A GDP Surprise

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The National Accounts Committee (NAC) recently signed off on an annualized projected GDP figure for the current fiscal year of 3.94%, which seems astounding to many. Aside from technical aspects of the accounting process, the surprise was attributable to factors such as: weariness from the gloom of a moribund economy over the past few years, the IMF’s and FATF’s impositions on the country, the fright of the pandemic’s economic fallout for the country, and a high rate of inflation that has eroded purchasing power. The IMF had forecast 2% growth, while the State Bank had forecast 3%. Yet a 4% recovery can be understood in the context of several micro- and macro-economic factors that augur well for the country.

The most prominent among these is the resilience of economic activity despite pandemic conditions, due to a Keynesian approach to keeping the wheels of the economy turning during the difficult period. The government’s pandemic stimulus program was powerful because of its pro-poor focus: income transfers to daily wagers, support to destitute households, support to small and medium enterprises (SMEs), and enhanced subsidization of utility stores. These targeted approaches, much like the targeted smart lockdowns, struck a prudent balance between the “lives” and “livelihoods” elements of public policy. This is in stark contrast to the iron-fist lockdowns imposed haphazardly in India, which decimated the economy, but then also forced citizens to flee to the countryside and generate pools of community transmission – annihilating both lives and livelihoods simultaneously.

Pakistan’s GDP also benefitted from strong performance in the industrial and service sectors. For example, the construction industry was kept open and active during the fiscal year, which helped sectors such as cement beat expectations by a wide margin. Industrial production also benefitted from better orders overseas, particularly in textiles, which was partly a function of gaining share from other countries in terms of order books. Agricultural output was also unusually high for all major commodities (except cotton), which translated into higher rural incomes. Remittances were also consistently growing despite worldwide economic turbulence, largely because remittance source countries fared reasonably well (as in the Gulf region).

There were also three mathematical factors which assisted the GDP figure representationally. The first was in the low base of the previous fiscal year (-0.4%), which was an exceptionally low annual number and therefore much easier to exceed in a normalized subsequent period. The second was a currency translation effect due to a strengthening rupee, or more accurately – a weakening dollar, which has fallen 12% relative to other major currencies recently. This helps in terms of converting GDP per capita into internationalized metrics in dollar-denominated terms. The third factor was that many service subsectors that were especially affected by the lockdowns, such as shaadi halls and gyms, were not incorporated into the GDP calculation meaningfully. The previous rebasing of the GDP calculation was done in 2005-06, at a time when such sectors were not considered as representative of the economy as they would be 15 years down the road.

Although there is much point to Pakistan’s robust and resilient economic approach in distressed circumstances, there is a sobering point about even 4% growth in a fast-growing population such as ours, which is that incomes per capita cannot meaningfully rise, and new labor entrants properly absorbed, unless the economy is growing at 7% or more. With the sorts of GDP growth rates observed in recent years, the incessantly expanding cohort of young labor market entrants is not finding economic outlets; and this is at the same time that inflation is eroding their households’ purchasing power. 4% should be the step up from moribund stagflation, but it cannot be an acceptable longer-term rate if the country is to advance on the path to development.

Since the NAC’s 4% figure is being challenged from several quarters, it should be noted that all developing countries suffer from data inaccuracies in calculating their national economic accounts. This is part of what makes them “third world” to begin with: an absence of formalization of economic life, and therefore an absence of the right tools to observe what is being done, when, where, and how. This problem is equally worrisome (if not more so) in other developing countries, including India, where foreign investors and observers invent their own proxies for economic activity (such as auto sales, shopping mall traffic, etc.). In fact, many developing countries have become serial manipulators of their data: Argentina, India, Venezuela, and even China have been found to do this, both at the national and subnational levels.

But the more that such manipulation is done, the worse it is for the credibility of an economy. Argentina’s statistics, for example, are not taken seriously by anyone at all. India’s government statistics are consistently faulty and more so under Modi’s fantasy-driven misgovernance regime. By contrast, accepting difficult economic conditions and governmental shortcomings, as expressed by rigorous and impartial economic data, increase the credibility of a country’s institutions, and therefore brings greater benefits in the longer run. Ideally, Pakistan’s record keeping, data gathering, and national accounting would be so credible that any number of GDP growth: 4% or -4%, would not raise eyebrows. We would accept the verdict without surprise, in good times and bad, knowing that the process that led to their derivation would be premised on dispassionate rigor.

The writer is the Director for Economics and National Affairs at the Centre for Aerospace & Security Studies (CASS). The article was first published in The Nation.  He can be reached at cass.thinkers@gmail.com.

Image Source: Ganti, Akhilesh. “Real Gross Domestic Product (GDP),” Investopedia, 2019, www.investopedia.com/terms/r/realgdp.asp.

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