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August 7, 2020

Disabling regulatory environment

Business

August 7, 2020

LAHORE: Pakistan’s institutions are weak and mostly dysfunctional that has compromised its growth potential. Strong economies have vibrant institutions to ensure that the economy follows a sustainable growth trajectory.

Economic planners in Pakistan have liberalised the trade regime that is essential for economic growth. The liberalisation of the economy however fails to deliver, since the regulatory institutions remain weak.

Government exerts too much control over the affairs of regulators that makes prudent regulation an uphill task. The heads of all the institutions are appointed by the Prime Minister from a panel of three short listed candidates for three-year tenures (mostly Water and Power Development Authority chairman is an exception as his tenure is five years).

Sometimes even this formality is ignored as in case of present State Bank of Pakistan governor who was inducted directly while serving the International Monetary Fund in Egypt.

History and traditions in Pakistan are such that when the tenure of a regulator expires, there is usually no one appointed in advance to replace him. The government has the option to extend the tenure of the regulator or ask him/her to officiate till further order (meaning that regulator could retain the office till he/she toes the line of the government).

This way the independence of almost all regulatory institutions is fully compromised. Though all regulators have constitutional protection of their tenure, governments adopts arm twisting to pressurise regulators to resign midway. Musharaf regime forced the Securities and Exchange Commission of Pakistan chairman Tariq to resign after government developed differences with him.

The Nawaz government forced WAPDA chairman to resign to pave way for its favourite retired bureaucrat. The State Bank governor during last PML-N regime was also forced to leave and another retired bureaucrat replaced him.

The present government again forced the SBP governor to resign in order to appoint the present one. All these steps show that regulators are required to follow government policy instead of free and fair regulations.

Institutional capacities depend to a large extent on the combination of the rule of law and democracy.

Global data shows that not only democratic governments, but authoritarian regimes with strong rule of law have the capacity to deliver efficient institutions that ensure sustainable economic growth.

However, measuring the efficiency of state and non-state institutions is not simple. In case of Pakistan, the collapse of the institutions is observable in the dramatic increase of the share of the shadow economy.

This is also clear from the decline of government revenues as a proportion of gross domestic product. 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.

Liberalisation was carried out without strong market institutions in Pakistan that led to the extraordinary output collapse. The importance of liberalisation cannot be underscored, but the devil lies in details, which often do not fit into the generalisations and make straightforward explanations look trivial.

The restructuring due to market imperfections is always 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.

Economies with weak institutions under perform. This happens because of barriers to capital and labour 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 labour market infrastructure.

The fragility of the institutions is manifested by high and growing money velocity, and in the decline of bank financing as a proportion of GDP; in poor enforcement of property rights, bankruptcies, contracts and law and order in general; and in increased crime rates.

Government policies certainly affect economic performance, but progress in liberalisation and macroeconomic stabilisation 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 all regime that the speed of liberalisation and macro-stabilisation would cure all ills.

The most important policy measures aimed at preserving and/or creating strong and efficient institutions have always been half-heartedly implemented.

We have the Competition Commission of Pakistan operating for two decades; yet government high ups complain of monopolies operating with impunity. We have SECP, yet the corporate frauds and capital market manipulations continue unabated.

We have Oil and Gas Regulatory Authority yet decanting of LPG cylinders is the order of the day. The National Electric Power Regulatory Authority allows power distribution companies to pass on the huge losses to consumers, instead of ordering power distributors to improve efficiencies or bear the loss. The list goes on.