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Sunday, April 14, 2024

How politics has crippled Pakistan’s economy?

Several political decisions have been taken in history that have dented Pakistan's economic prospects

If we look behind, there are certain factors that can be linked to the prevailing economic situation. Similarly, nationalization was being blamed as a major factor for the changed dynamics in the economy of Pakistan. Other than the textbook impacts of the state-run businesses such as inefficiency and lack of investment, it eroded the psyche of our business community as well. This assessment has been recently shared by an entrepreneur named Jarrar Shah on twitter who has keen interest in political economy.

He explained his assessment in a thread stating that nationalization was a massive shock to our economy. Other than the apparent folly of having state-run businesses, it had damaging effect on the psyche of our business community.

As the nationalization during Bhutto’s era listed 10 categories that had been selected for nationalization, we witnessed the flight of capital including the unpopular steel mills established by the Sharifs in the gulf. Prior to nationalization, our business groups were making remarkable things like aircraft parts and engines. However, after nationalization we observed rent seeking and cronyism.

He added that as the people found an escape in form of moving abroad, they started to get foreign passports. The preferred businesses were primarily commodity businesses such as spinning & weaving mills, sugar mills, power plants, fertilizer plants etc. Majority of the businesses got subsidized or were directly bought by the state.  In almost all sectors, cartels eliminated the element of competitiveness. The banks and telecom sectors along with media were being deregulated during the 2000’s.

Read more: Pakistan Economy: History and Required reforms

The period after 2004, when the world was quota free by the WTO, struggle of textile industry was witnessed. Other than the issues related to marketing and competitiveness, industrialists from the textile sector prioritized investing in property by borrowing cheap bank loans.

He highlighted that telecom sector was of no interest for our business community as this was the only sector where fierce competition existed. Mobilink, Telenor, Ufone, Zong were all foreign owned and their competitiveness proved to be advantageous for our economy.

He went on to say that consumers had almost free access to sui gas and water. But government intervention through FBR, WAPDA was being a massive drain. In 2006, the Supreme Court totally dissolved privatization with its decision regarding the steel mills. He said, “A mill that would have fetched US$320Mn has cost the taxpayers 10 times more since then and resulted in privatization derailing. This would be a huge problem post 2010

The federation structurally bankrupted itself when AAZ engineered his 18th amendment and the ensuing NFC award. Since then, the federation has been bankrupt.”

Due to inefficient role played by the provinces to increase revenues, our borrowing exceeded with the largest share of debt servicing in the budget during the last decade.

According to him, the cherry on the top was Ishaq Dar’s step of freezing exchange rates with the aid of borrowed dollars resulting in subsidized imports. Manufacturing was shifted to trading with the public sector leading growth through debt incurred due to expensive infrastructure projects.

He also mentioned the heavy reliance of our energy sector on imported sources like LNG & Coal with definite dollarized returns to power producers. Even public transport has been deteriorated due to the projects like Orange Train which is seemingly covering Lahore but is financially unsustainable. He stated, “the subsidy required on it is astronomical. Today we have a debt problem and a dollar problem. We have been living beyond our means for years. As an economy, our red tape and vested interests stifle innovation.”

Importantly, after discussing other domains, he provided his thoughts on the political instability prevailing in the country by saying “our politics is not stable, our rule of law is terrible.” Contracts are useless and there is neither any way out nor we can continue in the same way. The crucial decisions required include reconsideration of the whole social contract rather than increasing oil and energy prices.

He further said that patronage, rent seeking, business of plots, and largely bloated government are all unsustainable. A ‘Thatcher’ is all what the economy needs. Provide incentives for productivity and innovation and subsidize only those who can earn money and create employment opportunities.

He supported the ongoing slogan ‘imported hakoomat na-manzoor’ by stating that the starting point is to get rid of the “imported tola.” Patronage and rents being in their hands are the essential elements for their dynasties to function. He also emphasized that the economy’s primary investment destinations, Bahria and DHA are also unsustainable. He summed up by saying, “hard decisions are needed indeed!”

He got much appreciation for his detailed analysis provided in a thread. Issues which are the consequences of nationalization in Pakistan are similar to that of Bangladesh. A review of the problems faced by the nationalized industries of Bangladesh over the years clearly indicated that lack of consideration of basic issues related to nationalism. It led to a rather anomalous situation in the major production enterprises of the country. Mainly the issues were of three types: technical, institutional and ideological which are consistent in the case of Pakistan as well.