The Planning Commission has developed a framework for economic growth (FEG) which is a strategy that aims for sustained growth emphasising economic reform and productivity. The strategy is a radical shift away from past policies, which tended to sacrifice long-term growth for short-term fiscal stabilisation.
A striking example of this is the frequent changes in Pakistan's trade regime which comprised phases of import substitution, then export orientation and revival back towards protectionism due to the government's reliance on distortionary tax/tariff policies, as the first solution to resolving the fiscal crisis. Thus, the new growth strategy, in addition to uncovering additional areas of revenue mobilisation, recommends solutions to Pakistan's long-term trajectory of sluggish growth by focusing on the following themes; openness, competitive markets, vibrant and inclusive cities, connectivity, institutional and economic reform and the need to capitalise on the imminent youth bulge.
The FEG has recently faced criticism over its lack of emphasis on export-led growth. However, people tend to criticise without making any effort to understand, in fact if anyone reads the FEG document holistically they will find the contrary; the growth strategy calls for reforms in favour of export-led growth. These include openness, trade liberalisation, deregulation and the creation of space for innovative entrepreneurs capable of producing exportables critical for sustained economic growth that generates jobs, and raises productivity and wages, which in turn enhance the quality of life.
To illustrate, the current state of the trading climate in Pakistan involves distortionary policies including the reversal of tariff cuts and of liberalising reforms in agriculture (wheat, sugar and fertiliser policies), steeply escalated tariffs further distorted by EDB intervention, and quasi-import licensing. In spite of export promotion in some sectors, consumers have paid the price for protectionist policies in others.
As a result of this trade regime, exports and imports (as a percentage of GDP) have not varied in the past 3 decades and even within the structure of exports, the industrial sector has not been able to diversify away from textiles. Pakistani exports are narrowly concentrated geographically making them vulnerable to the economic crises in the US and EU. Lucrative markets like those in Africa remain an untapped opportunity that is why the FEG also advocates enhancing 'connectivity'. This is another theme in the FEG that compliments that of competitive markets, thus it is vital to understand the role of the strategy's interconnected themes before criticising any single part of it.
Securing Pakistan's place in international markets is vital for the success of this growth strategy, which is why this criticism is unfounded. The FEG proposes an across-the-board enabling environment, strict refrain from sector-picking, re-establishment of unilateral trade liberalisation programme, abolishment of the present system of distortive regulatory duties (SROs) and the ad hoc system of quasi-import licensing, and the enactment of a national competition act. The strategy also suggests maintaining a neutral real exchange rate policy, and the need to review the economic justification for sectors benefiting from export subsidies and taxes. All these reforms lay out a business environment conducive to a thriving export sector.
Some may argue against trade liberalisation saying it drives domestic producers out of the market. We all understand the textbook arguments for/against openness, but the time to learn from past mistakes has come; Pakistan's textile, automobile and fertiliser industries remain uncompetitive even after over 40 years of protection. This and the constantly changing context of global competition require an emphasis on facilitating broad-based innovation. We need to create opportunity for currently suppressed industries that have export potential. S. Lall and J. Weiss assert that the infant-industry argument might apply in some cases but it is imperative for subsidies to be time-bound and linked to performance. Sectoral protection has caused a move away from technology-based industries and into less technology-intensive industries with minimal value-addition and technological spillovers making it inadequate for achieving sustained growth. Also, firms need to be exposed to competition to evolve their productive capacities. Pavcnik studied Chile's case of trade liberalisation in the 1980s which illustrates how as a result of the exit of some firms, productivity rose in both import and export sectors to about 32 percent and 25 percent respectively. Turnover is important to allow incentive for innovation and ensure that inefficient businesses don't remain in the markets by accruing policy-induced rents at the expense of consumers in terms of product quality, price and variety.
Thus, the binding constraints to export expansion can be classified into two categories; the lack of competitive markets described above and the missing government reforms, which are needed to create space for investment and entrepreneurship. Several international indicators suggest that Pakistan has a heavily regulated business environment. The 2010 Doing Business report estimates that firms in Pakistan spend on average 560 hours in paying taxes, which is twice the South Asian average of 284.5 hours. Pakistan also ranks poorly in the Global Competitiveness indicators involving public institutions.
Opportunities in the potentially successful IT and other service sectors can be seized by strengthening intellectual property rights, for example. Nevertheless one cannot ignore the success of some Pakistani brands in establishing themselves abroad, eg Chen One and Bareeze. However, examples like these are very few indicating the unfriendly business climate small entrepreneurs face as compared to the larger incumbents who are able to secure preferential benefits.
The FEG asserts that public enterprise reform and privatisation will make space for entrepreneurship. Some may point out the failed privatisation attempts of the past. However, a more scrutinising view is required when evaluating past attempts; the necessary regulation to protect consumers, encourage competition across-the-board and enhance corporate efficiency was not provided. The government's role needs to be re-oriented away from market participation towards policy and regulation to allow space for private investors to establish themselves domestically and internationally. Once the current regulatory framework that stifles domestic commerce is reformed, innovative markets can emerge as the main driver of exports in a world now striving towards innovation-based competitive advantages rather than resource-based competitiveness.
(The writer is an Economic Consultant in Planning Commission, Government of Pakistan)