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Market Reform: The Long Haul

Based on the recent PIDE publication, authors argue that market reform and reducing the government’s footprint are crucial for sustainable growth, particularly given the constraints faced by the private sector due to an unfavorable business climate in Pakistan.

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When it comes to markets in Pakistan, whether we consider energy, agriculture, or real estate, markets are non-existent or deeply flawed. Despite the immense economic potential of Pakistan, the country has been unable to harness markets to achieve economic growth, even though there is a wealth of literature on how to tackle this problem effectively.

In its recent publication Creating Markets in Pakistan – Bolstering the Private Sector, the IFC has presented a diagnostic study of urgent action areas to establish and reform markets. Several of the points raised in this study can be linked back to PIDE‘s Growth Strategy.

PIDE’s Growth Strategy covers these areas, as well as several more of the requisite reforms in detail, describing its focus as “reforming almost every area that directly or indirectly influences economic growth.”

The section on reforming markets is preceded by “effectiveness of public investment,” focusing on societal software reform and “improving investment climate” – both of which lay the bedrock for market reform. In contrast, the IFC study gives an overly prescriptive list of measures to be taken.

Furthermore, PIDE aptly addresses the impact of foreign aid on our policy, clearly defining how high levels of lending are detrimental – a crucial point that the IFC naturally does not raise.

Read More: Pakistan Economy: History and Required Reforms 

PIDE’s ‘Growth Strategy’: Focusing on root issues

PIDE acknowledges that without an enabling role by the government, investment and entrepreneurial activity cannot occur in markets. Taking this as the baseline, PIDE then builds on medium and long-term growth objectives focusing on enabling a competitive environment.

Meanwhile, the IFC diagnostic presents a narrower outlook of Pakistan’s private sector, pointing out constraints to private sector development. It stresses that the government must promote greater competition in the economy, reduce the cost of doing business and remove policy distortions to trade and investment.

Three objectives are listed in the IFC study to increase private sector participation and investment. First, to enhance institutional capacity and policy coordination, secondly, to strengthen competition and level the playing field, and thirdly, to facilitate the development of a diversified and inclusive financial sector.

Both emphasize the need to reduce the government footprint – particularly in electricity, transport, and industry. This idea is not novel, having been emphasized in the Framework for Economic Growth by the Planning Commission as long ago as 2011, defining competitive markets as the “starting point towards increasing efficiency and sustained economic growth.”

Pakistan has faced economic distortions hindering market competition, with the added pressure of a high government footprint on the economy mushrooming rather than reducing.

Read More: Pakistan needs realistic strategies for economic growth

Cities as agents of change

PIDE contextualizes Pakistan’s current policy environment through a lens that the IFC diagnostic has somewhat neglected: Pakistan has been following a project-based growth model that relies heavily on foreign borrowing for the last 60 years.

Known as the HAQ/HAG Model, it is mainly obsolete, yet it has continued to shape our policy, basing it around three things: building extensive physical infrastructure (‘brick and mortar’) projects; five year plans to justify the projects; seeking foreign aid given the need to build beyond domestic resources.

Market Reform

This hardware-based approach has led to the neglect of software, i.e., capacity building, management, and optimizing yield on assets. Even today, 80 percent share of development spending is ‘brick and mortar’ (Pasha, 2012, Haque, 2020).

The Haq/HAG model was framed when funding and physical capital development were considered the defining features of the growth process. Unlike the IFC, PIDE has pointed out the role of cities as agents for growth, along with asset classes, commodities, products, firms, and people.

The formula for growth has long been established: give the vibrant young people quality education, new ideas, and high ideals, strive for institutions that support free and fair markets, create a professional, well trained civil service, achieve economies of scale through a large domestic market and open up for trade and investment; and, keep public spending on infrastructure and social sectors limited and focused only to critical and essential projects (Buiter and Rahbari, 2011).

Cities are central for promoting domestic commerce, a crucial reform for competitive markets, so “city zoning laws and building regulations should be reformed to allow land to respond to market demand.

Read More:Pakistan’s anachronistic economic policy and its solution

The legal framework must also be strengthened to support the complex needs of diverse markets. Moreover, there is a need to push for openness and competition to bring international quality goods to the market and promote innovation.” (Haque, Nadeem & Ahmed, Vaqar & Shahid, Sana, 2011).

Technological advancements worldwide provide another challenge as Pakistan struggles to keep pace, but opportunities also abound as we can achieve milestones once high-speed internet becomes accessible to all.

PIDE places great emphasis on internet access in terms of its usefulness in raising the literacy rate through online education to the deprived, providing health advice remotely in far-flung areas, enabling farmers and handicraft manufacturers to connect wholesalers and retailers directly in cities without the intervention of middlemen, and providing freelancing opportunities to many more, accelerating e-commerce.

The potential of renewable energy resources, tariff rationalization, improved metering, and the enforcement of collection are all aptly highlighted by PIDE as essential measures for more competitive markets. Pakistan’s businesses and producers are hamstrung by costly, unstable, and insufficient access to energy.

These challenges have rendered Pakistan unable to match the export growth of countries such as Vietnam, Bangladesh, and Cambodia, despite being equally capable and resourceful.

The country’s policy environment has served to squeeze exporters’ profit margins and responsiveness, thus reducing their competitiveness in the global market. Pakistan’s industry has been held back by gaps in the supply chain exacerbated by a complicated tariff regime.

Overcoming barriers to growth

Private investment has been declining for several years, suggesting that private investors have been losing confidence in the economy. This can be attributed to skewed priorities such as the non-favoring of exports and reliance on low value-added products, archaic technology, lack of policy continuity, and redundant business practices.

Read More: How is FBR hurting Pakistan economy?

Due to a lack of profitability, Pakistan has not been able to access quality resources, leading to a vicious cycle where the country unsuccessfully competes for investments and market share in the world economy.

Inefficient energy costs and high tariffs exacerbate the unprofitable nature of the economy. Furthermore, a reluctance to critique foreign aid and a reliance on outdated practices such as the HAQ/HAG model has created further limitations to growth and market reform.

In summary, to grow rapidly, attain economic stability, provide jobs for the burgeoning labor force and reverse the reliance on foreign debt, Pakistan must utilize its own intelligentsia and academia for research and planning rather than following Donor agencies’ prescriptions.

Provide free high-speed internet to all, encouraging innovation and entrepreneurship while fully implementing the “soft revolution” of the market. Consciously reduce State’s economic footprint to allow the Private Sector to prosper and focus on resolving intricate and seemingly tricky issues such as Circular Debt and Agricultural productivity through market mechanism rather than bureaucratic diktat and last but not least, provide the export sectors truly competitive inputs and incentives to maximize export earnings.

Mr. Shahid Sattar, is the Executive Director & Secretary General of All Pakistan Textile Mills Association (APTMA), largest exporting group in the country, has previously served as Member Planning Commission of Pakistan and an advisor to the Ministry of Finance, Ministry of Petroleum, Ministry of Water & Power.

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