Economic growth - How to get some in a changing world
Speech by Mark Lowcock, DFID's Permanent Secretary at the Karachi School of Business and Leadership on economic growth
I first came to Karachi 25 years ago as part of my introductory visit to Pakistan. Back then, I was struck by the pulsating, creative energy and excitement here – something common to all the world’s great cities, from London to New York, Rio to Shanghai.
While I have visited Pakistan from time to time in the intervening years, this is my first chance to come back here. This venue, the cutting edge business school in one of the world’s great commercial cities, a dynamic trading port and a crossroads of traders and cultures, is the ideal venue for my topic today.
The mission of the Department for International Development is to lead Britain’s contribution to tackling poverty around the world. Many people assume that, because we are about poverty, we are perpetually drawn into insoluble problems and that our work is endlessly dominated by disaster relief and humanitarian crises.
That is part of what we do, as for example in the response to the floods here in 2010. But in our bigger job, we are really about solutions. We believe that our generation can once and for all end the horror of extreme poverty globally. And that that will happen principally through economic growth, led by the private sector, creating jobs and opportunities and therefore better lives especially for all those people at the bottom of the pyramid.
So, my theme today is growth. Why it matters. How to get it. Why some countries have been getting more of it than others. The opportunities for Pakistan. And how the international community can help.
I am an accountant who studied economics and went to business school. On the face of it, this ought to be a useful background for contributing to a discussion about growth. My conclusion, however, is that what you really need to be good at, if you care about this agenda, is politics.
The world is getting better…
Let’s start with the global context. The world is changing. In most places, for most people, it’s getting better. Faster than ever before, at any time in the whole 150,000 years of human experience.
Life expectancy across the planet has increased from 47 to 67 in the last 50 years. Infant mortality has plummeted. Access to education has dramatically increased. Globally, far fewer people now have their lives blighted by conflict and insecurity than was the case a generation ago. As part of the Millennium Development Goals, the United Nations agreed a target at the end of the last century to reduce by half the proportion of people living on less than $1.25 a day by 2015. When it was set, this target was largely viewed as a nice aspiration but not much more than that. In fact, the sceptics were confounded and the goal was achieved 5 years early.
On the back of recent progress, the UN Secretary General has proposed that the world should now agree a new framework for global development. He has set up a panel, co-chaired by my Prime Minister David Cameron, President Yudhoyono of Indonesia and President Johnson Sirleaf of Liberia, to make recommendations on what should be in it.
The panel is now roughly half way through its work. It will report at the end of May. David Cameron has set out five things that are important to him in this endeavour.
First, the objective of the new framework should be the ending of absolute poverty across the globe.
Second, we should not get rid of the Millennium Development Goals. We should urge countries to complete and achieve them.
Third, we must look at the causes of poverty, not just address the symptoms.
Fourth, we should consult the poorest people in the world and ask what it is they want.
And fifth, we must be bold and ambitious. We want something simple and straightforward, with time-bound targets that everyone can understand, that can unite the world and that the politicians and leaders of the world can be held to account over.
… because more countries are growing faster, and the benefits are spreading…
The development progress we have enjoyed over recent decades arises principally from the accelerating economic growth achieved by countries in the emerging and developing world.
In east and south east Asia, market friendly economic reform combined with investment in human and physical capital has lifted hundreds of millions of people out of poverty. The same has happened across much of Latin America and south Asia.
And, especially over the last decade, it has been happening in Africa too, where I have spent much of my own career. Africa used to be thought of as the lagging continent. Now it contains many of the world’s fastest growing economies. Many Africans think that the 21st century will belong to them. The African lions are catching up with the Asian tigers.
So, the obvious question is how does a country increase its growth rate?
It is true that all countries benefit from growth globally and within their region. To some degree, growth next door pulls me forward too. But, equally, at any given time, some countries are doing better than others. There is, as my Prime Minister puts it, a global race.
The ingredients for growth are well known ………
When it comes to developing a prescription for growth, country context matters. What is important in one place may be less important elsewhere. There are, if you like, ingredients, but no recipe, and the menu varies from place to place.
The Commission on Growth and Development, which was set up by the World Bank and reported in 2008, set out some of the ingredients. It identified five characteristics which a diverse set of countries sustaining high growth rates all have in common.
First, they integrate into the world economy. Countries import ideas, technologies and know-how, and prioritise exports on the basis that whatever they are good at producing, there are far more customers outside the country than in it. Trade, in other words, is good for growth. And countries whose geography luckily locates them between big potential markets have a particular opportunity.
Second, high growth countries maintain macroeconomic stability. They avoid extreme inflation and exchange rate instability. They maintain modest fiscal deficits and prudent monetary policy. They keep government debt at moderate levels.
Third, fast growing economies have high saving rates. They forgo present consumption to pay for investment in pursuit of future incomes. Normally, that involves both high levels of public investment, and private saving channelled into private investment.
Fourth, high growth economies let markets allocate resources. They try to minimise distortions and limit the use of publicly financed subsidies. They also protect property rights, so that investors are confident they will be able to retain their assets.
And fifth, they have committed, credible, and capable governments. Growth is an overarching political priority. Governments of fast growing economies understand that it requires decades-long commitment, a credible vision which is well communicated, and building a consensus around reform.
This is a very important point. Reform is typically painful at the beginning. There are winners and losers. Especially in democracies, when politicians always have to look ahead to the next election, it can be hard to implement change with short run costs even if the long run benefits are large.
One way to tackle this is to make sure that the benefits of growth are widely shared. Perhaps by focusing growth policy on job creating opportunities. Or by using the higher tax revenue that arises from higher growth to finance improved education and health services for everyone. And, if distortionary or unaffordable subsidies are phased out, by safeguarding the poorest through social protection schemes.
It is also important to acknowledge that many countries face shocks along the way as they develop. That has certainly been the experience of a number of today’s rising stars. In Turkey at the end of the 1990s, for example, a crisis developed for which the country needed help from the IMF. Brazil faced similar problems in the early 1990s.
Both countries used the political space available to incoming governments to implement far reaching fiscal and structural reforms. Federal and local governments made rapid progress with transparency and innovation to improve services to citizens. Over the last decade per capita incomes have tripled in both Turkey and Brazil. Both are now seen as global economic powers, attracting international investment as well as major international investors themselves.
and Pakistan can use them as well as anyone ………
What do I draw from all this for the challenges and opportunities facing Pakistan?
The first point to make is that Pakistan has some fundamental assets.
Firstly, the economy has been transformed since 1947. That is particularly true in the agricultural sector. Wheat production has grown six-fold. Cotton production by a factor of 13. Sugarcane by six-fold. And, crucially, agricultural productivity – not just production - has increased dramatically. This increased productivity leads to higher incomes in rural communities. And is particularly important because it has meant that labour has been freed up for the cities, which in many countries is where you get the fastest growth. Overall, the population of Pakistan is now five times what it was at independence. But per capita incomes are still more than four times what they were then.
Second, because of your geography, Pakistan has enormous potential for trade. Your neighbours include large, richer and fast growing countries and some with enormous untapped potential. Trade volumes are currently low. But that actually gives you a major opportunity: open your markets, and activity will mushroom.
Third, your population dynamics mean that over the coming decades you can reap a demographic dividend. The proportion of people of working age will grow in relation to those who are dependents. This is an experience enjoyed by many countries in east Asia over recent decades. It has fuelled their growth.
Of course, there is a challenge in here. The economy will need to develop in a way that creates jobs for all your young people. But I would rather have that challenge than the opposite one of an aging population needing to be supported by a declining proportion of people of working age.
……… provided you get the recipe right
However it has been difficult, over the last decade, for Pakistan to exploit its inherent advantages. Conflict and insecurity, natural disasters like the 2010 floods and global economic shocks like the financial crisis and the 2008 fuel price hike have meant you have been sailing into a strong economic head wind. The robust growth rates you achieved from 2002-07 have not been sustained.
But in talking to people and reading reports ahead of this visit, I have been struck by how much consensus there is around the main economic challenges you face and what to do about them.
Whether you look at analysis by the IMF, the World Bank or other international financial institutions, or, much more important, by academics, think tanks, the media and the political parties here in Pakistan, the same prescription appears time and again.
All recognise that without sustained growth at around 7%, not enough jobs will be created for the growing population.
First, everyone talks about the energy sector. Pakistan cannot sustain high rates of economic growth without a sufficient, reliable supply of energy. Long, unpredictable blackouts hurt current producers and discourage new investment. The experts all agree that the current subsidy regime, which costs around 2% of GDP, is not viable. And that the sector needs to be put on a more commercial footing, including a regulatory and tariff structure that is attractive to investors.
Second, there is wide agreement that a tax system that collects less than 10% of GDP is unsustainable for any modern country. Without agreement and tangible progress on broader and fairer taxation, Pakistan will be unable to invest in a more prosperous future.
Third, Pakistan needs to invest in its best asset, which is your own people, especially in health and education to build human capital. It is also critical to promote women’s participation in the economy. This is an issue of fairness and good governance. But it is also crucially an economic issue.
Fourth, Pakistan must take steps to harness private sector dynamism in boosting investment and growth. Inefficient public sector enterprises play too large a role in the economy. They should be reformed or privatized. Bureaucratic barriers to private business need to be reduced and property rights better protected.
And fifth, there are enormous benefits to Pakistan from resuming your historical status as the regional hub between central Asia and south Asia with strong links to the Middle East. This involves reforming the trade regime to make it more open to the world and providing the infrastructure necessary for an important trading hub.
…… and the cooks are good at politics.
So, if there is a wide degree of agreement on the policy agenda, why is it so hard to pursue it?
The difficulty – but also the solution – lies in politics. As Pakistan’s national poet, Allama Iqbal, said “nations are born in the hearts of poets” - he would say that, wouldn’t he ! – and “they prosper and die in the hands of politicians”.
Recent academic literature, like James Robinson and Daron Acemoglu’s book on power and prosperity and why nations fail, helps explain the importance of politics.
Often, powerful people – those taking the decisions – tend to benefit from the existing system, and manage it to serve their own interests. They may be able to design and supervise the tax system to exempt themselves, or allocate rights to economic activity to cronies, or determine the composition of public spending in their favour.
Decision makers might fear a social backlash from some reforms, as is often said to be the case with food or fuel subsidy reform. Or in some cases there may be a genuine belief that political stability depends on the existing system, perhaps because powerful vested interests, on whom the politicians or decision makers of the day rely, benefit from the status quo and threaten to pull the plug if it is unpicked.
And in democracies, especially the newer or less mature ones, but not only in them, the electoral cycle means that there tend to be limited windows in which difficult reform can be pursued.
If that’s the problem, what can you do about it?
First, build inclusive institutions. Here in Pakistan, you are on the cusp of an important moment as the democratically elected government for the first time completes its full term, and the people choose its successor. I don’t suppose anyone thinks your system is perfect, and no system is. But the opportunity for politicians to win a mandate for another full term of democratic government is an important watershed in embedding an inclusive political system.
Second, vesting responsibility for the performance of state owned enterprises in genuinely independent boards might address some of the current problems. Greater transparency in public operations will help reduce conflicts of interest and outright corruption.
Third, broadening and widening the public discourse and national dialogue on economic reform can help establish a consensus behind some of the measures that may have short term costs but pay off in the longer term. The challenges of economic development take longer to address than one term of government. So agreement across political parties and with key institutions of civil society on the main reforms is crucial to sustain them over time.
The “Alif Ailaan” education campaign provides a useful precedent. Media, civil society organisations, politicians, academia, students, business leaders and modern icons like the rock band Strings, Shehzad Roy and Sharmeen Obaid Chinoy - from your own city – all coming together to promote education, are changing the currency of the debate.
The campaign has been accompanied by dramatic reform which is starting to show real results, especially in the school system in Punjab. DFID is supporting that. Our contribution on education helps get 4 million children in school by 2015. We think, given that there are 6 million children in our own primary schools, this is a significant contribution.
Sir Michael Barber, who is one of the world’s leading education reformers and worked closely with Tony Blair when he was Prime Minister, is our special representative on education in Pakistan. He is about to publish a report on progress so far. I would urge you to read it. You will get the flavour when I tell you that the title is “The Good News from Pakistan”.
The run up to the elections provides the ideal opportunity for a similar debate on economic policy. How best to tackle the challenge of energy supply? How to reduce the fiscal deficit to a more sustainable level? How to encourage business and investment based on fair competition and rule of law? How to get the best out of government resources to ensure expenditure leads to faster growth and jobs?
And how to reform the tax system? We will follow that particular debate with the greatest interest. Influential British Parliamentarians are currently conducting an inquiry into DFID’s assistance to Pakistan.
They have been told that 70% of the MPs here have not filed a tax return. In fact, in a country of nearly 180 million people, fewer than 1% paid any income tax at all last year, and many of those paid very little.
Our MPs have observed in public hearings that “It is very difficult to explain to British taxpayers why we should put our taxes there when the elite are not paying their share”. It is not for me to suggest precisely how you solve this problem. But I confess I was very intrigued by the suggestion from the Elections Commissions of Pakistan that anyone who had not filed a tax return should not be eligible for election as Members of the National or Provincial Assemblies.
Success starts at home but can be supported from abroad ……
What role should the international community play in supporting economic progress in emerging and developing countries?
Clearly, the main responsibility rests with each nation itself. Outsiders can support domestic efforts. But they can’t do more than that.
The Bretton Woods institutions have since their establishment in the 1940s taken the lead in international support for economic reform. They are available to all countries, not just developing or emerging ones. The World Bank’s first ever loan was made to France. The UK was supported by an IMF programme in the 1970s. The IFIs were given substantial extra resources to fulfil this role after the 2008 crisis.
Unfortunately, Pakistan’s experience with the IMF has been mixed. None of the IMF’s previous programmes here has been completed successfully. For any future programme, the IMF will I think want a greater degree of confidence than previously about commitment to reform, and the ability of the government of the day to implement the necessary actions.
…….and the UK will play its part.
What about bilateral support? Justine Greening, my Secretary of State, set out a new, enhanced approach for DFID support for growth and job creation in a speech earlier this month.
We can offer policy advice and research, as we do through the International Growth Centre at Oxford University and the London School of Economics, and its affiliates in 13 countries across the developing world.
We can facilitate private sector investment, as we do through CDC, our development finance institution.
We can offer technical assistance for the key institutions, including Central Banks, Finance Ministries and those responsible for the business environment.
We can help pilot innovation, whether it’s in broadening the financial sector, unleashing the power of technology, or creating new models for service delivery.
We can help build human capital, as we do through our programmes on education, training and skills development.
For DFID, Pakistan is potentially our largest country programme globally. We have made a commitment to expand our support here, potentially reaching 200 billion rupees over 4 years.
That is recognition of the importance we attach to our shared ties and heritage. And because we firmly believe in the ability of Pakistani girls and boys, women and men to improve their own lives. We are confident you can succeed, and that our money can be spent well here.
I mentioned our support for education. We also make major investments in the health sector and provide support to strengthen governance and accountability. Recent changes to the Benazir Income Support Programme, to improve the poverty targeting and the credibility and independence of monitoring means we can support that too, helping protect and empower millions of women and their families.
We will increase our support for growth and jobs. Our partnership with the State Bank of Pakistan has enabled over Rs 9 billion of private funds to reach nearly 4000 small and medium scale enterprises and over 200,000 microfinance clients.
We are also interested in collaborating with the private sector on basic services. Earlier today I visited a low-cost private school, meeting teachers wanting to teach and students eager to learn. I also met leading businessmen, who offer their own time and money to these schools because they recognise the value of education for the private sector as well as wanting to serve their wider community.
Conclusion
I know there are many challenges beyond those I have discussed this afternoon. But Pakistan has everything it takes to be a successful, thriving, prosperous Islamic democracy.
So I remain an optimist. If you develop a clear and shared vision, sustain a long term commitment to travelling the long road of reform, and refuse to be deterred by the problems that will inevitably arise, then you can transform your country within a generation.
Karachi can be a booming regional trading hub, to which international investors are flocking and from which Pakistani investors and traders get rich from opportunities in your region and further afield.
All your young people can be healthy, well fed and educated. And the whole population can feel secure and confident in a way that too many sadly currently do not.
And DFID will be gone! Our long term objective as an organisation is in fact no longer to be needed. In the early 1960s when we were first established (albeit with a different name), a young graduate in his first week, invited to meet the then Permanent Secretary, asked whether this was an organisation which would be around long enough for him to enjoy a full career.
It was a good question. The first country on which he worked, Singapore, long ago graduated from aid. Some of the countries in which we used to work have now progressed so far they provide development assistance themselves, rather than receive it.
The strong and deep relationship between the UK and Pakistan should flourish forever. Built on the unique foundations of the English language and cricket, the ties that bind us are permanent. But maybe we can in future create another tie: for you to have developed so far that we can work together helping others yet to make your progress.
And I want to end this speech drawing inspiration from Quaid-e-Azam. “If you will work in co-operation, forgetting the past, burying the hatchet, you are bound to succeed. If you change your past and work together, there will be no end to the progress you will make.”