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Economic Governance Framework – Journal

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BEFORE proposing solutions to the challenge of economic governance, it is useful to briefly review the current situation. Loans, deferred payments, decline in currency value, etc. may provide temporary relief, but it is not the answer to Pakistan’s economic problems. They have not worked in the past and cannot work now. First, the problem must be correctly identified, then possible solutions must be found.

Pakistan’s economy can be divided into three sectors:

(1) Fifty-eight percent of the $380 billion GDP is classified in the service sector, including wholesale and retail trade, and transportation and warehousing. Pakistan’s annual service exports amount to $7 billion, including $2.5 billion for ICT services. For context, India’s tech exports alone are worth $150 billion. Exporting services can earn foreign exchange at a lower cost than commodities. As a small proportion of a country’s exports, services may reflect insufficient human capital development.

(2) The industrial/manufacturing sector represents approximately 20% of GDP. But there are few goods that can be competitive in the international market, despite regulations and subsidies favoring big business and exporters. This is the main weakness of the Pakistani economy.

About 37% of the country’s population is engaged in agriculture, and a larger percentage is indirectly related to agricultural income. Some of the major industries are based on agriculture including textiles, fertilizers, agricultural machinery, etc. Exports are still mainly agriculture-based. But agriculture suffers from inefficiency — milk production from cattle is at a quarter of its potential; sometimes the deterioration of harvests represents up to a third of production; in some cases, the fruit/horticulture export prices received were well below those received by international market leaders.

No political party or even the army can attack entrenched interest groups.

There is an indefensible $48 billion gap in FY22 between rising imports and falling exports. Remittances from foreign workers ($31 billion) almost equal exports and fill a large part of the trade deficit. Annual net foreign inflows (multilateral and bilateral) were only about $5 billion. For decades, Pakistan has walked a tightrope over this trade deficit, resorting to borrowing from the IMF and friendly countries. Many commodity exports depend on gaining “privileged” status from importing countries, while Pakistani workers abroad are mostly less skilled and relatively replaceable. It’s an unequal/pleading relationship with buyers.

The majority of citizens are currently facing financial difficulties. Yet, a UN sponsored report (National Human Development Report) shows that some 2.6 trillion rupees (2017-18 data) are granted as privileges to powerful interest groups. “It implies special and privileged treatment of the privileged in laws, rules and regulations, as well as preferential treatment by public institutions” through the tax system, cheaper inputs, higher output prices and preferential access. “The corporate sector is the recipient of the greatest privileges, including industry and the banking sector.” Compare that to total government revenue Rs5,874bn July-March, FY22. And the government borrowed Rs 1.765 billion in July-May for FY22 for fiscal support.

Even a sincere and competent government, which lacks stability and the full authority mandated by the Constitution, cannot undertake the necessary reforms. No political party or even the army can attack entrenched interest groups. But national development goals must be achieved. Interest groups cannot be allowed to compromise these goals for their partisan advantage. Political parties and state institutions must come together to achieve this. The reform process can start with a long-term economic governance framework to which political parties and the establishment commit, which will facilitate sectoral reforms. Here are some initial points for the frame:

Parliament: a) Remove all unwarranted regulations favoring special interest groups, for example in banking, real estate and businesses linked to state institutions. b) Remove all unjustified subsidies and concessions, for example for large companies and public companies. Where concessions/subsidies are deemed necessary for large corporations, the citizens/state should receive a fair share (as new shareholders) of the subsidized corporations with citizens’ hard-earned revenue. (c) Appoint competent, non-conflict of interest individuals to regulatory bodies. d) Impose a tax on agricultural income at the same level as other sectors. The land revenue service should be streamlined to remove any impediment to the performance of the agricultural sector. e) Ensure equal opportunities for all businesses; those with the most merit can get ahead and then compete in the international market without depending on concessions and subsidies. (f) Minimize indirect taxation.

The judicial system: This includes laws passed by parliament, courts (judges, lawyers and court officials), police/inquiry, prosecution and defence, and prisons. It also includes relevant ministries, executive magistrates and other law enforcement agencies. Since these components fall under different administrative units, it is complicated to implement reforms. Therefore, a mechanism must be established for effective coordination. Interest groups cannot be allowed to get in the way of a quick decision — this must be overcome; economic activity is hampered if a quick and fair decision is not available. In addition, clear criteria must be agreed for the selection of judges and benches to be formed based on an established formula.

Government officials: Selection/assignments should be made on the basis of given criteria, without reference to the wishes of influential elements. Seniority cannot be unrelated to performance.

Agriculture: The most efficient water conveyance and distribution method, as developed by technical experts, should be implemented. Agricultural taxation should be taxed at the same level as the rest. Recognizing the importance of agriculture in the economy of the country, professional management may be required in agricultural institutions.

Services: This sector should be strongly encouraged to give the importance it deserves to exports. The government should modernize its export promotion services and establish professional management.

Unstable governments with circumscribed authority cannot defeat interest groups. The extent to which such a governance framework can be agreed upon and then implemented will determine the long-term economic viability of the country. A strong and prosperous country reflects on its citizens as well as on state institutions.

The writer is the author of Pakistan: Principles of Public Policy Redefined—How to Accelerate Progress and Engage Citizens.

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Posted in Dawn, August 5, 2022