The policymakers generally focus on short-term economic issues, but the country’s long-term economic well-being is directly linked to the rate of economic growth. The growth rate is directly linked to the skill set of the people of that country, financial condition, and fiscal and social development policies (Hanushek, 2020).
All the developed countries that powered prosperity and progress over the last three decades are decreasing. World Bank has found that the GDP growth between 2022 and 2030 is expected to be declined by a third from the rate that prevailed in the first decade- to 2.2% a year. Whereas, for developing countries, the decline in economic growth is also steep at 6% between 2000 and 2010 and 4% in the remaining decade.
Around the world ‘speed limit’ – the maximum long-term rate at which the economy can grow without affecting inflation –is set to slump to a decade low by 2030. To regain productivity, a good policy push is required, skilled labour supply, ramp up investment trade and harness the potential of the services sector.
Determinants to Attain Long-Term Economic Growth
Several determinants help in achieving long-term economic growth as per World Bank (2023), i.e.,
Align Monetary, Fiscal and Financial Frameworks
An efficient fiscal policy and macroeconomic policy framework can moderate the ups and downs of the business cycles. Policymakers should make an effort to reduce inflation and debt, ensuring financial sector stability and restoring fiscal far-sightedness. These policies help countries to attract investors by gaining their confidence in the national institution and policy making.
Investing in sectors like energy and transportation, climate-smart agriculture, manufacturing, and land and water system should align with the key climate goals. These kinds of investments can potentially increase the growth to 0.3 percentage points. It should strengthen resilience to natural disasters in the future.
Cut Trade Cost
Trade cost is associated with logistics, shipping and regulations, and the cost of international trade goods can increase to double. Countries with the highest logistics and shipping costs should cut their trade costs in half by adopting the trade facilitation and other practices of countries with the lowest shipping and logistic costs. Moreover, it can be reduced by following climate-friendly ways, such as restricting the usage of carbon-intensive goods inherent in many countries’ tariff schedules and encouraging the access and utilisation of environmentally friendly goods and services.
Capitalise on Services
The services sector can become a new avenue to increase economic growth. In 2021, the exports of digitally delivered professional services related to communication and information technology climbed up to 50%, and which was 40% in 2019. This shift could produce important productivity gains if it results in better delivery of services.
Increase Labour Force Participation
It was found that about half of the expected slowdown in potential GDP is due to changing demographics, including a decrease in working for age population and declining in labour force participation as societies age. Boosting overall labour force participation rates by the best ten-year increase on record could increase global potential growth rates by as much as 0.2 percentage points a year by 2030. The world bank report highlights that in regions like South Asia, the Middle East, and North Africa, their growth has increased by as much as 1.2 percentage points between 2022 and 2030 if they increased female labour force participation.
Benefits of Economic Growth
Increase the consumer’s purchasing power, enable citizens to consume more goods and services, and enjoy better living standards.
With the increase in the economy, the revenue of the firm will also increase, and the firm tends to employ more workers creating more employment.
The government will receive higher tax revenues, supporting the country to spend less on development projects. Hence, economic growth helps the government to reduce borrowing.
The standard of living of individuals will be improved because with the high tax revenue government will have more resources to spend on health care, education etc. This will increase life expectancy, high literacy rate etc.
Environment-friendly products and policies will be encouraged, and society will also prefer to use renewable resources.
Economic growth will encourage firms to invest in order to meet future needs.
The Situation in Pakistan 2023
Pakistan’s economic growth is anticipated to be slow due to devastating floods, high inflation and current account deficit and foreign exchange crisis. As shown in the chart, the Asian Development Bank has found that the economic growth of Pakistan was high in 2022, i.e., 6% and in 2023, it is projected to slow to 0.6%.
Whereas, in 2024, ADB forecasted the resumption of macroeconomic stability, post-flood recovery, implementation and improving external conditions. Climate change poses an adverse challenge to Pakistan’s social, economic and environmental development. As per the Global Climate Risk Index, Pakistan is ranked in the top ten countries most vulnerable to climate change risk. In the past few years, the climate induces extreme weather has led to thousands of fatalities and colossal losses in agriculture and the economy. In Fiscal Year 2023, it was forecasted that industrial growth would be declined, which reflects the monetary and fiscal tightening, which led to a significant devaluation of the local currency and higher domestic oil and electricity prices. It was predicted that average inflation in Pakistan would double from 12.2% to 27.5% in this fiscal year. The headline inflation will be jacked up to 25.4% in the first 7 months of 2023 because of the high prices of energy, currency devaluation, flood–related disruption to supply and restraint on imports caused by the crises of the balance of payment. However, as a major importer of oil and gas, Pakistan will experience strong inflationary pressure for the whole of 2023.
To encounter the continuous crippling economic situation, the government has made policies that will ease investment regulation to increase the rate of investment. Moreover, IT exports in Pakistan are increasing, so the government has to provide an incentive to tax exemption to freelancers. The female labour force participation in Pakistan is low, and providing conducive policies for females to remain in the labour market.
The long term economic growth is essential for the sustainability of the country. Long-term growth can be achieved by aligning Monetary, Fiscal and Financial Frameworks, cutting trade costs, revamping investment, and increasing labour productivity and participation.
This article is written by Sehrish Irfan. Sehrish is a Research Analyst at the Iqbal Institute of Policy Studies (IIPS).
Hanushek, E. (2020). For long-term economic development, only skills matter. IZA World of Labour .
World Bank. (2023). Global Economy’s “Speed Limit” Set to Fall to Three-Decade Low. Retrieved from World Bank: https://www.worldbank.org/en/news/press-release/2023/03/27/global-economy-s-speed-limit-set-to-fall-to-three-decade-low?intcid=ecr_hp_sidekick3_en_ext