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China's reform lessons for Pakistan

by Ashfaque H. Khan

China's reform lessons for Pakistan

China’s emergence as a global economic power within a generation is unprecedented in modern history. Pakistan has the potential to emulate China’s economic achievements of the past 35 years. But this will require fundamental changes at all levels of government, structural and sectoral economic reforms, and a determined drive to combat corruption.

China’s growth since 1980 has been sustained, broad-based and impressive. Real GDP grew at an average annual rate of 9.8% in the 1980s, 10.0% in the 1990s, and 10.3% in the 2000s, before slowing to 8.3% in 2010-15. China has maintained this rate of growth for several reasons, including policy consistency and continuity, a gradual and experimental opening up of its economy, and saving and reinvesting a large proportion of GDP.

The country has allowed local administrations to compete to attract investment, develop infrastructure and improve local business environments. Other reasons include the appointment of senior personnel based on qualifications and experience, and a ‘zero tolerance’ stance towards corruption.

Major investment programmes
China undertook major infrastructure investments to connect different and previously remote parts of the country. The development of a large and integrated national market allowed businesses to achieve new economies of scale and improve profitability, while dismantling regional barriers to the movement of goods and services contributed to the creation of a single national market.

The state’s investment in its human capital has been substantial, particularly in education, health, and vocational training. Between 1978-2015, 2.8m Chinese students completed their higher education abroad. Of these, as many as 2.2m, almost 80%, have returned to China.

Realising that global dynamics were changing after the 2008 financial crisis, Chinese policy-makers began transitioning from an investment and export-led growth model to a consumption-led model. The previous strategy is viewed as having resulted in over-investment, cycles of excessive credit expansion, and a large trade surplus. Facing frequent bouts of inflation, asset price bubbles and a vanishing demographics dividend, Chinese policy-makers recognised the need to engineer the country’s transition to slower (though still strong by global standards) and more sustainable growth.

Pakistan economic reform
Pakistan has maintained all-weather strategic relations with China since independence in 1947,  and is likely to benefit significantly from the country’s rapid economic rise. But while it may be ready to emulate China, it needs to reform its economy to do so. Reforms are required in sectors including agriculture, industry, energy, and banking and finance, as well as in the spheres of taxation, the civil service and the judiciary.

OMFIF Bulletin November 2016 Khan (1)

Pakistan must change its spending priorities. Substantial investment in infrastructure, including in energy, ports, shipping and telecommunications projects, and human capital, are key to higher economic growth.

Savings and investment are crucial to this equation, but here too Pakistan’s performance leaves much to be desired. Saving and investment rates are low, and the country’s reliance on foreign savings is rising to maintain higher levels of investment, resulting in the accumulation of debt. Moreover, the government needs to avoid spending more than it earns. Doing so will require a prudent fiscal policy in which resource mobilisation takes centre-stage.

Other necessary reforms include addressing corruption and cronyism. A key aspect of China’s success has been its crackdown on corruption, and Pakistan must ask itself whether it is ready to fight corruption to achieve higher economic growth. Honest, competent and well-paid civil servants are the backbone of any country’s development, but the quality of Pakistan’s civil servants is falling for a number of reasons, including declining standards of university education. Pakistan needs urgently to reform its state administration.

China’s rise has been due in great part to the quality of its leadership. Pakistan needs leaders who are honest, independent, visionary and intelligent. If it can find leaders of such quality, it too can experience an economic rise on par with, if not exceeding, that of China.
Dr Ashfaque H. Khan is Principal and Dean, NUST School of Social Sciences and Humanities, Islamabad, Pakistan.