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Of rave reviews and constraints
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Of late, Pakistan’s economy has received rave reviews and optimistic forecasts.
After the visiting senior executives of the International Monetary Fund and the World Bank appreciated the
economic performance of the present government, PricewaterhouseCoopers , one of the best known
international auditors, has predicted that the country will become the world’s 16th largest economy by 2050.
Such encouraging accounts, however, should not cloud the fundamental weaknesses of the economy.
The top three constraints that Pakistan must overcome for sustained economic growth are: lack of
entrepreneurship, lack of a strong and credible institutional framework, and the overall macro-economic
environment.
The conventional economic theory puts the premium on three basic factors of production, namely land,
labour and capital. But as later economists pointed out, it is possible that a country is rich in the basic factors
of production but fails to register significant economic growth.
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The reason: someone has to take the initiative of combining land, labour and capital to produce goods and
services. The person or the entity that does so is called an entrepreneur.
Entrepreneurship entails the willingness to take a risk, innovate and venture into new products, processes, or
new ways of doing business.
In a word, an entrepreneur is a person of enterprise. They do not wait for government support or subsidies
before undertaking productive investment. Nor is it essential for entrepreneurs to have a huge capital at their
disposal. All that is needed is the application of a fresh approach to the allocation of resources.
Basic economic indicators have to be significantly improved for sustained economic growth
The quality of entrepreneurship constitutes a big difference in the different rates of technical, and by
implication economic, progress between two countries.
The business culture of Pakistan is markedly deficient in entrepreneurship. Most businesses are family
owned: they prefer to tread the beaten track, look to the government for subsidised loans, duty drawbacks,
tax remissions and protection from having to compete with foreign products.
Not surprisingly, for last several decades, Pakistan has remained a producer and exporter of low quality, low
priced semi-manufactures, such as textiles and leather products, which are sold essentially to the low end of
the market.
Instead of promoting entrepreneurship and rewarding innovation, successive governments have
concentrated on doling out subsidies to the traditional sectors.
A case in point is the recent multi-billion export package introduced by the government. While such packages
may provide short-term relief to the beneficiaries, in addition to serving as an instrument of political
patronage, they do not shore up the productive capacity of the economy and thus can hardly contribute to
long-term growth.
One of the most crucial conditions for entrepreneurial growth is the presence of a supportive social climate
or institutions. These institutions are significant not only for the growth of entrepreneurship but for the
overall working of the economy as well.
According to institutional economists, market arrangements, the mainspring of economic activity, are socially
embedded and dependent on supportive social and political institutions. Production is not merely a
mechanical but a social process as well.
Even if it does not itself directly produce most of the goods and services, the state is, and should remain, a
key player on the economic scene. This it can do by building up strong and credible institutions. Institutional
interaction is a power play and the state needs to strike a balance between the interests of different
stakeholders.
Institutions are thus important in that they provide a predictable, fair and supportive environment for
economic growth.
They have the ability to either hinder or promote growth and investment, reward or penalise efficiency and
productivity, apportion costs and benefits squarely or unfairly, discourage or encourage predatory economic
behaviour — rent seeking without enhancing economic productivity.
For example, the presence of competition in the market not only makes for lower prices but also helps
improve product quality. The existence of a large number of firms also provides consumers with more
choices.
Unfortunately, years of political instability coupled with a precarious security situation have impeded the
growth of strong and stable institutions of economic governance in Pakistan.
No doubt the regulatory framework is in place: the National Electric Power Regulatory Authority (Nepra) and
Oil and Gas Regulatory Authority (Ogra) for the energy sector, Public Procurement Regulatory Authority
(PPRA) for government procurement, Intellectual Property Rights Organisation of Pakistan (IPOP) for
protection of intellectual property rights (IPRs), and the Competition Commission of Pakistan (CCP) for
checking anti-competitive practices, and Securities and Exchange Commission of Pakistan (SECP) for overall
governance of the corporate sector.
However, the independence and effectiveness of the regulators often comes under question.
For instance, several important industries, such as ghee, sugar, and cement, are characterised by cartels,
which often collude to cut back on output, fix prices, divide markets, create shortages or supply sub-standard
goods.
Likewise, protection of property rights, including IPRs, and enforcement of contracts is inadequate, which
discourages savings and productive investment. There is, thus, a need to shore up the institutional
framework.
The country has been in the throes of macroeconomic instability for the past several years forcing the
government to seek the IMF’s assistance twice in six years (2008 and 2013); although, compared to previous
years, the economy is now looking up.
However, most economic fundamentals remain unsound: fiscal deficit (5.3pc of GDP), public debt (64.4pc of
GDP), gross national savings (14.1pc of GDP) and real sector investment (13.6pc of GDP).
Pakistan’s investment-to-GDP level is one of the lowest among developing countries and the lowest in South
Asia: The same goes for its tax-to-GDP ratio.
Basic economic indicators have to be significantly improved for sustained economic growth.
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Published in Dawn, Economic & Business, February 27th, 2017