Is a turnaround possible?

August 14, 2022

Pakistan badly needs a broad-based political consensus on the economy

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akistan is not the only country in the world to have gradually lost its economic advantage or one where the government borrows to keep the country operational.

The economic mess in Pakistan is mostly self-created. Cleaning it up will require a paradigm shift in our governance and business culture. A turn-around is possible if we can revive the sprit of 1947.

In 1947, the government was broke and forced to look after millions of refugees that had migrated from India. The government lacked the resources even for the salaries of government employees. A private sector bank financed the salaries for several months.

Pakistan lacked the funds needed to open its embassies in the countries that had recognised it. A business family provided funds to open and operate its embassy in the United Kingdom. However, the income disparities were not as pronounced as today.

The bureaucrats inherited from Indian Civil Service were highly competent and motivated to serve their country. There were few institutions but they still regulated the economy and maintained the law and order. They made up for the shortage of human resources by being super-efficient. They worked beyond duty hours to ensure that decisions were taken promptly.

Above all, we were a responsible nation. The local population voluntarily looked after the refugees and provided them with shelter and food. Millions of refugees were able to carve out careers for themselves.

Corruption was not heard of on a large scale. Smugglers were not respected. The government could raid places where imported goods were sold or stocked. The businessmen were asked to provide ‘custom-paid’ documents for their goods. The goods were confiscated in case of a failure to provide such documents. The police were feared and respected.

That culture exists no longer. Self-interest now has priority over national interest. The prevalent culture is destructive. The competence level in the bureaucracy has declined. Corruption has increased manifold.

The police are not respected. To control law and order, we now need to call the rangers or the army. Everybody who has accumulated wealth by any means is respected. Inequality has increased. Merit is largely ignored in appointments.

Regulatory institutions formed in line with global norms have remained weak and unable to prevent or cure distortions in the economy. Many posts in at least five such institutions remain vacant. These include: the Competition Commission of Pakistan, the Securities and Exchange Commission of Pakistan, the National Electric Power Regulatory Authority and the Water and Power Development Authority. Even the State Bank of Pakistan is operating under an acting governor. No country can function smoothly if the regulatory institutions remain weak.

Pakistan badly needs a broad-based political consensus on economy. Investors have largely stayed away from Pakistan because of inconsistent policies. All governments in Pakistan formulate five sector-specific policies. The tenure of each elected government is also five years. Still, the policies are tinkered with prematurely or the promised facilitations and funds are not provided. This is the reason Pakistan cannot attract capital-intensive investments.

It is essential for the government’s writ to be effective. We cannot move forward if we hesitate to take action against smugglers, hoarders and tax evaders, particularly among traders. We must dismantle the cartels and ensure fair competition among manufacturers.

There are no large-scale engineering firms in Pakistan because they are capital-intensive, and the gestation period is long. High-cost industries require policy support for a minimum of 10 years. The investors commit resources only if iron-clad guarantees are forthcoming.

We need transparent industry and sector-specific policies that provide a level-playing field to all. Instead, we attract capital-intensive foreign investment by extending sovereign guarantees of profit. This has created distortions in the economy.

The duty protection given to the ICI polyester plant in 1997, for instance, kept the Pakistan textile industry out of the global blended textile market because the polyester fiber produced on protective duty was almost 20 percent more expensive than the global prices. The power plants provided a sovereign guarantee of purchase of power at 17 percent profit made power tariffs highest in the region.

Pakistan’s investment policy is liberal. It allows investment in sectors that are consumptive in nature and serve the local population and ensure repatriation of profit forever. In the food sector, for instance, the international fast food chains make a specific amount on sales of each meal. The investment received is nominal and the outflow of foreign exchange high.

These multinationals and their agents do not export their products. Rather they import many ingredients, even some meals from abroad (suspended for a while but allowed recently). We have seen car assemblers establishing plants with a low production capacity although delivery of all cars is delayed.

Car exports from Pakistan have yet to start. The vendors producing global quality components have set up small units and have limited capability to export those components. No original equipment assemblers buy these components from Pakistani vendors because they simply lack capacity to meet their demand.

The effectiveness of the government’s writ is essential. We cannot progress while we hesitate to take action against smugglers, hoarders and tax evaders, particularly among the traders. We must dismantle the cartels and ensure fair competition among the manufacturers.

The value-added apparel sector needs support because it is the most labour-intensive industry in the country. Over the last seven months, the construction sector has come under pressure. Construction is the largest employer of unskilled labour. It also supports 45 industrial sectors linked to construction activities.

Agriculture is the most neglected sector in the country. Crop yields are low among other reasons for poor farming practices like ignoring leveling of the fields to ensure even distribution of water and nutrients. Many farmers do not remove weeds that grow with crops and share the nutrients meant for the crops. If the weeds are removed the productivity can increase by 10 percent. The agriculture extension departments have failed to create awareness among the farmers.

The unavailability of quality seeds is a major problem. The private sector has proved this point by importing and locally producing high yield hybrid seeds of coarse rice varieties. In some cases, the farmers in Sindh have tripled their rice production per acre. This has resulted in poverty mitigation in hybrid rice growing areas. We need to produce or import high-yield disease-resistant cotton and wheat seeds to attain self-sufficiency. The GDP growth can double in short order if we exploit the full potential of our agriculture.

The writer is a senior economic reporter

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