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BEFORE proposing solutions to the economic governance challenge, it is useful to briefly review the current position. Loans, deferred payments, lowering currency value etc can give temporary relief but it is not the answer to Pakistan’s economic woes. They have not worked in the past and cannot work now. First, the problem needs to be properly identified and then possible solutions found.
Pakistan’s economy can be divided into three sectors:
(1) Fifty-eight per cent of GDP of $380 billion is classified as the services sector — including wholesale and retail trade, and transport and storage. Pakistan’s annual services exports amount to $7bn of which ICT services contribute $2.5bn. For context, India’s technology exports alone amount to $150bn. Services export can earn foreign exchange at a lower cost than commodities. As a small proportion of a country’s exports, services may reflect inadequate development of human capital.
(2) The industrial/manufacturing sector accounts for some 20pc of GDP. But there are limited goods that can compete in the international market — despite regulations and subsidies favouring big businesses and exporters. This is the basic weakness in Pakistan’s economy.
Around 37pc of the country’s population is engaged in agriculture, and a larger percentage indirectly related to agricultural income. Some of the main industries are based on agriculture, including textile, fertiliser, farm machinery etc. Exports are still primarily agriculture-based. But agriculture suffers from inefficiency — livestock milk production is at a quarter of its potential; sometimes crop spoilage is up to a third of output; in some instances, the fruit/horticulture export prices received were far lower than what was received by international market leaders.
No single political party or even the military can take on the entrenched interest groups.
There is an indefensible gap of $48bn in FY22 between higher imports and lower exports. Remittances from overseas workers ($31bn) are almost equal to the exports and fill a large part of the trade gap. Net annual foreign (multilateral and bilateral) inflows were only about $5bn. For decades, Pakistan has been walking on tightrope over this trade gap, resorting to borrowing from the IMF and friendly countries. Many commodity exports are contingent upon receiving ‘favoured’ status from importer countries, while Pakistan’s overseas workers are mainly less skilled and relatively replaceable. It is an unequal/supplicant relationship with buyers.
The majority of citizens are currently facing financial difficulties. Yet, a UN-sponsored report (National Human Development Report) shows that some Rs2,600bn (2017-18 data) is being given as privileges to powerful vested interest groups. “It involves special and favoured treatment of the privileged in laws, rules and regulations, along with preferential treatment by public institutions” through the taxation system, cheaper inputs, higher output prices and preferential access. “The corporate sector is the beneficiary of the greatest privileges, including both industry and the banking sector.” Compare that to the government’s total revenue Rs5,874bn July-March, FY22. And the government borrowed Rs1,765bn July-May FY22 for budgetary support.
Even a sincere and competent government, which lacks stability and the full authority mandated by the Constitution cannot undertake the required reforms. No single political party or even the military can take on the entrenched interest groups. But the objectives of national development must be achieved. Interest groups cannot be allowed to jeopardise these objectives for their partisan benefits. Political parties and state institutions must come together to ensure this. The reform process can begin with a long-term economic governance framework committed to by political parties and the establishment, which will facilitate sectoral reforms. The following are some initial points for the framework:
Parliament: a) Remove all unjustified regulations favouring particular interest groups, for example, in banking, real estate and businesses linked to state institutions. (b) Remove all unjustified subsidies and concessions, for instance, for big business and state-owned enterprises. Where concessions/subsidies are deemed necessary for big business, then citizens/the state must receive a fair share (as new shareholders) of the businesses subsidised with citizens’ hard-earned incomes. (c) Appoint competent relevant persons, with no conflict of interest, to regulatory bodies. (d) Impose agricultural income tax at par with other sectors. The land-revenue department should be streamlined to remove any hindrance to performance in the agriculture sector. (e) Ensure equal opportunity for all enterprises; those with the most merit can get ahead and then compete in the international market without depending upon concessions and subsidies. (f) Minimise indirect taxation.
Justice system: This includes the laws made by parliament, courts (judges, lawyers and court officials), police/investigation, official prosecution and defence, and prisons. It also includes relevant ministries, executive magistrates and other law-enforcement agencies. Since these components come under different administrative units, it is complicated to implement reforms. Therefore, a mechanism must be established for effective coordination. Interest groups cannot be allowed to hinder quick adjudication — this has to be overcome; economic activity is hampered if quick and just adjudication is not available. In addition, clear criteria need to be agreed upon for the selection of judges and benches to be formed on the basis of a set formula.
Government servants: Selection/postings should be done on the basis of given criteria, without reference to the wishes of influential elements. Tenure cannot be unrelated to performance.
Agriculture: The most efficient water conveyance and distribution method, as developed by technical experts, must be implemented. Agricultural taxation should be imposed at par with the rest. Recognising the importance of agriculture in the country’s economy, professional management may be required in agricultural institutions.
Services: This sector should be strongly encouraged to give due importance to exports. The government must upgrade its export promotion services and put in place professional management.
Unstable governments with circumscribed authority cannot overcome interest groups. How far such a governance framework can be agreed upon and then implemented will determine the long-term economic viability of the country. A strong and prosperous country reflects upon its citizens as well as state institutions.
The writer is the author of Pakistan: Principles of Public Policy Redefined — How to fast track progress and win over citizens.
Published in Dawn, August 5th, 2022
