Following the sustained slowdown in the global economy since the financial crisis of 2007-08, growth has fallen across the board, including in China, India and, of course, at home in Pakistan. It was expected that China would be more affected than countries like India and Pakistan, given its dependence on export markets for growth.

For the same reason, it was expected that Pakistan, a more domestically-driven economy, would be less affected. In 2009, goods and services exports comprised 40 percent of GDP in China, against less than 18 percent in Pakistan.

Ironically, the reverse seems to have happened, i.e. Pakistan has slowed much more than China. However, this does not mean that China has done exceptionally well to avoid the predicted slowdown; whereas, Pakistan has slowed as was expected.

In Pakistan’s case, in fact, the reverse may be true. For example, on a comparable note, Indonesia, which like us is also a more domestically-driven economy - goods and services exports at little over 20 percent of GDP in 2009 - has since emerged as the second-fastest growing major economy. We need to understand why this has been the case so that corrective steps can be taken.

While China experienced a huge external shock on account of the sharp decline in growth in its export markets in the Western countries, the impact on its growth was not commensurate to this shock and this was due to the huge investment-oriented stimulus package it injected in its economy.

Pakistan too had a timely stroke of good fortune in that our remittances increased at a much faster rate than originally expected and our textile exports grew significantly (mainly in value terms) between 2008-10, owing to a general bullish cycle in the global cotton and textile markets. But despite these positives, our growth rate stalled.

The post-crisis global economy, in the context of our region, can be divided into two stages, separated by the first phase up to 2010, the apparent resilient showing that with time has now yielded to an alarming ‘low’ in the second phase.

In the second phase, the global growth also dipped sharply again in the Western countries, starting from early 2011 and it still continues to be so. This has had a knockdown effect on even the larger economies like China and India, and Pakistan has been no exception. This time (second phase) around, though, we seem to be more severely affected than during the first phase.

Declining confidence arising out of lower growth has also acted to shackle economic activity per se, thus bringing down the economy and investment to a virtual standstill. It is necessary to keep the following three factors in mind, while trying to understand the sharper fall in Pakistan, relative to countries like China and more pertinently like Indonesia:

First, productivity may have been seriously impaired during the crisis that is reflected in a widening current account deficit, as Pakistani firms become less competitive. There are four reasons to believe why this is the case.

Unlike China and Indonesia, our market behaviour throughout the post-crisis period has been consumption-led, rather than being investment-led.

Whatever its social benefits, the industrial policies undertaken by this government over the last five years may have had a negative impact on productivity through rising wages without a commensurate increase in output, and also because the policies shifted jobs from more productive areas to less productive ones. Punjab, which is by far the most productive industrial destination within the country, as we know was deliberately targeted.

Competitive gains deriving from a falling rupee have been countervailed by rising commodity prices. Pakistan’s dependence on oil imports has long been its Achilles’ heel that, inter alia, has been the real trigger behind nearly all our balance of payments crisis.

Sustained high inflation relative to other emerging markets may have led to loss in competitiveness. This inflation is mostly commodity-led and largely explained by the need to raise administered oil prices and the structural rigidities in agriculture, as a result of which the supply responses to rising prices is weak. The consequential supply shock has created a stagflationary environment of low growth and high inflation.

Second, Pakistan has less fiscal space, for instance, than Indonesia or, for that matter, than most comparable economies of our size. And whatever little fiscal phase that we had we exhausted it rather than building it during the first phase. We now find that we have literally no fiscal space left to work with and dogged with a complete absence of investment in the economy and owing to perceptions on corruption and security-situation, the options left with the economic managers to resurrect the economic situation are unfortunately not many.

Third, the debate over the Pakistani monetary policy is a red herring, as real interest rates are negative if the consumer price index measure is considered. Indeed, negative real interest rates may be adversely impacting bank deposits and financial savings without stimulating investment. Inflation acts like a tax by eroding real incomes and, hence, consumer demand. The bottom line is that as a tool to stimulate private demand and investment, the monetary policy tends to be as helpless in an inflationary environment as it is in a ‘liquidity trap’ situation, like the one prevailing in some of the developed European countries.

Pakistan would now be wanting to change its fiscal policy mix by reducing consumption and increasing public investment, while simultaneously trying to build consensus on adopting structural reforms to stimulate private investment. However, as mentioned above, there is little fiscal space for any aggressive use of fiscal policy, and the political climate for major reforms remains uncertain and volatile.

The concern is that with significant amounts of repayment due in 2013 on our external debt, a worsening fiscal deficit situation by the day, non-existent investment in the economy, an underperforming manufacturing sector, an eroding rupee, and a visible reluctance on part of the international lending institutions to engage Pakistan, will the country be able to absorb another external economic shock at this stage?

The writer is an entrepreneur and economic analyst. Email: kamal.monnoo@gmail.com