LAHORE: Liberalization was carried out without strong market institutions in Pakistan that led to the extraordinary output collapse. This is the reason that liberalization has not put Pakistan's economy on a sustainable growth path. No economy has ever progressed until it was complemented with strong institutions. Meaningful implementation of government policies is possible only through strong institutions.
Economic experts point out that institutional capacities depend to a large extent on the combination of the rule of law and democracy. In fact, they say that global data imply that not only democratic governments but authoritarian regimes with strong rule of law can deliver efficient institutions that ensure sustainable economic growth. Strong institutions ensure full compliance with rules and regulations. State does not interfere in their affairs as long as they remain operating within their given mandate. The decisions taken by them are respected even if the government disagrees with them. The regulators and the heads of the institutions are appointed purely on merit. Political considerations do not form the basis of appointment.
The institutions become strong if the regulatory positions are filled as soon as the tenure of any regulator ends. There should be no adhoc appointments from the executive office till a permanent regulator is appointed through proper process. The process of filling a post should start weeks before the retirement of the regulator. Such institutions perform better. State Bank of Pakistan is one institution where an acting governor can work for three months after which a tenure-based governor has to be appointed. Even the three months acting period is wrong. Still the SBP is comparatively a strong institution in Pakistan enjoying autonomy not enjoyed by any other institution.
We have some important institutions that are vital for economic growth. These include the Security Exchange Commission of Pakistan, the Competition Commission of Pakistan and National Tariff Commission. There are some regulatory posts that remain vacant in these institutions filled with temporary appointments
The importance of liberalization cannot be underscored but the devil is in details, which often do not fit into the generalizations and make straightforward explanations look trivial. Sometimes the government exerts pressure on institutions for the sake of public appeasement. The Federal Board of Revenue is for instance asked by the finance ministry to stop raids on markets or industrial premises. It is asked to extend the last date of filing income tax returns. All these interferences weaken the writ of the revenue collector. Restructuring due to market imperfections is associated with the temporary loss of output. In economies with strong institutions the decline in the production of non-competitive enterprises and industries is offset by an increase in the production of competitive industries and enterprises.
It is because of weak institutions that we observe barriers to capital and labor flows such as poorly developed banking system and securities markets, uncertain property rights, the lack of easily enforceable and commonly accepted bankruptcy and liquidation procedures, the underdevelopment of land market, housing market and labor market infrastructure.
The collapse of the institutions in our country is observable in the dramatic increase of the share of the shadow economy; this is clear from the decline of government revenues as a proportion of GDP. The inability of the state to deliver basic public goods and appropriate regulatory framework; in the accumulation of tax, trade, wage and bank arrears indicates weakening of institutions.
Government policies certainly affect economic performance, but progress in liberalization and macroeconomic stabilization should not be considered sufficient to trigger sustainable growth. The most important policy factors that affect performance were not associated in Pakistan, despite popular beliefs of the previous regime that the speed of liberalization and macro-stabilization would cure all ills. The most important policy measures aimed at preserving and/or creating strong and efficient institutions were halfheartedly implemented. Virtually all services provided by the government from collecting custom duties to regulating street traffic he regretted are currently the symbol of notorious economic inefficiency.
Even the democracy in Pakistan is illiberal as competitive elections were introduced before establishing rule of law. In fact, democracy is periodically reintroduced in Pakistan when the dictators lose control over law and order and are forced to hand back power through elections. The democratic regimes invariably inherit weaker institutions.