Why Pakistan's GDP per capita has fallen behind India and Bangladesh's in recent years

Pakistan. India. Bangladesh. The three countries in South Asia that are compared most often on everything ranging from cricket and politics to their economies.

For Pakistanis, who may still remember the dark period of 2023 when the dreaded "default" word was being mentioned frequently in the news, it would be almost incomprehensible to believe that their country was doing better than the latter two at some point.

However, just like an earlier Nukta Research showed that the PKR initially performed better than the INR for years, the country's GDP per capita was also equal to or higher than Bangladesh and India's for decades.

It was the first among the three to reach a GDP per capita of over $1,000. However, things started changing in 2010 and by 2019, when both India and Bangladesh's GDP per capita crossed $2,000, Pakistan was only at $1,504.

So, why did Pakistan fall behind?

"Pakistan's economic decline has been in the making for decades. It's the result of a complex interplay of factors ranging from geopolitics to domestic politics. There is no bad luck in this, just bad policies and bad actors," according to Sakib Sherani, who has been a member of several economic advisory councils under different governments.

Slower growth, limited vision

One of the biggest reasons is the economic growth disparity between Pakistan and India and Bangladesh. The GDP growth rates of the latter two — that is, the rates at which the value of all the goods and services produced by them — have risen consistently over the years.

Head of Research at Ismail Iqbal Securities Saad Hanif pointed out that India's growth rates have been higher due to its diversified economy, robust IT and services sectors, and manufacturing expansion under initiatives like "Make in India".

"Similarly, Bangladesh has excelled in export-driven growth, particularly in textiles, and focused on economic reforms that encourage private sector participation," he added.

Meanwhile, Pakistan was heavily reliant on foreign aid. "Since independence, policymakers cast the country into a security state paradigm due to our unique history viz India. This meant looking for an external patron(s), which we found in the United States.

"The resulting flow of assistance blunted our need to develop our export sector, as well as to raise tax revenue or domestic savings (classic Dutch disease). Hence, while countries such as China, Vietnam, India, and Bangladesh were well-positioned to take advantage of the wave of globalization from the 1990s onwards, we missed the boat," Sherani commented.

Pakistan's economic growth was also hindered by structural issues, low industrial output, and a limited export base.

Low labor productivity

Over the years, India, and especially Bangladesh, invested in their populations — increased education and literacy rates and improved health infrastructure.

According to the United Nation Development Program's Human Development Index, the two countries fall in the medium human development range. On the other hand, Pakistan falls under the low human development range, which has resulted in lower labor productivity and GDP growth.

Rapidly falling currency

While the Indian rupee and Bangladeshi taka have been largely stable in recent years, the Pakistani rupee has been highly volatile.

The PKR fell a record low of over 300 per dollar in 2023 when the country was potentially at risk of defaulting, and while it later recovered, the currency is still weaker against the USD compared to the other two.

When a currency devalues against the USD, it directly affects the GDP per capita since it is calculated in USD.

Higher population

Pakistan's population growth remains among the highest in South Asia, Hanif noted.

Since the GDP per capita is calculated by dividing the GDP of any country by the total number of its people, a higher population means Pakistan's GDP per capita is diluted.

Poorer infrastructure

Another reason is Pakistan's outdated infrastructure and the lack of investment in its upgradation, which can perhaps be best exemplified by a Nukta report that found in the last 10 years, India has expanded its railway tracks by 27,000 kilometers while Pakistan has not increased it by even one kilometer.

The lack of investment in infrastructure also has a lot to do with Pakistan's elite capture, which has resulted in an inadequate taxation system.

"In addition, the elites have deliberately not invested in a stronger institutional framework, which provides the backbone for a country's development," Sherani said.

Hanif highlighted yet another issue — Pakistan's perennial energy issues. "Chronic energy shortages and outdated infrastructure in Pakistan have hindered industrial growth. On the other side, India has invested in renewable energy, IT infrastructure, and transportation networks," he commented.

Political and economic instability

But perhaps one of the biggest contributors to India and Bangladesh's consistent economic growth has been economic and political stability.

India has not seen even one military takeover while Pakistan has yet to see a prime minister complete their five-year term.

Hanif rightly pointed out that Pakistan's geopolitical focus on security has often diverted resources away from economic development. "We invest more on security rather than development of our economy while India and Bangladesh have prioritized stability and economic development," he added.

Meanwhile, Sherani said that domestic political instability and internal violence were again related to how the country's elites have "chosen to (mis-)govern the country".

So, while Bangladesh and India's GDP per capita have now crossed $2,500, Pakistan is not even close to $2,000, and it would take it considerable efforts to catch up.