Pakistan's judicial effectiveness outpaces decline in fiscal health, says 2019 Index of Economic Freedom

Updated February 09, 2019

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Pakistan’s overall score in the index has increased by 0.6 point.
Pakistan’s overall score in the index has increased by 0.6 point.

WASHINGTON: Pakistan’s overall score in the 2019 Index of Economic Freedom has increased by 0.6 point, with higher scores for judicial effectiveness and property rights outpacing declines in monetary freedom and fiscal health.

The Index of Economic Freedom is an annual index and ranking created in 1995 by The Heritage Foundation and The Wall Street Journal to measure the degree of economic freedom in 186 nations.

Pakistan’s economic freedom score is 55.0 on a scale of 0 to 100, making its economy the 131st freest in the 2019 Index. Pakistan is ranked 32nd among 43 countries in the Asia–Pacific region, and its overall score is below the regional and world averages.

Now in its 25th edition, the Index of Economic Freedom grades an economy on 12 measures of economic freedom that evaluate the rule of law, size of government, regulatory efficiency, and openness of markets.

The report notes that while some aspects of economic freedom have advanced modestly in Pakistan in recent years, “decades of internal political disputes and low levels of foreign investment have led to erratic growth and underdevelopment.”

The report points out that “excessive state involvement in the economy and inefficient but omnipresent regulatory agencies inhibit private business formation.”

Similarly, lack of access to bank credit undermines entrepreneurship, and the financial sector’s isolation from the outside world slows innovation.

The judicial system suffers from a serious backlog and poor security, and corruption continues to taint the judiciary and civil service.

The report notes that textiles and apparel account for most export earnings, but much of the economy is informal, and underemployment remains high.

It also identifies continued “tensions with India” as one of the factors of Pakistan’s underdevelopment.

The report refers to China’s pledge to provide over $60 billion in infrastructure and energy investments in a ‘China-Pakistan Economic Corridor’ but does not offer a comment.

The report identifies four major areas used for determining Pakistan’s position on the index:

Rule of Law Protection of property rights is weak. Although technically independent, the judiciary is subject to influence from extremist groups and high-ranking political officials. Courts are slow, outdated, and inefficient.

Corruption, including bribery, extortion, cronyism, nepotism, patronage, graft, and embezzlement, is so pervasive in politics, government, and law enforcement that the public has come to regard it as normal.

Government Size

The tax system is complex despite reforms to cut rates and broaden the tax base. The top personal income tax rate is 30 per cent, and the top corporate tax rate has been cut to 30pc. The overall tax burden equals 12.4pc of total domestic income.

Over the past three years, government spending has amounted to 20.3pc of the country’s output (GDP), and budget deficits have averaged 5.1pc of the GDP.

Public debt has risen to 67.2pc of GDP.

Regulatory Efficiency

Progress in improving the entrepreneurial environment has been modest. The cost of completing licensing requirements is still burdensome. A large portion of the workforce is underemployed in the informal sector.

The government’s 2018-2019 budget increased spending on subsidies for the construction sector and for such items as food (especially sugar), power, water, and textiles by 36pc.

Open Markets

The combined value of exports and imports is equal to 25.8pc of the GDP. The average applied tariff rate is 10.1pc. As of June 30, 2018, according to the WTO, Pakistan had 66 non-tariff measures in force. Excessive state involvement in the economy and restrictions on foreign investment are serious drags on economic dynamism. About 25pc of adult Pakistanis have access to an account with a formal banking institution.

Published in Dawn, February 9th, 2019