In economics, it has been long established that the success or failure of any country lies on the state of its factors of production; namely, land, labour, capital, including technology and enterprise. But perhaps the biggest contributing force is labour, for it is labour that makes efficient use of the bounties of the land and creates technology, and channels capital efficiently in the right direction.
And so, any discussion on Pakistan's economic future or that of any other country, should weigh heavily on state of labour force. In Pakistan, for every one percent growth in real GDP, half a percent of employment is generated, according to a World Bank study. Though Pakistan's population growth has slowed with time, it's still over two percent and highest in the region. With more concentration of population amongst youth and ever increasing number of female workers joining the job market, the country's labour force is growing at a pace of about 3-3.5 percent per annum.
Applying simple math on World Bank's findings, it can be seen that without a consistent output growth of 6-7 percent a year, unemployment rate is bound to increase. Add to that the already existing backlog; with a 2.5 percent average growth rate in the last three years, roughly two percent of additional labour force have either remained unemployed or replaced some of the existing lot.
Even with a 4 percent growth in GDP for the next five years, the unemployment rate will approximately increase by one percent a year on an assumption, based on World Bank's findings, that two-thirds of net new entrants are being employed by the economy. Hence, there are fears that the 6 percent unemployment rate today will grow to 11 percent by 2015.
BULGING YOUTH: ASSET OR LIABILITY The problem with Pakistan's growing youth is that a majority of them are a part of the illiterate segments of the population. With a literacy rate of merely 58 percent, the country is ranked 163 amongst all countries, which is clearly not something one can rely on. Even more disturbing is the fact that nearly 38 percent of the 'literates' are not even 'matric-pass'.
No wonder the informal sector and the unskilled labour force continue to dominate the charts - and hence lower income levels. Pakistan's demographic potential is so often talked about, but it is of no help if the literacy rate continues to be as dismal as it has been for decades.
"Lack of education (primary and secondary) to function effectively in the formal economy, in addition to a lack of recognition of skills garnered in the informal economy, act as a barrier to entering the formal economy," an ILO report titled Decent Work and the Informal Economy cautioned in 2002.
A related part of the problem is that recent trends show that education is gradually being skewed in favour of the service sector, which itself is the lowest employment generating segment of Pakistan's economy. The services sector is also seen getting saturated in the immediate term; the consolidation of banking and telecom sub-sector is one such example.
BUILDING BRIDGES The key to success lies in empowering today's youth - an idea that has been quite well articulated by the Planning Commission of Pakistan. In its latest policy, titled the New Growth Framework, the commission has stressed on the need to harness the softer side of growth.
"'Demographic dividend' is basically an opportunity provided by the changing age structure when the growth rate of labour force is higher than the growth rate of the total population. Demography started providing this opportunity to Pakistan in the early 1990s and would continue to do so till 2050, when the two rates will merge. This, however, is just an "opportunity", and the "dividend" has to be earned!", the commission's policy note said.
"A bulge in the working age groups in the coming 40 years will increase the economy-wide potential of productive capacity. However if economic growth is not leveraged on a higher trajectory, then the coming demographic changes will imply rising unemployment, shortage of assets and difficulties in competing with neighbouring South Asian countries - which are also benefiting from younger populations during the same period," the commission added.
This youth, therefore, can be channelled into enterprising endeavours. According to TiE (The Indus Entrepreneurs), a not-for-profit organisation promoting entrepreneurship, each entrepreneur creates an average of 30 jobs in the economy. On a macro level, entrepreneurship leads to greater investment with more individuals involved in wealth creation in the economy, and attracts FDI in the country over a period of time.
More recently, a few members of the civil society - such as the Institute of Business Administration, and the Center for International Private Enterprise - a US-based advocacy forum - have been quite active in fostering entrepreneurship skills. Still, while a lot needs to be done to encourage research and knowledge creation, as this is the key to new ideas and innovation, there is a need to direct young entrepreneurs to the real sector.
Most of the ventures initiated by upcoming entrepreneurs are mostly service-focused, and then too, most are imitators not innovators. To encourage innovation, skills-based education needs to be encouraged as much as management-focused education. Therefore, perhaps an integration of entrepreneurship initiatives between management schools and technical schools will push the right buttons for innovation and entrepreneurship in the country.
And since the country's SME sector constitutes about 90 percent of all private sector enterprises, employ about 78 percent of the non-agricultural labour force, contribute over 30 percent to the GDP, and generate a quarter of export earnings, improving Smeda's performance in this context, is also of paramount importance.
EDUCATION & SKILL DEVELOPMENT There is no doubt over Pakistan's real sector potential; from mining and minerals, to agriculture and energy generation, the country real industrial sector have a lot left to untapped. The way to achieve that is by boosting education and skill development.
If Pakistan's demographic dividend has to be capitalised, scarce resources must be diverted towards harnessing the much desired human capital. Knowledge, creativity and independent innovation must counter the currently dismal performance of Pakistan in the education sector.
"Lack of innovative and entrepreneurial practices can be traced back to the underlying system of education in Pakistan. The reform of education needs to address both the public and private educational institutions. All tiers of schooling require a futuristic outlook which equips Pakistan's youth with tolerance, discourse and capacity for lifelong learning. Sadly, the current education system ranks among the world's least effective and the current physical state of public sector schools endorses these low ranks," the planning commission said.
ROLE OF GOVERNANCE But to put the entire blame of Pakistan's economic failure on lack of education would be a bit out of proportion. That's because failure to develop markets, and efficient governance is also imperative. The Planning Commission also says that the two most important constraints to growth are: a) market failure and b) governance failure. While the market failure includes asymmetric information, lack of innovation and entrepreneurship - things which have been discussed above - it also includes creating industrial hubs, and market clusters across the country.
In the case of governance failure, immediate attention is required to making the judicial process efficient along with clear enforcement of contracts and property rights. While law and order situation in the wake of war against terror is indeed a major impediment the failure to secure property rights is keeping several new enterprising businessmen at bay.
In a Pakistan Institute of Development Economics (PIDE) working paper on entrepreneurship in Pakistan, Nadeem-ul-Haq mentions factors such as corruption, rent-seeking, poor administration, lack of legal frameworks, constraint of financing and lack of research, expertise and knowledge as barriers to small business growth in the country.
Anecdotal evidence also suggests that young businessmen from Karachi, who have ventured into dairy or poultry farming in suburban areas like Gadap, or have set up small factories in areas like Korangi, have been paying extortion money to unruly gangs in the area; failure to pay up the 'bhatha' often leads to kidnapping for ransom.
In such a scenario, monetary stimulus can do little; the real impetus needs to come from the government especially by focussing on increased documentation, faster judiciary, better governance, and higher level of awareness. Will the government be able to do it, is a million-dollar question.
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Education and Innovative Capacity
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Country Innovation Brain Drain Quality of
Index Education
(out of 132 System
Countries)
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Pakistan 79 68 99
India 30 34 37
Indonesia 39 27 44
Thailand 57 38 67
Malaysia 24 28 23
China 26 37 52
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Source: Planning Commission Pakistan
WHAT IS PAKISTAN
--- World's largest salt producer but negligible exports
--- World's 2nd largest meat producer but only US $20m meat exports
--- World's 4th largest milk producer but only 5% is processed and packaged
--- World's 4th largest cotton producer
--- World's 4th largest producer of mangoes, but only 5% is exported
--- World's 4th largest sugarcan grower, but the lowest yield per hectare
--- World's 5th largest copper mine but no copper exports
--- World's 6th largest coal reserves, but remain unexploited
Sources: AKD Securities
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