Understanding implications of global financial crisis emphasised

Deputy Chairman, Planning Commission, Dr Nadeemul Haque on Thursday emphasised the importance of understanding the implications of global financial crisis on the sustained economic growth.
Chairing the Quaid-e-Azam lecture on the third day of the annual conference of Pakistan Society of Development Economists, he said in Pakistan's context the underdeveloped financial system has made it immune to the international financial crises but at the same time it is not conducive for its long term economic growth.
Eminent economist Dr Parvez Hassan said that Pakistan could not grow until saving culture was introduced instead of foreign aid and loans. He said development of infrastructure was must for rapid economic growth along with increase the local investment in the export-oriented sectors. However, he stressed that improvement in governance was required to achieve these aims, as without good governance economic progress was not possible.
He said the world is passing through turmoil due to international financial crisis, but global trade will not collapse it will grow. The government should focus on enhancing export-oriented sectors as the share of other major developing countries in international trade have grown four times during the last few decades. He said that up-to 80 percent of new labour force will come from South Asian and Sub-Sahara African countries. The factors of productivity have remained low and new venues of trade should be focused to provide employment to new labour force.
He said Pakistan was witnessing fifth year of double-digit inflation and it was due to the high borrowing of the government. He warned that if faith in the currency vanishes then it was difficult to revive, adding there was no need to be emotional about exchange rate and let the market make correction.
Earlier, delivering the distinguished lecture, Professor Atif Mian of the University of California said the great recession in US, has to offer important lessons, as it was triggered by massive accumulation of debt on the US household balance sheet. The US households borrowed more and more for every dollar of income, which increased dramatically from 2000-01. He pointed out that this was not accompanied with high growth.
Mian argued that when credit comes into an economy it creates two different affects. On the one hand, when it comes into geographical regions where more houses are built, the housing prices do not increase a lot, while on the other, in areas where more houses cannot be built, it shows up in increasing housing prices. When housing prices increase, the households borrow more against value of their houses, which creates bubble. And one important consequence of which is that the first people to default are the ones who were last to borrow because they had little income. Consequently, the net worth of the US households started to decline. The macro impact of the situation is that aggregate demand decreases and employment to population ratio declines, which has social and political consequences.
"Chalking out the lessons that can be learnt from the financial crisis, said that one first lesson that we can learn from this is that debt matters and it should be given priority in theory formulation. When you have debt it translates into huge distributional shock as well, but nothing happens to that lending class. The way around this problem is to reverse the distributional shock, which is difficult due to political reasons. Therefore, financial contracts should be reformed ex ante," he concluded.
A panel discussion on the third day of the conference was chaired by Dr Rashid Amjad, Vice Chancellor, PIDE. The panellists included Azam Chaudhry, Dean, Lahore School of Economics, Lahore; Zafar Mueen Nasir, Dean, Business Studies and Chief of Research, PIDE, Islamabad; Thomas Morris, Chief Economist, USAID, Islamabad; Shoaib Z Malik, Director, Kausar Group of Companies, and Omer Saeed, Chief Executive, Service Industries Limited, Lahore.
The panellists tipped entrepreneurship as key to private sector development and economic growth in Pakistan. They addressed issues such as factors hindering entrepreneurship in Pakistan and how it can be promoted. They said that the entrepreneurial skills do not fully transfer to the next generations. Further, they said that entrepreneurship curriculum taught at educational institutions in Pakistan is not up to the par and it should be revised according to the needs of the domestic economy.
Earlier, the day third and final technical session of the conference was held, which addressed issues of governance and institutions, monetary policy and inflation, and poverty, inequality, and inclusive growth where 12 papers were presented.