The primary constraint to positive structural transformation in Pakistan is the persistence of barriers to market efficiencies and competition, often traceable to distortionary policy design and implementation, says the World Bank (WB).
The WB in its latest report "Pakistan@100 Structural Transformation" states that structural changes that lead to a more efficient allocation of resources are essential if Pakistan is to achieve high-income status by 2047. Distortions are manifested in different ways in sector-specific policies, such as agricultural, power sector, financial and foreign trade policy. The second main constraint is the lack of coordinated policy responses to market failures preventing firms from innovating and moving up the value chain.
The report further states that growth and structural changes go hand-in-hand in a modernising economy. At the broadest level, there is a shift of economic activity away from agriculture, toward manufacturing and services. While this may be the most visible form of structural change, there are many other ways in which modern economies fundamentally change as they grow.
Structural transformation is how resources are reallocated to more productive uses. This efficient reallocation - across sectors, across firms within sectors, and within firms - is a major source of productivity increase and sustained economic growth in modern economies.
Nearly 75 percent of the Pakistan's GDP per capita gap with the United States is explained by its gap in total factor productivity (TFP). Pakistan's economy is moving toward more highly skilled, modern and productive industries, but unevenly and slowly relative to the international norm. Pakistan is now less agricultural, and more urban and services-oriented than before. Traditional industrial clusters have started exporting new products, while entirely new industries such as ICT are emerging. Overall, relative to the norm for countries at similar levels of per capita GDP, while Pakistan's agricultural sector is of typical size, its manufacturing sector is too small, and the services sector too large. Worryingly, the pace of exit from the agricultural sector has been slow in recent years, and there are signs of a slowdown in industrialisation.
A high-level of resource misallocation persists within sectors. Not all the structural changes in recent years have been in the right direction. In manufacturing and services, there are too many resources trapped in low-productivity firms. Agriculture is characterised by an inefficient crop mix and overuse of resources, particularly water. The main constraint to structural transformation in Pakistan is the persistence of distortionary factor and product market policies that act as barriers to market efficiency and competition.
With initiatives such as the China-Pakistan Economic Corridor (CPEC) offering the prospect of pivotal improvements in market connectivity, Pakistan has the potential to move into export-oriented manufacturing activities due to rising wages in China, especially given the proven capacity of some clusters to compete in niche markets. Product and factor market regulation in Pakistan is characterised by complexity, opacity and uneven enforcement. Multiple layers of regulation - at federal and provincial levels - on business entry and operation add to the problem. Regulatory reform should aim to level the playing field for ordinary firms by reducing red tape, and the scope for excessive discretion and arbitrariness in enforcement.
The first key objective of trade policy reforms should be a simple and transparent tariff structure with reduced tariffs and fewer discretionary provisions. Recent analysis suggests that import duties are a less important source of revenue than commonly perceived. High tariffs not only help inefficient firms survive, but also reduce the incentive of domestic firms to reach out to export markets and raise the costs of imported inputs.
The top three constraints reported by Pakistani firms can all be traced to governance. This is obvious in the case of corruption. Electricity shortage too is related to regulatory governance issues in the power generation and network (transmission and distribution) sub-sectors. Further, one reason why Pakistani firms complain so much about taxation is the complexity of the tax system and how it is administered, a problem that has reportedly worsened following decentralisation.
The fact that nearly 70 percent of Pakistani firms consider corruption to be a major constraint suggests that the issue goes beyond petty bribery. It signals a pervasive weakness in the basic elements of 'good' economic governance: namely, the rule of law, strong property rights, and contract enforcement, and transparency and inclusivity in how policies are designed and implemented.
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