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MGT604 - Management of Financial Institutions - Lecture Handout 14

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INCREASING FOREIGN DIRECT INVESTMENT

Pakistan must increase Foreign Direct Investment, if it intends to enhance the growth of its economy. The experience of the developing countries is that FDI is directly related to economic growth. Two recent examples from the developing world are China and India.

The following factors have proven to be critical for attracting foreign investment:

  1. World-class physical infrastructure
  2. A secure law and order situation
  3. Skilled and productive labor
  4. Innovative capacities
  5. Agglomeration of efficient suppliers, competitors
  6. A well-developed institutional infrastructure

Foreign Interest in Local Financial Markets

With the rapid growth in Pakistan's economy, foreign investors are taking a keen interest in the corporate sector of Pakistan. In the recent years, majority stakes in many corporations have been acquired by multinational groups.

Enhancing and Sustaining a Growing GDP

There have been two problems with the GDP growth rate in Pakistan. First, Pakistan has not been able to sustain growth over the long term. Sometimes Pakistan grows at a rate of around 7 percent and sometimes it retreats to a 3 percent growth rate.
Second, the growth rate of the economy in Pakistan has not been linked to improvement in human development factors. Basic indicators like education, health, poverty, safe drinking water, etc., have been neglected in Pakistan. The "trickle down theories" and market forces of the 1970s and 1980s have failed to provide relief for the general public. A need exists to link the growth rate of the economy to improvement in human development. The basic argument is that a higher growth rate is of limited utility if it does not benefit the population as a whole, including the poor.

How can Pakistan improve and sustain its growth rate?

Production in agriculture must be enhanced because of its large share of the GDP. Agricultural production can be improved by taking two kinds of measures. First, the government must provide facilities to small and medium landowners to cultivate their lands. These facilities may include the provision of seeds, fertilizers, machinery, and water. Second, the government must play an important role in determining the prices of the goods produced in the agriculture sector. It is really discouraging to farmers when they are not getting adequate prices for their products, exacerbating rural flight to urban areas.

Industrial Sector

In the industrial sector, the government must place emphasis on the development of small and medium industries. The government can facilitate this by providing targeted loans to this sector. Pakistan can substantially increase export earnings from light industry in the areas of carpet and textiles, sports equipment, dairy products, etc. The sick heavy industrial units promoted in the past should be rationalized, because they have become a burden on the economy. India is a classic case study of effective transition in this regard.

Inter-provincial harmony in Pakistan

There is a need to create inter-provincial harmony in Pakistan. In the past there has been a perception of deprivation and exploitation of the smaller provinces by the larger ones. Interprovincial tensions have revolved around issues of resource distribution, investment and employment, water issues, etc. These factors hinder the growth rate of the economy.
Pakistan needs to create inter-provincial harmony to achieve better growth.

Achieving a Favorable Balance of Trade

Pakistan's trade balance has been in deficit most of the time since the country's independence. Despite much effort by successive governments to liberalize trade, Pakistan's trade regime still has many barriers that are preventing it from being successful. Pakistan has faced various problems in trying to integrate its economy with world markets. The opponents of economic integration with world markets argue that it will lead to deindustrialization of Pakistan. The basic problem for Pakistan is that its exports are mostly raw materials, which are subject to severe price fluctuations in international market prices. The main exports of Pakistan, cotton and rice, are less competitive in international markets.

Managing the Debt

The external debt can be managed by taking the following policy measures:

  1. Controlling the non-development expenditures of the government, which are currently consuming around 70 percent of public revenue
  2. Accelerating and sustaining the GDP growth rate
  3. Introducing an effective judicial system that strengthens accountability. This will help in reducing economic corruption and mismanagement.
  4. Continuing austerity measures and containing current expenditures on the part of the government.
  5. Providing more incentive to Pakistani citizens abroad and foreign residents of Pakistan to transfer their currency into the country. Foreign remittances will help in building up the foreign exchange reserves, thereby reducing the demand on the public debt.

Economic Resilience

Despite this record of sustained growth, Pakistan's economy had, until a few years ago, been characterized as unstable and highly vulnerable to external and internal shocks. However, the economy proved to be unexpectedly resilient in the face of multiple adverse events concentrated into a four-year period.

  • The Asian financial crisis;
  • Economic sanctions — according to Colin Powell, Pakistan was "sanctioned to the eyeballs";
  • Global recession;
  • Severe rioting in the port city of Karachi;
  • Heightened perceptions of risk as a result of military tensions with India — with as many as a million troops on the border, and predictions of impending (potentially nuclear) war;
  • The post-9/11 military action in neighboring Afghanistan, with a massive influx of refugees from that country;
  • The 2005 Pakistan earthquake

Conclusion

Despite these adverse events, Pakistan's economy kept growing, and economic growth accelerated towards the end of this period. This resilience has led to a change in perceptions of the economy, with leading international institutions such as the IMF, World Bank, and the ADB praising Pakistan's performance in the face of adversity.