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Tuesday June 25, 2024

Unshackling Pakistan’s economy

By Dr Khaqan Hassan Najeeb
May 26, 2024
A man reads newspaper while selling betel leaves, known as pan, cigarettes and candies from a shop in Karachi, Pakistan, December 30, 2021. — Reuters
A man reads newspaper while selling betel leaves, known as pan, cigarettes and candies from a shop in Karachi, Pakistan, December 30, 2021. — Reuters

Australia taught me a considerable amount of what I know about successful economic deregulation. Australia was a heavily regulated economy post-World War II. Protectionist measures like high tariffs and import controls were well in place. The financial sector was highly regulated. The government exercised price controls through agricultural boards.

This ambiance hindered competition, created inefficiencies, and restricted productivity potential. A similar story holds back the potential of Pakistan's economy to this very day.

Australia's exceptional journey towards economic deregulation began in the mid-1970s. Since then, it has been an impactful and transformative process – one that has been pursued quite well by successive Australian governments over the decades. Authorities have endogenously conceived and implemented a regulatory overhaul – insourcing economic thinking rather than relying on the outside. A path Pakistan consistently seems to miss.

Some key deregulation measures included floating the Australian dollar, deregulating financial markets, removing controls on foreign capital flows, decentralizing industrial relations, pushing a competition policy, broadening the tax base, and corporatizing state-owned enterprises. These reforms aimed to enhance economic freedom, reach new international markets, shape competitive behaviour, and better the economy's flexibility. The very story Pakistan needs to craft for itself.

Important areas of deregulation also included enhancing global trade by lowering trade barriers and tariffs and liberalizing sectors like telecommunication dominated by government entities, by removing prohibitions for new entrants. Government authorities engaged private-sector business development service providers for legal services and training for job seekers. Australia moved away from centralized wage fixing to enterprise bargaining. All worth learning lessons for Pakistan’s decision-makers.

Authorities responded to Australian-based Industry Commission reports on the payoffs and risks related to the corporatization and privatization of public utilities. The recommendations included administrative reform of public utilities and structural reform of a sector as a whole. The outcome included the introduction of competition into power generation and retail areas, and the privatization of publicly owned generation, transmission, and distribution assets. This is a valuable insight into Pakistan’s crumbling energy sector. The deregulation process gained steam in the energy sector in the early 1990s. Australia made a push to develop a National Electricity Market. The creation of an energy market has been pending in Pakistan for eons.

Australia's National Competition Policy (NCP) framework cut out regulatory barriers to competition, giving stronger incentives for suppliers to operate efficiently, be price competitive, and pursue innovation. A significant component of the NCP was the Legislation Review Program. This reform assessed whether regulatory restrictions on competition were in the public interest. It covered a large area of the economy including professional licensing, agricultural markets, insurance, and transport, among others.

A competition framework is a less understood area and a missing link in reforming the Pakistan economy. As a result, most businesses are uneasy operating outside the confines of our borders, protected by generous government concessions, exemptions and subsidies, and barriers to competition.

It is asserted that deregulation has been largely beneficial for the 26 million Australians. Competition has improved services, created long-term price stability and increased consumer choices. Labour has much higher wages, and citizens have experienced a surge in wealth and living standards. Importantly, the decades of economic growth are driven by private investments, not debt-funded fiscal largesse. Tragically, many of us are still unable to internalize this story for Pakistan. The thinking that foreign-funded projects, niche area investments, and an outsourced thought process can help us out of our morass is probably over-optimism. These actions are only likely to help at the periphery.

The present regulatory regime in Pakistan is a relic of a bygone era conceived to control and manage rather than facilitate and enable. We are still uncomfortable with market signals and rely on controls in many markets. It is time to recognize that undertaking economic reforms and liberalizing price controls and quotas creates a flexible and resilient economy. By prioritizing deregulatory policies, Pakistan can unlock productivity gains, and begin its journey to competitiveness in the global economy.

Australia carried out several studies to calculate the compliance costs of the prevalent regulations. These studies also considered the flow of regulation. They then set new guidelines to help reduce the flow. With little supporting evidence, most policymakers in Pakistan cannot relate to the heavy compliance costs that stifle entrepreneurship, create excessive paperwork, linger decisions, and lower the efficiency of the economy. The flow of new regulations and setting up of bodies has continued in Pakistan.

Australia’s success underscores the value for Pakistan in reducing unnecessary compliance costs, enhancing productivity, and driving economic growth. Deregulation is a potential driver of productivity growth. A step-up in Gross Domestic Product (GDP) growth is possible by freeing up the economy, reducing efficiency costs, and improving competition in several markets where it is currently constrained. The largest gains of a deregulatory effort would come from prioritizing a reduction in compliance costs relating to regulations that apply to large numbers of people and businesses, including an estimated 5.2 million small and medium businesses and their taxation regulation.

In 2016, I helped author a Doing Business Reform Strategy within the government. The reform agenda focused on smart regulations, simplified procedures, and competitive costs. This was to lay the foundation of a far wider effort to deregulate the economy. Short of a decade down the road, a few attempts have been made by the government through initiatives such as the Pakistan Regulatory Modernization Initiative, SMART, Digital Economy Enhancement Project, and Zero-time to start-up policy of the government of Punjab to signal regulatory reforms; albeit to our chagrin, we are a long way from home.

Research highlights that regulatory compliance costs across certain sectors can be as high as 40 per cent of GDP in Pakistan. An unnecessary and obsolete regulatory system burdens Pakistan’s investment climate. The economy is strangled at the federal, provincial, and municipal levels by a plethora of agencies. Regulatory overhang distorts markets and hinders economic activity while inflating costs and hurting the ease of doing business.

Regulatory Guillotine efforts, an approach towards determining the legality, necessity, business friendliness, and associated cost of regulation hangs in balance, as the Asaan Karobar Act, needs to move forward. The much-discussed single window for business and investment, Pakistan Business Portal is yet to be fully functional.

Brooding over the technically correct noises raised over the past decade regarding regulatory reforms and seeing limited impact on the ground, one feels that a serious action-oriented effort towards doing away with regulations that are no longer considered necessary; streamlining and harmonizing regulations across jurisdictions; and moving towards technology or digitization to ease frictions should be the hallmark of the economy for the next few years

Sometimes life can be gratifying. The arduous hours of completing a doctorate, my engagement with a research think tank, and my industry work in Australia gave me invaluable insider perspectives into remodeling a well-regulated market economy. One could always feel the sense of this transformation in the air.

One understands Pakistan’s policymakers' mindset for focusing on visible outcomes. However, simplifying rules and regulations shows the state’s capability of deeper reforms. It is Pakistan's time to realize the depth and breadth of work required to make such a transformation – one sincerely hopes we can nudge the mindset of the nation for hard work to achieve a seriously deregulated competitive economy. God bless Pakistan.


The writer is former adviser, Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at: khaqanhnajeeb@gmail.com