Thirlwall Law: Why Hasn't Pakistan's GDP Grown Faster Than 5% Average Since 1960s?

Pakistan's economy has grown at a compounded annual growth rate (CAGR) of about 5% since the 1960s. While Pakistan's average 5% annual economic growth rate is faster than the global average, it falls significantly short of its peer group in Asia. The key reason is that, unlike Pakistan's, the East Asian nation's growth has been fueled by rapid rise in exports. History shows that Pakistan has run into balance of payments (BOP) crises whenever its growth has accelerated above 5%. These crises have forced Pakistan to seek IMF bailouts 13 times in its 73 year history. Pakistan's current account deficits would be a lot worse without 23X growth in remittances from overseas Pakistanis since year 2000.  What Pakistan has experienced is BOP-constrained growth as explained in 1979 by Thirlwall Law, a law of economics named after British economist Anthony Philip Thirlwall.  Another reason why Pakistan has lagged its Asian peers in terms of economic growth is its lower savings and investment rates. The best way for Pakistan to accelerate its growth beyond 5% is to boost its exports by investing in export-oriented industries, and by incentivizing higher savings and investments. 

History of Pakistan's IMF Bailouts

Economic Growth Since 1960: 

The World Bank report released in June, 2018 shows that Pakistan's GDP has grown from $3.7 billion in 1960 to $305 billion in 2017, or 82.4 times. In the same period,  India's GDP grew from $37 billion in 1960 to $2,597 billion in 2017 or 71.15 times. Both South Asian nations have outpaced the world GDP growth of 60 times from 1960 to 2017.

While Pakistan's GDP growth of 82X from 1960 to 2017 is faster than India's 71X and it appears impressive, it pales in comparison to Malaysia's 157X, China's 205X and South Korea's 382X during the same period.

Thrilwall's Model: 

Thrilwall's BOP-constrained growth model says that no country can sustain long-term growth rates faster than the rate consistent with its current account balance, unless it can finance its growing deficits. Indeed, if imports grow faster than exports, the current account deficit has to be financed by borrowing from abroad, i.e., by the growth of capital inflows. But this cannot continue indefinitely. Here's how Jesus Felipe, J. S. L. McCombie, and Kaukab Naqvi describe it in their May 2009 paper titled "Is Pakistan’s Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth"  published by Asian Development Bank: 

"The reason is straightforward. If the growth of financial flows is greater than the growth of GDP, then the net overseas debt to GDP ratio will rise inextricably. There is a limit to the size of this ratio before international financial markets become distinctly nervous about the risk of private and, especially in less developed countries, public default. If much of the borrowing is short-term, then there is danger of capital flight, precipitating the collapse of the exchange rate. Not only will this cause capital loses in terms of foreign currency (notably United States [US] dollars) of domestic assets owned by foreigners (the lenders), but it will also cause severe domestic liquidity problems. This is especially true of many developing countries as overseas borrowing by banks and firms is predominantly denominated in a foreign currency, normally US dollars. As the exchange rate plummets, so domestic firms have difficulty finding domestic funds to finance their debt and day-today operations, often with disastrous consequences."

Investment as Percentage of GDP Source: State Bank of Pakistan 

Pakistan's Rising Current Account Deficit:

Pakistan's external debt has been rising rapidly in recent years to fund its ballooning twin deficits of domestic budget and external accounts. It pushed the external debt service cost to $12 billion in fiscal 2019-20, and added to the trade deficit of nearly $24 billion. Remittances of $21 billion from Pakistani diaspora reduced the current account deficit to $11 billion, but still forced the new PTI government to seek yet another IMF bailout with its stringent conditions to control both fiscal and current account deficits. These conditions resulted in dramatic slow-down in the country's GDP growth. 

Pakistan's External Debt. Source: Wall Street Journal

Pakistan's Exports: 

Pakistan’s exports have continued to lag behind that of its South Asian competitors since the early 1990s. Bangladesh’s exports have increased by 6.2 times compared to Pakistan’s, measured in terms of exports per capita, and that of India by 6.8 times, according to Princeton's Pakistani-American economist Atif Mian. 

Exports Per Capita in South Asia. Source: Dawn 

Savings and Investment: 

The second reason why Pakistan lagged its Asian peers in terms of economic growth is its lower savings and investment rates. 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 15 percent 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

21X Remittance Growth Since Year 2000:

Remittance inflows from Pakistani diaspora have jumped 21-fold from about $1 billion in year 2000 to $24 billion in 2020, according to the World Bank. In terms of GDP, these inflows have soared nearly 7X from about 1% in year 2000 to 6.9% of GDP in 2018.

Meanwhile, Pakistan's exports have declined from 13.5% of GDP in year 2000 to 8.24% of GDP in 2017.  At the same time, the country's import bill has increased from 14.69% in year 2000 to 17.55% of GDP in 2017.  This growing trade imbalance has forced Pakistan to seek IMF bailouts four times since the year 2000.  It is further complicated by external debt service cost of over $6 billion (about 2% of GDP) in 2017. Foreign investment in the country has declined from a peak of $5.59 billion (about 4% of GDP) in 2007 to a mere $2.82 billion (less than 1% of GDP) in 2017. While the current account imbalance situation is bad, it would be far worse if Pakistani diaspora did not come to the rescue.


Pakistan's average economic growth of 5% a year has been faster than the global average since the 1960s, it has been slower than that that of its peers in East Asia. It has essentially been constrained by Pakistan recurring balance of payment (BOP) crises as explained by Thrilwal's Law. Pakistan has been forced to seek IMF bailouts 13 times in the last 70 years to deal with its BOP crises. This has happened in spite of the fact that remittances from overseas Pakistanis have grown 24X since year 2000. The best way for Pakistan to accelerate its growth beyond 5% is to boost its exports by investing in export-oriented industries, and by incentivizing higher savings and investments. 

Related Links:

Haq's Musings

South Asia Investor Review

Pakistan's Debt Crisis

Declining Investment Hurting Pakistan's Economic Growth

Brief History of Pakistan Economy 

Can Pakistan Avoid Recurring IMF Bailouts?

Pakistan is the 3rd Fastest Growing Trillion Dollar Economy

CPEC Financing: Is China Ripping Off Pakistan?

Information Tech Jobs Moving From India to Pakistan

Pakistan is 5th Largest Motorcycle Market

"Failed State" Pakistan Saw 22% Growth in Per Capita Income in Last 5 Years

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Riaz Haq's YouTube Channel

PakAlumni Social Network


Riaz Haq said…
#Pakistan #economy gains strength as #coronavirus cases decline. It's seen from growing cement-to-fuel sales & demand for home appliances to cars. Economist Muzammil Aslam who expects economic expansion at 4%-5% in current FY with demand push via @markets

Evidence of momentum returning can be seen from growing cement-to-fuel sales and demand for home appliances to cars. That’s happening even as Pakistan added fewer than 2,900 cases last week compared with almost 35,000 cases in a week in June, and 96% of the total 300,000 infected have fully recovered.

“It has surprised everybody,” said Muzzammil Aslam, chief executive officer at Tangent Capital Advisors Pvt., who expects economic expansion at 4%-5% in the year started July, higher than the government’s 2.1% target. “The growth is led by an aggregate demand push.”

Cement sales rose 38% from a year ago to 4.8 million tons in July, and near a record level seen in October. A government program to give amnesty to tax evaders, provided they fund construction projects, is expected to fuel activity -- and demand for cement -- as work resumes after the lockdown.

“We expect dispatches to continue their rising run moving forward because of tax measures,” said Saad Khan, research head at IGI Securities Ltd. “Substantial decline in interest rates and mandatory targets given for banks to increase housing and construction financing to at least 5% of private sector credit” will also help, he said.

Cement sales eased to 3.5 million tons in August, mainly because of torrential rains across the country.

Fuel Sales
Gasoline sales in June rose to a record high as people return to work after lockdown measures eased in May, according to A. A. H. Soomro, managing director at KASB Securities Pvt. Sales have stayed elevated in July and August.

Fuel for power generation has increased as well. Fuel oil sales rose in June to the highest in a year while LNG spot cargo purchase resumed in June after a six-month hiatus.

Car Sales
Local car deliveries have recovered to about 10,000 units after four months as the end of lockdown ushered in new demand.

Kia Motors Corp.’s local unit is planning to add a second shift at its factory in Karachi from January.


Manufacturing output improved for a second consecutive month in June. The overall recovery in large-scale manufacturing will likely be stronger in the October-to-December quarter with worldwide demand picking up, said Khaqan Najeeb, a former adviser to Pakistan’s finance ministry. Home appliances are also seeing “robust demand,” said Haroon Ahmad Khan, chief executive officer at Waves Singer Pakistan Ltd.

Riaz Haq said…
How to fix Pakistan’s economy
Yousuf NazarUpdated 14 Sep 2020

Pakistan has gone through this boom and bust cycles many times before: an import-driven boom, balance of payments crisis, International Monetary Fund (IMF) bailout, stabilisation, a period of growth and then back to a crisis. This time is no different.


These facts suggest that the reasons for Pakistan’s poor export performance are deep and structural. The 2019-20 improvement in the current account deficit has been largely the result of more than a $5bn fall in energy imports and (possibly one-off) record rise in the worker’s remittances as overseas Pakistanis return following the huge surge in unemployment across the globe including in the Middle East.

It is wrong to focus on just the so-called twin deficits: current account and fiscal. These are just symptoms of much wider and deeper issues including Pakistan’s chronically low savings and investments rate compared to its GDP. I would call them intellectual and capacity deficits. We need a growth model.

An exports-led growth model has lifted hundreds of millions out of poverty in countries like China, South Korea, Taiwan and Singapore. China invested heavily in education, particularly science and technology, as well as in heavy engineering and other capital-intensive industries. Foreign investors looking for trained and low-cost workers found no shortage of human talent as the ‘communist’ China had invested heavily in basic education and its Special Economic Zones (SEZs) jump-started the labour-intensive exports-led industrial revolution that has transformed China.

Tax concessions and government-guaranteed yields may have succeeded in attracting investments in the energy sector but this is an unsustainable model. Economic progress cannot be imported or borrowed. It has to come from long term pursuit of appropriate strategies through policies implemented consistently through competent governance. A successful national growth plan must have a 3D strategy: deregulate, devolve, and digitise.

Deregulation is essential to harness the energies of the private sector (especially medium-size businesses) severely constrained by bureaucratic hurdles and rent-seeking. Without devolution, it is impossible to provide basic services in a country with one of the fastest urbanisation rates, and without digitalisation, Pakistan cannot compete in a world defined by the digital divide as Bill Gates has put it. Imran Khan has three more years to change course. His success or failure would depend on how correctly he identifies the challenges and what resources and people he employs to meet those.

Anonymous said…
Many economists suggest that the government has achieved its first goal, maintaining economic stability in Pakistan. In this article, I will argue that the economy is still in turmoil and stability is far away.

Stabilisation is achieved when all key macroeconomic indicators start performing at their optimum – growth-facilitating – level. One significant measure is the rate of inflation and the other is the interest rate.

Both are connected. When inflation is high, the interest rate should also rise to compensate for the time value of money and maintaining monetary discipline in the economy. In Pakistan, the Consumer Price Index (CPI) was recorded at 8.2% in August 2020. Although it is the lowest in the last three months, expectations are high that the CPI will rise in the coming months.

The key interest rate is at 7%, which is arbitrary since the State Bank of Pakistan (SBP) is keeping it at a low level to facilitate post-Covid recovery in the market. This negative interest rate is, in fact, a signal that the monetary policy is still not disciplined and sooner or later the SBP will revise its monetary policy goals.

Another indicator of stabilisation is the fiscal policy, which deals with spending and taxing accounts of the state. The fiscal deficit in the last two years was more than 8% of gross domestic product (GDP), the highest in the last four decades, even though the government is maintaining the lowest public spending.

I do not think the PTI government will keep retaining this lowest level of spending since this policy is hurting its popularity in public.

Current account

The fourth major proxy of economic stability is the current account balance. At present, Pakistan’s current account balance is in surplus. But two main factors are responsible for manipulating its present level.

One is the low level of imports due to the uncertain economic situation caused by Covid-19, volatile exchange rate and ambiguous economic policies of the present government since 2018.

The second is remittances which are increasing not due to any efficiency of the present government. Mainly, migrants send more money to their families when they find them in more financial difficulties or they decide to return to their home countries.

Dependence on remittances is like reliance on foreign markets and not on the domestic economy. It is evident that in the last two decades the more Pakistan relies on remittances, the more decline we see in exports. The reason is that the remittances are providing key support to the current account balance.

This reduces incentive for the government to remove those policy barriers which hurt productivity, innovation and competence in the domestic market. Without a strong competent market, Pakistan cannot boost its exports and sustain its growth rate at a more than 5% level.

One major barrier is the import-restricting protectionist policies. The economic literature is very clear in explaining that free trade policies boost exports and economic activities in a country.
Riaz Haq said…
#UK increases #Export Finance country limit for #Pakistan to £1.5 billion. UK is Pakistan’s 3rd largest export partner, accounting for 7% of Pak's total exports to the UK. Increase in #credit #financing limit will help turbo-charge trade between the two.

This announcement will boost trade partnerships between the two countries and unleash Pakistan’s growth potential. UKEF helps secure large contracts by providing attractive financing terms to buyers and supporting working capital loans.

The British High Commissioner to Pakistan, Dr Christian Turner met with the Federal Minister of Commerce for Pakistan Razaq Dawood today to discuss trade ties and business potential between the two countries. The Commerce Minister welcomed the UKEF’s announcement of an increase of £500 million in the credit limit for business investment in Pakistan, especially at a time when Pakistan is looking to expand its trade potential to mitigate the impacts of COVID19.

The British High Commissioner, Dr Christian Turner said;

UK credit financing for Pakistan has tripled in the last two years, and is key to achieving my ambition to double the trade between the UK and Pakistan. It is a sign of our confidence in Pakistan and the strength of the unique relationship between the two countries. I encourage all Pakistan businesses to look for opportunities to partner with the UK on their journey towards economic prosperity.

The UK is Pakistan’s third largest export partner. Between July 2019 and March 2020 Pakistan exported 7% of its total exports to the UK, and the increase in the credit financing limit will help turbo-charge trade relations between the two countries.

Notes to the Editors:
UK Export Finance (UKEF) is the UK’s official Export Credit Agency (ECA) working closely with the Department for International Trade (DIT).
Its mission is to ensure that no viable UK export fails for lack of finance or insurance, while operating at no net cost to the taxpayer.
In 2019/20, UKEF provided £4.4 billion of support for UK exports globally.
UKEF recently completed a comprehensive review of its Country Limits, resulting in increases in over 100 markets including Pakistan
The Export Financing offered is quite attractive if comparing to a commercial bank
There is a baseline requirement for 20% of the whole deal to come back to the UK, but that doesn’t necessarily mean –for example –the whole construction on the ground or the production of a specific product. It looks at the whole supply chain. The 20% can come from a UK company that looks after the procurement of services as part of a bigger deal. This makes UKEF very attractive for multinational consortiums.
Riaz Haq said…
In the outgoing FY (2019-20), Pakistani expatriates remitted a record of $23.12 billion with more than 6% year-on-year (YoY) growth compared to $21.74 of FY 2018-19.

The momentum has not only persisted but amplified in on-going FY 21 with a whopping $2.77 billion remittance in July, followed by an inflow of $2.095 billion in August. This unprecedented surge is bemusing, and what has baffled many is the fact that this escalation has occurred during the pandemic. So, what could the potential triggers to this mammoth inflow be?
The extraordinary leap can be primarily due to the tightening of informal money markets, which has augmented the inflow through formal banking channels. In the budget for FY 2020-21, the incumbents allocated Rs25 billion to formalise foreign remittances, which would aid in stockpiling foreign exchange reserves to service colossal national debt obligations.
Pakistanis typically used to carry cash in their luggage physically. But due to flight reduction and sparse international travels, they would have been compelled to access official banking channels for money transfers. Also, remittances might have incremented on account of significant job losses in the Gulf region due to the Covid-related recession. Hence the spiral may demonstrate high one-time repatriation of money back to Pakistan.
On the other hand, the State Bank of Pakistan (SBP) has emphasised an orderly ‘market-based’ exchange rate management and sound policymaking under the Pakistan Remittance Initiative. The SBP sheds the spotlight on the reduction of the threshold for eligible transactions from $200 to $100 under the Reimbursement of Telegraphic Transfer (TT) Charges Scheme. It also stressed on adoption of digital channels and targeted marketing campaigns to promote formal routes. Similarly, IT-related freelance services’ payment limits have increased from $5,000 to $25,000 per individual per month. The SBP believes that it has facilitated to enhance home remittances through formal banking channels in Pakistan.
The crux of the matter is remittances will upslope further in the future due to effectuated compliance of formal banking channels. Still, the recent abnormal increment will ease down in the coming months when the western economies recuperate from the ramifications of the Covid-related slump.
Riaz Haq said…
#Pakistan earns $1.44 billion in #IT #exports, up 20.72% from $1.19 billion from last year. #computer services exports grew 23.44% as it surged to $1,106 million from US $ 895.990 million last year. #technology #economy #trade$1438-million-from-IT-services-export-during-FY2019-20

Pakistan earned US $ 1438.827 million by providing different information technology (IT) services in various countries during July-June (2019-20).

This shows growth of 20.72 percent when compared to US $ 1191.864 million earned through provision of services during the corresponding period of fiscal year 2018-19, Pakistan Bureau of Statistics (PBS) reported.

During the period under review, the computer services grew by 23.44 percent as it surged from US $ 895.990 million last year to US $ 1106.027 million during July-June (2019-20).

Among the computer services, the exports of software consultancy services witnessed increase of 14.98 percent, from US $ 354.397 million to US $ 407.492 million while the export and import of computer software related services also rose by 11.62 percent, from US $ 285.235 million to US $ 318.368 million.

The exports of hardware consultancy services decreased by 16.55 from, US$ 2.345 million to US$ 1.957 million whereas the exports of other computer services rose by 51.91 percent from US$ 247.976 million to US $ 376.699 million. In addition the export of repair and maintenance services however witness decline of 74.97 percent from $6.037 million to $1.511 million.

Meanwhile, the export of information services during the period under review increased by 61.39 percent by going up from US $ 1.580 million to US $ 2.550 million.

Among the information services, the exports of news agency services increased by 100.89 percent, from US $ 0.677 million to US $ 1.360 million whereas the exports of other information services also increased by 31.78 percent, from US $ 0.903 million to US $ 1.190 million.

The export of telecommunication services also witness increase of 12.22 percent as these went up from US $ 294.294 million to 330.250 million during the fiscal year under review, the data revealed.

Among the telecommunication services, the export of call centre services increased by 26.17 percent during the period as its exports increased from US $ 98.858 million to US $ 124.730 million whereas the export of other telecommunication services also increased by 5.16 percent, from US $ 195.436 million to US $205.520 million during the period under review, the PBS data revealed.

It is pertinent to mention here that the services trade deficit of the country during the fiscal year (2019-20) decreased by 42.96 percent as compared to the corresponding period of last year.

During the period from July-June, 2019-20, services exports decreased by 8.66 percent, whereas imports reduced by 24.25 percent, according the data released by Pakistan Bureau of Statistics.

The services worth US $ 5.449 billion exported during the period under review as compared the exports of US $ 5.966 billion in same period of last year, whereas imports of services into the country was recorded at US $ 8.284 billion as against the imports of US $ 10.936 billion, the data revealed.
Riaz Haq said…
China’s export machine comes roaring back to life as #COVID threat wanes. While overall volumes have fallen, #China’s share of global #exports leapt to more than 18% in April, before falling back slightly to 15.9% in July. #economy via @financialtimes

The same coronavirus that hammered global trade has increased the appetite for goods made in China, such as electronics products and medical equipment. That boom in exports is supporting the country’s early recovery as other big economies flounder, raising the question of whether China’s recent trade advantage will outlive the pandemic.

Data from Oxford Economics and Haver Analytics show that while overall volumes have fallen, China’s share of global exports compared with other large exporters leapt to more than 18 per cent in April, before falling back slightly to 15.9 per cent in July.

“It is too early to write off China’s role in global supply chains,” said Louis Kuijs from Oxford Economics, who pointed to the “fundamental competitiveness” of Asian economies.

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He added that the market share effect was in part temporary but suggested that “there will be some permanent shift . . . and that should benefit certain countries".

Partly a function of declining activity elsewhere, China’s recent success is also a result of a wider resilience of exports in east Asia, fuelled by a shift in global demand towards products suited to a world working from home.

Taiwan’s exports, the majority of which are electronics components and IT and communications products, reached their highest ever monthly level in August. In South Korea, exports of information and communications technology products rose year on year in each of the past three months after a sharp fall in April. 

Such economies have benefited from much lower reported coronavirus infections since the second quarter. Lockdown restrictions in China were already being eased in April, when other countries were plunged into chaos from the spread of the pandemic. New cases have remained lower in China, Taiwan and South Korea than in the US and Europe. 

That paved the way for enough manufacturing activity to take advantage of a shift in global consumption patterns. In addition to the kind of soaring exports of electronics also seen in Taiwan and South Korea, Chinese exports of medical equipment leapt in the first seven months of the year. China’s trade surplus with the US in August reached $34.2bn, its highest level since November 2018.

Trinh Nguyen, senior economist at Natixis, points to a “bifurcation of performance globally”. That is reflected in South Korea, where electronics and medical consumer products have performed well but “heavy industries” such as shipping and autos have struggled. In Japan, exports fell year on year for the sixth straight month in August.

Trade Secrets
Medical equipment boost for Chinese exports could be shortlived Premium

In China, the state has provided support for manufacturing in a way that Mr Kuijs said was “unimaginable” in the US. But he added that the export response in China was also down to “entrepreneurial and agile” companies. “Virtually none of these companies is state owned,” he said.

While overall exports have been able to adapt to changing demand, the mood in its manufacturing hubs is mixed.

Kexin Chen, a sales manager of a toy factory in Guangdong, said export orders from Europe were improving but admitted that her business was still struggling. “We are counting on [orders for] Black Friday and Christmas,” she said.

Elsewhere, there are signs that aspects of the east Asian export boom may be driven by short-term fears over supply chains. Taiwan Semiconductor Manufacturing Corporation, the world’s largest contract chipmaker, told investors last month that technology companies were building larger stockpiles because they were worried new Covid-19 infection waves could disrupt supply chains again.

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