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Presentation by Dr. Vaqar Ahmed on Inclusive Growth & Sustainability at University of Lahore - 8 November 2012
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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 [email protected] 30
Thank You