Five decades ago, the average Pakistani earned as much as his Sri Lankan counterpart and about 50 percent more than the typical Indian or Bangladeshi. Today, Sri Lankans make three times what we do, while Indians and Bangladeshis earn 50 percent more than us.
What went wrong? Why have we fallen so far behind?
No single reason fully explains this underperformance, but population growth was surely a key factor. Pakistan has almost four times as many people today than it had 50 years ago. India and Bangladesh, by contrast, have about two and a half times as many, while Sri Lanka has less than doubled its population.
It isn’t quite as simple as that, however. Yes, dividing national income over more people certainly reduces income per capita. But having more people also results in more income as they engage in productive activity. So simply having a larger population doesn’t necessarily mean lower per capita income.
Instead, what matters is the age structure of the population. If a large share of the populace is young or old (ie, not of working age), domestic saving will be low. To see why, consider how families save. For example, if two families have the same income and are otherwise similar except that one has two children and the other has four, clearly the larger family will not be able to save as much as the smaller one. Nationally, this translates into a lower saving rate in countries where the share of working age to total population is relatively low, such as Pakistan.
At 60 percent, Pakistan’s working age population’s share is much lower than that of our neighbors (65-68 percent), mainly because we have continued to have more children. Fifty years ago, the share of the young—those under 15—was 40 percent in Pakistan, India, and Sri Lanka, and 45 percent in Bangladesh. Today, that share in Pakistan is still 35 percent, while it has fallen to 24-27 percent in the other countries. Put simply, as a country we have aged—or “grown up”—much less than our neighbours.
No surprise, then, that Pakistanis save so much less than Indians, Bangladeshis, and Sri Lankans. Over the past decade, Pakistan’s gross domestic saving has remained below 10 percent of GDP. In Bangladesh and Sri Lanka, it varied between 20-25 percent, while in India domestic saving consistently exceeded 30 percent of GDP. While many factors account for this difference, one half to two thirds it can be attributed to the difference in the working age population ratio. In other words, if the age structure of Pakistan’s population had been similar to that of our neighbors, our saving rate would have been 6-10 percentage points higher.
Low saving means less financing is available for investment, and lower investment in turn holds back economic growth. Had saving been 6-10 points higher, investment would have been higher by at least 6-10 points too, and possibly by even more on account of “multiplier” effects (because higher saving and investment would result in higher incomes which in turn would yield more saving and, as a result, higher investment). And with that much more investment, the economy would have grown at a 2½-3 percentage point faster clip than what actually took place. Over five decades, the cumulative impact of even 2½ percent higher annual growth would have been massive—per capita income in Pakistan today would have been at par with Sri Lanka and twice the level of India and Bangladesh!
So what are the lessons? How can we catch up?
First and foremost, reducing population growth is paramount. Improving access to education and enhancing its quality—and hence the return to education—will be immensely important to curbing fertility and ensuring that today’s youth are able to earn adequate income when they reach working age. But even with success on this front, a meaningful change in the age structure will take a decade or two.
Until then, because of our demographic disadvantage, Pakistan will have to do much better in other areas that enhance economic growth just to keep pace with our neighbors. And to close the gap with them, we will have to do better still. That means it will not be enough just to improve our business environment, competitiveness, and economic governance to the best in South Asia. We will have to be considerably better than our neighbors on all these dimensions to start catching up with them.
(The writer was formerly Deputy Director of the European, the Middle East & Central Asia, Western Hemisphere, and Strategy, Policy & Review departments of the International Monetary Fund)
Copyright Business Recorder, 2022