How Has Bangladesh Left Pakistan Behind in Per Capita Income?

A headline in the Economist magazine's recent issue screams: "Bangladesh's GDP per person is now higher than Pakistan's". Let's examine this development to understand its causes.

Per Capita GDP:

The Economist article explains its headline as follows: "Last month revealed a remarkable turnaround. Bangladesh’s GDP per person is now higher than Pakistan’s. Converted into dollars at market exchange rates, it was $1,538 in the past fiscal year (which ended on June 30th). Pakistan’s was about $1,470....Strange as it may sound, Bangladesh jumped ahead because of an advance in Pakistan. On August 25th Pakistan released the results of its census, updating earlier population estimates. They showed that the country has 207.8m people, more than 9m more than previously thought. It may now have the fifth biggest population in the world, surpassing Brazil’s. But the new count also lopped 4-5% off Pakistan’s GDP per person, the arithmetic consequence of revealing so many more people."

Savings Rate in Pakistan Source: State Bank of Pakistan

Pakistan Growth By Decades. Source: National Trade and Transport Facility

Economic Growth Trends:

One can quibble with the Economist on details of its report but the fact remains that Bangladesh's economy has been growing significantly faster than Pakistan's for about a decade. To understand why, it's important to look into savings and investments, population growth trends and security situation in the two countries. Let's examine each in a little more detail.

Investment as Percentage of GDP Source: State Bank of Pakistan

Savings and Investment:


There's a strong relationship between investment levels and gross domestic product. The more a country saves and invests, the higher its economic growth.  A State Bank of Pakistan report explains it as below:

"National savings (in Pakistan) as percent of GDP were around 10 percent during 1960s, which increased to above 15percent in 2000s, but declined afterward. Pakistan’s saving rate also compares unfavorably with that in neighboring countries: last five years average saving rate in India was 31.9 percent, Bangladesh 29.7 percent, and Sri Lanka 24.5 percent..... Similarly, domestic savings (measured as national savings less net factor income from abroad) also declined from about 15 percent of GDP in 2000s, to less than 9 percent in recent years. Domestic savings are imperative for sustainable growth, because inflow of income from abroad (remittances and other factor income) is uncertain due to cyclical movements in world economies, exchange rates, and external shocks".

Net Foreign Direct Investment Source: State Bank of Pakistan

Population Trends:

The total fertility rate (TFR) in Bangladesh has declined faster in Bangladesh than in Pakistan in the last few decades. Currently, Bangladesh is at 2.17 children per woman while Pakistan is at 2.62 children per woman.

As a result of reduced birth rates and more female labor participation rates, a larger percentage of Bangladeshi population is in the work force than Pakistan's. There are now more wage earners and fewer dependents in each Bangladeshi household. This demographic trend has helped boost Bangladesh's per capita income faster than Pakistan's.

Rising working age population and growing workforce participation of both men and women in Pakistan will significantly boost domestic savings and investment. Increased foreign direct investment such as Chinese investment in China-Pakistan Economic Corridor over the next several decades will help fill the gap between the national savings rate and investments required to reach 7% annual GDP growth to create over 2 million jobs a year.

Security Issues:

Pakistan has paid a heavy price for its proximity to and involvement in "war on terror" in Afghanistan. It has cost Pakistan dearly in terms of loss of thousands of precious lives and lower investments due to investors' security concerns. Recent operations by Pakistan Army have helped turn the tide against terrorists, bringing more hope and greater confidence in Pakistan's future. Rising FDI in CPEC-related projects in the last couple of years are an indication of this confidence.

Future:

Pakistan is now experiencing the demographic dividend that Bangladesh has seen in the last few decades in terms of more of its population earning and fewer dependents. Pakistan's labor force is growing at 3.6% a year, much faster than its population growth rate of 2.34%. This should help boost Pakistan's per capita and its domestic savings rate.

At the same time, China-Pakistan Economic Corridor (CPEC) related projects are bringing more foreign direct investment, thereby speeding up the economic growth in the country. Pakistan's GDP growth is accelerating from less than 5% two years ago to 6% forecast for fiscal 2017-18.  In its latest economic growth projections, Kennedy School's Center for International Development (CID) at Harvard University expects Pakistan's annual GDP growth to average 5.97% over the next 8 years, ranking it as the world's 6th fastest growing economy. It is within the realm of possibility that economic growth in Pakistan could exceed 7% in the next couple of years.

Summary:

Pakistan has fallen behind Bangladesh and India in per capita income as its growth rates have slipped in recent years mainly due to declining savings and investment rates and security issues.  Demographic trends and improved security situation now favor Pakistan's future growth as its workforce grows and household sizes shrink.

Comments

Riaz Haq said…
Belt and Road: Xi’s initiative finds momentum and meaning in south Asia By: Elliot Wilson Published on: Tuesday, September 26, 2017 BRI may be hard to define, but it is already working wonders in parts of a region crying out for good infrastructure. Global and regional lenders are happy to go along for the ride.

https://www.euromoney.com/article/b14r677vlmysyt/belt-and-road-xis-initiative-finds-momentum-and-meaning-in-south-asia


The genius of China’s sprawling attempts to rework globalization in its own image is that, for now at least, it defies any attempt at clarity. Ask any two people to define the Belt and Road Initiative and you receive utterly different answers. Nawaz Sharif, former premier of Pakistan, a country that stands to benefit handsomely from the initiative, has described the BRI as a “game-changer” for his homeland. Matthew Oxenford, a research associate at Chatham House’s global economy and finance team in London, sees it as Beijing’s “flagship branding exercise”. He draws comparisons between the BRI’s nation-building efforts and the Works Progress Administration, a Depression-era US agency that put jobless men to work building much-needed roads and public buildings. This lack of clarity is often more help than hindrance. “Even if no one understands what BRI is, which they don’t, everyone does understand infrastructure,” notes Fraser Howie, author of ‘Privatizing China’. “Belt and Road allows you to justify pretty much any infrastructure development in any country along its route. BRI is a magic word that explains any project to investors, bankers, or multilaterals.”

Nayana Mawilmada, head of investments at Megapolis, a scheme to rebuild Sri Lanka’s western provinces, says: “Even when a project isn’t tacitly part of the Belt and Road Initiative, it is part of the pitch process. Just saying that something is Belt and Road-related opens up new conduits of financial resources.”

Take the example of south Asia, which is the only part of the world in which the ‘belt’ and the ‘road’ interconnect, and which has benefited more from the initiative than any other region. China’s push into the subcontinent began back in 1962, when a border dispute drove a wedge between it and India. Beijing turned to Pakistan, which became a willing buyer of Chinese-made military equipment, and more recently a direct-aid recipient: in April, the Chinese government gave Islamabad $1 billion in loans to stave off a currency crisis. China’s presence in Pakistan accelerated from 2009. First, it built and secured control over a new industrial port and naval facility in Gwadar on the Arabian Sea. This granted Beijing unfettered access to the Indian Ocean, with its busy shipping lanes, but also its lack, as the historian Robert Kaplan noted in his book ‘Monsoon’, of entrenched superpowers. From there, China pushed north, building infrastructure as it went. A 2,280-acre free-trade area sprang up in Gwadar, controlled by China Overseas Port Holding. Beijing is building new power plants, coalmines, hydroelectric dams, nuclear reactors and a highway linking Karachi on the Indian Ocean with western China via the Karakoram Pass. New pipelines built, funded and, importantly, controlled by mainland institutions, will convey Middle Eastern crude oil overland to China and send liquefied natural gas in the other direction, easing Pakistan’s constant energy and power shortages.
Riaz Haq said…
Pakistan targets import curbs to ward off currency crisis

Abbasi to impose fresh curbs on luxuries in effort to avoid devaluing rupee

https://www.ft.com/content/a495b148-a1d2-11e7-9e4f-7f5e6a7c98a2


Please use the sharing tools found via the email icon at the top of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour.
https://www.ft.com/content/a495b148-a1d2-11e7-9e4f-7f5e6a7c98a2

Pakistan plans to tighten curbs on luxury imports to ward off a foreign currency crisis without devaluing the rupee, Shahid Khaqan Abbasi, the prime minister, has said.

Mr Abbasi said he would rather place further controls on imports in an effort to preserve fast-dwindling foreign reserves than allow the rupee to fall against other currencies.

Some experts believe Pakistan will have to request another bailout from the International Monetary Fund within a year.

In March, the Pakistani government made it harder to import non-essential items such as vehicles, mobile phones, cigarettes and jewellery by insisting buyers put down 100 per cent of the cash upfront.

The measure drew criticism that it would encourage people to trade instead on the black market. The IMF said it had been told by Pakistani officials that the restrictions would be removed within a year but Mr Abbasi told the FT his government was planning to impose more.

“We can put regulatory duties on certain items, especially luxury finished goods, that’s possible,” he said. “We probably will do more of that, yes definitely, to discourage imports.

“Currency devaluation is not on the table, it’s not. A lot of people thought it was . . . [but] it is important to have stability for the rupee,” said Mr Abbasi.

Pakistan is running out of foreign currency as exports and payments from Pakistanis abroad fall while imports rise.

The central bank had $14.3bn of foreign reserves as of September 15, according to the most recent data — enough to cover exports for about three months. That is down from a high of $18.9bn last October.

Pakistan has been importing more than it exports for some time, but the problem has been exacerbated by having to buy Chinese supplies for projects as part of the $55bn China-Pakistan Economic Corridor.

While the scheme is aimed at improving Pakistan’s energy supply and transport networks, many economists believe that in the short term it will push Islamabad back towards the IMF.

“We will have to go back to the IMF any time now,” said Muhammad Zubair Khan, a former commerce minister who worked at the IMF for more than a decade. “The current situation is not sustainable.”

Sakib Sherani, a former economic adviser to the government, warned: “From a balance of payments crisis, we will have a full-blown macroeconomic crisis, where private sector sentiment is hit, growth stalls, inflation is high, and the central bank has to act.”

As well as restricting imports, the country has also borrowed money at short notice from various international lenders to pay off its debts. In 2016 and early 2017, Pakistan borrowed $1.2bn from state-backed Chinese banks.

Many economists believe the only long-term way out of the crunch is to allow the rupee to fall, encouraging exports and discouraging imports.

But doing so has become politically sensitive, with ministers insisting on a strong currency while central bankers warning of the likely consequences.

In July, the rupee suddenly fell 3 per cent, having traded in a narrow band since 2015. Central bank officials said they had backed away from shoring up the currency, but the move drew an angry response from the government, which stepped in to boost its value again before replacing the acting governor.
Riaz Haq said…
#Pakistan boasts the world's fastest growing retail market. Growing middle class & youth bulge are big reasons why.

https://www.bloomberg.com/news/articles/2017-09-28/135-million-millennials-drive-world-s-fastest-retail-market

Middle class expected to surpass U.K., Italy over 2016-21
By Faseeh Mangi
September 28, 2017, 1:00 PM PDT
From
Nearly two-thirds of Pakistan population under 30 years old
Pakistan’s retail stores forecast to grow by 50% in 5 years
Pakistan’s burgeoning youth and their freewheeling attitude toward rising incomes have turned the nation into the world's fastest growing retail market.

The market is predicted to expand 8.2 percent per annum through 2016-2021 as disposable income has doubled since 2010, according to research group Euromonitor International. The size of the middle class is estimated to surpass that of the U.K. and Italy in the forecast period, it said.

Pakistan's improving security environment, economic expansion at near 5 percent and cheap consumer prices are driving shoppers to spend up big. Almost two-thirds of the nation's 207.8 million people are aged under 30, according to the Jinnah Institute, an Islamabad-based think tank.

“We have a new millennial shopper at hand. They don’t mind spending to have the kind of lifestyle they would like,” said Shabori Das, senior research analyst at Euromonitor. “It’s not like the Baby Boomer generation where savings for the future generation was important.”

Pakistan is bucking the trend in the U.S. -- where stores are closing at a record pace as e-commerce undermines bricks-and-mortar. It's also attracting foreign operators: Turkish home appliance maker Arcelik AS and Dutch dairy giant Royal FrieslandCampina NV entered the market last year via acquisitions. Meanwhile, Hyundai Motor Co., Kia Motors Corp. and Renault SA are all building plants in the South Asian nation.

Pakistan’s retail stores are expected to increase by 50 percent to 1 million outlets in the five years through 2021, Euromonitor said. Its three biggest malls, Lucky One in Karachi and Packages Mall and Emporium Mall in Lahore, opened in the past two years.

Pakistan is mirroring what India went through about four years ago. Both countries have young populations with more income and less inclination toward saving which is a distinct difference to what retailers elsewhere are dealing with, said Das.

Riaz Haq said…
#India’s Growth Slowdown. #Modi #Achhedin #BJP https://www.wsj.com/articles/indias-growth-slowdown-1507233968 … via @WSJOpinion


Narendra Modi promised Indians acche din, Hindi for good times, when he became Prime Minister in 2014. So an economic slowdown that has seen real GDP growth tumble to 5.7% in the second quarter threatens his popularity. The ruling Bharatiya Janata Party is now debating how the government went wrong and how to boost growth ahead of the 2019 general election.
Riaz Haq said…
From Express Tribune:


https://tribune.com.pk/story/1696282/2-pakistan-posts-5-8-growth-rate/

“Every statistic has improved and we have managed to increase gross domestic product growth rate and at the same time contained the budget deficit and inflation,” said Ismail. Pakistan’s economy expanded to $313 billion, the highest in history.


--------

Ismail admitted problems on the external front and expressed the hope that the recent two devaluations of the rupee against the US dollar would help narrow down the widening current account deficit. He said that the government did not want to curtail imports but was trying to bridge this gap by increasing exports and remittances.


--------------

Investment and savings

The investment-to-GDP ratio stood at 16.4% against the five-year target of 22.8%. This ratio was slightly better than last year’s revised rate of 16.1%. Savings slipped below last year’s level of 12% and stood at 11.4% of GDP, far below the five-year target of 21.3% of GDP.

Fixed investment remained at 14.8%. Public investment increased to 5% of GDP, which was better than the previous year. The target of private investment was also missed by a wide margin, which stood at 9.8% of GDP against the five-year target of 16.7%. Results for private investment are worse than last year when they had been estimated at 10%.

GDP growth

The PML-N government claimed to achieve an economic growth rate of 5.8% in its last year in power that is the highest over the past 13 years. But it is significantly lower than the 7% target the incumbent government wanted to achieve when it came to power in 2013.

However, the current growth rate is decent enough to give a political advantage to the ruling party in the upcoming general elections.

In 2012-13, which was the last year of the PPP tenure, the economic growth rate was 3.7%.

Just under than two-thirds of growth — 66.4% to be precise — came from the services sector, which performed slightly better than the expectations. The government achieved growth targets for services and agriculture sectors but missed the industrial sector growth target again.

Despite a better economic performance, the growth rate was still insufficient to absorb the youth bulge — Any pace of growth below 7% rate would increase unemployment.

Popular posts from this blog

Economic Comparison Between Bangladesh & Pakistan

Fast Moving Consumer Goods (FMCG) Boom in Pakistan's $152 Billion Retail Market

Dairy Revolution Draws Investors to Pakistan's Agribusiness