The bull case for Pakistan

If you read about Pakistan’s economy, you have probably – at some point – felt some optimism about Pakistan’s prospects as a country. Just as equally likely, you have probably felt that optimism fading away some time over the past 2-3 years, if not even earlier. It is our contention that you were not wrong to feel that optimism. You saw something real. And it is still there.

This article is not a pie-in-the-sky optimistic view of Pakistan that believes in stupid things like “if the government were to solve these problems, we would be prosperous.” No, our view of Pakistan’s economy is that for it to be successful, the ingredients that make it successful need to be idiot-proof. Because the only logical assumption is that Pakistan will continue to be run by idiots for decades to come.

What we describe below, therefore, is a view of Pakistan’s economy that does not expect the government of Pakistan to do anything to help the economy at all. Indeed, we go so far as to assume that the government of Pakistan will continue its destructive ways and that the growth we describe will simply have to make room for that destructive behaviour.

Luxuries like “political stability” and “a conducive environment for foreign investors” are not factors we will be listing in our bull case for the Pakistani economy.

We do not, however, have a completely cynical view of the government. It is not as though the government of Pakistan does nothing right. It is just that it tends to find the most inefficient ways of doing the right thing, starts doing them decades after other countries, and makes slower progress. We do not anticipate any of that changing any time soon.

This article is the fourth in a four-part series we have been publishing over the past few weeks. It tackles the fourth in what we think will likely be the four key ingredients of Pakistan’s ability to capitalize on its demographic dividend. The four ingredients are:

1. Electricity generation, which needs to be above 500 kilowatt-hours per person per year in order for the country to have enough electricity to begin the industrialisation process;
2. Stabilising fertility, which means having a fertility rate below 3.0 in order to have the right balance of dependents and working age adults in the population to work, save, and grow the economy;
3. Sufficient literacy, specifically meaning adult literacy above 70% in order to have a workforce that can do basic skilled tasks in industrial settings, and educate their children to move even further up the value-chain
4. Sufficient domestic savings, specifically a domestic banking sector large enough to result in relatively lower costs of capital.

Every country that has industrialised over the past 75 years has had all three of the first of these characteristics come together at the same time (the fourth one is an almost inevitable byproduct of the second two). Many countries that did not have these characteristics come together are very likely to have missed the boat on industrialization – and therefore creating a mass middle class – entirely.

You would think that Pakistan will be in that second category of countries, because that is how our luck seems to run. Call it Murphy’s Law of Pakistan’s political economy: any bad thing that can happen to a country usually does happen to Pakistan.

Except, you would be wrong.