Pakistan's best chance to save its economy

As the military confrontation between Pakistan and India continues, Pakistan’s economy could be caught in the crossfire. The ongoing crisis has fuelled concerns that India may try to halt the flow of the Indus River into Pakistan — a threat that Pakistan’s struggling economy can ill afford.

- Aasim M. Husain

Five decades ago, Pakistan had the strongest economy in South Asia, outperforming India, Bangladesh, and even Sri Lanka in terms of per capita income. Today, the opposite is the case: Pakistan's per capita income is half that of its neighbours, and it trails them in education, health care, and most other development indicators. While macroeconomic mismanagement has contributed to this decline, an often overlooked factor is rapid population growth.

When population growth outpaces income growth, per capita income falls. The long-term consequences are far-reaching: a larger population — especially one with a high dependency ratio — means lower household savings, less investment, and slower economic growth. Pakistan’s population has more than quadrupled over the past half-century, and 36% of its residents today are under 15.

This demographic imbalance places immense strain on household savings. When earners are outnumbered by dependents, a society's capacity to save diminishes. That helps explain why Pakistan's domestic savings rate, at under 7%, is about 20 percentage points lower than in neighbouring economies.