Abstract
Pakistan has been stuck in sub-optimal growth equilibrium, while other countries in the region have moved forward and are providing higher living standards for their citizens. Given the focus of policy makers, politicians and international financial institutions (IFI’s) on short-term stabilization to address inflation, the devaluation of the PKR and lack of private sector lending; it is important to pause and look at the bigger picture, the evolution of a typical Pakistani’s real income ( i.e. after adjusting for inflation). This exercise is important not only to identify past policy mistakes, but also to formulate a future course of action. We show that Pakistan has been in a state of long term economic decline, which is at the source of most of its economic weaknesses- we call this the original sin. This decline can be explained by a structural focus that relies primarily on services to generate value addition and less so on agriculture and industry. As a result, the agriculture sector is slowly receding, while the industrial sector is growing far slower compared to its peers. This journey of structural change has left Pakistan with a services sector dominated by low-productivity traditional services. The sliver-lining in this unpleasant reality, is that this structural transformation has been a policy choice, which implies that it can be reversed. To explain these findings, we first frame the problem of below average real growth in Pakistan by comparing its economic performance with Bangladesh and India. This comparison is relevant as these countries share a common colonial history, institutional development and similar natural endowments. After establishing what we call the “Pakistani Growth Rate,” we explore some possible explanations for this by doing a historical and cross-country analysis of sectoral GDP.