Several countries of the world are success stories due to strategies employed by them. We ought to learn from their approach and, Insha Allah, Pakistan has the capacity and capability to emerge as a strong economic powerhouse. This piece shares some selected examples of success stories using one niche. In this respect, we have used the sampling technique by selecting some countries from five continents of the world:
1. Africa - South Africa
2. Americas - Chile
3. Asia - Bangladesh, China and Singapore
4. Europe - France, Germany, UK
5. Oceania - New Zealand
Africa South Africa: Mineral Development as Economic Driver
South Africa is known for its struggle led by Nelsen Mandela and this ultimately resulted in freedom from the British. Moreover, their cricket team has been a flag carrier for their country. They have been blessed with tremendous reserves of gold and diamond. Their focus has been on using mineral development as an economic driver. Unfortunately the contribution of minerals in GDP in Pakistan is around 3% and its performance during 2009-10 was negative. It is high time that the Pakistan government focus attention through an institutionalised approach to harness the hidden resources to our advantage and ensure significant contribution of minerals to the GDP. Allah has gifted all resources onshore, offshore and hidden ones. We need focused attention in this sector to usher in an era of prosperity and consequential enrichment of lives of millions of our country.
Americas Chile: Fish as economic driver
The geography of Chile is very interesting. Its west is spread along the Pacific Ocean. It used the niche of developing her coastal area for catching fish and exporting the same. UNITC, Geneva, Switzerland popularised this niche as a lesson to several countries of the world. Pakistan's South resembles the west of Chile and one can learn from their approach of harnessing the coastal area to our advantage. Beside a boost to our exports, poverty reduction can also be achieved along with the spread of prosperity to the downtrodden of Balochistan and Sindh.
Asia Bangladesh: Garments export as a niche The over-talked myth of jute, serving as the golden fibre, to support the then West Pakistan at the cost of the then East Pakistan, which later became Bangladesh, was exploded as the international demand for jute was on the decline and Bangladesh found it difficult to earn foreign exchange, which was earlier propagated on a massive scale.
Caught with this problem, Bangladesh adopted one significant niche to economically develop the country. The first niche, which successfully worked, was a breakthrough in the export of garments which now constitutes 64% of her exports. The market niche was used as a focused approach. Pakistan needs to learn from this approach by focusing on the export of "Fish" as her niche. We have huge potential to exploit the coastal belt of our country by concentrating on the development of fishing on the coastal belt.
Institutionalised efforts are needed to be taken in this respect. Poverty-stricken fishermen of Sindh and Balochistan can be helped through financial support and technical training and Pakistan can achieve great heights in exports. Now the contribution of fish in total agriculture, which has a weight of 22% of in the GDP of Pakistan, is only 2%. Let us learn from the above "niche" approach and use "fish" as an economic driver to achieve the above goal.
2. China: Synergy through relationship China-Pakistan friendship has been historically well-known. Recently the Free Trade Agreement (FTA) was signed between the two countries. China is keen to help us. Today China has emerged as a great economic power. Based on the World Development Report 2010, China is ranked as number three in global exports (US $0.97 trillion). By now, her exports have crossed the barrier of US $1 trillion. Her foreign exchange reserves in the world are the lightest.
She has achieved great economic heights through a breakthrough approach of focusing on her internal strengths and capitalised these to her advantage. Her products are globally available at affordable prices. Benefiting from FDI flows of US $40-50 annually, she is now in reverse gear by providing financial assistance and FDI abroad on a rising curve. Her Western side needs considerable development as she needs access to hot waters, which only Pakistan can provide.
The President of Pakistan has made several visits to China with the objective of transfer of technology in agriculture and delegations have visited her for learning techniques of introducing innovations in industry and services sector. She has the capacity to deliver goods in all sectors of our economy including mineral exploration and breakthrough in the energy sector. The time is ripe to give a serious focus to strengthening of Pak-China relationship on synergistic basis to usher in a new era of prosperity in our country. The earlier this is done, the better.
3. Singapore: education as an economic driver In 1964, Singapore was like a boat country. She was born as a sovereign independent nation split out of Malaysia. Lee Kwan Yew, a leader with vision, became her Prime Minister and spelled out his vision of Singapore for the next 25 years.
He compared his promise with performance and accomplished all the three promised goals namely: every Singaporean to have his/her own house, Singapore to be the cleanest city state to encourage tourism and Singapore to emerge as significant financial centre in the world.
These were achieved through the establishment of two universities namely, National University of Singapore, which ranks number one in Asia Pacific now and Nan Yang Technological University which ranks number five in Asia Pacific now. Huge allocations were made to higher education, which has enabled Singapore to use quality education in management sciences, computer technology, social, physical, natural and other sciences. Later, a third University of Management Sciences was established which was permitted to enroll persons of 40 and above years of age to ensure that new skills should continue to bejewel the nation for meeting the challenges of 21st century.
How much are we investing in higher education? This is a question, which yearns for thinking on our part. Let us learn from Singapore to use quality higher education as an economic driver for all-round gains to broaden the canvas of prosperity across the board. Today Singapore has the lowest gini co-effluent (0.19 out of a scale of 1) representing the lowest poverty in the world. This index measures the level of inequality of income. The lower the index, the less is the inequality and the higher the index, the greater is the inequality of income.
Europe 1. France: Tightening the belt France is a nuclear power country. Her culture is well-spread out globally - Africa, Canada and Europe. She is a great economic power and is a member of G-8. She is also struggling with economic problems and has, despite demonstrations, decided to tighten the belt by rationalising expenditure pattern. Our Federal Government annual recurring expenditure is 88%, excluding defence expenditure.
A rough break up of 88%, is 45% for debt servicing and 33% for running the affairs of the government. It is high time that we set up a Commission to suggest reduction of the above expenditure by restricting the annual federal government recurring expenditure to 20%. The resultant saving can be channelised for strengthening the social sector (education and health) and also contribute to financing development activities under the annual Federal ADP.
2. Germany: Voluntary financial support announcement by the affluent Germany rose from the ashes after the Second World War and has become an economic power in today's world. Based on World Development Report 2010, Germany has been ranked number one in the global exports which amounted to US $16.3 trillion. Their products are well-known due to top quality, precision and high-tech contents. Despite small area, their productivity in all sectors of the economy is high.
Due to financial difficulties, they are facing problems. To support the government to successfully grapple with the issues, the affluent business community of Germany has announced that, notwithstanding legal issues, they are, in a voluntary spirit, willing to extend financial support to enable their government to confidently tackle the financial problems.
This spirit is laudable and speaks volumes of their love for the country, constituting patriotism. In Pakistan, only 2.4 million persons file income tax returns on annual basis. It is interesting to note that the Parliament has laid down the maximum exemption of up to Rs 3 lac annual income. Vast majority earns income below Rs one lac annually. However, millions enjoy the luxury of the legal exemptions under the Second Schedule annexed to the Income Tax Ordinance 2001. The other category is of non-filers of their income tax return.
Rather than waiting for the withdrawal of legal exemptions, the affluent ones must demonstrate the voluntary spirit of depositing income tax in a separate bank account to be opened in the State Bank of Pakistan as financial support to reduce the budget deficit and enable the government to accelerate the development activities in the country which will promote employment and reduce poverty.
3. United Kingdom: 'Austerity'UK dominated the world for a long time. Even today she claims to be a big power drawing influence and/or strength from commonwealth countries numbering 60 plus. The discovery of oil in the North Sea had given a big boost to her in the 1980s. Now due to the financial crisis globally, UK has also been hit hard. The current government is in great financial problem. She has decided to rationalise all types of government expenditure, including public sector enterprises, through the internationally known instrument namely; Austerity.
Pakistan can learn this lesson as the budget deficit has grown and efforts to rationalise expenditure in all aspects must be undertaken quickly to harvest the dividend by learning from the UK. The "Austerity Package" can be developed by our country as a positive challenge to tackle financial problems being faced at the Federal, provincial, district, tehsil and union levels. All stakeholders must rise to the occasion and be the beneficiary to flutter the flag of Pakistan high in the larger interest of strengthening the economic front.
Oceania New Zealand: Livestock as economic driver New Zealand has sprung into prominence as she has the least corruption as announced by Transparency International in their Corruption Perception Index (CPI) 2010. This was 9.3 out a scale of 10. However, besides having many jewels in her crown, one interesting feature of New Zealand is that her population of sheep is twice the total population of the country.
Accordingly, dairy farming products through processed shape are being enjoyed by several countries of the world in particular in Far Eastern Asian countries. Pakistan's share of livestock in the GDP of the country is 11%. This needs to be doubled for achieving high contribution to agriculture as a sector and for development of the country in boosting exports of dairy products, development of agro-based industries in reduction of imports, and generation of self-employment to serve as an instrument of poverty reduction.
Way forward Change is the crying need of today. We all should be driven by it. Strategic new initiatives can enable us to follow niches of several countries as narrated above. We do not need to reinvent the wheel but implement the spirit of father of the nation and adopt various successful niches for which supportive environment has to be transformed into our success. The earlier we do so, the better it will be for us.
(The writer is Professor Emeritus and Principal, Hailey College of Banking & Finance, University of the Punjab)
([email protected])
Copyright Business Recorder, 2011