December 18, 2006	Monday	Ziqa'ad 26, 1427

PAKISTAN could achieve a higher growth rate of 7-8 per cent provided existing weakness in certain key areas of business environment are addressed effectively.

This was the consensus that emerged at a two-day seminar on “Pakistan: growth and competitiveness” organised by the World Bank at Lahore University of Management Sciences. Many analysts viewed costly and unreliable supply of energy, weak infrastructure and lack of judicial reforms affecting competitiveness.

Weaknesses enumerated by the World Bank included costly regulations, weak public institutions, corruption, political uncertainty and feeble contract enforcement. Other problems reiterated by the bank were transport bottlenecks, corruption, lack of skilled workers , the rigidities of land and labour markets and difficulties faced by SMEs in accessing credit. The country has also a narrow tax base, it was stated.

A former federal minister Dr Abdul Hafeez Sheikh viewed “corruption as one of the top problems “ and added military coups to the listed problems. Listening to his candid speech were minister for industries and production Jehangir Tarin and prime minister’s advisor on finance Dr Salman Shah.

Dr Abdul Hafeez Sheikh observed: The tackling of corruption and resolving governance-related issues are important. It should be decided whether the country will be ruled by the army or the army is to be subservient to the elected representatives. Build institutions and not dams.

There was almost a consensus among speakers including academicians that corruption and weak public sector institutions were at the heart of Pakistan’s problems and unless confronted head-on, no policy measures and incentives could be of any help.

Dr Abdul Hafeez Sheikh enumerated many failures of the present military-led government that varied from water and power sectors, to aviation industry and from shipping to gas and Thar coal development. On the positive side, he mentioned telecom, banking and privatisation as successes.

On land holdings and property laws, he said, assets that could not readily be turned into capital, are dead assets. Prof De Soto had been invited to a high profile meeting presided over by the President and attended by ministers and who’s who of the government to seek guidance for converting these dead assets into capital but “mysteriously the offer Mr De Soto made was not taken up”.

We have not been able to settle political disputes and inter-provincial issues like resource(NFC award) and water distribution etc. Macroeconomic stability is a must but not sufficient for bringing change in the lives of the people. The country’s economy started to improve after 9/11 in the shape of high remittances and capital aid and rescheduling of foreign debt. Growth spurts driven by aid were destined to increase disparities and just a seven per cent of foreign direct investment went into the manufacturing sector- not a good sign for the long-run.

Former finance minister Sartaj Aziz said: the investment to GDP ratio was quite low and Pakistan could not sustain high trajectory of growth with existing trend of investment. An investment to GDP ratio of at least 27 per cent was a must to achieve growth rate of seven per cent.

Interestingly, Pakistan achieved higher growth during three military rules when the country was needed by the foreign powers for their agendas but it never helped reduce poverty. We do not accept dictatorship.

A World Bank study that examined in detail the textile chain and its competitiveness abroad was of focus of all participants. Tariq Sayeed Saigol said his cousin had started to import electronic goods for assembling home appliances because of higher input costs in textiles at home. The bank report said Pakistan could make tangible progress but it would not be automatic. To realise it, Pakistan will need to do more than reinforce the fiscal and monetary discipline that has enabled it to regain lost ground.

The country must also build strongly on initial, far-from-complete progress in designing and promoting an investment-friendly business environment that will nurture new competitive strength. A broader and deeper investment climate reforms and a strengthened macroeconomic framework could propel the economic revival to produce a higher and sustained growth.

The value chain analysis of the textile sector showed that many weaknesses harm the cost competitiveness. In exporting Blue Denim Jeans and other textiles and apparels to the US market, Pakistan was at a competitive disadvantage because of the longer shipping time and higher freight costs as a percentage of export values.

Relative to China this disadvantage amounts to 6.5 per cent of the export value. This highlights the importance of compensating the disadvantage with competitive cost advantages through relatively more efficient Customs administration, port operations, and inland transport and logistics, and lower factory-gate costs.

In cotton spinning where power charges account for about a fifth of total costs and 42 per cent of conversion costs, competitiveness and profitability is adversely affected not only by the high electricity tariffs for industrial users, but also by frequent outages –commonly an average of three per day--that heighten inefficiency and expense. With funds which they could otherwise be used to automate some processes, many textile mills install back-up generators, further raising their costs of production.

In ginning and weaving, the scarcity of trained workers, technicians and engineers is hampering maintenance and productivity improvements. And due to the rigidities of the labour market, contractual hiring is preferred, encouraging under-investment in training by employers and workers.

For non-integrated mills which are mostly SMEs (e.g., in weaving), access to financing is limited by high collateral requirements because of inadequacy of the private credit information system and restricted range of assets acceptable as collateral.

In dying, material inputs account for over 55 per cent costs. Chemicals, mostly imported, account for 95 per cent of these inputs. Collecting rebates on customs duties and other levies paid on these imports can take 3-5 months, delays that create cash flow problems for the firms and raise their costs, thus undermining their competitiveness.

Similar problems are faced in the production of other intermediary inputs, notably yarn. Excessive use of (subsidised) water through flood irrigation is reducing cotton yields and quality and also raising costs of water extraction and tube-well investments.

Many cotton growers cannot obtain enough quality seeds for their crop because of lack of private-sector involvement in the production and distribution of seeds, while inefficient state-owned enterprises are unable to supply sufficient quantities of quality seeds at prices that are set below-cost.

Responding to inadequate supply of quality seeds, growers use retained hybrid seeds, which are susceptible to pests and viruses, thus reducing cotton yields and quality. Former finance of Thailand Tarrin Nimmanhaeminda said the globalisation demanded continuous changes in policy-making so as to maximise gains and minimise losses. He advised the policy makers to defend national interests and put in place hard and soft infrastructure for better regional and global integration.

International quality standards should be accepted and adopted and but law and regulations governing capital flows be very carefully prepared and changed as the world changed. The exploitation of natural resources should be subject to limits and privatisation should not attract the impression of selling away national assets and creating private sector monopolies but for creating competition.

In his opinion Pakistan should provide access to credit but without making it free money so that poorest of the poor could benefit and equality of law is ensured. Besides, he said, the public administration should comprise small, clear and efficient bureaucracy whose wage pattern should not have major gap with the private sector.