ISLAMABAD: A new report by the World Bank reveals that politically connected firms in Pakistan received 45 per cent more credit than others between 1996 and 2002.

Such loan recipients were less productive and had 50pc higher default rates, says World Development Report 2017.

Based on the productivity gap between firms, the annual cost of this credit misallocation could have been as high as 1.6pc of GDP, the report says.

It says that cronies were able to secure preferential treatment and blocked entry of newcomers through regulatory barriers, like limiting access to loans, ease of licensing requirements, energy subsidies or import barriers.

Although it is possible for economies to grow without substantive changes in the nature of governance, it is not clear how long such growth can be sustained. What keeps some countries from transitioning? With a few exceptions, policy advice for these countries has focused on the proximate causes of transition, such as the efficiency of resource allocation or industrial upgrading.

The real problem, however, may have political roots: powerful actors who gained during an earlier or current growth phase (such as the factor-intensive growth phase) may resist the switch to another growth model (such as one based on firm entry, competition and innovation in a process of “creative destruction”).

The report urged developing countries and international development agencies to rethink their approach to governance as a key to overcoming challenges related to security, growth, and equity.

The report notes that when policies and technical solutions fail to achieve intended outcomes, institutions often take the blame. However, it finds that countries and donors need to think more broadly to improve governance so that policies succeed.

As core functions to produce better governance outcomes, institutions need to bolster commitment to policies in the face of changing circumstances. This would help in cases where decision makers spend windfall revenues instead of saving them for the future, or when leaders renege on peace-building agreements in the absence of binding enforcement.

Effective policies help promote cooperation by limiting opportunistic behaviour, such as tax evasion, often through credible mechanisms of rewards or penalties.

The report finds that good policies are often difficult to introduce and implement because resistance to reforms that can disturb the political equilibrium.

Published in Dawn, February 1st, 2017

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