CHP 3A10.1007 2F978 3 642 40078 0 - 52
CHP 3A10.1007 2F978 3 642 40078 0 - 52
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Asif Kamran, Nadeem A. Syed, Khurram Amin and Syed Nayyer Ali
Abstract All the serious challenges Pakistan’s GDP is facing today like very wide
budget and trade deficits, galloping inflation, increase in the level of poverty, power
outages, water shortages, closure of industries, food insecurity, etc, has diverted our
attention from realizing the very serious challenge that we have overcome. Since
the 1950s we had a system in this country where the Ministry of Finance and all
the economic ministries were headed by World Bank and IMF officials of Pakistan
origin. People feel vindicated to see representatives of the people occupying min-
istries of finance and economic affairs. Monopolies and cartels have played a major
role in restricting output and escalating prices in Pakistan. Most of the members
of cartels are ministers and other influential. The Government has to devise both a
short term as well a long term policy to deal with the situation. In the short run the
Government should scrutinize the imports of the country and temporarily halt the
import of nonessential consumer goods, luxuries, etc. The research data has been
collected which consists of a survey of 42 respondents, among whom the question-
naires have been distributed. The data is presented in tabulated and graphical form.
Through this research a vast segment of respondents was analyzed, while dividing
them into several age groups. The questionnaire has enabled the researcher to re-
A. Kamran (B)
School of Management & Economics, University of Electronic Science & Technology of China,
Chengdu 610054, P. R. China
Management Science Department, National University (Fast), Karachi 009221, Pakistan
e-mail: [email protected]
N. Syed
Management Science Department, Shaheed Zulfikhar Ali Bhutto Institute of Science and Technol-
ogy (SZABIST), Karachi 75600, Pakistan
K. Amin
Management Science Department, National University (Fast), Karachi 009221, Pakistan
S. Ali
General Studies Department, Yanbu Industrial College, Madinat 30426, Yanbu Al Sinaiyah, Saudi
Arabia
main objective, detached, value-free and non-influential on the study. The results
have been analyzed through several tools to be able to give recommendations and
draw conclusions.
Keywords Gross domestic product (GDP) · Uncertain variable · Gross domestic
income (GDI) · System of national accounts (SNA)
The gross domestic product (GDP) or gross domestic income (GDI) is one of the
measures of national income and output for a given country’s economy. GDP is
defined as the total market value of all final goods and services produced within the
country in a given period of time (usually a calendar year). It is also considered the
sum of a value added at every stage of production (the intermediate stages) of all
final goods and services produced within a country in a given period of time, and it
is given a money value.
The most common approach to measuring and understanding GDP is the expen-
diture method:
If the renovation involves the purchase of a chandelier from abroad, that spending
would also be counted as an increase in imports, so that NX would fall and the total
GDP is affected by the purchase. (This highlights the fact that GDP is intended to
measure domestic production rather than total consumption or spending. Spending
is really a convenient means of estimating production.)
If a domestic producer is paid to make the chandelier for a foreign hotel, the
situation would be reversed, and the payment would be counted in NX (positively,
as and export). Again, GDP is attempting to measure production through the means
of expenditure; if the chandelier produced had been bought domestically it would
have been included in the GDP figures (in C or I) when purchased by a consumer
or a business, but because it was exported it is necessary to ‘correct’ the amount
consumed domestically to give the amount produced domestically.
World map showing GDP real growth rates for 2007. Current GDP is GDP ex-
pressed in the current prices of the period being measured
Nominal GDP growth is GDP growth in nominal prices (unadjusted for price
changes).
Real GDP growth is GDP growth adjusted for price changes.
Calculating the real GDP growth allows economists to determine if production
increased or decreased, regardless of changes in the purchasing power of the cur-
rency.
52.1.3 Measurement
As per Richard, net interest expense is a transfer payment in all sectors except the
financial sector. Net interest expenses in the financial sector are seen as production
and value added and is added to GDP [10].
As per Wizarat and Shahida, When people refer to “the economy” they are gener-
ally referring to GDP. If a newsperson says, “The economy grew by 3.5 percent last
year”, it means that GDP grew by 3.5 percent during the year (compared with the
previous year’s GDP). Incidentally, a growing economy characterizes an expansion,
which is also known as a recovery [5]. A contracting economy characterizes a re-
cession. For now, it’s important to know that a society benefits greatly from a stable,
growing economy.
A growing economy generates increasing amounts of jobs, incomes, and goods
and services for its citizens. All of these are good things, of course. In a contracting
economy, jobs and incomes are lost and the amount of goods and services produced
shrinks. This puts people out of work, and means that there are fewer goods and ser-
vices to go around. A stagnant economy-one that is neither growing nor contracting-
isn’t much better than one that’s contracting. As the population grows, people need
more jobs and more goods and services, and a stagnant economy doesn’t produce
them.
If you look at the formula for GDP, you’ll see that if any one component in-
creases, then the total GDP increases (assuming that the other components remain
unchanged). For example:
• If consumer spending grows-if people buy more clothing and cars and homes-
then the economy grows.
• If business investment grows-if companies invest in new buildings and equipment
and buy more raw materials-then the economy grows.
• If government spending grows-if money is poured into the space program, de-
fense, roads, and police forces-then the economy grows.
By the same token, if any one component of GDP decreases, then total GDP
decreases unless another component of the GDP increases enough to make up for
the loss.
Lastly consider the effects of an increase in real GDP. Such an increase represents
economic growth. Thus, the study of the effects of a real GDP increase is the same
as asking how economic growth will affect interest rates.
608 A. Kamran & N. Syed & et al
GDP may increase for a variety of reasons and are discussed in subsequent chap-
ters. For now we will imagine that GDP increases for some unspecified reason and
consider the consequences of such a change in the money market.
Suppose the money market is originally in equilibrium at point A in the adjoining
diagram with real money supply M S /P$ and interest rate $’. Suppose real GDP
(Y$ ) increases ceteris paribus. Again, the ceteris paribus assumption means that we
assume all other exogenous variables in the model remain fixed at their original
levels. In this exercise it means that the money supply (M S ) and the price level (P$ )
remain fixed. An increase in GDP will raise the demand for money because people
will need more money to make the transactions necessary to purchase the new GDP.
In other words, real money demand rises due to the transactions demand effect. This
increase is reflected in the rightward shift of the real money demand function from
L(i$ , Y$ ) to L(i$ , Y$ ) (see Fig. 52.1).
At the original interest rate, $’, real money demand has increased to 2 along the
horizontal axis while real money supply remains at 1. This means that real money
demand exceeds real money supply and the current interest rate is lower than the
equilibrium rate. Adjustment to the higher interest rate will follow the “interest rate
too low” equilibrium story.
The final equilibrium will occur at point B on the diagram. As the interest rate
rises from $’ to $”, real money demand will have fallen from 2 to 1. Thus, an in-
crease in real GDP (i.e., economic growth) will cause an increase in average interest
rates in an economy. In contrast, a decrease in real GDP (a recession) will cause a
decrease in average interest rates in an economy.
Pakistan is a nation with a diverse economy that includes textiles, chemicals, food
processing, agriculture and other industries. It is the 25th largest economy in the
world. The economy has suffered in the past from decades of internal political dis-
putes, a fast growing population, mixed levels of foreign investment, and a costly,
ongoing confrontation with neighboring India. However, IMF-approved government
52 GDP Growth Sources of Finance in Pakistan 609
GDP is a significant factor in identifying the growth of a country; there are many
efforts by the government to increase the growth rate of the economy thus increasing
the GDP. Pakistan as a growing nation has shown potential in the latter years with a
sufficient growth in GPD but unfortunately it has now decreased below expectations,
thus my topic “Sources of financing in the growth of GDP”.
The research looks in to the related matters and analyzes the following:
• economy overview,
• efforts by the government,
• international funding,
• indicators and their effect on GDP,
• future prospective.
This effort is basically a research report and it is being conducted to find the po-
tentiality of sources such as production, taxation extra to help increase the GDP of
Pakistan. This research will provide an outline to Economists, Finance students and
the relative concerns. This project that is basically an effort to,
610 A. Kamran & N. Syed & et al
Due to political instability, the policies of Pakistan keep changing as the government
changes and because of it might be affecting on the economy.
Most importantly, another thing that needs to be considered here is conducting
such study is my first experience and I have no earlier experience regarding such
survey.
In light of these reasons, the report may not be valid for a long period of time. So
the time frame of this report is kept up to one year.
The research is conducted through utmost effort to find the possible financial sources
that will contribute towards the growth of the economy and in turns the GDP. As the
mode of investment, government policies and the international economic environ-
ments constantly and highly changing, So there are some assumptions that are kept
in order to project a better picture of the business.
Some of them are:
• The current market trend continue in the market.
• The government will remain the same.
• The government will not change its basic laws concerning the mega projects and
the working of different areas such construction of roads, bridges and parks.
• The investment pattern will remain in the favor this sector.
• Government would not change any of its regulatory laws.
In the light of the above basic assumptions the study will be carried out and the
change of any of the above assumptions might influence the study and will reduce
the level of accuracy of the study.
The research is designed to check the financial sources affecting the growth of the
economy. It is also to cover all the important aspects related to the matter. Further-
more, further data will be gathered from various sources in order to achieve the
objective.
52 GDP Growth Sources of Finance in Pakistan 611
While designing this research study it was considered that it should serve the
purpose of practical applicability and should be in line with the objective of the
study. The data will be gathered through secondary data as well as primary data.
Secondary data will be gathered from the internet or different published articles
from concerned magazines. Arranging unstructured interviews with the concerned
people and hearing their views about the opportunity will be the method used for
gathering of primary data. The type of study is explorative since the study will cover
the potentiality of the sources in the current era.
The main instrument used in this research is unstructured interviews through which
a wide variety of information can be retrieved from the respondents. Primary data is
gathered in the form of interviews & questionnaires. Interviews will be conducted by
personally meeting the concerned people and asking them about the related issues
and concerns of the objective being studied. Interviews will be preferred but due
to the shortage of time and availability of the respondents’ questionnaire will be
provided. Secondary Data Sources include research reports of previous researchers,
newspapers, magazines, and Internet.
The data collected through primary research will be calculated on the qualitative
basis as well as on numerical basis that is quantitative basis. The relevant statistical
data that will be converted into the form of charts and the interpretations of that
secondary data will be done.
612 A. Kamran & N. Syed & et al
The data gathered will be analyzed on qualitative as well as on quantitative basis and
the presentation of the findings will be in the form of charts, tables and explanations.
(1) Structural issues
As per ABN-AMRO Bank report [1] stated that the ultimate causes of poor ex-
ports are grounded in long-term and deep structural issues relating to the lack of
diversification of export industries, poor compliance with quality standards, and
concentration of exports in a small number of markets, it added.
Tarin conceded that the industrial base in Pakistan is “very low, highly lopsided
and mostly dependent on textiles”. The industrial base is low because of basic struc-
tural weaknesses developed over the years. It has not developed like other develop-
ing countries. The manufacturing sector contributes 25 to 35 per cent to the GDP
in developing countries but we have not developed like others. We are now making
efforts to follow that route and broad-base our industrial sector, said the minister.
(2) Performance
Excessive protectionism in the past has been the root cause for a lackluster
performance of the industrial sector in general. “My biggest concern is that we
had strength in textiles, but we are in danger of losing our edge because of over-
protection to the textile industry and if we do not prepare for the international mar-
keting competition.” ABN-AMRO Bank [1] report said the share of manufacturing
in GDP was 12 per cent when General Musharraf took over and has increased to 19
per cent in 2006-07. He said the industrial sector has played a key role in developing
countries but this area has not developed in Pakistan like other developing countries.
The manufacturing sector contributes 25 to 35 per cent to the GDP in developing
countries but we have not developed like others. “We are now making efforts to
follow that route and broad-base our industrial sector.”
To change this structural base is a long-term job and basic challenges we are
going to face are lack of skills, modernization of technology and provision of raw
material. So, we are now focusing on skill development, including managerial skills
and labor skills, particularly in the engineering sector. Tarin said our engineering
sector, particularly iron and steel, has been hostage to protectionism. The Pakistan
Steel Mills that should have been a source of strength for iron and steel has, in fact,
been hampering growth. So we have reduced import duties to make raw material
available at lower costs.
(3) Initiatives
Secondly, Pakistan has been lacking marketing initiatives. Hence, the Engineer-
ing Development Board is being revitalized while efforts are being made to urbanize
the SME sector. The minister did not agree that utility costs were extremely high in
Pakistan. “That is a myth.” He said the textile ministry has recently got a study done
by an international firm WERNER’s which after comparing a number of countries
has come up with the conclusion that utility costs are not high. However, efficient
use is the key and this is an area where we could improve things by developing
managerial and labor skills and technology up gradation.
52 GDP Growth Sources of Finance in Pakistan 613
Yes
80%
Through research I found that most of the economist measure GDP as a correct
measure for calculating country’s income, 20% replied NO and 80% says yes (see
Fig. 52.2).
(3) In your opinion Pakistan’s G
I have included this question in order to understand the current knowledge of the
respondents about the economic condition of Pakistan.
I found out that the people were very current with the economic conditions 12%
people says increasing GDP, 14% people says Stagnant and 74% people says GDP
Decline (see Fig. 52.3), as the new that Pakistan’s economy was in a declining state
majorly due to the economic condition of the world.
(4) What steps the government has taken?
Through research I found out that major’s reason for this economic decline was
due to the world’s economic crisis and due to the rich Pakistan’s saw major flight of
614 A. Kamran & N. Syed & et al
Through the research I found out the 70% of people Disagreed 25% agreed and
5% strongly agreed.
Through the research I found out the 48% of people Disagreed 17% agreed and
35% strongly agreed (see Fig. 52.4).
(6) In the light of above discussion do you think GDP is a not good predictor of a
countries growth?
I included this question to find out that now after acquiring knowledge about
GDP and it’s current reputation as the measurer of the country’s growth so from
perspective of the respondent that is it a correct measure or not.
0.85
In this question we found that 15% people says Yes and 85% people says No (see
Fig. 52.5).
(7) In your opinion what factors affect GDP the most?
Through research I found out that the main factor that effected GDP was the
current interest rates of the country which directly affected the investments of the
country thus affecting the growth.
Secondly I found out that the net export was very low as compare to the net
imports which indicated huge flight of capital thus indicating decrease in foreign
reserve of the country.
(8) What steps the government has taken to ensure the stability of this particular
factor?
Government has taken help from IMF in terms of loan secondly has introduced a
strict monetary policy which insures the stability of the interest rate also restrictions
52 GDP Growth Sources of Finance in Pakistan 615
0.75 Agree
StonglyAgree
0.2
I have concluded that the steps taken by the government are not satisfactory (see
Fig. 52.6).
(10) What else could be done?
I have included this question to know about further steps to be taken and con-
cluded that the government should encourages the exporters by ensuring and re-
stricting illegal trade and government should also ensure the cut down of interest
rate as it would directly affect the growth of the industries of the country which will
also affect the inflation of the country.
(11) What other factors can you identify?
Through research I found out that other factors include the consumption factors
and expenditure factors, consumption in the sense that as the country’s income will
grow and consumption will also increase thus increasing the GDP. Secondly if we
talk about expenditures we will say that if government increases its expenditures
and that will end up affecting the GDP.
(12) How the recent recession has affected the country’s GDP?
Through research I found out that the recent recession has increased the unem-
ployment rate through which masses have lost their purchasing power. Secondly the
interest rate has grown up due to which it has affected the inflation rate.
(13) Due to recession has the factor lost its importance?
I have included this question to know about the perception of the respondents
about the factors that have lost the importance which were discussed before.
0.78
616 A. Kamran & N. Syed & et al
Through research I found out that since as these factors were very important in
increasing the growth rate of the economy and government was really influenced in
the increasing of these factors but due to the world economic crisis and the current
crunch in the Pakistani economy, these factors were not able to fully play their
role in the economic conditions of the country also because of which governments
effort has also not been worthwhile but still government is trying to make the most
situation and get back the economy on line (see Fig. 52.7).
52.5 Conclusions
All the serious challenges Pakistan’s GDP is facing today like very wide budget
and trade deficits, galloping inflation, increase in the level of poverty, power out-
ages, water shortages, closure of industries, food insecurity, etc, has diverted our
attention from realizing the very serious challenge that we have overcome. Since
the 1950s we had a system in this country where the Ministry of Finance and all
the economic ministries were headed by World Bank and IMF officials of Pakistan
origin. With increase in the indebtedness of the country the situation got from bad to
worse. The worst period was the decade of the 1990s when not only the economic
ministries, but even prime ministers came from these institutions. During negotia-
tions between the Government of Pakistan (GOP) and the International Financial
Institutions (IFIs) it was difficult to distinguish between the GOP and the IFIs, for
both sides comprised of IFI officials. These were very trying times for those of us
who value independence and economic sovereignty of the country. As per Wizarat
and Shahida, there are several articles questioning the wisdom of a system which
even after elections denied the representatives of the people to have anything to do
with the ministries that dealt with the wealth and finances of the people [9]. So
people feel vindicated to see representatives of the people occupying ministries of
finance and economic affairs.
Starting with this positive note let us now try to give some suggestions to the new
government on crisis management of the economy and thus the GDP. But before we
venture into discussing specific problems and challenges let me present two broad
observations. It is quite acceptable for a country to deviate from its normal course
during times of emergency and ultimately come back to the designated path. For ex-
ample, the United States of America states that it is committed to liberalization and
globalization. Yet, in the aftermath of a crisis it imposed a 30% tariff on the import
of steel. Therefore, crisis management warrants we deviate temporarily from liber-
alization to fix the distortion, and return to the path when things return to normal.
Second, in order to retain our economic sovereignty it will be better not to resort to
policy based lending.
52 GDP Growth Sources of Finance in Pakistan 617
References