Why isn’t the economy growing?

Why isn’t the economy growing?

DURING the roughly 150-year period between 1760 and World War I, England, the countries of northwest Europe, and the US went through the economic transformation of the Industrial Revolution. Real per capita GDP, which had remained stagnant at $2-3 per day, started to rise. Real wages that had historically remained slightly above subsistence level doubled. The percentage of labour force employed in agriculture plummeted. The West’s share of global manufacturing — around 25 per cent before the Industrial Revolution — jumped to more than 80pc by 1914. Some economic historians have labelled this shift as humanity’s ‘great escape’ from poverty, disease, and squalor. In the past 200 years, Japan, South Korea, and China stand as the only non-European nations to have bridged the economic divide with the West. These countries accomplished in decades what the West achieved in centuries by sustaining long periods of nearly double-digit economic growth. After the destruction wreaked by World War II, Japan grew at an average annual rate of nearly 10pc from 1955 to 1973. In 1968, it surpassed Germany to become the second largest economy. Starting in the early 1960s, South Korea entered a period of sustained economic growth, described as the ‘Miracle on the Han River’. Real GDP increased 25-fold in three decades. In 1996, South Korea became a member of the OECD. In the 40 years following the ‘reform and opening up’ of 1978, China’s economy grew at an average annual rate of about 9.5pc, increasing the size of its GDP roughly 35- to 40-fold in real terms. In the process, China lifted nearly 800 million people out of poverty and became the world’s largest economy in PPP terms in 2014. The high-speed economic growth of the East Asian economies displayed three characteristics. First, the period of rapid economic growth was preceded by fundamental restructuring of society’s political and cultural institutions. Second, the shift from an agricultural to industrial economy was spearheaded by the state. Third, during the transformation period, the attainment of econo­m­­ic goals was prioritised over political freedoms. For Pakistanis to live better, the economy must grow at near double-digit rates for decades. From 1945 until 1951, Gen Douglas MacArthur presided over Japan’s post-World War II transformation as supreme commander of the allied powers. He had Emperor Hirohito issue a rescript denouncing his divinity, promulgated a new constitution, carried out land reforms, changed the education system, and introduced American cultural elements to Japanese life. In South Korea, before Gen Park seized power in 1961, land reforms had already been accomplished through the initiative of the United States Army Military Government in Korea. Gen Park launched the New Community Movement, promoted traditional ethno-nationalism, and strictly regulated social life. During the first 30 years after the revolution of 1949, the Communist Party of China dismantled the 2,000-year-old imperial system, gave land title to nearly 300m peasants, and laid the foundations of a modern state. The post-World War II reconstruction in Japan was led by the ‘iron triangle’ of bureaucrats from the trade and industry ministry, Liberal Democratic Party politicians, and the captains of Japan’s leading industrial conglomerates. In South Korea, Gen Park adopted the policy of export-led economic growth by providing subsidised credit to chaebols, suppressing domestic demand, and quashing labour unions. In China, the state laid the foundations of basic and heavy industry through financial and technical Soviet assistance. Even after Deng Xiaoping’s liberalisation, the state still controls strategic sectors of the economy and takes the lead in pioneering new technologies. Nominally, Japan was a parliamentary democracy during the post-World War II economic tra­n­s­­formation, but the Liberal Democratic Party re­­mained in power for 38 years in what is described as a ‘one-and-a-half party system’. Following a coup in 1961, Gen Park first ruled South Korea as a military dictator and then adopted a constitution giving him near absolute powers without term limits. China has remained a one-party-led state since its founding in 1949. Deng Xiaoping, who launched the economic ‘reform and opening up’ in 1978, rejected dem­ands for Western-style democracy and suppressed the 1989 demonstrations in Tiananmen Square. In varying degrees, these conditions were present in all countries that successfully transformed into industrialised nations. Pakistan experienced something similar during its first two decades, when it attempted land reforms, passed the Muslim Family Laws Ordinance, and adopted the five-year planning system, with input from the Harvard Advisory Group. All the economic and social gains of these early decades were lost starting in the 1970s. In 1998, Pakistan discontinued the practice of drawing five-year plans and began transitioning to a medium-term development framework. Slow growth in the last two decades has caused Pakistan to fall behind its South Asian neighbours in living standards. The manufacturing sector represents less than 13pc of GDP, and the country runs an average annual trade deficit of around $30 billion. Harsh policy measures have stabilised Pakistan’s economy. During FY2024-2025, Pakistan recorded a current account surplus because of import restrictions and robust remittances. Fiscal deficit dropped to a multi-decade low of 2.6pc of GDP in 2025-26. Record-high inflation has come down to more manageable levels. Pakistan’s sovereign credit rating has improved because of lower external risks. However, growth has remained stagnant at around 3.5pc per annum for the last decade. The IMF projects an annual growth rate of 3.5pc for 2026-27, which is barely sufficient to offset the depreciation of the capital stock and compensate for population growth. For Pakistanis to experience any meaningful improvement in living standards, the economy needs to grow at near double-digit rates for several decades. Our current subsistence level agricultural economy with a rudimentary level of industrialisation has reached the limits of its productive capacity. Transformative growth can only come by making the quantum leap to industry. However, industrialisation requires us to fundamentally restructure the political and social order of society, and the state should lead the industrialisation process, with political differences subordinated to the pursuit of economic goals. The poverty trap will not be broken by incremental policy reforms. It requires restructuring the entire system of society. The writer has a background in public administration. He has worked with international financial institutions, including the World Bank. Published in Dawn, September 18th, 2026