It is important for policy makers to look for innovative solutions
eveloping economies have faced numerous obstacles that have hindered their economic recovery following the Covid-19 pandemic. There is now a greater sense of urgency to accelerate actions towards achieving sustainable development goals, such as inclusive growth, social justice and environmental conservation.
Pakistan is no exception. External challenges after the pandemic, including rising commodities prices, supply chain disruptions, temporary shortages of food and raw materials have all contributed to economic vulnerabilities.
Government budgets were allowed to expand to cover for the much-needed increase in social protection and health coverage. This was also necessary to support the most vulnerable given the high inflation and floods.
Amid these challenges, important structural reforms were put on the backburner. At the same time, regressive subsidies extended to large-scale manufacturing sector became an important factor behind the fiscal overrun in 2022-23.
It is now clear that design and roll out of such support packages was not well targeted and led to waste of scarce resources, ballooning of fiscal and current account deficits and unprecedented inflation. These challenges coincided with a political transition in Pakistan that added to economic and financial uncertainties.
Despite the ongoing discussions in mainstream media about possible remedies, some experts contend that viable solutions already exist. The crucial missing factor is the political will to translate words into concrete actions.
Given that Pakistan is not the only country facing political or economic difficulties, it is important for policy makers to also look for innovative solutions in the region. In the run up to the International Monetary Fund (IMF) Annual Meetings in Marrakech, planned for October, a recently published book, Promoting Inclusive Growth in Middle East and North Africa provides important insights and lessons.
The themes discussed in the book form the foundations of Marrakech 2023 Agenda — aims to build resilience and securing a transformational recovery that fosters inclusion, tackles the challenge of climate change, and supports digitalisation, while reinvigorating global cooperation.
The authors argue that there are wide-ranging opportunities in any economic crisis. A case in point is the changing nature of work in the MENA region. The region has high GDP growth but limited job creation. Skills mismatches, rigidities in the labour market and a large government sector are preventing adoption of advances in automation technologies, remote work arrangements and artificial intelligence.
The MENA region has the lowest female labour force participation rate globally. This is attributed to gender discrimination in workplace practices, including recruitment and promotion, laws restricting women’s physical mobility and women’s ability to engage in self-employment.
A more productive labour force is a means to achieving greater competitiveness and inclusiveness in the growth process. The energies of Pakistan’s large and young labour force must help the country get integrated in the global value chains.
The story is not very different in Pakistan. Among other unharnessed opportunities, embracing fast evolving nature of work and increasing female labour force participation are low-hanging fruits which could lend sustained periods of inclusive growth.
A recent presentation by the IMF team at the University of Karachi offers a four-pronged strategy to achieve this: right-sizing the state-owned enterprises (SOEs); ensuring labour markets are flexible and inclusive; boosting public investment in digitalisation and internet-for-all; and strengthening education systems to remove skills gaps and mismatches. Incorporating this narrative into Pakistan’s federal and provincial development plans and budgets could take the economy to a higher level.
A more productive labour force is not an end in itself. It is a means to achieve greater competitiveness and inclusiveness in the growth process. The energies of Pakistan’s large and young labour force must help the country get integrated in global value chains.
In the short term, this can happen through export of the goods and services that have a dynamic demand. A flexible exchange rate has already made Pakistan’s exports competitive in price terms. Reducing the anti-export bias of the tariff policy, ensuring a flexible exchange rate durably and improving efficiency of export promotion schemes offered by the Central Bank and Federal Board of Revenue could help further.
In the medium term, providing opportunities for creative expression is crucial for the younger generation in Pakistan. This can be facilitated by the state in two ways. First, offer a conducive environment for entrepreneurship. Allow new ideas and technologies to compete with activities which are already not competitive globally and end up draining fiscal resources. Pakistan Regulatory Modernisation Initiative (PRMI) offers hope and should be expedited.
Second, Pakistan’s neighbours are all trying to reduce public sector’s footprint across economic activities. The state cannot have a role beyond basic regulation that helps promote competition. It is best to leave production across agriculture, manufacturing and services to the private sector.
The government must not compete or involve itself in the setting of price or output ceilings. The private sector, particularly young startups, are a better allocator of resources. This creates more high quality jobs.
There is hope that the above-mentioned could happen if Pakistan commits itself to the recent adoption of the new bill for the SOEs. Ultimately, this should pave the way for rationalising the role of SOEs in the markets. This could also allow the public sector to divest from SOEs so that higher levels of public investment can go into human capital formation.
There is a large potential in Pakistan’s young labour force. At the above-mentioned seminar, the IMF mission chief, Nathan Porter reminded the audience that “Pakistan should take advantage of the demographic dividend, materialising over the next two decades. Reforms done the right way by creating the right environment for investment in the capital and people, and fostering inclusion and entrepreneurship can, as international evidence suggests, significantly lift potential growth and living standards and reduce poverty and inequality.”
The writer is an economist and a former civil servant. He tweets @vaqarahmed