MACROECONOMICS
The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.
MACROECONOMIC GOALS:
Three conditions of the mixed economy that are most important for macroeconomics, including full employment, stability, and economic growth, that are generally desired by society and pursued by governments through economic policies.
These goals are widely considered to be beneficial and worth pursuing. Each goal, is achieved by itself, improves the overall well-being of society. Greater employment is typically better than less. Stable prices are better than inflation. Economic growth is better than stagnation. However, the pursuit of one goal often restricts attainment of others. For example, policies that promote economic growth might create unemployment or policies that improve stability might limit economic growth.
Introduction and Background
Of all the regions in the world, developing Asia has experienced the most momentous change over the last 5 decades. The region has enjoyed tremendous economic growth, with real gross domestic product (GDP) per capita (in 2005 purchasing power parity terms) growing by an average of 6.4% per year between 1990 and 2008, substantially faster than in countries of the Organization for Economic Co-operation and Development (OECD), at 1.8%; Latin America and the Caribbean, at 1.9%; and developing Europe, at 1.1% (Table 1). Asia’s growth has been led by the People’s Republic of China (PRC), with 9.1% average annual growth in real per capita income; India, with 4.9%; and the Republic of Korea, with 4.6%.
The strong economic growth has been accompanied by growth in employment and, in turn, poverty reduction. Employment in developing Asia grew by an average annual rate of 1.5%, significantly faster than the OECD at 0.9%, and developing Europe at 0.1%, although not as rapidly as in Latin America and the Caribbean, at 2.5%.
Behind this rosy picture of economic growth, job creation, and poverty reduction, is the reality that these achievements have been largely unequal and the quality of job creation in Asia has been inadequate. Many low income economies have had only mild poverty reduction and job creation. Even in emerging economies that have experienced substantial job creation, it has largely been driven by massive structural transformation (the PRC is a good example) from the low-productivity traditional sector to low-cost manufacturing created by high export led growth.
Full Employment
According to Pigou:
“Everybody who at the ruling rate of wages wishes to be employed is in fact employed.”
According Keynesian
“The maximum level of employment that private enterprise countries can attain without experiencing strong inflationary pressures.”
Full employment is achieved when all available resources (labor, capital, land, and entrepreneurship) are used to produce goods and services. This goal is commonly indicated by the employment of labor resources (measured by the unemployment rate). However, all resources in the economy--labor, capital, land, and entrepreneurship--are important to this goal. The economy benefits from full employment because resources produce the goods that satisfy the wants and needs that lessen the scarcity problem. If the resources are not employed, then they are not producing and satisfaction is not achieved.
The classical economists believed that there was always full employment and lapses, if any, were strictly temporary. According to them, full employment is a situation when there is no involuntary unemployment, though there may be voluntary, causal, seasonal, structural, technological and frictional unemployment. In there opinion, in a free competitive economy, serious unemployment was a passing phase. All job seekers are able to fingd jobs sooner or later at the prevailing wage rate. This view, however, is not accepted by economists these days. Actually there is always some unemployment.
High rates of unemployment are associated with many indicators of individual and social stress, such as suicide, domestic violence, stress-related illnesses, and crime. Unpredictable fluctuations in rates of inflation, interest rates and foreign exchange rates make it difficult—and in the worst cases, impossible—for individuals and organizations to make productive and economically sensible plans for the future.
Unemployment
“The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labor force.”
The labor force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded from the labor force. Unemployment can be generally broken down into several types based related to different causes.
TYPES OF UNEMPLOYMENT
Classical Unemployment
“Classical unemployment occurs when wages are too high for employers to be willing to hire more workers. Wages may be too high because of minimum wage laws or union activity.”
Frictional Unemployment
Consistent with classical unemployment, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment.
Structural Unemployment
“Structural unemployment covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs. Large amounts of structural unemployment can occur when an economy is transitioning industries and workers find their previous sets of skills are no longer in demand.”
Seasonal Unemployment
“Seasonal unemployment arises because of the seasonal character of a particular productive activity so that people become unemployed during the slack season.”
Cyclical Unemployment
A factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle. When business cycles are at their peak, cyclical unemployment will be low because total economic output is being maximized. When economic output falls, as measured by the gross domestic product (GDP), the business cycle is low and cyclical unemployment will rise.
While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates.
While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates.
NATURE OF UNEMPLOYMENT IN UNDER DEVELOPED COUNTRIES
Bulk of the unemployment in under developed countries is of a different nature from that in advanced and developed countries. A major part of the unemployment in developed countries is of cyclical nature which is due to deficiency of aggregate effective demand. But most of the unemployment in under developed countries like Pakistanis the deficiency of the stock of capital in relation to the needs of the growing labor force.
A nation’s stock of capital can be enlarged by increased investment which, in the absence of any unutilized resources, requires additional savings on the part of the community. Since our stock of capital has not been growing at a rate fast enough to keep pace with the growth of population, the country’s capacity to offer productive employment to the new entrants to the labor market has been severely limited.
The basic solution to the problem of this sort is the faster rate of capital formation so as to enlarge employment opportunities. For this purpose every possible encouragement should be given to savings and their productive utilization in increasing the rate of investment. The State itself can participate in the process of capital formation by undertaking such development activities as the private entrepreneurs do not find it profitable to undertake.
ECONOMIC GROWTH
“An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries.”
“Economic growth is best defined as
A long-term expansion of the productive potential of the economy. Sustained economic growth should lead higher real living standards and rising employment. Short term growth is measured by the annual % change in real GDP.”
Origin of the concept
In 1377, the Arabian economic thinker Ibn Khaldun provided one of the earliest descriptions of economic growth in his Muqaddimah (known as Prolegomena in the Western world):
In the early modern period, some people in Western European nations developed the idea that economies could "grow", that is, produce a greater economic surplus, which could be expended on something other than mere subsistence. This surplus could then be used for consumption, warfare, or civic and religious projects. Later, it was theorized that economic growth also corresponds to a process of continual rapid replacement and reorganization of human activities facilitated by investment motivated to maximize returns.
Alternative measures include life expectancy, average levels of education, infant mortality and nutrition, all of which are related to individual welfare.
Economic growth versus the business cycle
Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. Briefly, the business cycle is made up of booms and busts in production that occur over a period or months or years. The most recent example of a business cycle was the global boom starting in approximately 2002 that ended with the bust of 2008–9. Economists attribute the ups and downs in the business cycle to a number of causes including: overproduction of goods followed by large inventories that can't be readily sold, overexpansion of credit resulting in piling up of debt that inhibits purchasing; speculative bubbles, and shocks—like wars, political upheavals, and so on.
In contrast, the topic of economic growth is concerned with the long-run trend in production due to basic causes such as industrialization. The business cycle moves up and down, creating fluctuations in the long-run trend in economic growth.
Economic growth per capita
Economic growth per capita is primarily driven by improvements in productivity, also called economic efficiency. Increased productivity means producing more goods and services with the same inputs of labor, capital, energy, and/or materials. For example, labor and land productivity in agriculture were increased during the Green Revolution. The Green Revolution of the 1940s to 1970s introduced new grain hybrids, which increased yields around the world.
Among other factors that might prevent a long-term improvement in standard of living despite economic growth is the potential for population growth matching or outstripping productivity improvements.
Measuring Economic growth
Economic growth is measured as a percentage change in the Gross Domestic Product (GDP) or Gross National Product (GNP). These two measures, which are calculated slightly differently, total the amounts paid for the goods and services that a country produced. As an example of measuring economic growth, a country which creates $9,000,000,000 in goods and services in 2010 and then creates $9,090,000,000 in 2011, has a nominal economic growth rate of 1% for 2011.
In order to compare per capita economic growth among countries, the total sales of the countries to be compared may be quoted in a single currency. This requires converting the value of currencies of various countries into a selected currency, for example U.S. dollars. One way to do this conversion is to rely on exchange rates among the currencies. Another approach is to use the purchasing power parity method. This method is based on how much consumers must pay for the same "basket of goods" in each country.
Inflation or deflation can make it difficult to measure economic growth. If GDP, for example, goes up in a country by 1% in a year, was this due solely to rising prices (inflation) or because more goods and services were produced and saved? To express real growth rather than changes in prices for the same goods, statistics on economic growth are often adjusted for inflation or deflation.
Advantages of Economic Growth
Sustained economic growth is a major objective of government policy – not least because of the benefits that flow from a growing economy.
- Higher Living Standards
- Employment effects: Growth stimulates higher employment
- Fiscal Dividend: Growth has a positive effect on government finances - boosting tax revenues and providing the government with extra money to finance spending projects
- The Investment Accelerator Effect: Rising demand and output encourages investment in new capital machinery – this helps to sustain the growth in the economy by increasing long run aggregate supply.
- Growth and Business Confidence: Economic growth normally has a positive impact on company profits & business confidence – good news for the stock market and also for the growth of small and large businesses alike
Disadvantages of Economic growth
- Inflation risk: If the economy grows too quickly there is the danger of inflation as demand races ahead of aggregate supply. Producer then take advantage of this by raising prices for consumers
- Environmental concerns: Growth cannot be separated from its environmental impact. Fast growth of production and consumption can create negative externalities (for example, increased noise and lower air quality arising from air pollution and road congestion, increased consumption of de-merit goods, the rapid growth of household and industrial waste and the pollution that comes from increased output in the energy sector) These externalities reduce social welfare and can lead to market failure.
The trend rate of Economic growth
Another way of thinking about the trend growth rate is to view it as a safe speed limit for the economy. In other words, an estimate of how fast the economy can reasonably be expected to grow over a number of years without creating an increase in inflationary pressure.
- Above trend growth – positive output gap: If the economy grows too quickly (much faster than the trend) – then aggregate demand will eventually exceed long-run aggregate supply and lead to a positive output gap emerging (excess demand in the economy). This can lead to demand-pull and cost-push inflation.
- Below trend growth – negative output gap: If the economy experiences a sustained slowdown or recession (i.e. growth is well below the trend rate) then output will fall short of potential GDP leading to a negative output gap. The result is downward pressure on prices and rising unemployment because of a lack of aggregate demand
PRICE STABILITY
“A situation in which prices in an economy don't change much over time. Price stability would mean that an economy would not experience inflation or deflation. It is not common for an economy to have price stability.”
Objectives of Price Stability
The objective of price stability refers to the general level of prices in the economy. It implies avoiding both prolonged inflation and deflation. Price stability contributes to achieving high levels of economic activity and employment by
- Improving the transparency of the price mechanism.
- Reducing inflation risk premia in interest rates (i.e. compensation creditors ask for the risks associated with holding nominal assets). This reduces real interest rates and increases incentives to invest;
- avoiding unproductive activities to hedge against the negative impact of inflation or deflation;
- reducing distortions of inflation or deflation
- preventing an arbitrary redistribution of wealth and income as a result of unexpected inflation or deflation;
- And contributing to financial stability.
In case of unstable prices inflation or deflation exists.
NATURE OF INFLATION IN DEVELOPING COUNTRIES
Developing countries in their bid to raise the standards of living of their people through development plans have often found themselves in the grip of inflation. But the nature of inflation in the underdeveloped but developing economies is quite different from that found in advanced or developed countries. In advanced countries true inflation starts after the level of full employment is attained. But in under-developed countries like India huge unemployment and inflation exist side by side. In other words, in under-developed countries, serious inflation is in evidence long before the level of full employment is reached. This is so because the nature of unemployment in under-developed countries differs from that which prevails in developed countries during times of depression.
In under-developed countries, level of national income can be increased and the unemployment can be removed by accumulating more real capital. But increase in the rate of capital formation requires stepping up the level of investment. This huge investment expenditure leads to a sharp increase in aggregate demand for consumer good. It is worth noting that it is the food prices which first start rising rapidly in a developing economy. Rise in food prices then followed by the rise in the prices of consumer goods. A steep rise in food prices increases the cost of living of the people.
Inflation: Background
Clearly, we've experienced a significant amount of inflation over the last 60 years.
When inflation surged to double-digit levels in the mid- to late-1970s, Americans declared it public enemy No.1. Since then, public anxiety has abated along with inflation, but people remain fearful of inflation, even at the minimal levels we've seen over the past few years. Although it's common knowledge that prices go up over time, the general population doesn't understand the forces behind inflation.
When inflation surged to double-digit levels in the mid- to late-1970s, Americans declared it public enemy No.1. Since then, public anxiety has abated along with inflation, but people remain fearful of inflation, even at the minimal levels we've seen over the past few years. Although it's common knowledge that prices go up over time, the general population doesn't understand the forces behind inflation.
Inflation and deflation
‘Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.”
Inflation can occur when an economy becomes overheated and grows too quickly. Similarly, a declining economy can lead to deflation. Central bankers, who control a country's money supply, try to avoid changes in price level by using monetary policy. Raising interest rates or reducing the supply of money in an economy will reduce inflation. Inflation can lead to increased uncertainty and other negative consequences. Deflation can lower economic output. Central bankers try to stabilize prices to protect economies from the negative consequences of price changes.
What Is Inflation?
The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. There are several variations on inflation:
- Deflation is when the general level of prices is falling. This is the opposite of inflation.
- Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation's monetary system.
- Stagflation is the combination of high unemployment and economic stagnation with inflation. This happened in industrialized countries during the 1970s, when a bad economy was combined with OPEC raising oil prices.
In recent years, most developed countries have attempted to sustain an inflation rate of 2-3%.
Causes of Inflation
There is not a single cause that's universally agreed upon, but at least two theories are generally accepted:
Demand-Pull Inflation –
This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.
Cost-Push Inflation –
Cost-Push Inflation –
When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.
Costs of Inflation
Almost everyone thinks inflation is evil, but it isn't necessarily so. Inflation affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated. If the inflation rate is greater than that of other countries, domestic products become less competitive. People like to complain about prices going up, but they often ignore the fact that wages should be rising as well.
Finally, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) can be just as bad as high inflation. The lack of inflation may be an indication that the economy is weakening. As you can see, it's not so easy to label inflation as either good or bad - it depends on the overall economy as well as your personal situation.
Almost everyone thinks inflation is evil, but it isn't necessarily so. Inflation affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated. If the inflation rate is greater than that of other countries, domestic products become less competitive. People like to complain about prices going up, but they often ignore the fact that wages should be rising as well.
Finally, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) can be just as bad as high inflation. The lack of inflation may be an indication that the economy is weakening. As you can see, it's not so easy to label inflation as either good or bad - it depends on the overall economy as well as your personal situation.
How Is It Measured?
Measuring inflation is a difficult problem for government statisticians. To do this, a number of goods that are representative of the economy are put together into what is referred to as a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year.
There are two main price indexes that measure inflation:
A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. U.S. CPI data can be found at the Bureau of Labor Statistics.
- Producer Price Indexes (PPI) –
Families of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. U.S. PPI data can be found at the Bureau of Labor Statistics.
Inflation and Unemployment
Many modern economists believe that inflation is inversely related to unemployment. This relationship is shown through something called the Phillips Curve. The Phillips Curve shows the relationship between a given level of inflation and the expected level of unemployment that would go along with it. As inflation decreases, unemployment is expected to rise. Economists agree that there is a minimum level of unemployment that an economy can handle without causing inflation to accelerate.
Many modern economists believe that inflation is inversely related to unemployment. This relationship is shown through something called the Phillips Curve. The Phillips Curve shows the relationship between a given level of inflation and the expected level of unemployment that would go along with it. As inflation decreases, unemployment is expected to rise. Economists agree that there is a minimum level of unemployment that an economy can handle without causing inflation to accelerate.
MACROECONOMIC GOALS IN PAKISTAN
Price Stability/Inflation:
Pakistan has been grappling which inflationary pressures of varying intensity during its entire life of over 64 years as an independent country. The pace of inflation has, however, been varying at different periods of history.
Inflationary pressures in the economy during the 1950s and 1960s , were quite moderate; the average annual price increase during the 1950, was 3.0 per cent, while it was 3.2 per cent during the 1960s. During the decade of the 1970s there was worrisome acceleration in inflation attributable to heavy devaluation of the rupee, sharp-rise in oil prices and large monetary expansion (average annual increase of 21 per cent as against average annual growth of 4.8 per cent in Gross Domestic Product). There was deceleration of inflationary pressures during the 1980s with higher real domestic growth of 6.5 per cent on an average basis and a marked reduction in the annual average growth of monetary assets to 13.2 per cent. During the decade of the 1990s, inflationary trends witnessed acceleration with an annual average growth of 9.7 per cent in consumer price index (CPI); monetary assets also witnessed a sharp average annual rise of 21.7 per cent in this decade as against an annual average increase of 4.6 per cent in GDP. There was a welcome decline in inflation rate to 3.6 per cent in 1999-2000. During 2000-2001 to 2003-04, the average annual rate of rise in consumer price index was a modest 3.9 per cent. This impressive performance on the inflationary front was quite remarkable especially in view of the fact that monetary assets expanded at an annual average rate of 15.5 per cent during this period. The low level of inflation during 1999-2000 to 2003-04 can be attributed to improved supply position stemming from output recovery, strict monetary measures leading to lower monetization of fiscal deficits, depressed international market prices and appreciation of the exchange rate.
Price inflation indicators for FYs 2004-05, 2005-06 an 2006-07 were somewhat disturbing. Inflation as measured by CPI increased by 9.3 per cent in 2004-05, 7.9 per cent in 2005-06, 7.8 % in 2006-07; monetary assets during these fiscal years increased at an annual average rate of 17.9%. The CPI-based inflation during July-April 2007-08 was measured as 12.00 %, 22.3 % during 2008-09. Inflation accelerated at a rapid pace mainly because of rising food prices; a weaker rupee/dollar exchange rate; the gradual withdrawal of subsidies on gas, electricity and petroleum; the imposition of custom duty on the imports of various items; and an upward revision in the support price of wheat and sugarcane crops. 11.49 % was measured during 2009-10.
The beginning of the current year 2010-11 in Pakistan saw number of unfavorable factors impacting the supply and demand situation which created imbalances in the economy. Massive floods swept through one-fifth of the country and caused massive damages to crops, livestock and infrastructure which resulted in sharp acceleration in the commodity price and spike in inflation. The acute shortage of items of mass consumption necessitated substantial imports at rising landed cost. While on the production front, the imported inflation via pass through effect of escalating oil prices consequently raised transport freights, production cost of materials and a substantial hike in all the consumable items or services. Some Structural problems of power outages and weaknesses in the supply chains impacted the real sectors production performance added yet another push factor to the general price hike trend.
The global prices are also adding fuel to the fire as commodity and crude oil prices surged at unprecedented pace since July 2010. Pakistan’s problem compounded as all price indices of global prices surged at a massive rate. The pass through of international prices impacted prospects for domestic inflation. On the positive note, major price indices have started decelerating in March 2011 after eight consecutive months of brisk increases in all price indices. Pakistan’s domestic structural problems and global commodity price movement collectively provided momentum to inflation in recent months. The cumulative inflation rose to 14.1 % in July-April 2010-11. During most of the period, food remained the major driver of inflation on the back of major supply disruption owing to flood. Pakistan is regarded as one of the agrarian economies with high dependency on agriculture. However, food imports comprises sizeable portion of imports as it account for 13.5 % of imports in July-March 2010-11 and contributed 38 % increase in imports. Pakistan has imported 1.02 million tons of sugar, 1.4 million tons of edible oil (palm oil), 0.5 million tons of pulses and 94.3 thousand tons of tea. This shows sensitivity of domestic food prices to global price movement and domestic food security upon global food supplies.
Measures to achieve Price Stability:
· The government’s reform program is critically important as it is trying to restore macroeconomic stability in the country which ultimately led to price stability.
· The inflationary pressure necessitated a tight monetary policy to suppress the aggregate demand. SBP has kept its discount rate at 14 % unchanged for last three policy announcements after raising the policy rate by 150 basis points in three installments.
· On the fiscal side, the government is applying strict adjustment to bring down fiscal deficit in line with the availability of adequate financing.
· The government has formed a high powered Committee chaired by the Finance Secretary and all provincial Chief Secretaries are members to look into identifying interventions within the framework of market mechanism to smoothen supplies of consumer items and allowing markets to function well.
· Administrative steps have been taken by the government to enhance supply of essential commodities like sugar, edible oil and pulses etc through imports.
· To minimize the impact of imported inflation, efforts have been made to substitute imported food items with local production.
Economic Growth:
In the first 20 years after independence in 1947, Pakistan had the highest growth rate in South Asia. According to the World Bank (2002) Pakistan exported more manufactures than Indonesia, Malaysia, Philippines, Thailand and Turkey combined in 1965. By the 1990s Pakistan, however, become the slowest growing country in South Asia, an exact reversal of its previous role. The incidence of poverty, which declined from 46 % in the mid-1960s to18 % in the late 1980s rose to 34 % by the late 1990s.
Macroeconomic imbalances in form of large fiscal and current account deficits of the 1980s had repercussions on the economy in the subsequent period in form of increased debt burden. Real Defense spending increased on average by 9 % per annum during this period while development spending rose 3 % per annum. Defense spending averaged 6.5 % of GDP in this decade and contributed to large fiscal deficits and a rapid buildup of public debt. The neglect of development spending was one of the contributory factors to slow growth in the 1990s i.e. average trend GDP growth of 4.4 % per year. In 1991, financial sector was dominated by inefficient state-owned banks and access to capital was limited. The policy environment in relation to rules, taxes and import tariffs was unstable and arbitrary use of Statutory Regulatory Orders (SROs) affected the level playing field needed for investors to compete based on business fundamentals rather than their ability to secure special deals. Political instability, frequent changes in government, weak governance, poor macroeconomic management and unfavorable external environment were more dominant than the favorable impact of economic policies of deregulation, liberalization and privatization introduced in 1991. These reforms and policies were pursued haltingly and sporadically. The with-drawl of US aid after the end of the Afghan war and the nuclear imposition of sanctions by the western governments following the nuclear tests in 1998 accentuated the difficulties. The freezing of the foreign currency accounts of Pakistani residents and nonresidents eroded investor confidence.
The turn-around in the economy since 2000 did put Pakistan on a higher growth path. The economy has considerably lost significant growth momentum during last three years as the economic growth averaged just 2.6 % as against 5.3 % in the preceding eight years. There are many reasons for deceleration of growth momentum like massive terms of trade shock of 2008, global financial crisis, and intensification of war on terror, security hazards and high profile killings. During the year 2010-11, the economy’s capacity to withstand internal and external pressures of extreme nature was tested by devastating floods that engulfed one-fifth of the country, jeopardize fiscal consolidation efforts of the government already recovering from rehabilitation of half a million internally displaced persons (IDPs) from Swat. The problem was further compounded by paucity of resources as a result of lukewarm response from development partners. The economy was also confronted with inherited structural problems like acute energy shortages and fiscal profligacy. The government is striving hard to win political support for sustainability and ownership of critical reforms in the areas of taxation and power sector. The domestic environment is still affected by the intensification of war on terror and volatile security situation while external environment is affected by uncertainties surrounding external inflows and oil prices. Notwithstanding substantial improvement in the current account balance, the external sector vulnerabilities needs a review especially in the backdrop of spike in international crude oil prices which bounced back from as low as $33 per barrel in January 2009 to beyond $120 in May 2011. Pakistan’s economy weathered an unprecedented set of challenges during 2010-11 , however, the resolve to take challenges head on is even greater. The economy suffered a significant supply shock in the aftermath of devastating floods of July 2010 in addition to massive disruptions in provision of energy. A spill-over effect of the European debt crisis was felt on debt and fiscal sustainability of Pakistan. Finally, the year witnessed the intensification of domestic security challenge which has exacted an extremely high cost on the economy, both in terms of direct costs of the fight against extremism, as well as in terms of a knock on effect on investment inflows and market confidence. A significant collateral impact has been borne by Pakistan in terms of the squeezing of fiscal space for critical development and social sector expenditures that hampered growth prospects in future. Real GDP growth in the outgoing year is now estimated at 2.4 % compared to 3.8 % in the previous fiscal year. The commodity producing sector recorded a rise of only 0.5 % – the lowest since 1992-93. The services sector on the back of public administration & defense, and social services, contributed lion’s share of this modest growth rate. Gross fixed investment declined substantially, from 22.5 % of GDP in 2006-07 to 13.4 % provisionally in 2010-11. This is the lowest ever investment rate in four decades. More importantly the private sector witnessed a significant fall and recorded lowest ratio since 1998-99. This implies a significant deterioration in the job creating ability of the economy.
Despite negative effects on the economy of a host of challenges during 2010-11, especially with regard to growth, when viewed in the global context, Pakistan’s economic performance has not been out of sync with its peers.
Measures to Achieve Economic Growth:
· While the economic environment in Pakistan remained inhospitable for growth and investment during 2010-11, a comprehensive growth strategy is being evolved, to increase productivity, efficiency, and competitiveness of the economy, and to ensure high growth rates that are both sustainable as well as more equitable.
· The government is now expanding the social safety net to a broader platform of social development, the scale of which is unprecedented in Pakistan’s history.
· The World Economic Outlook estimates that global GDP, after expanding by 5.0 % in 2010, will slow to 4.4 % in 2011, before it reaches 4.5 % in 2012. The recovery is not able to mitigate concerns regarding high unemployment in advanced economies, while new macroeconomic challenges are building-up in many emerging economies.
Employment/Unemployment:
Without productive employment, achieving the goals of decent living standards, social and economic integration, personal fulfillment and social development becomes a chimera. Enterprise promotion and human resource development are key elements in achieving these goals.
Pakistan’s greatest asset is its quality human resource on which progress and prosperity of the country largely depends. It is very unfortunate but true that searching for the data regarding the unemployment rate of Pakistan, it is nearly impossible to find out relevant figures due to a lack of base data and massive governmental tempering of statistics which have made the validity of the available data questionable. In 1955, there was a survey held which tried to give the false impression of full employment in the agriculture sector. However, this was proved wrong when in 1965 a survey was held and it was found that the economy of Pakistan was most stagnant in the ratio of unemployed and underemployed labor to the total working force could be taken as nearer to reality. In all the five-year plan starting from 1955, policies were included at the reduction of unemployment, however due to inadequate efforts on the part of the government most of them proved wane. Pakistan had seen variations in its unemployment rates as it was 7.8% and 8.3 % in 1999-00 and 2001-02 respectively. Paucity of resources constricted policies to properly develop human resources and their effective utilization caused unemployment to lower down to 5.2% in 2007-08. However, unemployment increased to 5.5% and 5.6% in 2009-
10 and 2010-11 respectively. During the LFS 2009-10 and LFS 2008-09, there is a marginal increase in the comparative profiles of own account workers and employers while decrease in the case of employees and unpaid family workers. The quantum of unemployment is high in urban areas as compared to rural areas and the reason behind of this may be that a major portion of labor force is working as unpaid family helper in rural area which is classified as employed.
Unemployment is a major challenge that is not only faced by Pakistan but also the world at present. The fear of persistent unemployment undermines confidence, thereby, affecting consumption and investment decisions and recovery process itself. Also, perceptions of job precariousness exert further downward pressure on wages, aggravating the risk of depressed aggregate demand and poverty. Current Unemployment rate i.e. 5.5%, which is low by historical standards although anecdotal evidence suggests this, may understate the current situation. There are a number of reasons for unemployment in Pakistan, firstly, there is a serious mismatch
between the jobs demanded by the emerging needs of the economy and the supply of skills and
trained manpower in the country. While the economy is moving towards sophisticated sectors
such as telecommunications, information technology, oil and gas, financial services, engineering goods the universities and colleges are turning out hundreds of thousands of graduates in Arts, Humanities and languages. This mismatch has created waste and misallocation of resources on one hand and the shortages of essential skills required to keep the wheels of the economy moving. There is also a lack of technical and vocational training to fill out the gaps between the demand if skills and their availability, and so there large number of experienced technicians and professionals who have migrated to the Middle East and elsewhere
between the jobs demanded by the emerging needs of the economy and the supply of skills and
trained manpower in the country. While the economy is moving towards sophisticated sectors
such as telecommunications, information technology, oil and gas, financial services, engineering goods the universities and colleges are turning out hundreds of thousands of graduates in Arts, Humanities and languages. This mismatch has created waste and misallocation of resources on one hand and the shortages of essential skills required to keep the wheels of the economy moving. There is also a lack of technical and vocational training to fill out the gaps between the demand if skills and their availability, and so there large number of experienced technicians and professionals who have migrated to the Middle East and elsewhere
Measure to achieve Full Employment:
· The Government has sought to mitigate the effects of the economic downturn by establishing the Benazir Income Support Program (BISP), which provides cash transfers to poor and vulnerable households. Slow implementation, fiscal pressures, and stabilization requirements may limit the ability of programs like BISP to fulfill its goals.
· Robust levels of economic growth, of from 6–8% may be required to accommodate new entrants to the labor force while addressing redundant labor in agriculture and responding adequately to unemployment and underemployment.
· Small and medium enterprises (SMEs) that account for nearly 99% of the more than 3.2 million business enterprises in Pakistan have a strong potential to become the key engine of job creation. Construction and domestic commerce also have great potential to create rapid growth.
Comparison of implication of Macroeconomic Goals in Pakistan with an industrialized economy as Japan
If we compare the implication of three main macroeconomic goals i.e. price stability, economic growth and full employment in an under developed economy like Pakistan with some industrialized economy like Japan, we get the following results.
Price Stability/Inflation:
It is evident from the chart that as compared to Japanese economy, the rate of inflation is very high in Pakistan. Nor only these rates are high, they are showing an increasing trend day by day.
Food has remained the major driver of the inflation on the back of major supply disruptions owing to devastating floods as well as spike in imported fuel and food stuff prices. However, domestic drivers contributed with much vigor to higher prices, including:
· elevated capacity utilization rates,
· accommodative macro policy stances
· increased inflationary expectations following several years of rising inflation
· Temporary price shocks, such as the disruption of flooding in Pakistan and;
· Some liberalization of fuel-price subsidies in India.
Whereas the general inflation rate in Japan was last reported at 0 % in September of 2011. From 1971 until 2011, the average inflation rate in Japan was 2.97 % reaching an historical high of 24.90 % in February of 1974 and a record low of -2.50 % in October of 2009. The low inflation rate has kept Japanese products cheap compared to products from other countries -- making Japanese industries more competitive. This has added to Japan's export growth and, in turn, increased demand for the Yen. The inflation rate is also dependent on the value of the Yen since a weaker currency leads to greater demand for Japanese products and makes imports more expensive for Japan -- hence increasing the inflation rate.
Economic growth:
By looking at the chart we can see that Pakistan’s real GDP growth rate has been better and higher than Japan’s real GDP growth rate. Pakistan’s GDP growth rate is showing a positive trend throughout since 2007-08 until now. Pakistan's economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with neighboring India. However, IMF-approved government policies, bolstered by foreign investment and renewed access to global markets, have generated solid macroeconomic recovery during the last decade. Whereas Japan’s GDP growth rate shows a negative trend till 2008. The Gross Domestic Product (GDP) in Japan contracted 0.50 % in the second quarter of 2011 over the previous quarter. Historically, from 1980 until 2011, Japan's average quarterly GDP Growth was 0.52 % reaching an historical high of 3.15 % in June of 1990 and a record low of -4.90 % in March of 2009. Japan's industrialized, free market economy is the second-largest in the world. Its economy is highly efficient and competitive in areas linked to international trade, but productivity is far lower in protected areas such as agriculture, distribution, and services. Japan's reservoir of industrial leadership and technicians, well-educated and industrious work force, high savings and investment rates, and intensive promotion of industrial development and foreign trade produced a mature industrial economy. Japan has few natural resources, and trade helps it earn the foreign exchange needed to purchase raw materials for its economy.
Japan's economy shrank more than initially thought in the April-June period due to weaker-than-expected capital investment in the wake of the March 11 earthquake and tsunami.
Full Employment/Unemployment:
Conclusion:
In Pakistan a diminutive portion of the total population has excessive resources to lead a luxurious life, the rest are subjugated badly as their income are depressed because either they lack the opportunity to be employed or if at all they get it, it is far below the subsistence level, among these victims a large proportion comprised of passionate youth who steps in the market with the devotion to thrive and ends up mostly in despair and devoid potentials. Thus low incomes and below subsistence wages are responsible for the perpetuation of the vicious circle of unemployment in Pakistan. The inflexible wage structure in Pakistan, minimum wage laws, poor monitoring of demand and supply of labour force all are contributing in aggravating the situation. When there is a high level of unemployment, economic growth will automatically be low. Besides nationalization of industrial units badly affected the investment industrial sector as private sector absolutely stopped because they shifted their capital to other countries. Lack of infrastructure and facilities in the field of energy, telecommunication and transportation also prevent the industrialist from setting up new industries. Karachi is the biggest industrial base of Pakistan, but investors are reluctant to invest there because of unrest and violence. All these factors and many others like political instability, less capital expenditures by government, less job opportunities, improper check and balance conditions and poor law and order situation are responsible why Pakistan is lagging behind the developed countries like Japan.
The need of the hour is that the government should announce Economic revival package to boost investment and production sector, to stimulate exports by broadening the tax base and reducing tariffs. A number of fiscal and monetary measures should take attract industrialists and particularly foreign investment. Technical training facilities should be provided. In this way unemployed people will get a chance to enhance their skills and become able to earn more reason able income. Small scales industries should be established so that those labours who remain unemployed despite of owing skills in hand-made items and handicrafts can play their active role in society as an employed member.
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