In a bid to combat Pakistan’s economic crisis, the Economic Advisory Group (EAG) recently published a comprehensive report suggesting ways to transform the country and identifying the key factors that have prevented this transformation in the country.
The twenty pages report titled “New Vision for Economic Transformation: Rethinking Resource Allocation and Productive Structures” discusses Pakistan’s misallocation of resources and economic consequences. It also highlights the elements that led to the current economic situation in Pakistan and policy actions for it. The German think tank FNF supported the printing of the document.
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While sharing the document on his Twitter account, Economic expert Ahmed Jamal Pirzada said,” the document aims at diagnosing the problem and providing a broader policy framework.”
This document doesn't include everything one can think of and, instead, aims at diagnosing the problem and providing a broader policy framework. EAG is happy to present it at ur institution/forum and discuss this in detail. Feel free to reach out if interested. We obviously are.
— Ahmed Jamal Pirzada (@ajpirzada) November 22, 2021
Free trade: Urgent need of the hour?
The report is based on analyzing the country’s economic complexity (using the Harvard-based ECI methodology), or lack thereof, and critically looks at resource allocation problems in Pakistan.
The report advocates free market and free trade, privatization, and deregulation. It explains why Pakistan has not undergone an economic transformation that countries such as Vietnam have been able to achieve. An interesting chart explains how in the last twenty years Vietnam introduced 48 new products into its export basket versus Pakistan’s 21 products, these only added $2 to Pakistan’s per capita to the value of their exports as compared to Vietnam’s $1,020.
Similarly, twenty years ago Vietnam’s biggest one-line export (20%) was crude petroleum, now it is broadcasting equipment (15%). Unfortunately, Pakistan is still stuck in a rut in producing low-value manufactured goods. The report clearly explains the reasons. One critical factor has been excessive protection in the country, other include high tariffs, big spending by the government, and generally misallocation of resources that have not enhanced capabilities in the country but rather subsidized businesses to continue on the same path to nowhere.
The document briefly illustrates the deeper structural issue arising out of the fatal conceit of the state interventions, and much worse trying to choose winners.
— Javed Hassan (@javedhassan) November 21, 2021
Furthermore, the document acknowledges “the important role governments can play in helping overcome market failures and investing in capabilities which are essential for a successful economy. However, in the context of Pakistan, ill-conceived state interventions have undermined efficient allocation of resources thus reducing the general welfare of the society. For example, the fixing of support prices for certain agriculture commodities has had the perverse effect of incentivizing suboptimal usage of land holdings and sluggish improvement in yields. Likewise, subsequent governments have continued to provide incentives to uncompetitive industries, thus preventing resources to move from less productive to more productive economic activities.”
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Government regulations: A hurdle to economic growth
Interestingly, according to top US Economist Arthur Laffer, government regulations and taxes are hurdles in the path of incentives. He made the statement during a keynote address at the Pakistan Prosperity Forum 2021 organized by PRIME Institute in Islamabad a few days back.
“Pakistan should be where it could be. Free markets are more needed today than at any other time. Economics is all about incentives. Government regulations and taxes are hurdles in the path of incentives, are in fact negative incentives. Taxes are used to discourage bad behaviors like restricting smoking by imposing taxes. But, when we tax income, then earning more becomes less attractive, and economic activity declines,” Arthur B Laffer said.
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Overall the report recommends among other things reducing import duties of different kinds and introducing a uniform system, redesigning SBP’s export finance scheme to incentivize export of new products and/or to new markets (this is in line with the government’s current policy of product and geographical diversification), become part of Global Value Chains (GVCs) for products, and importantly government should strengthen industrial and infrastructure capacity so as to attract FDI, which will produce exports for the country rather than looking for domestic markets.