Inclusive Growth and Sustainability

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Dr. Vaqar AhmedSustainable Development Policy Institute

Lecture at University of Lahore – 8 November 2012

How do economies grow?

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Growth Strategies in Regional Economies

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Country Plan Strategy Focus

Indonesia Medium Term Plan 2010-14

Focus on social infrastructure for creativity development

Thailand 10th Plan 2007-11 Opportunities for learning, increase potential of communities by linking them in networks

Malaysia New Economic Model (launched in 2010)

Developing quality workforce, competitive domestic economy and transparent markets

China 11th Five Year Plan 2006-10

Promotion of independent innovation, and enhance social harmony

India 11th Five Year Plan (2007-12)

Reinforces focus on basic services such as education and urban development

Bangladesh Draft Plan 2011 Effective governance, promoting innovative people for a digital Bangladesh, creating a caring society and enhancing regional cooperation

Philippine Medium Term Plan (2004-10)

National innovation system, market reforms, technology entrepreneurship and support to R&D

From Harrod Domar to Endogenous GrowthTheories Main Insights

Harrod-Domar Growth Model – 1940s

Model focuses on saving and the efficiency with which capital is used

Solow (Neoclassical) Growth Model – 1950s

Allows for substitution between labour & capital. Technology increases exogenously

Endogenous Growth – 1980s

Competition and knowledge – related externalities imply increasing returns. Romer 1986; Lucas Jr. 1988.

Endogenous Growth – 1990s

Knowledge spillovers lead to falling R&D costs resulting in further growth. Romer 1990; Grossman & Helpman 1991

Endogenous Growth – 2000s

Schumpeterian entry & exit, with entrants bringing new technologies, knowledge accumulation in cities lead to growth. Aghion & Howitt 2005

Growth Diagnostics–Binding Constraints

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Entrepreneurship

Availability of Finance

Domestic

Intermediation

Domestic Savings

Foreign

Return to Economic Activity

Social Returns

Infrastructure

Human Capital

Appropriability

Market Failure

Coordination

Information

Govt. Failure

Macroeconomic Stability

Contract EnforcementAdapted from Hausmann & Rodrik (2005)

Growth Diagnostics – Binding Constraints

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Entrepreneurship

Availability of Finance

Domestic

Intermediation

Domestic Savings

Foreign

Return to Economic Activity

Social Returns

Infrastructure

Human Capital

Appropriability

Market Failure

Coordination

Information

Govt. Failure

Macroeconomic Stability

Contract EnforcementAdapted from Hausmann & Rodrik (2005)

Low incentives for “self-discovery” – information

externalities

• The Need for Growth Strategy & Reforms• Stabilization & Adjustment• Governance & Institutions• Markets, Entrepreneurship & Investment Climate• Cities & Connectivity• Youth & Community

• Some Scenarios – Desired Growth Paths• SWOT• Demographic Challenges• Required Growth Rate• Returns from Reforms

Pakistan Economy: SWOT Analysis

• Strength: Youth bulge

• Weakness: Governance

• Opportunity: large domestic demand

• Threat: Coordination & information failures

Need for Rapid Economic Growth

(i) Rapid population growth increases demand:– Pakistan adds: • Every 1 year a New Zealand to its population; • Every 2 years a Switzerland; • Every 3 years a Greece; • Every 4 years a Chile or a Netherlands; and • Every 5 years an Australia.

– It does not accumulate capital assets at the same pace.

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Some criticism on Planning Commission’s approach

• Some said: – The strategy does not talk enough about pro-poor

interventions– Some said it does not cater for sustainable

development

– Lets see what these are….

Exclusion Analysis

• What is the development process? • Income generation process• Empowerment

• Development is……….

• Development is……….– Creating and investment climate and empowering

poor

• Nicholas Stern

Income

ProductivityPhysical, Human & Social Capital

InstitutionsTrade

Geography

• But then somebody gains and some lose in the growth process….standard critique on market process

• This is where interventions around empowerment become important

Empowerment

What the individual owns:

• Assets• Human Capital

Internal Constraints

• Perceptions of own role• Preferences• Capacity to aspire

External Constraints

• Family• Community (caste, religion)• Society • Governance

Beyond Inclusive Growth and MDGs

• Sustainable Development…..

• And the talk about Sustainable Development Goals (SDGs)

Three Pillars of Sustainable Development

Sustainability 101

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• Case study: Chitral in 1970s• Nature of economy: • Self-reliant food secure justice social capital

• Then comes globalization (the bad one!)• Provide irrelevant education without opportunity brain

drain• Sectoral reallocation away from agriculture loss of

comparative advantage• Ex-Chitral firms flood agriculture and industrial output

killing agriculture and low-end industry in Chitral• In the end no agriculture, no industry for Chitral (recall

2007 global food crisis)

Sustainability 101

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• Now Chitral’s people migrate to cities• Skill mismatch exploitation in name of cheap labour• Slums environmental and health hazards• Crime

• Result: • We have destroyed production structure in rural economy

& and overloaded urban economy

• Please remember GDP is still growing

Before Jumping to Remedies……

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• Some questions: • Who benefited from adopting bad forms of globalization? • Power structure imposed not adopted

• Why was no value attached with good form of globalization? • Why not celebrate diversity!

• If one tries to answer these questions, one will not blame political leadership rather ownself• Revealed preferences• Voted for external competition, urban living and

extravagance choice (bigger and better)

Before Jumping to Remedies……

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• How to sustain extravagance fiscal deficit?

• Where to finance subsidized production & consumption? • Debt• Trade-off own natural resources• Gas and water at throw-away prices !

Now where to go from here……

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• Kickstart growth create sustainable jobs• Lets revisit our comparative advantage: • Rural• Agriculture (crop sector, livestock)• Labour (unskilled)

• Urban• Infrastructure• Integrated markets• Labour (skilled) educated and healty

• Inequality is clear not sustainable

Now where to go from here……

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• To move towards sustainable jobs, give rural economy what urban has• Education with opportunity (relevant education)• Food security and health

• How? • Through inclusive markets and rural infrastructure• Give large rural populations municipal services

• Need for local-area growth strategies • Putting value on local-area production and diversity• Not forcing Chitrali framer to go to cities for selling output

But the story is not complete…

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• The above mentioned is what East Asia has done e.g. China [Rural Development Strategy] and Thailand [Once Village One Product] balanced growth strategies

• But Chinese model will only kickstart growth what about sustainability and equity• With local-area growth model ….need for local-area

sustainability and equity planning• 18th Amendment to help!• Planning Commission’s Growth Strategy important

Where should we go from here?

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• Any ideas for Pakistan economy?

Our Advice: Go for Responsible Growth

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• Restore Economic Growth for employment• Energy for Industry• Water for Agriculture

• Open up competition markets for middle class and poor• Rural markets focus on human capital• Urban markets focus on connectivity

• Pay attention to trade restrictions• Trade with China and India is good! regionalism

• Respect natural resources• Hurting environment brings natural disasters

Our Advice: Who will do it

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• Need for Civil Service & Accountability Reform Supply side capacity

• Need to strengthen civil society Demand side engagement

www.sdpi.org, www.sdpi.tv vaqar@sdpi.org 30

Thank You