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Provincial Economic Development: Performance, Challenges, and the Way Forward

Khalid Ikram*

1.        Introduction

Analyses of economic development in Pakistan have traditionally followed a “top-down” approach. They examine the behavior of macroeconomic indicators for the country as a whole, referring only in a general, even cursory, manner to the trajectories of each province, and even more summarily to the policy issues, constraints, and opportunities that confront the different provinces. The implicit attitude—that it is the federation as a whole rather than the federating units that matter—is so firmly embedded in the official mindset that, even after 65 years of Pakistan’s existence, the authorities do not produce official statistics of province-level gross domestic product (GDP), investment, savings, exports, imports, labor productivity, and other key economic indicators.

2.        The Importance of a Province-Level Approach

Why is a province-level approach important? The issue is not merely of academic interest. It is necessary to strengthen studies at the province level, because policies to address questions of employment, poverty, and perceived deprivation, and to improve the delivery of key services are more effective if the perspective is as close to the ground as possible.
The validity of this approach is recognized by the burgeoning number of regional or state studies in India and in other parts of the world—such as China, Malaysia, Vietnam, Thailand, Indonesia, Brazil, Argentina, and Nigeria among developing countries, and of course the United States, Canada, Australia, Germany, Italy, and several others in the developed world—where individual provinces or states can exercise a significant degree of autonomy over many economic decisions. Stimulating the convergence of economic growth between the different provinces of Pakistan is vital, because the cohesion of the country depends on it. Is it really necessary to remind ourselves that the breakup of the original state of Pakistan in 1971 was triggered principally by economic disparities between East and West Pakistan, and which East Pakistan felt were not being addressed?
Disparities in the endowment of physical and human resources and divergences in the strength of institutions require different policies to realize the development potential of each jurisdiction—one size of policy will not fit all. Economic policy will be most effective if the usual countrywide macroeconomic analysis is supplemented by a detailed “bottom-up” approach, based on a comprehensive examination of the challenges and opportunities specific to each province.
The disjunction between the endowments of land and population is brought out in Figure 19.1. A comparison of Balochistan with the other provinces is especially striking. In 2011, Balochistan’s population density at 19 persons per square kilometer was only 5, 8, and 9 percent, respectively, of that of Punjab, Sindh, and Khyber Pakhtunkhwa (KP). The vast imbalance between area and population gives rise to special challenges— such as smaller markets; higher costs of production, distribution, and services; and difficulties of governance—as discussed in Section 5.3.


Figure 19.1: Share of provinces in area and population of Pakistan, 2011
19-1.wmf
Source: Pakistan Economic Survey, 2012.
The division of authority between the federal and provincial governments is laid down in the Constitution of Pakistan. Some areas—such as defense, foreign affairs, customs duties, and income tax—fall within the ambit of the central government, while others—for example, agriculture, irrigation, primary education, and health—are covered by the remit of the provincial authorities. In formulating a strategy for provincial development and recommending sectoral and other policies, one must bear in mind what the responsibilities and capabilities of the provinces now encompass.[1]
Thus, following the 7th National Finance Commission award in 2009, the overall squeeze on Pakistan’s resources has been accompanied by a shift in revenue sharing in favor of the provinces. Consequently, the combined share of the provincial governments in the national Public Sector Development Program for 2010/11 rose from 26 percent of the total in 2000/01 to 60 percent. This indicates that the locus of development planning in the country is shifting to the provinces, and again underscores the importance of examining development constraints and strategies at the provincial level, and the necessity for making the provincial strategies congruent with those at the national level.

2.1.      Data Sources and Caveats

With the passage of the 18th Amendment to the Constitution of Pakistan, a substantial amount of responsibility for economic development has been transferred to the provinces. However, the absence of much essential information and data makes it almost impossible for provincial governments to design and implement economic policies that are firmly based on a foundation of knowledge. The dearth of reliable information on regional economic issues also makes it difficult for the federal government to ascertain the extent of, and the reasons for, divergences in economic growth between the provinces, and to formulate effective measures to accelerate the growth of lagging regions.
The data and other gaps have been partially filled by the efforts of private researchers and international institutions. The early attempts were designed primarily to address the question of income disparities between East and West Pakistan (see, for example, Haq, 1963; Khan & Bergan, 1966). These estimates, therefore, looked at West Pakistan as a whole and did not investigate regional subdivisions.
A pioneering effort at constructing individual GDPs for the four provinces of (West) Pakistan was made by Bengali (1997) and extended by Bengali and Sadaqat (2006). The analysis of provincial development issues—as opposed to calculations of provincial GDPs—has, in recent years, attracted the attention of a number of scholars and Pakistani think-tanks.[2] More comprehensive studies have been conducted by international institutions, especially by the World Bank, which, in partnership with the provincial governments, the Asian Development Bank (ADB), and the UK Department for International Development (DFID), has prepared reports on the economic development of each province.[3]
These joint studies are a valuable first step in analyzing critical issues and recommending policies, and also in generating time series of provincial GDPs using procedures consistent with those of the Pakistan Bureau of Statistics for the construction of the national accounts. At times, however, the nonavailability of survey data compels the unofficial estimates to resort to some assumed relationships between different variables, which can make the calculations less secure The nonavailability of data has also meant that some key indicators, such as investment (public and private) and provincial savings could not be calculated. Finally, it has not been possible to obtain reliable estimates of the “shadow economy” (defined as legal activities concealed from the authorities) for each province. The exclusion of this would understate the actual production and GDP in the province. Thus, figures for provincial GDPs are better regarded as indicators of trends and orders of magnitude than as precise levels.
Most of the provincial GDP data used in this chapter have been prepared by the World Bank for its suite of provincial economic reports. This is not because the World Bank data are necessarily superior to those developed by other scholars and institutions, but they have certain clear advantages. First, the figures have been discussed with all the provinces in the context of the provincial economic reports (indeed, the Punjab’s statistical department prepares its own, as yet unofficial, series on the lines of those prepared by the World Bank). Second, the figures have been used in other World Bank work—such as studies of poverty, income distribution, labor markets, rural development, etc.— making it possible to draw on those analyses. Third, they provide a consistent series of the provincial GDPs and their components for a two-decade span (1991–2011), based on 1999/2000 prices, as used by the Pakistan Bureau of Statistics for the all-Pakistan figures. The World Bank data have thus at least implicitly been accepted by the provinces, and are sufficiently long and detailed to permit a meaningful discussion of the underlying structural issues that each province confronts and how the provincial experience differs from that of the country as a whole.
The numbers generated by all the foregoing studies cannot, of course, substitute for an official set of figures prepared by the Pakistan Bureau of Statistics. Moreover, they are still incomplete in that there are no reliable estimates of provincial investment, savings, and other key variables. Thus, the present estimates can serve only as an interim measure. It is hoped that the Pakistan Bureau of Statistics will soon begin to issue officially sanctioned figures for GDP and other macroeconomic variables at the provincial level. Such data have long been published in India both by official and nonofficial sources (see, for example, India, Ministry of Commerce, 1949; National Council of Applied Economic Research, 1967).

3.        Pakistan’s Growth Requirements and the Growth Framework

A detailed discussion of all the issues that have an impact on Pakistan’s economic growth and development strategy is beyond the scope of this chapter; it therefore focuses on three central questions:
-       Why it is urgent to expand Pakistan’s economy at a rapid pace?
-       What elements must be emphasized in the country’s development strategy, given the constraints of a very tight resource position?
-       What are the main issues that the provinces face, and how can they play their role in the rapid development of the country?
The last question is crucial, because the country’s economy does not develop in some abstract space, but in the physical space of the provinces. It is, therefore, most important that the provinces’ development strategies be harmonized with the country’s overall development strategy.

3.1.      The Urgency of a High GDP Growth Rate

Why is it urgent for Pakistan’s economy to grow rapidly? The short answer is: to cope with the pressures of demography. Time is not on Pakistan’s side. Every year Pakistan adds a New Zealand to its population; every two years, a Switzerland; every three years, a Greece; every four, a Netherlands; and every five, an Australia. Moreover, while it adds these populations, it does not add the capital assets or institutions of these countries.
The age-distribution of the population provides another imperative for acting quickly. Nearly 50 percent of Pakistan's population is below 20 years of age, and over 60 percent below 30 years. With growing unemployment, these youths become disconnected from the economy and disaffected with the polity, and are vulnerable to the blandishments of extremists. The demographic projections show this “youth bulge“ continuing to dominate the population for perhaps another 30–35 years. Unless Pakistan can generate the required number of jobs through sustained, high GDP growth, its streets are likely to be crowded with thousands of young men and women desperately seeking jobs, justice, education, and medical care for themselves and their families—a serious threat to the country’s stability and a mouth-watering prospect for an extremist recruiter.

3.1.1.        The Required Rate of GDP Growth

How fast must the economy grow? Pakistan’s labor force is growing at an annual rate of around 3.5 percent. The World Bank’s provincial economic studies cited above estimate the elasticity of employment with respect to GDP growth at between 0.45 and 0.6 for the different provinces—let us use 0.5 as an average. This means that a 1 percent increase in GDP growth leads to a 0.5 percent increase in the employment rate. Thus, if the economy is to generate a sufficient number of jobs to employ all the additions to the labor force, it must grow at least at 7 percent a year. Indeed, if the backlog of the currently unemployed is to be reduced and/or the labor force expands more quickly, then the economy will need to grow even faster.
This will not be easy. Over the four decades 1970–2011, Pakistan’s economy is estimated to have grown at an average annual rate of about 5 percent. This could serve as a rough proxy for the economy’s potential growth rate at the existing level of investment, technology, and institutional performance. This rate is insufficient to produce the required number of jobs, and will have to be, on average, about one third higher over the next three decades than it has been over the last four. A business-as-before approach thus will not work.

3.1.2.        The Growth Strategy

What strategy could enable Pakistan’s economy to grow at the required rate? It is easier to start by explaining why Pakistan’s traditional strategy of relying heavily on public sector projects has to be modified. The modification is necessary for two reasons.
First, Pakistan simply does not have the financial resources to generate the required growth rate by piling public sector project on public sector project. In 2011, the “throw-forward” on public sector projects (the total cost of projects minus the amounts already spent on them) amounted to over PRs 2,000 billion, even if one were to exclude energy sector projects on the assumption that their financing could be arranged separately. At the current rate of allocations to the development program, it would take more than 11 years simply to complete the existing portfolio of projects (no new projects or schemes could be added), and even this assumes that there would be no increase in prices during these 11 years. (Pakistan Planning Commission, 2011a).
Given the average of price increases in the past, just completing the existing portfolio is likely to take 15 years or more (again assuming that no new projects are added). And, of course, if separate financing could not be arranged for the more than PRs 1,000 billion required for the crucial energy projects (of which the Diamer-Basha dam alone accounts for PRs 895 billion) implementing the total portfolio would take very much longer.
Second, Pakistan’s growth has relied excessively on adding factor inputs and too little on increasing productivity. Thus, between 1970 and 2005, only about 20 percent of GDP growth in Pakistan derived from productivity increases (World Bank, 2006a). More recently (1998–2008), the contribution of productivity was even smaller, accounting for only about 11 percent of GDP growth (Favoro & Koehler-Geib, 2009). The likely impact of these trends in productivity on the country’s competitiveness and its impact on prices and exports is all too clear.
Bearing in mind these constraints and other considerations, the Planning Commission formulated a framework for economic growth that was approved by the National Economic Council in May 2011 (see Pakistan, Planning Commission, 2011b). The growth strategy outlined in the report aims at creating a framework that would stimulate the private sector to increase investment, expand rapidly, and improve productivity.
In keeping with a policy of making the best use of straitened resources, the strategy lays primary emphasis on strengthening institutions (such as the judicial system, the civil service, the taxation system, and the education system), improving governance, reducing red tape and bureaucratic impediments, increasing competition, encouraging innovation and productivity, harnessing the growth potential of cities, and so on. The aggregate of these measures should significantly reduce the cost of doing business in Pakistan, thereby increasing enterprise profitability and encouraging a higher rate of investment, and at the same time making this investment more productive. Most of the (physical) public sector investment that is proposed in the strategy is aimed at breaking key bottlenecks, such as in the energy sector.

4.        Comparative Provincial Economic Performance

Difficulties with provincial data have already been discussed and should be borne in mind when considering the analysis in this section. However, two complications deserve special mention.
First, in the case of Sindh, the presence of Karachi can seriously distort the results for the province. The city is the country’s sole seaport and the major locus of manufacturing industry (and employment); the site of numerous educational and medical institutions; and home to the province’s largest businesses, its legislators, administrators, and higher judicial system. All these factors combine to make most development outcomes much more favorable for the city than for the rest of the province. The “average” results for Sindh, especially concerning the impact on welfare, should therefore be interpreted with care.
Second, in the case of Balochistan, the treatment of income from natural gas production creates a complication. The gas is produced in Balochistan, but an overwhelming amount is used in other provinces. Under the pricing formula that has been in effect, Balochistan does not receive compensation for the full value of its natural gas exports. The practical effect is that GDP estimates, since they are based on value added within the province, can overstate the welfare benefits available to the residents of Balochistan.

4.1.      Provincial GDP Growth

The performance of the national and provincial GDPs is shown in Figure 19.2. During the three decades from 1973 to 2005, Pakistan’s GDP in constant prices increased at an annual average rate of about 5.0 percent. There were, of course, divergences between the growth rates of the provinces: Punjab’s GDP is estimated to have grown at about 5.2 percent annually, and that of Sindh and KP at 4.9 percent; Balochistan lagged behind with its GDP increasing at an annual rate of only about 4.2 percent.
Figure 19.2: Provincial GDP growth rates, 1972/73–2004/05

(at constant 1972/73 prices; index numbers, 1972/73 = 100)

19-2.wmf
Source: World Bank Asian Development Bank, and Government of Balochistan (2008).
The difference of only one percentage point between the performance of the fastest- and the slowest-growing provinces might not appear to be too much. However, the power of compound interest is such that at the end of a 32-year period, an economy growing at 4.2 percent a year would be about three-and-a-half times its size at the beginning, while one that was growing at 5.2 percent a year would be more than five times its starting size. These differences translate into differences in the growth rates of per capita income (percent per annum): the Punjab, 2.7; Sindh and KP, 2.3; and Balochistan, 2.1. A person in Balochistan who started off in 1973 with an income of PRs 100 would have an income of PRs 194 in 2005; someone in the Punjab who started off with PRs 100 would see his/her income increase to nearly PRs 250—almost 30 percent higher than the individual in Balochistan. Standards of living between the provinces have thus diverged significantly.
The more recent performance, with the series rebased to 1999/2000 prices (in line with the rebasing of the national series by the Pakistan Bureau of Statistics) is shown in Figure 19.3 below.
Figure 19.3: Provincial GDP growth rates, 2000–11

(percent at 1999/2000 prices)

19-3.wmf
Source: World Bank (2013).
Over the 11-year period, Balochistan’s GDP increased by about 50 percent while that of Pakistan as a whole rose by 67 percent (and that of the other three provinces taken together increased by around 72 percent). However, Figure 19.3 shows that the growth rate of Balochistan’s GDP fluctuated much more than that of the other provinces.
These fluctuations can be expected to have had two effects. First, for the period as a whole, the average per capita income remained below that of the other provinces. Second, the wide swings in the GDP growth rate would have created considerable uncertainty about returns on investment and heightened perceptions of risk which, as international experience shows, are likely to have deterred investors from making large-scale or long-term commitments. (The absence of data on provincial investment makes a more detailed analysis impossible.) This, in turn, would have further weakened the base for GDP growth in the province.

4.2.      Structural Changes

Between 1973 and 2011, the provinces’ economic structures changed significantly. The main shift, as is normal in the process of development, was a relative decline in the share of agriculture and an increase in that of services. In the Punjab, the share of agriculture dropped from 40 percent of GDP to 20 percent. The share of services in that province increased substantially. Sindh witnessed a similar decline in the share of agriculture, but also saw an increase in the share of GDP contributed by manufacturing.
The smallest amount of structural change occurred in Balochistan. The contribution of agriculture in 2011 did drop from 40 percent in 1973, but the decline was only to 30 percent of the GDP. In view of the importance of crop agriculture and livestock in Balochistan’s agricultural sector, it is evident that fluctuations in water availability would affect output in a major way. Indeed, the availability of water in Balochistan is extremely variable, because the province lies outside the main Indus River basin and also benefits the least from the monsoons. This has left it prone to frequent water shortages and, indeed, to severe droughts (the most recent from 1998 to 2005). The substantial share of Balochistan’s GDP accounted for by agriculture, and that sector’s vulnerability to the availability of water, explain the wider fluctuation in Balochistan’s GDP compared with that of the other provinces. The structural changes in provincial GDPs between 1973 and 2011 are displayed in Figure 19.4.
Figure 19.4: Structure of provincial GDPs, 1972/73 and 2010/11

(percent of provincial GDP)

19-4.wmf
Source: Bengali and Sadaqat (2006) and World Bank (2013).

4.3.      Poverty and Income Distribution

The movements in GDP growth have had an impact on poverty reduction in the provinces. Figure 19.5 shows changes in the poverty headcount (the percentage of the population below the poverty line) in the different provinces between 1999 and 2008. The pace of poverty reduction was stable in the Punjab and KP, and resulted in a steady decline in the incidence of poverty, but poverty incidence in Sindh and Balochistan continued to fluctuate, quite substantially in the latter.
There appear to be two principal reasons for these different outcomes. First, the World Bank has found that the volatility in Sindh and Balochistan was highly correlated with the growth of agricultural GDP, and particularly with the value-added of the main crops. This was particularly important in the case of Balochistan because, as shown above, the share of agriculture in its GDP was significantly higher than in the other provinces. However, poverty rates in the Punjab and KP did not show a statistically significant linkage between variations in the value-added of the major crops and reductions in poverty.
Second, a major factor influencing the different outcomes was the relative contribution of workers’ remittances. The ratio of foreign and domestic remittances to household expenditures is high in the Punjab and KP, but much less so in Balochistan and Sindh. Thus, data from the Pakistan Social and Living Standards Measurement (PSLM) survey for 2007/08 shows that the sum of foreign and domestic remittances amounted, on average, to more than 20 percent of household expenditure per-adult-equivalent in KP and about 12 percent in the Punjab. This compares with around 2.5 percent in Balochistan and less than 1 percent in Sindh (an expected result, since emigration from these two provinces is much higher than from the other two). Therefore, the sharp increase in workers’ remittances from about $1 billion in 1996/97 to around $9 billion in 2008/09 flowed overwhelmingly to the Punjab and KP and benefited incomes in these provinces much more than in Balochistan and Sindh.


Figure 19.5: Poverty headcount, 1998/99–2007/08

(percent of population)

19-5.wmf
Source: World Bank (2013).
What happened to income distribution? Between 2002 and 2008, income inequality increased in the Punjab, KP, and Balochistan, and remained more or less unchanged in Sindh. Even though inequality in Balochistan increased between these two dates, the income distribution in the province still remained less unequal than in the others. Further disaggregation of the data shows that in Balochistan, as in all the other provinces, inequality remained higher in urban than in rural areas. Indeed, the overall result for Balochistan was influenced chiefly by a steep fall in the inequality of rural incomes (possibly because of a recovery from the earlier drought years), which moderated the effects of an increase in the inequality in urban incomes. Figure 19.6 displays the Gini coefficients for all the provinces between these dates.[4]
Figure 19.6: Gini coefficients, 2002 and 2008
19-6.wmf
Source: World Bank (2013) based on Pakistan Integrated Household Survey 2001/02 and 2007/08.
In view of the uncertainties connected with estimates of income data and poverty rates derived from household expenditure surveys, the following sections supplement them with an examination of other sources of physical and social indicators that bear on the quality of life.

4.4.      Social Indicators

Provincial differences in social indicators are shown below in Table 19.1, and gender-disaggregated differences in education, literacy, and immunization in Figure 19.7.
Table 19.1: Provincial social indicators, 2011 (percent)
Indicators
Balochistan
KP
Punjab
Sindh
Pakistan
Primary gross enrolment rate
74
89
98
84
92
Primary net enrolment rate
47
51
61
53
56
Middle gross enrolment rate
35
57
58
48
54
Middle net enrolment rate
13
17
23
19
20
Matriculation gross enrolment rate
38
54
61
55
57
Matriculation net enrolment rate
6
7
14
11
12
Literacy rate (10 years and older)
41
50
60
59
58
Adult literacy rate (15 years and older)
37
46
57
58
55
At least one immunization (12–23 months)
94
98
97
98
97
Full immunization (12–23 months)
53
77
86
75
81
Tetanus toxoid (percentage of married women aged 15–49 years)
31
61
77
60
69
Piped water
35
45
24
43
32
Toilet with flush
31
62
72
62
66
Source: Pakistan Social and Living Standards Measurement 2010/11.
Table 19.1 shows the wide differences that exist between Balochistan and the other provinces in education, immunization, and access to piped water. The Punjab also stands significantly ahead of KP and Sindh in terms of education and immunization indicators, although it lags well behind the other provinces, including Balochistan, in access to piped water.
Figure 19.7: Gender gaps in education, literacy, and immunization, 2010/11 (females as percentage of males)
Gross enrolment rates (%)
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Net enrolment rates (%)
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Literacy rates (%)
19-7c.wmf
Immunization rates (%)
19-7d.wmf
The gender gaps in education and literacy are highest in Balochistan. For immunization, the gaps are not very large and, interestingly, the lower figures here are for the Punjab.

4.5.      The Investment Climate and the Cost of Doing Business

It was pointed out earlier that the development strategy for the country had to be formulated in the context of very tight public sector resources. This means that most of the investment and growth in the future will have to be generated in the private sector. This sector responds largely to considerations of profitability. If Pakistan is to successfully compete internationally, the private sector’s profitability must come from greater efficiency and decreases in costs, not from the maintenance of monopoly rents. It is therefore important for each province to ascertain which factors impact on the cost of doing business in its jurisdiction, how it compares with other provinces, and what the managers of enterprises view as the main impediments to investment and to the growth of the business.
It is possible to answer some of these questions by mining the World Bank’s databases. Table 19.2 ranks 13 major cities of Pakistan by the ease of doing business, using various criteria. The table shows a wide spread in the rankings, with cities in the Punjab generally ranking higher than those in the other provinces. Since most of the factors involved require little financial expenditure and mainly concern questions of policy and its implementation, it should be possible for cities (and provinces) at the lower end of the scale to significantly improve their performance.


Table 19.2: Ease of doing business in Pakistan, 2010 (ranking of cities)

Ease of doing business
Starting a construction business
Dealing with permits
Registering property
Paying taxes
Trading across borders
Enforcing contracts
City, Province
Rank
Rank
Rank
Rank
Rank
Rank
Rank
Faisalabad, Punjab
1
2
6
1
3
4
2
Multan, Punjab
2
6
1
7
3
5
4
Lahore, Punjab
3
3
3
4
3
13
8
Islamabad, ICT
4
1
8
3
1
11
10
Sheikhupura, Punjab
5
9
8
5
3
7
6
Gujranwala, Punjab
6
13
2
6
3
10
4
Sukkur, Sindh
7
10
4
10
11
3
1
Peshawar, KP
8
3
6
9
10
8
8
Karachi, Sindh
9
3
10
11
11
1
3
Rawalpindi, Punjab
10
8
5
7
3
12
10
Sialkot, Punjab
11
12
11
1
3
5
10
Quetta, Balochistan
12
6
12
13
2
9
13
Hyderabad, Sindh
13
11
13
11
11
2
7
Source: World Bank (2010).
What do managers of business enterprises regard as the main impediments to expanding investment and production? These perceptions are important, because they shape the managers’ view of the investment climate and, hence, of their decision to increase investment and expand their businesses and employment. The constraints to firms are discussed below.

4.5.1.        Power Supply

Access to a reliable power supply was a serious deterrent for firms in all the provinces. The largest number of outages occurred in the Punjab, the second highest in Sindh (Figure 19.8). It is therefore not surprising that around 80 percent of the enterprises in these provinces in the World Bank’s sample considered issues with electricity to be a major or very severe obstacle for operation and growth (Figure 19.9).
Figure 19.8: Average number of electricity outages, 2007
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Source: World Bank (2007).
Figure 19.9: Managers who consider electricity a major impediment, 2007 (percent)
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Source: World Bank (2007).

4.5.2.        Governance

A great many of the factors that affect the investment climate relate to governance. The most important impediments include bureaucratic delays, corruption, intrusive inspections, the slow implementation of decisions, and inconsistent application of rules.
Managers of enterprises in the Punjab report having had to pay substantial bribes in order to get bureaucratic issues resolved. These payments are estimated to amount to more than 40 percent of the value of sales, and are significantly higher than those reported by managers in other provinces, even exceeding the national average. Nearly 20 percent of the establishments surveyed in the Punjab reported that they had been requested for “gifts” during labor or tax inspections. This is a lower proportion than in the other provinces, but is nevertheless high.
Close to 100 percent of managers in Sindh and 80 percent of those in KP viewed corruption as a serious obstacle to the operation and growth of their enterprises (Figure 19.10). In view of the other responses to the survey, such as the amount of payments that had to be made to settle bureaucratic issues, it may be a little surprising that more Punjab managers did not share this view. It is possible that these payments have become more institutionalized in the Punjab and been factored into the cost of doing business.
Figure 19.10: Managers who view corruption as a serious obstacle, 2007 (Percent)
19-10.wmf
Source: World Bank (2007).
As a result of the delays caused by the procedures to obtain business licenses and permits and the costs incurred in bribes and similar payments, 17 percent of the managers surveyed by the World Bank regarded licensing procedures as a serious obstacle to the operation and growth of business enterprises.
A key consideration for the efficient functioning of any market-led economy is the time taken to register and enforce contracts and the costs of doing so. The World Bank (2010) notes that, as the Pakistani courts are all governed by the national code of civil procedure, they all require the same number of steps, irrespective of the location of the case. However, the survey also finds that enforcing contracts in Lahore and Faisalabad takes longer and costs more than in Peshawar, Quetta, or Sialkot (Figure 19.11).


Figure 19.11: Cost of enforcing a contract, 2007
19-11.wmf
Source: World Bank (2007).
The report finds that enforcing contracts in Lahore and Faisalabad takes about 20 percent longer than in Peshawar or Sialkot. The higher time required in Lahore and Sialkot is attributed to lengthy judicial and enforcement time (as opposed to filing time). The lengthier judgment time adds to lawyers’ fees and thus raises costs. In particular, even though the judgment time in Lahore and Faisalabad is only 8 percent higher than in Peshawar and 19 percent higher than in Sialkot, the time to enforce the judgment is 40 percent greater in Lahore and Faisalabad than in Peshawar. Even in Sialkot, the enforcement time is 17 percent higher than in Peshawar.
Clearly, the enforcement of contracts needs to be strengthened. This is particularly important to the functioning of a private sector economy, the basis of which is contestable markets based on secure property rights and enforceable contracts.

4.6.      Effects of Adopting "Best Practices"

An interesting question is how the country’s performance could be improved were it to adopt the best practices of all the provinces in key business activities (such as dealing with licenses, registering property, enforcing contracts, etc). Based on the World Bank’s (2010) Doing Business methodology, Pakistan—represented by Karachi’s indicators—ranks 74th in the world for ease of doing business. If it were represented by a hypothetical city that consolidated the scores for the highest-ranking Pakistani city, in 2010 the country would rank 52nd in the world. Again, this demonstrates the nexus between the practices of the provinces and their impact on the country as a whole, and the importance of improving the provinces’ scores.

5.        Future Challenges

5.1.      General Challenges

The future development of the provinces faces two broad types of challenges—those that will affect all provinces, and others that will be specific to the province concerned. Two challenges that are common to all the provinces will not be discussed here. The first is that of ensuring security. The federal and provincial responsibilities and powers for dealing with this issue are so complex and intertwined that a meaningful discussion would require far more space than this chapter allows. However, it should be understood that security is perhaps the most crucial issue that Pakistan’s society faces, and that dealing with it is a sine qua non for sustained economic growth. The second is that of providing a reliable supply of power. In this area, too, the provincial authority and capability is so limited compared with the federal that one has to assume that the central government will discharge its responsibilities to resolve this problem.
A number of other factors are likely to shape the environment within which the development of all the provinces is likely to unfold over the next, say, 20–30 years. What are likely to be the chief factors?

5.1.1.        External Factors

The spread of globalization, meaning the continuing integration of the countries of the world, is likely to be a major factor shaping the world in which Pakistan’s and the provinces’ development will take place. Capital resources, both external and domestic, can be located in any province that offers the appropriate mix of security and financial return.
All the provinces, therefore, will be competing with each other to attract domestic and international capital. Moreover, in view of the relative paucity of labor and managerial skills, some provinces (particularly Balochistan and KP) can ill afford a brain drain. Talented people will move to places that offer not only good job opportunities, but also a high quality of life. If a province is not deemed more “livable” than other provinces in Pakistan, or indeed than other countries, it risks losing its ablest citizens. Thus, economic decisions made in any province will progressively have to take account of decisions and actions taken in other provinces and other countries.

5.1.2.        Internal Factors

Globalization will not be the only force impinging on the provinces’ development in the next 20 years. The development strategy for each province must also incorporate alterations to the domestic political and social profile. Two forces are likely to be especially important.
Decentralization
The first of these changes is likely to be a continuation of the movement toward increased decentralization, democratization, and people’s participation in society. Legislative changes in Pakistan—such as the passage of the 18th Amendment to the Constitution—are also hastening moves in this direction
The increased decentralization and more vigorous civil participation will require changes in the manner in which economic and other policies are conducted. First, it means that there will have to be more transparency and accountability for government actions and less ability on the part of the government to impose its will unilaterally. This may initially cause some discomfort in certain areas of the government, but overall should make government actions more effective because they will be more responsive to people’s perceived needs.
Second, the increased political pressure will almost certainly require the provision of full employment to become a central tenet of economic policymaking. This will call for a delicate balance. The budgetary resources of provincial governments do not permit the creation of large numbers of “make-work” jobs in the public sector, nor would this be an efficient use of scarce resources. Hence, most of these jobs will have to be created in the private sector. However, in dealing with the private sector, an important asymmetry exists. The authorities can prevent the private sector from doing certain things (by, for example, passing a law or denying the sector access to some key input), but they cannot make the private sector do something. They can only provide incentives that they hope the private sector will consider sufficient. Thus, a key challenge for the provincial governments in realizing their vision will be to create a business environment in which the private sector feels comfortable and secure, and in which it is willing to invest on the scale required to create the appropriate number of productive jobs.
Third, the experience of other regions and countries shows that wider political participation will increase the demand for improved social services, particularly health and education. Pakistan’s provinces will not be exempt from such pressures. One cannot, for example, envisage a viable Balochistan 20 years hence in which the majority of the labor force is illiterate. Thus, the development agenda must incorporate substantial improvements in the coverage and quality of healthcare, in access to higher-quality education, and in technical training to make it more relevant to the needs of the provinces’ economies.
Fourth, participatory politics are likely to put more stress on equity in the distribution of incomes, both between persons and between different regions of the provinces. There will also be pressure to develop more comprehensive social safety nets so that the disadvantaged are, to a significant extent, protected from disaster. The development strategies must, therefore, explicitly incorporate policies to redress large-scale differences in the distribution of incomes between individuals, and explicit regional policies to stimulate the development of the more backward areas of the jurisdiction.
Urbanization
An important element that the development strategy must address is that of increasing urbanization; indeed, an important component of the growth framework described earlier is aimed at enabling cities to act as major engines of growth. A strategy of rapid development that depends largely on industrialization, the exploitation of minerals, the creation of a massive amount of infrastructure, and development of the backward areas of the provinces will almost inevitably accelerate the urbanization of each province.
Numerous studies show a strong correlation between urbanization and prosperity. On average, as the share of a country’s urban population rises by 10 percent, the country’s per capita output increases by 30 percent. Indeed, per capita incomes are almost four times higher in those countries where a majority of people live in cities than in those where the majority live in rural areas (Glaeser, 2011).
What challenges does this present?
In brief, rapid urbanization will present three major challenges:
-       The cost of providing infrastructure to the rapidly expanding urban population.
-       A political challenge, in that large concentrations of population make it easier to organize and enable groups to voice their demands more assertively.
-       The imperative of using land more efficiently: most provinces lack an effective urbanization strategy, with the result that urban sprawl makes it difficult to provide services and steadily eats away valuable agricultural land.

5.2.      Specific Challenges: Critical Issues and Development Strategies

It is clearly impossible within the confines of a single chapter to provide a detailed analysis of all the development challenges that each province faces and a comprehensive account of how it should respond—this must be left to the provincial development plans. A more complete analysis has also been attempted in the World Bank/ADB/DFID reports cited earlier.
This chapter confines itself to highlighting the critical issues, describing the principal assets a province possesses that would enable it to deal with its development challenges, and outlining the most important policies that would be required to reap the fruits of these assets. Moreover, the chapter will not dilate on issues that are common to all the provinces—such as the general security situation in the country or the framework of macroeconomic policies; it focuses on the issues particular to each province. The purpose of this chapter is essentially to provide a framework for thinking about the critical issues and to suggest some ways in which they might be addressed.

5.3.      Balochistan

Balochistan occupies the largest land area of any province of Pakistan; it is a significant producer of natural gas; it possesses extensive deposits of copper, lead, gold and other minerals; it is home to vast tracts of rangelands that support large herds of ruminants; it accounts for 70 percent of the country’s coastline; it possesses a very substantial potential for generating electricity from wind and solar sources; it is well-situated for trade with Iran, Afghanistan, and the Persian Gulf countries; but in spite of these natural resource and locational assets, it remains the poorest province in the country. Why? A successful development strategy for the province must ensure that Balochistan’s past does not become its future.
The basic development predicament for Balochistan is that while it accounts for nearly 45 percent of the land area of Pakistan, it is home to only 5 percent of the population. This combination results in many of the province’s inhabitants being thinly dispersed over wide areas—in 2011, Balochistan’s population density at 19 persons per square kilometer was only 5, 8, and 9 percent, respectively, of that of the Punjab, Sindh, and KP. Such dispersion creates three principal difficulties. First, it means that the critical mass of skills required for specialization is present in only a few localities. Second, it results in smaller markets, thus losing economies of scale. Third, it raises the cost of providing a unit of service, including governance, above that in the rest of Pakistan.[5]
A further challenge imposed by geography is the province’s relatively small and highly variable water supply. Balochistan is an arid region because of its location and physiography. The province lies outside the monsoon belt of the Indo-Pakistan subcontinent—therefore it does not have a copious or a regular source of rainfall. About 556 m3/ha/year of water are available to Balochistan, compared with a national average of 2453 m3/ha/year, and an average of 3921 m3/ha/year for the other provinces. Spatial water availability in Balochistan is thus less than one-fourth the national average, and only about 14 percent of the average of the other three provinces.
Moreover, the province’s topography ranges from a few feet to over 9000 feet above mean sea level—therefore the sparse and irregular rainfall that it does get, varies markedly between different parts of the province. The effects of physical geography have been made worse by human policies—uneconomic subsidies have encouraged the indiscriminate exploitation of groundwater, thus intensifying water scarcity and making water management even more difficult.
The combination of inefficient water use, waste of surface and groundwater, and inadequate investment in water infrastructure has resulted in less than 40 percent of the available water being utilized. It is not surprising that only about 2.1 million ha (approximately 6 percent of Balochistan’s geographical area) are cultivated,[6] and that at recurrent intervals water shortages have been severe enough to tip the province into a prolonged drought. More recent experience indicates that the frequency of drought in the province has actually been higher than that projected using historical data. The most recent drought lasted seven years (between 1997 and 2004), and was the longest and most severe recorded in the history of Balochistan.
A major challenge to the development of Balochistan is the weak state of its human resource base—it has the lowest indicators of literacy, health, and labor force participation, and nearly 70 percent of the labor force is illiterate. The structure of Balochistan’s society has also made the dissemination of benefits from economic development slower and perhaps less widespread than in the other provinces.
What assets does the province possess that would help it overcome its liabilities? The assets include the vast land area (almost 45 percent of the area of Pakistan) that has been the major producer of Pakistan's natural gas for more than 50 years, and where many promising geological structures still remain unexplored, largely because of the security situation. The province also contains one of the largest deposits of copper in the world—a resource that has scarcely been touched—and barely developed deposits of gold, marble, granite, onyx, and other minerals. Balochistan’s coastline of nearly 750 km—about 70 percent of the total coastline of Pakistan—provides a base for fisheries, port development, and tourism, and is a prime location for import-intensive industries.
Rangelands cover much of the province and support a large livestock sector which, if appropriately developed, could substantially increase the production of meat, leather, wool, and dairy produce. Preliminary assessments by USAID indicate that the province’s topography and climate hold the prospect of generating large amounts of wind and solar power. Balochistan also occupies a strategic location that could help it act as a “hub” for trade between the Middle East and the Central Asian republics, as well as between Pakistan and Iran.

5.3.1.        The Strategy[7]

The task confronting Balochistan is to pursue a strategy that builds on its assets and overcomes its liabilities. Providing its citizens with a better quality of life will require sustained action in a number of areas that are discussed below.
The first step is a strategy for increasing incomes. In a modern economy, most incomes result from employment. The first priority for the Government of Balochistan is, therefore, to adopt policies that will accelerate provincial GDP growth and create sufficient jobs to absorb the additions to the labor force and progressively decrease the backlog of unemployment and underemployment. The growth rate required for this purpose was estimated at 7 percent a year.
How can this growth be attained? A viable strategy would comprise several elements. First, although Balochistan’s public finances have improved with the passage of the 18th Amendment, its responsibilities have also expanded to cover, for example, agriculture, irrigation, health, and primary education. Thus, a substantial part of investment growth in the productive sectors will have to come from the private sector.
Ultimately, GDP growth will depend largely on increasing the rate of investment in the province. If, in the long run, the private sector is to generate the majority of jobs, then the bulk of investment will have to be located in the private sector. This will require strengthening the investment climate in the province.
The next major element of the strategy should be to strengthen and develop efficiently the province’s growth generators—those parts of the economy that are the primary creators of the region’s economic wealth. A major sector of Balochistan’s economy—contributing about 30 percent of GDP and employing nearly two-thirds of the labor force—is agriculture, including livestock and horticulture. The strategy in this area needs to be rethought.
The most critical constraint on Balochistan’s agricultural development is water. In order to make the best use of its scarcest resource, the province will have to be very selective about the sources from which it elicits growth in the agricultural sector.
The most efficient path will be to concentrate on expanding sustainable high-value activities. In the context of a long-term strategy, this is likely to mean providing more support to ventures in livestock rearing and downplaying that to grain cultivation. It is also likely to require readjustments in the horticulture subsector, the present expansion of which derives largely from a generous subsidy to electricity for tube-wells (currently PRs 8 billion a year). This has resulted in the excessive use of water, because the private cost of using the resource has become much less than the social cost. Indeed, more water is extracted from the aquifer than is added to it, with the result that the water table is falling.
The increasing depth to which tube-wells have to be sunk—depths beyond 250 meters are now commonly reported—demonstrates the dwindling supply of groundwater. Moreover, the water table is dropping quite quickly: in some important districts (for example, Quetta, Mastung, and Mangochar), the level of groundwater has fallen by as much as 3 meters per year in the last eight years. The major part of groundwater has already been exploited. It is estimated that groundwater will contribute only about 2 percent of the total water available for future development.
The province must diversify the sources of its GDP. Agriculture by itself cannot accelerate the growth of the provincial GDP to the targeted 7.0 percent a year; Balochistan will have to turn increasingly to other sources, such as manufacturing and mineral development, while continuing to make agriculture as productive and efficient as possible. Reducing poverty will also require moving labor from the slow-growing sectors to faster growing ones, such as industry.
At present, the agriculture sector employs the highest proportion of Balochistan’s workforce—67 percent compared with the national average of 42 percent—while the industrial sector employs the lowest. Moreover, land ownership is highly skewed, with 10 percent of farmers owning 53 percent of the province’s farm area. The majority of tenants work on small (5–12.5 ha) and not very productive holdings, with the result that their incomes remain below the poverty line. The desired changes to the structure of GDP mean that the industrial sector’s share will have to increase.
The expansion of manufacturing in the province can rest on two foundations. One, it can be based on the natural resources—minerals such as natural gas, coal, marble, chromites, and copper, or the products of the agricultural sector (including those from the livestock and fisheries subsectors)—that are indigenous to the province. These would provide industries located in Balochistan with the advantages of lower transport costs and a steady and assured supply of inputs.
Two, Balochistan should take advantage of its long coastline—the province accounts for over 70 percent of Pakistan’s coastline—and encourage the location of industries that use a significant amount of imported materials. Much of Pakistan's non-textile industry is based on imports, and to the extent that these facilities are situated away from Karachi, they are disadvantaged by having to pay additional transport costs. Moreover, Karachi itself is becoming a high-cost site. It will be in the interests of the country's industry and of the province to locate the expansion of import-intensive industries along the southern seaboard of Balochistan.
The province must develop its coastline in a comprehensive manner. Even though Balochistan occupies 750 km of Pakistan’s 1,100 km coastline, its underdevelopment means that the province’s economic activities are as disadvantaged as if the area were landlocked. A start toward rectifying this situation has been made by constructing a port at Gwadar. However, developing the potential of Gwadar will require a number of ancillary actions. These include providing freshwater to the population that will locate there, offering incentives such as low prices on industrial land, removing restrictions on foreign or local investment, and establishing fast one-window operations to start enterprises. Additionally, it will be necessary to enlarge the province’s transport infrastructure and strengthen links with the other provinces so as to handle their domestic trade and traffic. In short, in order to develop Gwadar’s potential, the Balochistan authorities must be very proactive in attracting industries and the concomitant requirements of skilled labor, because the region has not traditionally hosted such activities. A major demand for transit and entrepôt trade from Afghanistan, the Central Asian republics, and China would be a bonus (see World Bank, 2004, 2006a). In the longer run, Balochistan’s coastline has the potential to be used for different activities—to situate manufacturing industries, develop the fishing industry, and build additional ports.
Balochistan’s fishing industry performs well below its potential because of low productivity along the entire value chain. Fishing boats are small and unable to reach many fishing grounds; harbors and auction halls do not meet international health and safety standards; and processing units lack proper preservation equipment and are largely innocent of the required packaging techniques. Modernizing the fishing industry will require investment in harbor facilities; the provision of echo-sounders to fishermen to locate fish; helping them finance on-board refrigerated fish-holds; and encouraging private investment to diversify activities in this sector, such as by moving into shrimp farming. The province will also have to strengthen institutions to ensure compliance with international standards of hygiene.
In Balochistan, as in the other provinces of Pakistan, most jobs are provided by small and medium enterprises (SMEs). Such enterprises work under four major disadvantages: (i) they lack access to finance, (ii) their technology is often outdated and inefficient, (iii) they cannot easily find skilled labor, and (iv) they are not aware of market opportunities outside their immediate locality. It will not be easy to solve these problems. Some of them, such as access to finance, are structural and result from “asymmetric information.” SMEs know their financial position and its weaknesses much better than do banks, and the cost for the latter of obtaining accurate information can often outweigh the profit from the loan.
Moreover, the slow working of Pakistan’s legal system means that recovering collateral in the event of a default by an SME is a drawn-out and expensive process. Thus, banks and other financial institutions prefer not to lend to very small borrowers. These difficulties only underscore the need for provincial authorities to make every effort to develop innovative solutions to these problems, drawing as required on the experience of other provinces and countries.
If private sector industry is to become the motor for Balochistan’s economy in the longer term, then a number of important supporting measures will also have to be taken. One of the most important of these is to bring the supply of skills into line with demand. Nearly 70 percent of Balochistan’s labor force is illiterate; it is virtually impossible to provide significant skills to workers laboring under this handicap.
Moreover, the skills imparted by the system of technical education and training often do not correspond to those required by private industry. The authorities must ensure that the education system at all levels delivers qualifications that meet employers’ needs and that support a changing economy. It seems essential that, as in other countries, elements of the private sector be encouraged to work with the authorities in charge of Balochistan’s technical education system. This is an ideal area for public-private partnership.
The provincial and federal authorities must make a concerted effort to develop more of Balochistan’s mineral resources and to ensure that this development is integrated with the rest of the economy. So far, almost 90 percent of mineral production is attributable to natural gas alone, and production of this resource is now declining. Moreover, the natural gas sector in Balochistan developed as an enclave; it has virtually no links with other sectors of the province’s economy and thus does not create spillover effects that benefit these parts.
The province must also begin to vigorously exploit other important minerals, such as copper, coal, and marble. This will require the government to concentrate on settling security issues and expanding the road network, while letting the private sector bring in more modern mining methods and technologies in order to speed up the development. Again, the aim must be to move up the value chain (see World Bank, 2003).
Balochistan is judged to have considerable potential for generating energy through nontraditional sources, such as the wind and sun. The US’s National Renewable Energy Laboratory (2007) estimates Balochistan’s wind resource potential to be more than 20,000 MW (to put this figure in context, Pakistan’s total installed power generation capacity in 2011 was about 22,000 MW). The study has also assessed the national and provincial potential of solar energy. Its preliminary calculations estimate the total power generation potential of this source at as much as 1.2 million MW.
An underutilized asset of Balochistan is its location in the region. The province has the potential to act as a hub as Pakistan moves to reactivate its traditional trading routes to the west and northwest. The countries on these routes, such as Iran and the Central Asian Republics, are developing rapidly. They have the potential not only to provide a growing market for Pakistan’s exports, but also to supply the country with oil and gas—two resources with which these countries are well endowed.
Developing the province will call for a specialized water strategy. Balochistan is largely an arid region and drought is a frequent occurrence; the latest lasted from 1997 to 2004. About a quarter of the population was affected, and between 1996 and 2000, livestock holdings fell by almost a third.
Balochistan has three main sources of water: (i) the Indus basin irrigation system, which provides about 39 percent of the province’s total water; (ii) floodwater (sailaba), which accounts for 57 percent; and (iii) groundwater, which supplies the remaining 4 percent. However, much of the groundwater has already been utilized, and the province will have to exploit the other two sources in order to meet the increasing demand.
An assessment of future water potential indicates that the sources are likely to be distributed as follows: (i) Indus water, 26 percent; (ii) floods and run-off, 72 percent; and (iii) groundwater, only 2 percent. Harnessing this future potential will, however, require a specialized strategy. As Ahmad (2006) points out, the chief strategic weakness of the province’s water sector policy has been to treat water availability almost exclusively as a supply-side issue, to the neglect of demand-management considerations.
Such a long-term strategy must incorporate three pillars:
-       Conservation. The province must conserve groundwater by recharging the aquifer through the construction of a number of storage/delay-action dams. It must also aim to reduce losses in irrigation and water use in agriculture through a combination of civil works and policy improvements (such as controlling the subsidy on tube-wells), and by taking steps to improve the system’s performance. “More crop per drop“ must be the guiding principle for water use in agriculture.
-       Management. Following an integrated approach will yield maximum effectiveness in managing the province’s water resources. This means that a hydrological basin must be taken as the basic unit for planning, and planning and policies tailored to the requirements of each basin (there are 14 such basins in the province).
-       Augmentation. In the medium to long term, Balochistan should aim to build new canals to make use of the perennial and nonperennial flows of Indus Basin water. The province must make greater use of floodwater, and store and divert water for salaiba agriculture. It must also develop new water resources by recycling and reusing wastewater (such as sewage and agricultural effluents), and develop measures to desalinize brackish groundwater and seawater.
It has been argued that the frequency of water scarcity and drought conditions in Balochistan means that they ought to be regarded not as isolated or transient occurrences but as recurrent or structural phenomena. This implies that a long-term, pro-poor strategy should be developed to mitigate the impact of such events on the most vulnerable sections of society. Gazdar (2005) has put forward a proposal along these lines, arguing that future investment should target the poor in highly drought-affected areas by prioritizing projects that will maximize labor demand.
The strategy must include the delivery of key services. This chapter started by outlining various measures to increase per capita income. Clearly, however, income or wealth is not demanded for its own sake, but because it enables one to acquire the goods and nonmaterial services that help an individual lead a life that he or she has reason to value.[8] Economic development must be used as an enabler of improved quality of life. Therefore, in addition to the measures that have been outlined above, the province must pay attention to the delivery of key services.
The areas of service delivery on which the government must concentrate during the next two decades are health, education (especially of females), clean water and sanitation, transport, and the distribution and reliable supply of gas and electricity. The provision of some of these services will obviously have an economic impact as well, in that they could help produce a more efficient worker. However, while this is important, services such as health and educational facilities, and clean drinking water must be provided because they are essential to producing individuals who can function in a modern society.

5.4.      Khyber Pakhtunkhwa

Four factors shape the development challenge for KP:
1.        Distance from seaports. KP is situated far from Pakistan’s seaports. This raises the cost of imported inputs and also makes exports more expensive.
2.        A frontline state. As a result of international politics, KP’s recent history has been turbulent. An 11-year war against the Soviet occupation of Afghanistan, the succeeding civil hostilities, and the “war on terror” have all used KP as their base. This has created considerable uncertainty in the province regarding economic conditions, and flooded the area with unregulated weaponry and more than 3 million refugees, about 1.5 million of whom are estimated to still be in the province.
3.        A limited modern private sector. Modern private enterprise in KP is weaker than in the other provinces of Pakistan. The World Bank’s (2007) study of the business community’s perceptions indicates that Peshawar ranked lowest among the major cities of Pakistan for conducting business. The reasons cited included greater policy uncertainty in KP, a weak infrastructure, and institutional impediments that increased the cost of doing business in the province.
4.        Weak human resources. KP’s social outcomes, although improving, are significantly worse than those for Pakistan as a whole. The overall literacy rate for the population aged 10 years and older in 2010 was 50 percent in KP compared with 58 percent in Pakistan as a whole (the female rate was 31 percent compared with 42 percent); prenatal consultations were 32 percent compared with 41 percent; postnatal consultations, 7 percent versus 11 percent; births assisted by trained birth attendants, 15 percent compared with 20 percent; and 60 percent of households in KP had access to clean drinking water compared with 85 percent for Pakistan overall.
An effective development strategy must address these weaknesses to the extent possible, either by eliminating the deficiency or by mitigating its impact. Thus, while not much can be done to move KP closer to the sea, it should be possible to improve the efficiency of the transport and communications network so that the province’s higher costs are minimized. It should also be possible to develop KP’s potential for trade with countries such as Afghanistan and the Central Asian republics that are geographically closer.

5.4.1.        The Challenge of Poverty

Along with Balochistan, KP has remained the poorest province of Pakistan. The difficulties imposed by geography and international politics have been compounded by natural disasters, such as the earthquake of October 2005. The first step toward improving the quality of life for KP’s citizens is to tackle the problem of poverty.
What are the reasons for KP’s poverty? The main reason is the slow growth of the province’s GDP compared with the growth of population. Thus, between 1990/91 and 2010/11, KP’s real GDP is estimated to have increased at an annual rate of about 4.5 percent; the population growth rate during this period averaged 2.8 percent a year, so per capita incomes increased by only about 1.5 percent annually.
However, three other factors have also contributed in substantial measure to the incidence of poverty in KP: (i) conditions in the labor market, (ii) the ownership of assets, and (iii) the educational attainment of the household head.
Ownership of Assets
Poverty in rural areas is closely associated with the lack of ownership of agricultural land. The incidence of poverty declined sharply for households owning between 1 and 4 ha of land, falling to almost zero for households with more than 4 ha. The close correlation between land ownership and poverty is evident in the finding that individuals with no land constituted about 58 percent of the rural population, but accounted for about 70 percent of the population in the poorest quintile.
Education of Household Head
Poverty in KP is characterized by poor outcomes for education and health. There is a strong association between the educational level of the household head and poverty incidence. The data indicate that in 2008, households whose head had never attended school constituted about 60 percent of the population, but accounted for nearly 70 percent of the lowest quintile. On the other hand, households whose head had been educated to the matriculation level or above constituted 16 percent of the population, but only about 10 percent of the poorest quintile.

5.4.2.        The Strategy

A strategy to tackle poverty in KP can take heart from findings—for example, Heltberg and Narayan (2005)—that a large proportion of the province’s population is clustered close to the poverty line, and that extreme poverty accounts for a relatively small share among the poor. Helberg and Narayan conclude that, since most of the poor are close to the poverty line, a large part of the measured poverty in the province is likely to be transitory. However, it also means that even small fluctuations in income can produce large changes in the measured poverty rate. Although a substantial part of KP’s population is thus vulnerable to falling into poverty as a result of such shocks, it can also be lifted permanently above the poverty line if there is a sustained growth in GDP. It is important, therefore, to develop a strategy for sustained growth in employment and incomes.
The strategy must begin by estimating the GDP growth rate required to create the desired number of jobs. Following the analytical framework developed earlier, the long-term elasticity of employment with respect to real GDP growth can be used to estimate how fast the provincial GDP will have to grow in order to generate the required number of jobs. The World Bank, Government of the North-West Frontier Province, and DFID (2005) have estimated that this long-term elasticity is approximately 0.55 while the provincial labor force is growing at about 3.2 percent a year; this implies that GDP should grow at about 6 percent annually in order to provide employment to all new entrants to the labor force. However, the GDP growth will obviously have to be higher in order to cut into the backlog of unemployment. A rough estimate of the required GDP growth rate would then be in the neighborhood of 6.5 percent a year.
The World Bank, Government of the North-West Frontier Province, et al. (2005) also estimate the potential growth rate for KP’s GDP. They conclude that, given KP’s existing institutional and technological base, the potential rate of growth is around 4.5 percent a year, which is insufficient to attain the government’s objectives. The priority for the authorities is thus to strengthen institutions and upgrade the technological base of the province.
What would be the drivers of the higher growth rate? Broadly speaking, the growth will have to be underpinned by more efficient use of resources in the existing drivers, such as agriculture, and a structural change in GDP toward sectors that have the potential for faster growth.
Agriculture will continue to play a central part in the strategy to accelerate growth and reduce poverty because of the sector’s potential and because most of KP’s poor live in rural areas. However, within the agriculture sector, structural change will be necessary for the province to deploy its scarcest resource—irrigated land—in uses that yield the highest returns. This means that thinking about agriculture must move away from emphasizing self-sufficiency in cereals toward a broader understanding of food security. Concretely, this means that farmers should be encouraged to move toward high-value activities, such as livestock and horticulture. The additional returns generated thereby can then be used to purchase cereals and other commodities in the production of which KP does not have a comparative advantage.
This does not, of course, mean that KP must give up the production of cereals; indeed, it cannot—these crops presently account for about three quarters of land use. It simply means that the authorities must increasingly recognize that the most efficient use of the province’s limited fiscal resources for developing the agriculture sector and prosecuting the war on poverty would be to support the movement toward high-value products.
According to the World Bank, Government of the North-West Frontier Province et al. (2005), farmers have indicated that converting from cereals to horticulture provides five times the income per hectare. Horticulture also requires up to five times the labor input of cereals; the move would, therefore, provide many more opportunities for landless laborers and underemployed farm households.
In addition to horticulture, a revised agricultural strategy would seek to expand the livestock sector (principally cattle, goats, and poultry). According to official statistics, the sector’s contribution to provincial GDP is greater than that of crops. This is likely to grow quite rapidly as increasing urbanization in the province has expanded the demand for meat and dairy products.
KP is home to about 40 percent of Pakistan’s forests (of which three quarters are in the northern mountains) and about 2.1 million ha of rangeland. Both these are sources of high-value products, but poor land-use rights and weak institutional arrangements have held back the optimal utilization of these assets, particularly in mountain areas.
In order to assist the move toward high-value products in the agriculture sector, the authorities will have to take a number of steps. The most important of these will be to:
-       strengthen the infrastructure, particularly transport and cold-storage facilities, in order to reduce the post-harvest losses of high-value products;
-       create a research system for best-practice research into commodities and activities (such as rearing sheep for high-quality wool in the high mountain areas and goats suitable for the southern districts of the province; improve fodder production; and enhance natural resource management, especially of forests and rangelands);
-       improve the linkages between agricultural research, extension, and farmers; and
-       increase the capacity of small farmers by developing farmer organizations.
As discussed earlier, KP’s manufacturing sector labors under the handicap of distance from the seaports. The result, of course, is higher costs of imported inputs and for exports. A strategy to develop this sector must emphasize three factors.
First, it must develop manufactures based on materials that are indigenous to the province, such as gemstones, marble, granite, and construction materials; the latter could be especially useful for reconstruction work in Afghanistan. While activities based on these materials offer considerable possibilities, they will not occur without intervention by the government. For example, an analysis by the World Bank of the value chain for marble shows that the government would have to (i) clarify ownership rights (not least in order to improve access to finance); (ii) facilitate the private sector in adopting better technology for extracting marble (at present much of the marble is extracted simply by blasting, which destroys a considerable part of the mineral and also results in nonstandard blocks, which reduces their price); and (iii) provide training for workers in finishing and polishing the stone.
Second, KP’s comparative advantage in producing hydel electricity suggests that industries based on an intensive use of this input could prove competitive. This is discussed in a little more detail below.
Third, in view of KP’s distance from Pakistan’s seaports, the province should energetically explore the possibility of exporting to the Central Asian republics and Afghanistan (as the situation in the latter country stabilizes). Focusing on markets that are physically closer will reduce some of the disadvantage posed by its distance from the seaports. It also means that KP must engage more actively in obtaining market information from these destinations.
An activity related in some measure to manufacturing is construction. The authorities should pay particular attention to this industry both because it generates a considerable amount of employment, and because of its vertical and horizontal links with other industries, such as cement, glass, brick-making, wood- and metal-working, furniture, plumbing, electricity, and so on. Studies on this activity (e.g., in background papers for World Bank, Government of the North-West Frontier Province, and UK Department for International Development, 2005) show that the government must concentrate on policies to regulate the quality, safety, and protection of casual labor.
Another area that offers major possibilities is the generation of hydel power. KP’s potential is a large multiple of the 4,000 MW that it currently generates.[9] Moreover, the electricity generated in the province is sold to the Water and Power Development Authority (WAPDA), which then sells it to consumers, including those in KP, at a higher price. One option suggested is for the province to set up electricity generating stations that, while covering their costs, could sell power to users within KP at a lower price than that provided by WAPDA to the national grid. A number of private sector representatives in KP have argued that this reduction in the cost of a major input could go a long way toward making the province’s industries more competitive by offsetting the higher transport prices paid by KP’s industry for the shipment of inputs from the seaports.
Of course, given the size of the province’s potential in hydel generation, it would appear possible to pursue both options—selling large amounts of electricity to the national grid at WAPDA’s price and smaller amounts at a lower price within the province—simultaneously. This would help the provincial budget as well as stimulate the province’s industrial sector.
In the longer run, once the security situation stabilizes, another important source of growth could be tourism. KP is richly endowed with artifacts for cultural and historical tourism; these include ancient Buddhist monasteries, Ghandara sculptures, and a range of museums. The province is also replete with scenic sites, such as high mountain ranges, alpine valleys, and rivers and streams. The development of the tourism sector requires investment in roads and other infrastructure to make the region more accessible. Additionally, the security situation needs to be stabilized so that the private sector has an incentive to invest in hotels and tourists, and so that international tourists in particular, are encouraged to visit the region. Fortunately, the National Finance Commission Award of 2009 has vastly increased the financial resources available to KP, and thus puts the required investment within closer reach than was hitherto the case.
The bulk of jobs will have to be provided in the private sector. Therefore, improving the environment for this sector is an overarching issue in KP’s strategy for development. One way of identifying areas in which the KP authorities should act is by comparing it with the other provinces, particularly those that are performing better.
The World Bank’s (2007) study of the investment climate in Pakistan highlights a number of areas in which KP lags behind Punjab. These include the security situation, highly administrative barriers (particularly relating to tax administration), transport, and corruption. The findings are displayed in Figures 19.12 and 19.13, and underline the perception among investors that KP has some distance to go to become a major magnet for private investment.


Figure 19.12: Obstacles to growth in KP compared with the Punjab, 2004
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Source: World Bank, Government of the North West Frontier Province, and DFID (2005).
These findings are reinforced by the perception among investors that Peshawar is one of the least attractive cities in which to invest, as ranked by firms outside Peshawar (Figure 19.13). Additional investigations show that the business community views the state of governance in KP as being particularly inimical to private enterprise. This view is reinforced by several indicators, for example, the cost of enforcing a contract and the cost of creating a collateral agreement were both higher in Peshawar than in Karachi or in the main commercials cities of Punjab (Lahore, Faisalabad, and Sialkot).
Figure 19.13: Perceptions of the investment climate, 2004

(rankings by firms outside the city)

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Source: World Bank, Government of the North West Frontier Province, and DFID (2005).

5.4.3.        The Problem of the Federally Administered Tribal Areas (FATA)

The foregoing analysis dealt with areas under the provincial administration. However, in view of KP’s close links—geographical, ethnic, and social—with FATA, a few words should be said about development issues in the latter. In thinking about development in FATA, two questions must be addressed:
-       What should be the strategy for stimulating growth?
-       How large is the development problem in FATA, and is it amenable to the strategy proposed?
Employment and development strategies for FATA must rely on a combination of remittances and direct support.
The basic question is: How can economic development be delivered and employment increased in FATA? Two approaches have been suggested.
The first, and one which agencies such as USAID appeared to be contemplating, would be to establish manufacturing and other enterprises in FATA (in what are termed the “reconstruction opportunity zones”). Although this route has been talked about for several years, nothing of substance has emerged. It is, therefore, impossible to judge how successful such a venture would be; if anything, the delay suggests that the difficulties have given even the proponents of this approach cause for introspection. On the face of it—given the fragile security situation, the undeveloped infrastructure, the paucity of trained workers, the distance from major population centers and transport hubs, and the difficulty of attracting managerial and other skills from outside the region—this strategy is unlikely to be very successful in the immediate future. It is probably best considered a supplement to the second strategy, described below.
The second strategy would essentially turn FATA into a ”remittance economy“ in the short run, and bank on the multiplier effects of a large volume of remittances to generate a range of economic activities within these territories in a somewhat longer timeframe. The strategy would rapidly develop economic activities in some of the cities in the settled areas—such as Peshawar, Mardan, Kohat, Nowshera, Charsadda—that already have the basic infrastructure and industrial base, and provide subsidies and tax breaks for enterprises there to employ workers from FATA.
A policy that combined boosting the employment of workers from FATA in the settled areas of KP with direct public works programs and substantial support for SMEs in FATA itself could produce successful results. The secondary effect of a substantially increased flow of remittances to this region, plus the additional spending on public works, would be to trigger a significant increase in the demand for goods and services in FATA and in the growth of economic activities in the region to respond to this demand. This is likely to take the form initially of expanded retail trade—experience shows that stores selling food and grocery items, clothing, kitchen utensils, hardware, construction materials, and pharmaceuticals tend to start off first—together with construction, transport, and domestic services. This increase in economic activity should generate a substantial number of jobs within the FATA region itself.
The calculations presented in the next section suggest that a policy that combines remittances from FATA workers employed in the settled areas, together with measures to promote direct employment in FATA, could be viable.
“Full employment” requires creating around 250,000 more jobs for FATA workers.
A back-of-the-envelope calculation shows that the underlying development problem in FATA, namely, providing more employment, is not unmanageable. The region’s population in 2011 was 4.2 million (Pakistan, Ministry of Finance, 2011, statistical appendix, table 12.7), of which about half were women who, in the social mores of the region, were not available for work outside the home. Of the remaining 2.1 million, about 50 percent would be below 15 or over 60 years of age, assuming the same age distribution for FATA as for the rest of Pakistan. This leaves a potential labor force of about one million.
According to the Government of Pakhtunkhwa’s Economic Growth Strategy (Khyber Pakhtunkhwa, Planning and Development Department, 2011), the unemployment rate in KP was about 8.5 percent of the labor force. If one assumes an unemployment rate of 25 percent in FATA (three times that of KP), then 750,000 workers would be employed and jobs would have to be provided for about 250,000 additional workers.[10] Of course, not all the additional jobs would have to be created in FATA; workers from these territories could be employed in the settled areas of KP or indeed anywhere in Pakistan (as many of them already are).
The World Bank’s economic report on KP calculated that the elasticity of employment with respect to GDP growth in the province was close to 0.6, i.e., an increase of 1 percent in the province’s GDP would lead to an increase of 0.6 percent in its employment (World Bank, Government of the NWFP et al., 2005). If KP’s employment elasticity was applicable to FATA, and remittances, additional government spending, and autonomous private sector expenditures created a GDP growth rate of, say, even 5 percent a year (the four-decade average of Pakistan’s growth rate over 1970–2011), it would create 22,500 new jobs annually [(0.6 x 5%) = 3.0 percent of 750,000] in FATA itself. (This is in addition to those created in the settled areas of KP and elsewhere resulting from the special incentives to employ workers from FATA.)
Of course, these estimates are offered only as ballpark figures and to provide a framework for thinking of possibilities. The actual outcome will depend on the employment elasticity calculated specifically for FATA, and accurate data on employment and the employment multiplier in that region. Indeed, the elasticity of employment with respect to GDP growth in FATA could quite likely be higher than that used here because many of the activities that would be triggered initially—retail trade, house construction, household services, and so on—are highly labor-intensive. Moreover, these ”secondary effects“ jobs could be supplemented substantially by direct action to finance public works in FATA itself, such as road building, brush clearing, and digging irrigation channels, which are also highly labor-intensive. FATA’s employment problem would not appear to be unmanageable.

5.5.      The Punjab

In 2011, the Punjab accounted for about 54 percent of Pakistan’s population and about 56 percent of national GDP; the economic success of this province is, therefore, enormously important to the country. The Punjab’s assets include an infrastructure and human resource base that are about the best in the country, a diversified agriculture sector, a large services sector (benefiting from the province’s human resources), and a substantial industrial base. It is the only province that touches all the other provinces of Pakistan and also shares an extensive border with India.
However, on the other side of the ledger, the Punjab suffers the disadvantage of being a landlocked region, which makes imported inputs and exports relatively more expensive. Unlike the other provinces, it does not possess significant mineral resources; it is in danger of running short of water (which could have a profound impact on agriculture); and the structure of its industry has not modernized sufficiently. The absence of mineral resources and the locational disadvantage of distance from the seaport suggest that the Punjab’s economic growth must be rather more policy-driven than in some of the other provinces.

5.5.1.        Employment and the Required GDP Growth Rate

The Punjab’s labor force is estimated to grow at around 3.5 percent in the next decade. If the province aims to provide full employment (defined as incorporating 5 percent unemployment for frictional and structural reasons), then somewhat more than 10 million additional employment opportunities (including self-employment) will have to be created. The World Bank estimates the elasticity of employment with respect to GDP growth for the Punjab at 0.5. Thus, generating the required number of jobs suggests that the Punjab's GDP must grow at a sustained rate of about 7 percent a year.

5.5.2.        The Drivers of Growth

On what can the Punjab base this higher growth? The potential drivers of the Punjab’s growth are discussed below.
Agriculture
One must begin with the prospects for the provincial economy’s largest sector, namely, agriculture. This sector contributes about 27 percent of the provincial GDP and employs around 40 percent of the total labor force; its fortunes therefore play a major role in the outcomes for the Punjab’s economy. An adequate discussion of the issues in this sector merits more space than is available within the confines of this chapter; one must therefore satisfy oneself with highlighting the main issues.
Shifting Cropping Patterns Towards High-Value Items
The structure of the agricultural sector was not conducive to increasing employment in the last decade—according to the Labor Force Surveys, employment in the Punjab’s agriculture between 1993/94 and 2010/11 increased at barely 1 percent per annum. On the other hand, through appropriate structural changes, it is possible to increase both the value added as well as employment in agriculture. For example, Ali and Abedullah (2002) report that the experience of several South and East Asian countries demonstrates that converting 1 ha of rice to vegetable cultivation for one season generates one year-round job. This suggests that diversifying the structure of agriculture in the direction of higher-value and more labor-intensive activities can lift the province’s growth rate of agriculture and create more jobs. (Rice is not the only possibility; fruits and vegetables, for example, offer much the same opportunities.)
Raising the Productivity of Water
Raising the growth rate in agriculture requires a combination of physical investment and institutional improvements. Since the availability of water is an important constraint in the Punjab, growth in agriculture will require increased public investment in irrigation and water management. It is, therefore, a source of concern that the productivity of water used in agriculture has declined over the past three decades (see Ali & Byerlee, 2000).
Modernizing Wholesale Agricultural Markets
The production of high-value crops will be encouraged if the government facilitates the marketing of such products. In this context, significant reforms to wholesale markets will be necessary.
The World Bank, ADB, Government of the Punjab, and DFID (2005) comment that: “Market infrastructure tends to be biased towards major crops rather than livestock, fruits, vegetables, and other such high-value crops, the market information system is poorly developed, and the administrative structure to regulate output markets is highly bureaucratic and lacks effective private sector participation.” The report goes on to recommend a number of concrete actions that the provincial authorities should take in order to modernize wholesale markets. These include (i) improving the market information system by revamping the district-level market information system; (ii) developing in collaboration with the private sector critical infrastructure such as refrigerator bogies, cold storage facilities at major airports, and laboratories for food safety testing; and (iii) establishing minimum grades and standards for all agricultural raw and processed products for domestic and export markets.
Strengthening Institutions (Particularly Land and Water Markets)
Other vital institutional improvements need to target the functioning of land and water markets, and to encourage research and innovation in agriculture. Perhaps the most important aspect of institutional strengthening that is required is the creation of an effective land records system. Such measures would clarify property rights and promote the smooth transfer of titles. Land taxes could be based on the size of holdings and calibrated to reflect the land’s productivity potential (the existing “produce value” indices have not been revised for several decades). The combination of clearly defined property rights and this type of taxation would discourage large landowners from holding on to underutilized land.
The Nonfarm Sector
The authorities must, if anything, devote even more attention to the nonfarm sector. This includes manufacturing, construction, wholesale and retail trade, transport, and other services, and will be the main source of creating productive jobs. In 2010/11, the combined contribution of these subsectors accounted for well over two-thirds of the total provincial GDP. These areas fall largely under the private sector and are very important for providing employment—almost 90 percent of the Punjab’s labor force is employed in the private sector. A strategy for developing the private sector (one such example is DFID, 2010) must, therefore, be a key component in any overall development strategy for the Punjab.
Focusing on the Problems of SMEs
Within the Punjab’s private sector, about 85 percent of jobs are in units that employ less than 10 employees. The authorities must provide supporting policies for the small and medium enterprises (SMEs), because it is on the performance of these enterprises that the wellbeing of the majority of the population depends. Moreover, these enterprises are important generators of employment—the elasticity of employment with respect to output in this sector is estimated to be 0.85 (i.e., a 10 percent increase in output would produce an 8.5 percent increase in employment).
The performance of these enterprises is constrained by access to finance and electricity, and the availability of skilled workers. Surveys by international agencies and other investigators (Ghaus-Pasha cited in DFID, 2009; Bari & Cheema, 2003) —show that only about 6–8 percent of fixed investment by SMEs is financed by development finance institutions and commercial banks. SMEs tend to rely on self-financing to begin operations and continue them with retained earnings. Large enterprises, on the other hand, draw on commercial banks both for working capital and fixed investment.
The problems of access to commercial bank financing arise from the banks’ cumbersome procedures and their requirements for collateral. According to the Small and Medium Enterprises Development Authority (SMEDA), banks and other financial institutions often stipulate levels of collateral that exceed even those mandated by the State Bank of Pakistan. SMEDA reports that financial institutions frequently require SMEs to provide collateral worth 120–130 percent of the requested loan. It is possible that banks require such high levels because the unhurried working of the legal system makes recovering the collateral a slow, uncertain, and expensive process.[11] However, given the importance of such enterprises in providing jobs and generating incomes, it is essential that the provincial authorities examine ways of dealing with this problem, and can draw on the experience of other developing countries that have coped with such difficulties more successfully.
Figure 19.14 illustrates a comparison of the chief investment obstacles faced by formal and informal firms. The figure summarizes some of the findings of a survey conducted by the World Bank and SMEDA. The broad finding is that physical constraints (such as access to telecommunications, transport, and electricity) appear to be systematically greater obstacles for the informal sector, but areas (such as customs and trade regulations, tax administration, labor regulations) in which the sector can function “under the radar” pose smaller problems for it than they do for firms in the formal sector. Electricity-related problems were a major obstacle to investment both for formal and informal firms, but they affected nearly 50 percent of informal firms compared with 39 percent of formal enterprises.
Figure 19.14: Investment obstacles in the Punjab: Formal vs. informal firms, 2009
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Source: World Bank


Stepping up Training of Labor
There is a saying in Arabic: “With every mouth, God sends a pair of hands; with every pair of hands, God sends a mouth.” The problem in today’s highly competitive and technologically-oriented world is that an untrained pair of hands is not quite a pair of hands. One is left with only the mouths.
Informal firms have reported difficulties in increasing their productivity because of their inability to attract skilled and educated workers. This is not surprising—skilled workers are in short supply in the Punjab, and can therefore choose to work largely in the formal sector where wages are higher and employment more stable. If the Punjab is to achieve its aim of accelerating GDP growth to a rate that can generate enough jobs for its labor force, it will have to invest more heavily in training this labor force. This is particularly important for the informal sector, which has few resources of its own to provide the training, but which must be supported because it provides the overwhelming share of employment and its low levels of productivity drag down the productivity and competitiveness of the entire provincial economy.
Improving Governance, Especially in Property Rights, Contract Compliance, and Dispute Resolution
Major development of the private sector requires a transparent and effective system of economic governance. Such a system would promote secure property rights and effective compliance with contractual obligations, create an environment of open and fair competition that would minimize costs, and establish an efficient mechanism for adjudicating and resolving commercial disputes.
The Punjab must do much more before such a system of governance can be said to be in place. For example, the World Bank cites a backlog in 2009 of over 100,000 cases in the high courts of the Punjab and Sindh (about half of which concerned commercial disputes), and estimate that, when these cases were taken up by the courts, it took an average of 46 steps and almost one third of the contract value to enforce a contract (see updated note to unfinished revision of World Bank, 2006b). A large number of such cases took more than five to seven years to be decided, while appeals and implementation of the judgment took a further year or two.
These drawn-out legal processes lead to higher court costs and lawyers’ fees, and make access to justice an expensive proposition, particularly for small firms, which often view the legal system as invariably slow, frequently unfair, and generally costly. The slow and costly judicial procedures can act as a severe disincentive to all business investment, but especially to foreign investment, which has very wide options about where it can go. The most important areas of governance fall within the remit of the provincial government, and it is essential that it act vigorously on them. (See DFID, 2010, for a more detailed list of recommendations for developing the private sector.)

5.5.3.        Intra-Provincial Development Disparities

An effective development strategy for the Punjab must recognize that the province is not a monolith, but contains important regional differences. Living standards differ significantly between regions. From the point of view of income, poverty, and social indicators, central Punjab is the most developed part of the province, followed by northern Punjab, with southern Punjab bringing up the rear (see, for example, World Bank, ADB et al., 2005; Cheema, Khalid, & Patnam, 2008; Institute of Public Policy, 2012). An interesting analysis by the Institute of Public Policy (2012) argues that, “overall, regional inequality has declined despite the fall in ranking of districts of South Punjab” (p. 128).
If this is indeed the case, it is an encouraging result. However, two points should be borne in mind. First, as the Institute of Public Policy study itself points out, the exclusion of the small-scale manufacturing sector biases the results against districts such as Lahore, Faisalabad, Sialkot, Gujranwala, Gujrat, and Wazirabad (all in central Punjab), which have large clusters of small enterprises. Again, the study emphasizes that the official statistics might not capture the private provision of social services, especially in the relatively large cities of the Punjab (most of them in central Punjab). This, again, is likely to imply greater regional inequality than estimated. Moreover, lumping the federal territory of Islamabad (for example, in electricity consumption) with northern Punjab can only have raised that region’s ranking with respect to the others.
Second, government actions do not appear to be assisting convergence. Mukhtar (2009) has argued that the Punjab’s public sector development program has been very “Lahore-centric.” Figure 19.15 expresses more vividly than any words could the disproportion in the allocations for Lahore compared with all the other urban centers in the province. Lahore has been provided with projects that cost about PRs 34,000 per capita, while the next largest recipient (Rawalpindi) was awarded projects that cost only PRs 10,000 per capita. At the extreme end of the scale, Sheikhupura, Okara, Sahiwal, Vehari, Lodhran, Khushab, Rajanpur, Khanewal, Bahawalnagar, Toba Tek Singh, Layyah, and Jhangh—all significant urban centers—have been provided projects that cost only about PRs 1,000 per capita.
One must make the observation that the interests of equity and private sector development would both be better served if the government encouraged the private sector to enter to the maximum extent areas in which it has expressed the greatest interest—namely, Lahore. This would free up public resources that could be more generously deployed for infrastructure and service delivery in the smaller urban centers, for which the private sector shows less enthusiasm. It is to be hoped that the greater decentralization of powers will call for greater accountability and a quicker response from the authorities, facilitating such an outcome.
Figure 19.15: Cost of projects allocated to various cities
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Source: Mukhtar (2009).

5.6.      Sindh

At the time of Pakistan’s independence, Sindh’s per capita income was estimated to be perhaps 40 percent higher than that of the Punjab and 55 percent higher than the rest of the country. After Partition, with Karachi as the country’s only seaport, Sindh acted as a magnet for import-based and export industries; consequently, its economy grew rapidly. However, in the early 1970s, Sindh’s economic performance began to falter, and this trend has continued well into the 2000s. In 1991/92, Sindh’s estimated per capita income was one-third higher than the rest of the country; the difference fell to 16 percent by 2004/05.
Concomitantly, poverty increased faster in Sindh than in the rest of the country. From 1994/95 to 2004/05, while per capita incomes in Punjab and KP grew at 1.6 and 2.3 percent, respectively, that of Sindh grew by only 0.9 percent. During 2000–10, real per capita incomes in the rest of the country increased at about 2.7 percent a year, compared with barely 1.0 percent in Sindh.
Sindh’s earlier performance demonstrates its enormous potential. The central issue facing the province on the economic side is how to perform to this potential once again. Not surprisingly, the answer depends on accelerating the province’s rate of GDP growth and improving the delivery of key services, such as education and health. However, the particular constraints and drivers of growth differ to some extent from those affecting other provinces.

5.6.1.           “Two Sindhs”

Earlier, the chapter argued that provinces should not be regarded as monoliths and that attention should be paid to the regional diversity within each province. Sindh, in particular, exhibits a strong duality. About half the population lives in rural areas where more than 70 percent depend on agriculture, livestock, forestry, and fishing for their livelihoods. There are almost no organized manufacturing or services sectors in these areas.
The other half of the population—about 18.3 million people—live in the urban areas; of this number, about 15 million live in Karachi. This segment of the population is heavily employed in the manufacturing and services sectors. The Labor Force Surveys show that about one-third and two-thirds of the urban labor force was employed in industry and the services sector, respectively, compared with only 9 and 21 percent of the rural labor force, respectively. The result of these structural differences is that mean per capita consumption in rural Sindh is only about half that in urban Sindh.
Indeed, the World Bank (2006b) argues that the urban-rural gap in Sindh is worse than the gender gap, even though the latter occupies much more of the attention of policymakers. The report goes on to say:
With 99 percent gross primary enrolment, a 72 percent literacy rate, and 87 percent of babies fully immunized, urban Sindh’s social indicators equal or surpass the level of development in other developing countries with comparable per capita income. On the other hand, with 58 percent gross enrolment at the primary level, a 38 percent literacy rate, and 62 percent of babies fully immunized, the level of human development in rural Sindh is worse than that in some of the sub-Saharan African countries.
Figure 19.16 shows the social gap in 2009 between rural and urban residents compared with the gender gap. For each of the variables, the rural-urban gap is larger.
Figure 19.16: Social gap between rural and urban Sindh, and between males and females, 2009
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Note: A= gross primary-level enrolment rate, B = net primary-level enrolment rate, C = matriculation-level enrolment rate, D = gross primary-level enrolment rate (private schools), E= literacy (population aged 10 years or older), F= fully immunized.
Source: Calculated from Pakistan Social and Living Standards Measurement 2008/09.
Moreover, the weight of Karachi is so overwhelming that it can seriously distort any analysis of the economic performance of Sindh as a whole. Therefore, while space and the available data do not permit a separate discussion of Karachi in this chapter, to the extent possible the problems of Karachi will be highlighted in the context of the development of urban Sindh.
A further comment is necessary. Karachi’s rapid growth in the past has attracted waves of immigrants from other parts of Sindh and from the poorer provinces of Pakistan. This has put tremendous pressure on the city’s physical and social infrastructure. The concern is that renewed growth would again lead to a massive influx of population from outside Karachi. This does not, of course, mean that Karachi’s growth should not be accelerated. Rather, it means that (i) one must pay attention to a balanced development of all the provinces of Pakistan; and (ii) Sindh, in particular, should develop a comprehensive plan for its urban areas so that other urban centers—such as Hyderabad, Sukkur, Larkana, Nawabshah, Rohri, Kotri—are also developed as alternative growth poles. Such a policy should help to reduce the “push” factor from at least the other parts of Sindh and ease the pressure on Karachi.

5.6.2.        A Strategy for Sindh

The first point to consider is the likely expansion in Sindh’s labor force in the coming years. Four factors will shape the outcome. First, the size and age structure of the province’s population suggest that about 380,000 persons will enter the labor force annually over the next decade. Second, the rise in the literacy rate and increasing enrolment in primary and secondary schools are expected to add another 160,000 potential workers. Third, migration from other provinces could add as much as 50,000 persons a year to Sindh’s labor force. Fourth, social changes and increasing education are likely to increase the participation rate, especially of women, thereby adding more job seekers.
In short, while over the long term the province has created, on average, about 350,000 jobs annually (although job creation has touched about 500,000 in years in which the province’s economy expanded rapidly), it will be expected to generate 600,000-plus jobs a year in the coming decade. The World Bank (2006b) estimates that, if current economic trends continue, there could be an annual addition of nearly 100,000–250,000 to the pool of the unemployed every year. Such a situation could have very damaging social consequences.
On the basis of the past relationship between output growth and employment creation, it is likely that the GDP growth rate required to create 600,000 jobs a year will be closer to 7 percent a year in real terms than to six. Such a rate of growth will also be required to deal with the problem of poverty. The broad movement in Sindh’s poverty tracks that of Pakistan, but after 1994/95, poverty in Sindh increased more sharply than in Pakistan as a whole, and in 2001/02 it was estimated to be significantly higher. In that year, nearly 40 percent of Sindh’s population was estimated to be below the poverty line.[12]
Owing to the more rapid growth in the economies both of Pakistan and Sindh, the poverty headcount declined substantially to about 20 percent of the population in 2008. However, income distribution in Sindh remained more unequal than in the other provinces both in 2002 and 2008 (see Figures 19.5 and 19.6 above). In order to deal with poverty, Sindh will have to adopt an inclusive development strategy that can sustain the GDP growth rate at close to 7 percent a year and share the fruits of growth more equitably.

5.6.3.        Developing Urban Sindh

”Sindh needs to grow not in parts, but as a whole,” commented the World Bank (2006b). It is not too much to say that the province has relied excessively on Karachi to act as its engine of growth. As a result, the potential of other urban centers has been stifled and no dynamic second-tier city has developed.
It appears that the strategy of relying almost exclusively on Karachi has gone as far as it can. In the future, Sindh will have to follow policies that maintain the dynamism of Karachi, but also develop additional growth poles that relieve some of the pressure on the city’s infrastructure, and take advantage of Sindh’s other assets that are located near these new urban centers. This will require the authorities to adopt a more comprehensive urban strategy that addresses issues specific to each major city.
While all cities in Sindh (including Karachi) face a number of common problems, such as an often unreliable and expensive electricity supply, there are a number of city-specific problems that discourage investment. A survey by the World Bank (in connection with the preparation of World Bank 2006b) showed that entrepreneurs in Karachi felt most discouraged by the high price of land and problems with electricity, while those in Hyderabad and Sukkur did not regard access to land as a critical problem, but were most concerned with the unavailability of skilled labor. Again, entrepreneurs in the interior of Sindh regarded the law and order problem as the biggest impediment to conducting and expanding their business.
The need to encourage private investment in the province means that the authorities must move vigorously to improve Sindh’s investment climate, where the constraints have been changing quite rapidly. The World Bank (2006b) reports that, between 2001 and 2004, the nature of the problems described as being most hostile to the business environment changed significantly. In the earlier year, the most serious constraints related primarily to those for which the central government was responsible—tax administration, tax rates, the cost of and access to finance, and electricity. In 2004, the major problems came under the remit of the provincial government—corruption, utility hookups, law and order, and uncertainty regarding the application of regulatory policies. With the greater devolution of powers and responsibilities following the passage of the 18th Amendment and the increased financial resources made available to the province by the 7th National Finance Commission Award in 2009 , the ball is even more squarely in the provincial government’s court.
The major challenges to Sindh’s investment climate can be grouped under four headings: (i) access to and workings of factor markets, especially land; (ii) governance issues, especially corruption, law and order, contract enforcement, and the performance of the judicial system; (iii) infrastructure, particularly electricity and water supply; and (iv) policy uncertainty.
The distortions characterizing land markets are well known. They include (i) unclear property rights; (ii) inflexible and apparently arbitrary zoning laws; (iii) the fragmentation of land ownership among public sector bodies (nine such bodies own more than 90 percent of Karachi’s land, and there is very poor coordination between them); (iv) high taxes on property-related transactions; and (v) legislation that is tilted heavily in favor of tenants and against owners.
The efficient and inexpensive determination of a clear set of rights governing property is fundamental to any market economy. Enforcing contracts in Sindh, including Karachi, is both expensive and time-consuming. These are important weaknesses because the concept of a free, private sector-led market economy is based on the premise of enforceable rights and contracts that are rapidly and efficiently executed.[13] Sindh is also the most litigious province in Pakistan. For example, at the beginning of 2004, there were more than 2,647 pending cases per million of the population in the Sindh High Court, compared with 738, 429, and 377 in Punjab, KP, and Balochistan, respectively. The nearly 88,000 cases pending before 15 judges in the Sindh High Court accounted for 48 percent of all pending high court cases in the country. The situation is getting worse—Sindh is the only province where the number of new high court cases exceeds the number of cases disposed of.

5.6.4.        Accelerating Growth in Rural Sindh

The wide gap in living standards and social outcomes between urban and rural Sindh was pointed out earlier in the chapter. The biggest threat in rural Sindh to even the existing standard of living—and the biggest challenge to raising it—is the deteriorating water situation.
Sindh is an arid region that receives sparse and irregular rainfall. To make matters worse, its groundwater is largely saline and the province is, therefore, exceptionally dependent on a supply of water from the Indus and its tributaries via the canal irrigation system. From 1996/97 to 2001/02, annual rainfall in Sindh was 35–80 percent lower than the long-term average. Since the drought had also affected much of the rest of Pakistan, the supply of canal water also decreased. In most years from 1992, canal withdrawals in Sindh were below their long-term average—withdrawals in 2000 were 28 percent below the average.
The situation is likely to deteriorate even further. Population growth is projected to turn the province’s water balance from a small surplus to a sustained deficit (see Figure 19.17). Rapid industrialization will intensify the problem. The World Bank (2006b) estimates that, if Sindh were to achieve the level of Indonesia’s industrialization, the water deficit would be twice the 2004 level. It is clear, therefore, that future growth in Sindh’s agricultural sector will have to emphasize water-efficient activities.
Figure 19.17: Projected shortfall from present availability at different levels of requirements (percent of present availability)
19-17.wmf
Source: World Bank (2006b).
A strategy for developing Sindh’s rural areas will have to incorporate at least five elements. First, it must improve the productivity of water. This will involve adopting more effective water management practices, relating water fees to actual consumption levels (this should help shift the cropping pattern in the direction of more water-efficient products), and setting abiana[14] rates at levels that cover operation and maintenance costs.
Second, the strategy must encourage a movement within the crop sector in the direction of high-value added crops. This move can be facilitated by eliminating some of the existing distortions relating to prices, subsidies, and regulations (in particular, the economics of sugarcane versus cotton must be revisited). The idea is that the cropping pattern should, as far as possible, be determined by the market rather than by the government.
Third, developing the rural areas will also require a move away from the crop sector toward high-value nonfarm activities, such as livestock and fisheries. While the investment in such productive facilities is expected to come largely from the private sector, the government can help by improving the infrastructure and facilitating the transfer of techniques and technology.
Fourth, the authorities will also have to pay attention to those problems the agricultural sector faces that are not related to water. An important obstacle to the growth of the rural areas is that Sindh’s agriculture is not properly integrated with the transport and storage sectors (nearly 20 percent of communities in rural Sindh lack basic motorable access and 60 percent of communities lack paved access), nor does it provide a broad base for the development of agro-industry.
Fifth, the marketing system must be strengthened, and the sector linked more closely with retail trade activities in Karachi and the rest of the province. Only when the rural and urban sectors are more closely integrated will there be a single, unified Sindh, the development of which will live up to the potential of the province and bring to all its citizens the benefits and wellbeing that they deserve.

6.        Conclusions

This chapter has covered too much ground to admit of some simple conclusions, but several points are worth stressing.
First, accelerating the GDP growth rate is imperative for Pakistan; the demographic dynamics do not allow an alternative. Failure to grow at the required rate will create a serious risk that the demographic transition, instead of offering a dividend, will construct a nightmare. In order to achieve the required rate of growth for the country, each province will have to capitalize on its assets to the maximum extent.
Second, each of the provinces will have to maintain a significantly higher GDP growth than in the past if they are to absorb all the additions to the labor force and reduce the backlog of the currently unemployed. However, they all possess the assets needed to arrive at a successful outcome. The discussion in this chapter has highlighted that it is largely a matter of adopting policies that will transform the potential of the province into actual results. Doing this is a question of political leadership and will, but a discussion of such matters lies outside the remit of this chapter.
Third, while this might seem paradoxical in view of the shortcomings of past policies and economic performance, the most important lesson that one should draw from Pakistan’s experience is one of hope. At the time of independence, the areas that comprise Pakistan had a population of barely 35 million; today, the population of just the province of Sindh is 50 percent larger than that number. The difference between Pakistan’s present population of nearly 180 million and that at the time of independence is equal to the total present-day population of Russia, or of the UK, France, Sweden, Norway, and Denmark put together.
Moreover, these 180 million persons—five times the number at the time of independence—have, on average, higher incomes, are better fed, housed, clothed, educated, and connected to the rest of the world, and have much greater opportunities to fulfill their capabilities than their counterparts in 1947. This fact alone would attest to the resilience of the economy and bear witness to the distance it has traversed over the last 65 years.
If one is critical of the economic performance of Pakistan and its provinces, the regret is for opportunities missed and for not performing to their potential, rather than for a disastrous outcome. The reproach is that the country and all the provinces could have done much better. If, say, Korea and Taiwan, perched on the edge of Asia, destitute of natural resources, and rent for long periods by war (and in the case of Korea, with its capital city occupied twice by enemy forces) could achieve so much so quickly, then it should not be impossible for Pakistan’s provinces, with their abundance of natural resources, to achieve something comparable.
However, this will not happen by itself; as the discussion in this chapter has shown, such improvements will require a change in people’s thinking. The Holy Qur’ān repeatedly stresses this message: it says (viii, 53): “Allah never changes the favor He has bestowed on any people until they first change what is in themselves.” This is reiterated (xiii, 11): “Allah changes not the condition of a people until they (first) change what is in themselves.” It is in the spirit of this injunction that the present chapter has sought to identify some crucial areas in the economic field towards which changes in thinking could usefully be directed.


* The author is a former director at the World Bank. He was senior adviser to the World Bank and Asian Development Bank teams that prepared the province-level economic reports cited as World Bank, Asian Development Bank, Government of the Punjab, and DFID (2005); World Bank, Government of the North West Frontier Province, and UK Department for International Development [DFID] (2005); World Bank and Government of Sindh (2006b); and World Bank, Asian Development Bank, and Government of Balochistan (2008). He was also the principal author of the World Bank (2013) and DFID (2009, 2010) studies. This chapter draws on these reports and their background papers, on Ikram (2006, 2009), and on discussions with government officials, businesspersons, academics, and other representatives of civil society in the provinces.
[1] Central government policies impact on provinces in broadly similar ways; but not necessarily to the same degree. Thus, for example, when the federal government decided to support the mujahedin in Afghanistan, the effect on the Punjab was negligible compared with that on KP.
[2] See, for example, Hamid and Hussain (1992); Ghaus-Pasha, Pasha, and Ghaus (1996); Jamal and Khan (2003); Jamal and Aamir (2003); Ikram (2006, 2009); Social Policy and Development Center (2001, 2004); Institute of Public Policy (2012).
[3] See, for example, World Bank, Government of the North West Frontier Province, and DFID, (2005); World Bank, ADB, Government of the Punjab, and DFID (2005); World Bank (2006b); World Bank, ADB, and Government of Balochistan (2008); World Bank (2013); ADB (2005); United Nations Development Programme (2003); DFID (2009, 2010). Some of these reports are underpinned by a substantial array of background papers.
[4] The larger the coefficient, the greater is the degree of inequality.
[5] In 2010, Balochistan had 1.85 civil service posts per 100 of the population, compared with 1.06 in the Punjab, 1.21 in KP, and 1.29 in Sindh.
[6] About 47 percent of the cultivated area is irrigated, while the remaining 53 percent is under sailaba (runoff) and khushkaba (dryland) farming. The latter farming system contributes to the livelihood of a sizeable majority of the population.
[7] The following discussion draws in part on Ikram (2006, 2009).
[8] Almost 2,400 years ago, Aristotle observed at the beginning of his Nicomachean Ethics that “wealth is evidently not the good that we are seeking, for it is merely useful and [sought] for the sake of something else.”
[9] The Sarhad Hydel Development Organization has identified hydel potential of more than 6,500 MW and completed feasibility studies of several hydel projects ranging from 8 MW to 125 MW.
[10] In fact, in most countries, “full employment” is interpreted to accept unemployment of 5 percent because it has been found that, on average, about this proportion of the labor force remains unemployed at any given time for seasonal, frictional, and trade reasons. Thus, on these assumptions, 200,000 additional jobs would have to be created. However, let us ignore this for the moment.
[11] The World Bank team working on the 2005 report was told by banks that the average period for taking custody of the collateral (in instances where they were able to do so) could be four to five years or more after default had been declared; all the time, the costs of pursuing the process of obtaining possession would keep mounting.
[12] There is some dispute over this figure because of questions pertaining to the small sample and high standard deviations in the measurement of income and consumption. The Social Policy and Development Centre (2004), using techniques more applicable to small-area estimations, puts poverty incidence at 31 percent in 2001/02.
[13] As Thomas Hobbes put it in Leviathan (1651): “He that performeth first has no assurance that the other will perform after, because the bonds of words are too weak to bridle men’s ambitions, avarice, anger, and other passions without the fear of some coercive power.”
[14] Income collected by government from irrigated (canal-fed) land.

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posted by S A J Shirazi @ 1/11/2014 08:00:00 AM,

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