IN introductory economics courses, economic systems are explained by using the two extreme (and mostly theoretical) examples of the ‘command economy’ and the ‘laissez-faire economy’. The former is fully controlled by the state and the latter has no state interference at all. Most economies in the world today (except, perhaps, for North Korea) exist somewhere between these two extremes: the mixed economy.

Some mixed economies are more planned than others, however. For example, Cuba’s is a heavily planned economy. Production decisions (what to produce and how much of it to produce) and price decisions (how much to sell for) are directly or indirectly determined by the state.

Alternatively, Japan, South Korea, Singapore and India, which had strongly state-guided economies during the 1960s and 1970s, have liberalised over time. In each one of these cases the state has gradually surrendered the more intrusive levers of economic control in favour of less direct tools. This has allowed a more market-based economy, where production and price decisions are determined by the market forces of demand and supply. There are exceptions, of course (India recently banned the export of onions; Japan limits rice imports; etc.).

Pakistan’s is a mixed economy also. It is unclear, however, what the political consensus is on the role of the state. Do we want a market-based economy or a state-driven economy? Is the state’s role regulatory or should it micromanage economic activity? Have we even bothered to have a debate on the matter? Historically, the Pakistani state has always directed the economy aggressively. This began with the import-substituting industrialisation of the 1960s and reached its heights in the 1970s with nationalisation. Today, state involvement in the economy continues to exist in the much less intrusive form of subsidies, tariff protections, export quotas and price controls.

Here are some examples. In the textile sector, yarn manufacturers are not free to sell their product to the highest bidder (whether local or international). There is an upper limit to the amount of yarn that is allowed to be sold to international buyers: an export quota. The rest of Pakistan’s manufactured yarn has to be sold to Pakistani textile manufacturers. The reason for this policy is that the state would like to enhance ‘the value added’ of Pakistani exports by allowing local textile manufacturers to access local cotton yarn at lower prices (since they are not competing with foreign buyers for it). This has the effect of keeping costs for textile manufacturers down (which is a good thing) but it also keeps profits for yarn manufacturers lower (which is a bad thing). At the same time, the state does not allow textile manufacturers to import yarn from abroad.

When it comes to household goods (sugar, flour, etc.), the state controls the amount of these goods to be exported in order to guarantee local supply. But it also controls the amount that is imported in order to protect local suppliers from foreign competition. At the same time, the government tries to guarantee farmers some income by creating price floors: minimum prices that sugar and flour manufacturers must pay per ton of sugarcane or wheat, respectively. It also tries to create a price ceiling at which sugar or flour must be sold to the end consumer to protect consumers from price hikes for basic staples.

For economists, the most suitable reason for state intervention in the markets is market failure (a situation where the forces of demand and supply lead to an inefficient economic outcome). Such market failures may occur in some parts of the economy, but they cannot justify the web of subsidies, quotas and price controls that pervade our economy.

These trade quotas, tariffs and price controls are changed frequently in response to political pressures from consumers (voters) and producer groups. Just recently, the current administration in Islamabad withdrew planned changes in electricity and oil prices under political pressure. It also announced a lifting of the import limits on raw sugar late last year to alleviate the pain of increased sugar prices on consumers, only to be publicly chastised by the Pakistan Sugar Mills Association.

The Sindh government just announced its intentions to delegate ‘magisterial powers’ to local district officers to implement price controls as public unrest at inflation is mounting. This will, undoubtedly, lead to many traders selling their goods in the informal market, further shrinking the taxable base.

If you are confused by the web of limitations and constraints that govern commerce in the country, you’re not the only one. Picture a circus clown balancing precariously on a plank on a large ball, juggling a dozen daggers, while simultaneously being pelted from all sides by bananas and hand grenades and you will barely begin to understand the absurdity of the ad hoc nature of economic policy practised by the state for most of Pakistan’s history.

This balancing act, performed by each new government, in order to appease voters and special interests and achieve narrowly defined goals such as export targets, comes at the price of economic efficiency. Each distorted price distorts future consumption and production decisions. This in turn distorts investment decisions. All the while the economy becomes more and more inefficient. Farmers grow crops that they would not grow but for guaranteed prices; manufacturers that should have shut down years ago because of inefficiency are rewarded instead; and new more efficient businesses that should have cropped up in their place never materialise.

In the final analysis, decades of price controls, trade quotas and subsidies have not protected consumers from higher prices and inefficient producers from going under. All along consumers and producers have learned to expect the state to protect them from the normal ebbs and flows of the economy, instead of making the appropriate economic adjustments. We are left with an economy (with the notable exception of a couple of sectors) devoid of innovation and full of rent-seekers.

Now, though, the circus tent is about to collapse on the clown’s head. The state is faced with fiscal constraints that threaten the entire apparatus of subsidies, price controls and trade protections. In order to remain solvent it has to keep borrowing from international donors and in order to do so it will have to implement economic reform. So, as the Pakistani state’s ability to guide the economy through incentives and controls declines, the choice of which kind of economy we want to be, may increasingly be out of our hands.

The writer is a graduate student at the George Washington University. He has previously taught public policy and macroeconomics at SZABIST in Karachi.

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