The economic thinking in Pakistan is shifting in the right direction. In a seminar organized by IGC and hosted by the SBP, the talks by country’s economic managers and thinkers have boosted the confidence of the market participants. There is a sense of direction. A complete shift is envisaged. The focus is to move from inward looking (consumption based) to outward looking (exports based) growth.
In the last regime, Dar policies discouraged exports and focused on domestic consumption. He used to say that forget about debt, currency overvaluation and current account deficit. His focus was on generating domestic economic demand in a protective environment. Such a model can only work if the world is ready to finance your deficits perpetually. But Pakistan is not a super power to run on such a model.
Rethinking is required. Pakistan businessmen have to look outward; even foreign investors should be facilitated on efficiency seeking investment. Finance Minister, Hafeez Sheikh bashed the private sector by saying that if players (investors) cannot play, then the coach (government) cannot do anything. He couldn’t be more candid. In Pakistan, all the investment in the last decade or so was to cater domestic demand.
Planning Minister, Asad Umar added on the thought, saying that heavy protections in some sectors hindered the growth potential. He mentioned that agriculture value-add industries like dairy and sugar sectors are highly protected and these might crumble if opened up to competition. The tariff structures are skewed. It promotes rent seeking culture. Businesses invest in advocacy capital and do not focus on innovation. Sooner or later, level playing field will have to be provided across the board.
The point these two senior economic managers were making is that private sector is the key player to drive the economy. It’s not government job to find new sectors or markets. Private sector has to take the lead. Someone from the private sector said that Pakistan should look towards east for exports. On that government folks implied that ball is your court. Its private sector’s job to find new markets, innovate production and all. All what government can do is to provide an enabling environment.
That is correct. The policy of government selecting winners is wrong. That spurs rent seeking and hinders innovation. There is nothing better than market forces and the decision has to be that of the risk taker (private sector). Government should open up the economy for all; it should foster general policies of export orientation. It is the role of the private sector to identify the sectors and markets.
ICG economist, Ijaz Nabi rightly pointed out that investment in the last decade was stalled as the country was going through a war. Now that war is behind us, it’s time to boost the private sector investment. Governor SBP said that there are two kinds of investment in any country. One is consumption driven while the other is export oriented. Pakistan is doing fine on consumption side when it is compared to other emerging economies. The problem is of the export oriented investment, which is too low in Pakistan.
In order to boost exports, exchange rate is one factor. There are other issues too. Such as non-uniformed and skewed tariff structure. Pakistan lacks competition in a few sectors, but industries are running due to protection. In other sectors, the country is competitive, but unwarranted protections are making players lazy. If these sectors are liberalized, inefficient players will be wiped out while the efficient players could become big enough to generate exportable surplus.
The Governor SBP gave examples of two countries working on two different models, but have success in achieving exports. One is Bangladesh; the country has concentrated in one sector – textile and is moving up the ladder of economic growth. The other example is of Vietnam where the exports are diversified and it has become part of the Global Value Chains (GVCs).
Pakistan’s dillema is that its exports are historically concentrated in textile; yet Bangladesh – late entrant, is taking lead. A positon that could have been well captured by Pakistan, is now attained by Bangladesh. The policy question is should we look at Bangladesh or Vietnam Model. Or perhaps, Pakistan could become an example of its own.