Many wonder why Pakistan’s economy is struggling? Are these purely global factors, such as inflation and high energy prices, or are local causes more important, such as corruption or low tax collection? Some in Pakistan attribute it to a Western plot, aimed at keeping the country weak and dependent on the IMF, while some in the West see it as a Chinese plot to keep Pakistan trapped in debt and dependent on Beijing.
The underlying answer to the first question becomes clear when a different question is asked, why does Pakistan seem more fragile than Bangladesh, even though both are seeking IMF loans? While 2022-2023 will be difficult for both, in the recently published book, The Time Traveling Economist, I explain why the whole of 2020s will be more difficult for Pakistan. But the 2030s may show a radical and permanent change in the fortunes of the country. No illiterate country has ever achieved prosperity. Literate elites were able to build very successful empires, from Imperial Rome to the Mughal Empire, but without mass literacy (in any language), countries always remained poor.
A social scientist in the 1960s showed that countries with adult literacy rates below 40% never experienced sustainable growth and that 70-80% adult literacy was needed to s ‘industrialize. In the latest round of comparable UN data, Pakistan’s adult literacy rate of 59% was the lowest of any emerging market and lower than Bangladesh at 72% or India at 74% . We can see why Bangladesh’s textile industry exports so much more than Pakistan.
You know better than I why Pakistan has yet to achieve the goal set in 1948 by the All Pakistan Education Conference for universal primary education, or the 1981 goal of achieving mass literacy. I wish I had asked this question during my last visit to Islamabad and Karachi. But if Pakistan can increase adult literacy by 1 percentage point per year in the 2020s, then by the 2030s it will be above 70% and ready to industrialize. Given the national security implications of faster GDP growth in industrialized India than in Pakistan, the armed forces probably recognize how critical it is to have widespread literacy, especially among girls.
No country takes off if girls are not educated. Human capital is half the challenge for Pakistan. The other half is real capital, the real money needed to invest in infrastructure such as cheap and reliable electricity. Surprisingly, this is a function of fertility rates. When countries have a fertility rate above 5 children per woman – as Pakistan did just 20 years ago – the average family has to spend all their income just to feed the children, leaving nothing left over. the end of the week to save in a bank. Banking systems tend to be small, with deposits accounting for around 20% of GDP. The scarcity of savings means that the cost of money is high.
This is also true in Pakistan today, and due to high local interest rates, the country has borrowed heavily abroad to finance the investments that Islamabad knows the country needs. In contrast, China’s low fertility rate means that savings are plentiful and the cost of money is so cheap that China has excess cash to lend to Pakistan. Why doesn’t Bangladesh face the same scale of debt problems as Pakistan? Because the fertility rate in 2015-19 was 2.1 children per woman (similar to 2.2 in India) while it was 3.6 in Pakistan. Bangladesh has never borrowed on the international financial markets by issuing a Eurobond, unlike Pakistan, because it has sufficient local savings to finance the investments of its own banks. Bank lending in Bangladesh was around 45% of GDP in 2021, three times the figure of 15% of GDP for Pakistan.
Infrastructure in Bangladesh was built without excessive foreign borrowing. And the external debt is much less heavy; the ratio of external debt to exports in 2020 was about 200% in Bangladesh against more than 400% in Pakistan. Again, good news is on the horizon for Pakistan. UN forecasts last year indicated that Pakistan would have a fertility rate of 3 children per woman in 2030 and 2.6 in 2040. Bank deposits will increase and so will bank loans. By the 2030s, Pakistan should be able to self-finance its own investments and should not need to rely on IMF support or expensive Eurobonds.
But the 2020s will be difficult. To meet the understandable demands of its people, Pakistan has borrowed heavily, and global borrowing costs have now skyrocketed. Any post-election government will have to tax the population more, or spend less, or default. Pakistan is not alone in this case. Egypt, Ghana and others are in a similar leaky boat and face the same tough choices. The good news for Pakistan is that the choices should be easier a decade from now. Sri Lanka carries a final word of warning. It achieved adult literacy to industrialize in the 1980s (and did) and achieved fertility rates below 3 children soon after. It was the most prosperous economy in South Asia.
But instead of reaping the demographic dividend, the war meant that its savings were redirected from essential investments to security spending. Then, after the war ended in 2009, Sri Lanka tried to catch up with Southeast Asia and borrowed too much in the 2010s, while taxing its people too little. The lesson here is that in the 2030s and beyond, insecurity and conflict could still derail Pakistan’s much-improved trajectory. We should all look forward to a peaceful and prosperous Pakistan in the decades to come.
THE WRITER IS THE CHIEF GLOBAL ECONOMIST OF RENAISSANCE CAPITAL, AN EMERGING, FRONTIER INVESTMENT BANK FOCUSED ON FRONTIER MARKETS