Beruflich Dokumente
Kultur Dokumente
Students Name & I.D : Mohammad Fahad (6306) Souban Jilani (6312) Shoaib Shafi (6323)
Project of Macroeconomics
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Overview:
In 1947, Pakistan had 30 million people with per capita income of 100$. Agriculture accounted for almost 50% of economic output with hardly any manufacturing, as all industries were located in India. Therefore, it was unable to feed 30 million people and was dependent on PL-480 imports from the USA. From thereon, Pakistan has come a long way. Today with 170 million people, our per capita income in 2008 was 1000$ which was tentimes more. Pakistan is the third largest exporter of rice in the world and producing enough food grains to feed its people. 3 million tons of rice is exported every year by Pakistan which is surplus to our requirements. Pakistan is also one of the five major textile producing countries in the world. So if we measure in relation to where we were vis--vis structure of economy, agriculture has come down from 50% to 20%. Therefore, out of total national income, agricultures contribution is just 20%, but instead of being deficient in food production, we are actually surplus and that is what productivity means i.e. by using the same land you produce more from the same inputs, that is how economic growth takes place. Agriculture is not only crops, within agriculture there has been a significant change. Livestock, dairy, mutton, beef, poultry and similar other products is 50% of agriculture output in Pakistan. Pakistan also produces third largest quantity of milk in the world. So within agriculture sector, there is a change i.e. major crops are only 36% of agriculture value added and 14% are minor crops, fisheries, orchards, fruits and vegetables. Thus, we are moving in a direction where the same land and same resources are being used more efficiently in order to produce more. As a contrast, agriculture is only 2.5% in the US having a population of 300 million, out of which they not only feed the entire population, but also export to the rest of the world. Therefore, it is important to understand that when it is said that agriculture is producing/contributing more, it is the productivity of agriculture rather than the share of agriculture in GDP. Manufacturing and industry now Project of Macroeconomics Page 2
account for 25% of the income; when we recall there was not even a single industry worth its name at the time of partition. So if we look where we were and where we are, I think the justification for Pakistan in terms of betterment of economic conditions of Muslims in this part is very strong. But where we have failed is that we have not lived up to our potential. In 1969, Pakistan exports of manufactured goods were higher than the combined exports of Indonesia, Malaysia, Philippines and Thailand. In 1960s Korea emulated Pakistan in its five years planning process. The tragedy is that even a country such as Vietnam which was completely devastated by the war has now overtaken Pakistan. Ten years ago, India which was way behind Pakistan (till 1990s) is now way ahead. As an economist and student of globalization, the biggest challenge is: how can we organize ourselves to reach that position where at least we can be running not at the nine second a mile but at least ten second a mile race which is going on in the global economy.
b. We Import More and Export Less. Till 2007-2008, 80% of our imports were Financed by our export earnings. This ratio has come down to only 50%, it may go up to 60% but a gap of 40% of financing needs in order to keep with the Import level still exists. As a nation we prefer to use even the basic commodities of foreign countries rather than locally manufactured goods. Unless we do not Change this attitude of preferring the imported goods we have to keep on relying on outsiders to fill in this gap b/w our imports and exports. Relying on outsiders Means that there are cycles, ups, and downs i.e. when things are good, one gets Financing, and when things are bad one starves for financing. No nation which Strives to preserve its honor must go through this particular route. The lower is this gap between our export earnings and expenditure on imports - and that can be achieved only by expending our exports; our reliance on external sources would be reduced.
c. Government spends more than it earns as Revenues. Fiscal deficit is the difference between the
revenues which are collected in a year and the total expenditure incurred by the Government. Pakistans government takes away 20% of national income as its own. 80% is left in the private sector and 20% in the hands of the government is spent on defence, debt servicing, development on education, health, general administration etc. The revenue generated is only 15% of the GDP at best, and in the worst days it is 12 to 13%. Out of the every rupee of income received by a Pakistani, on average, tax paid is only 9 paisas and 91 paisas remain with the individual. In 2007-2008, Pakistans fiscal deficit was more than 7% which means its income or revenues were only 13% of GDP whereas, expenditures were 20%. Therefore, fiscal deficits have to be financed from somewhere, so how do you finance them; you either go again begging the external donors, or to the State bank of Pakistan. The financing provided by the State bank of Pakistan is dangerous because it creates high inflation in the economy, which is injurious to the middle class, those earning fixed wages and salaries, and the poor. Therefore, there is an uproar in the country if the inflation rate goes up. In 1999, our Debt to GDP ratio was 100%, which means that the entire national income was pledged as debt. Every single penny was pledged to the creditors. This ratio was reduced gradually over next six to seven years and brought down to 50%, an average for all the economies. However, the way the things are going for the last two years, it has moved from 50% in last two yrs to 58%, and with all the borrowings it may go to 60%, while the Fiscal Responsibility Law 2005 says, that the government should not exceed the debt GDP ratio more than 60% and is required to reduce it by 2.5%; and that is not happening. The reason the fiscal deficit is widening is low revenue collection. How can you expect that only nine paisas out of every rupee of income generated by Pakistani population suffices to meet the Project of Macroeconomics Page 3
requirements of defence, infrastructure, development, debt servicing etc. This is just not possible. In India, tax GDP ratio is 15% and still they have fiscal deficit. So Pakistan is way below the norm for developing countries. Many people say that defence takes away a lot of government expenditure. Whereas, the fact is that defence expenditure is only 20% of government expenditure. It is only 4% of GDP, and is not such a large expenditure as compared to debt servicing which is 7-8% of GDP and almost 40% of government expenditure. Therefore, government has to contain its fiscal deficit by raising revenues. Agriculture incomes are exempt, professionals, retailers, wholesales, transport owners and many other service providers evade taxes by paying a small fraction of what is due. Continuing large fiscal deficits year after year may plunge the country into debt trap again.
d. Our Share in the World Trade is shrinking. In 1990, Pakistans share was 0.2% of the world trade.
After 20 years it has come down to 0.12% in a very buoyant world economy. World trade has been growing faster as compared to the world output. India in the same period had doubled its share from 0.7% to 1.4%, while Pakistan is going the other way and that is the reason why exports/imports imbalance is increasing. We are not taking advantage of the opportunities which a buoyant world economy is providing. Pakistan is stuck with only a few commodities textiles, leather, rice, sports, goods and the surgical goods. We have not entered the markets for more dynamic products. All our exports are to a few markets the USA, EU and the Middle East. So this narrow export base and very limited geographical spread are not allowing us to expand our share. Unless we improve the quality of our products, go out and do the marketing abroad, invest in research and development, the prospects do not look promising. That is why we are lagging behind other countries which from way back are over taking Pakistan.
e. We Badly Lag in Social Indicators. One of the most glaring weaknesses is that a country like Pakistan that should have had best indicators in literacy, infant mortality, fertility rates, in access to water supply, in primary enrolment ratios has social indicators which are more comparable to Africa rather than to the Countries of similar per capita income. Even Tajikistan, which is a very poor country, has better literacy rate and primary enrolment ratios than Pakistan. What does it means? It means that if we had literacy rate of 100% instead of 55%, then in 2009-2010 our per capita income would have been 2000$ rather than 1000$. Instead of 30 million middle class in Pakistan we would have 60-70 million middle class people; we would have poverty reduced to 15-20%. We have committed to achieve the millennium development goals by 2015 i.e. we will be able to reach 80-85% literacy rate, but it is doubtful that this will happen. Why do we have regional inequalities? Why Baluchistan is lagging behind other provinces? It is because of literacy rates and primary enrolment ratios. There is a direct correlation between regional inequities and backwardness with the level of education. f. We Face Energy and Water Shortages. Another challenge we face today is energy and water shortages, and that is not because we are not generating enough electricity or we are not having enough water. With the losses of KESC from the point it has generated to the point they realize the billing is 45%, so 55% people are paying for those who are stealing the electricity. Government of Pakistan out of its own limited resources is paying 200 billion rupees every year as subsidies for electricity. Our industry is at a disadvantage that they get the orders from foreign countries but they cannot execute the orders because there are electricity outages. In addition to economic losses it also creates inconvenience for pursuing normal life. We have silting of our dams, but no additional dams have been constructed since Tarbela in 1974. We have water course losses of about 20-25%. Even after these losses, the water is inequitably distributed. The influential land lords are able to take greater share of water from the canals as compared to poor farmers. Therefore, the productivity of poor farmer is only one ton per acre as compared to 3 tons by large holders. If we provide the water equitably to the small farmer, he would also be able to increase the productivity from one to at least two tons resulting into additional income, increase in exports of food grains, cotton and fruits and vegetables which will add to export earnings of Pakistan. With the climate change taking place with all the glaciers in Himalayas which are going to melt, we are going to have difficulties in future due to global warming. g. Cost of Doing Business is High. Pakistan is ranked among the bottom half of the rankings of the countries where cost of doing business is quite high. It is not high for any particular reason but because of Project of Macroeconomics Page 4
our bureaucracy totally sitting on their seats without taking actions or decisions in time. Unless there is some pressure or incentive for them, the normal businesses particularly the small and medium businesses have serious problems at the hands of bureaucracy. Even if we have investors who are welcomed by the federal government, when it comes down to provincial and local governments there are given a run around the land is not available, the water is not available, the gas is not available, electricity is not available, road is not available. Lack of coordination among various government agencies, innumerable laws and regulations that are antiquated and outdated have proved to be serious impediments. Labour laws, inspections by multiple agencies, the delays in the court system, infringement of intellectual property rights and evasion of taxes by competing firms in the informal sector have rendered some of the well established firms unprofitable, or the feasibility of starting near ventures questionable. h. Crisis of Governance and Implementation Weaknesses. If we glance on policy documents of various governments on education, agriculture, health, trade policy etc, and look at the same policy forty years ago and the problems, there is hardly any significant record of implementation of those policies or plans over this period. We produce five years plans and all kinds of medium term frameworks, but it is the poor governance and implementation that are the weak links in getting things done. Unless we strengthen civil services and bring about a merit based system of recruitment, promotion, performance evaluation, compensation, disciplinary action, etc, we will not be able to see any difference in the quality of governance. Orders are given by the higher ups but they are not carried out; summaries are approved, but they remain buried in the files and therefore; whether it is education, health, water supply, revenue or law and order, you can pin down the problem to the governance issues. Unless we fix the governance issue, the economy is not going to take off at the speed which is required.
j. Uncertainty and Unpredictability due to Lack of Continuity. Every Government whether military or civilian starts with a clean slate, as if nothing Happened before them and nothing will happen after them. This is not the way the real world works. You take the projects and programmes which were initiated by the previous governments, evaluate them as to what the strengths and Weaknesses were, fix those weaknesses and carry them forward. It will take only Few years to bring these inherited projects to completion and the country will benefit from new motor ways, new ports, highways, educational institutions etc. But the blame game of successive governments results into abrupt termination of all such projects and programs. When these are resumed the cost has escalated three times and it takes several additional years to complete them. In the meanwhile the people of Pakistan suffer because of this lack of continuity. When faced with such unpredictability about the future, the investors are pondering whether they should invest in this country as they are uncertain whether the new government when comes in would stop or alter what the previous government was doing, or adhere to the commitments made to them. Take the example of Higher Education Commission, which was sending 1700 students for PhDs abroad but the new government comes in and suspends the funding of those programmes. This solved down the process of faculty development for our universities at a time when we should have been sending twice as many scholars. k. Political Stability, Law and Order/Security. The overall arching theme is that for a robust economy we should have political stability, law and order and security. The Armed Forces of Pakistan deserve gratitude for what they have done in Malakand Division to bring about stability as far as the law and order situation is concerned. The sooner the country is gotten rid of this image of political instability, poor law and order situation and insecurity, whereby investors from all over the world hesitate in coming to Pakistan and invest, we will not be able to make any progress in this country. In 2007, Pakistan was one of the most favourite countries among the international investor community. A thirty year piece of paper was floated which was a bond for Pakistan to be paid in 2037 and Pakistan got four times over subscription at a price which was only 300 basis points above the US treasury. Very few countries can claim to have that kind of credibility with international fund managers. However, in two years time we have missed that boat.
a. Change in National Psyche and Mindset. We as a nation are too much negative oriented and too much cynical where we find everything wrong in this country. Unless we change our mindset and unless everybody who is doing what he is supposed to do, carries out his or her task with sincerity and honesty, we are not going to go anywhere. We should not expect any Messiah to come and fix our problems we have to do it ourselves individually and collectively. There are no short cuts available. Media is muddying the water by their sensational stories and inviting so called experts who contribute in projecting negative thinking and negative national psyche. Unless we have a positive can do mentality, it will be difficult to progress. Unless each one of us changes our mindset rather than blame the government and the system, we are not going to go anywhere in this race for global economic survival. This is easier said than done. But I expect our younger generation to be more responsive and responsible. b. Building up of Human Capital. There is no substitute to building up human capital. Private sector, public sector, NGOs, local communities, philanthropists etc, all here to put their hands on deck and participate in making sure that every child goes to school. Every high school graduate has some technical and vocational skill or goes for higher education. Unless we build up human capital, we are just going to be left behind because the world economy is going to be a knowledge based economy. It is not an economy where you memorize material or reproduce that in the exam and forget about it - that is no longer the case. One has to acquire the knowledge and use it in order to apply to problem solving. This is a new paradigm where human capital is as important as machinery and equipment. Pakistan lags behind other countries in the institutions, infrastructure and incentives for human capital formation. We have no choice but to accelerate the pace to catch up with others. c. Use of Technology. The technology is spreading like a wild fire. How many people five years ago could have thought that even in a small towns and villages of Pakistan, one would access to mobile telephones. 95 million Pakistanis have mobile phones today. You can use this technology in order to provide them banking services, information on climate/weather, agriculture extension, health, education etc. It is a
powerful tool which can leapfrog a lot of time which we have wasted.Using technology particularly the information/communication technology for the betterment of social and economic problems of Pakistan is something which needs to be done but it cannot be done the way we have compartmentalized this into different ministries. A more holistic and comprehensive approach that deploys technology for poverty reduction has to be put in place. d. Young Labour Force. Pakistan is one of the few countries which has a young labour force which can be harnessed for its own and global economy. Japan, Europe, USA and after 2050 China are going to have aging population where the ratio of old to young people is going to increase. India and Pakistan are two countries where the ratio of younger people to the older ones is going to increase. If we tool these young men and women properly, we increase the female labour force participation, give them skills and knowledge, they can become the labour force for the rest of the world. This will give a big boost to Pakistans own economy. In 2001, worker remittances were less than a billion dollars; today we have almost 7-8 billion dollars. Now this can be multiplied by three or four times if we have educated labour force i.e. skilled labour force going for overseas employment. This is also a way to create employment opportunities because if you have large number of younger people coming to labour force and you dont have job opportunities for them you can have social upheaval. Therefore, it is imperative to create employment opportunities for them and one of the avenues is to train them in the kind of the skills which are needed not only by the national economy but also by the international economy. e. Governance, Devolution and Decentralization. As the population is increasing, one cannot govern Pakistan sitting in Islamabad, Karachi, Lahore, Peshawar or Quetta. One has to devolve powers, decentralize and delegate authority, provide resources to the local/district governments so that they can take decisions at their own. Those decisions would be very much in accordance with the requirements and the needs of those communities. Sitting in Islamabad one cannot visualize what is needed in Chaghi or Loralai, but the people in Loralai and Chaghi know exactly whether they need water, fertilizers or fruit processing industry. Let us devolve powers to the people at the grassroots level and there would be much Project of Macroeconomics Page 6
better allocation and utilization of resources. There must, however, be accountability of the local governments by the provincial governments and of provincial governments by the federal government but not interference or usurpation of powers. If we do that, then a lot more can happen with same amount of resources which are being wasted today, and the economic growth rate can be raised from 6-7 percent average to 8-9 percent annually.
improved. Customs administration and procedures for exporting and importing performed relatively well. Pakistans worst score is related to physical security, consistent with the findings of this report overall. Market access also scored poorly indicating the need to pursue favorable trade agreements. The lack of trade between Pakistan and India, whatever the political and security obstacles, takes a major toll on Pakistans market access. Efforts to secure duty-free entry to the US market, perhaps through Reconstruction Opportunity Zones (ROZs), remains bottled up in the US Congress and it is unclear whether a broader appeal for the entry of Pakistani products to the US market will be successful in a US election year, notwithstanding the flood-related sympathies and the importance of Pakistans collaboration in regional security efforts. The Government of Pakistan should make every effort to achieve further trade concessions where possible with its major trading partners.
decline in imports, rather than an increase in exports. Total investment made a negative contribution of 0.3 percentage points, while net exports contributed a meager 0.6 percentage points to growth. Public and private investment has fallen off sharply from the higher levels of preceding years. After increasing from around 17% of GDP in FY2003, to a record high of almost 23% of GDP in FY2007, total investment in Pakistan declined to a little over 16.6% in FY2010. Fixed investment decreased from 20.5% of GDP in FY2007 to 15% in FY2010. Public sector investment, critical for facilitating private investment and for social and infrastructure development, is not only low, but also decreased as a percentage of GDP during the last three years.Overall private investment decreased from 11.3% of GDP in FY2003 to 10.7% of GDP in FY2010: public sector investment increased slightly from 4% of the GDP to 4.3% of the GDP over the same period.Foreign direct investment (FDI) has been pivotal in driving recent growth by bridging the chronic saving-investment gap, while financing the current account deficit. Nevertheless the total flow of foreign investment in Pakistan has been consistently declining since FY2008. After reaching USD 5.4 billion in 2008, FDI has fallen to just over USD 2 billion for FY2010. During the first eight months of FY2010, FDI declined by USD 1.5 billion, or 52.8%. According to the most recent figures, FDI for 2010 stands at USD 2.2 billion as compared to USD 3.7 billion for FY2009. A vibrant agricultural economy is very important in mitigating rural poverty but its overall growth has been quite modest despite the volatility of its subcomponents and weather-related fluctuations. Fishery and forestry performance has been quite volatile, but as mentioned earlier, livestock performed relatively well in FY2010 compared to agriculture. The performance of major crops has been highly volatile during the decade, especially when compared to that of minor crops. Future growth and stability in Pakistans economy greatly depends on large-scale agriculture diversification, including promotion of horticultural crops, floriculture and value-addition. Almost half of the manufacturing sector activities are related to the cotton, textile, and apparel industry, which account for around two-thirds of Pakistans exports. This industry has failed to become a real engine of growth despite its natural resource advantages and abundance of labor. China and Bangladesh however gained market share after the expiration of textile quotas in 2005 while the Pakistani industry has struggled with comparatively high interest rates, labor productivity issues, uneven electricity supply, costly logistics and other unfavorable aspects of the business environment. In FY2009 the manufacturing sector contracted by 3.7% as compared to 4.8% expansion in FY2008 and the annual average of 7.8%. Manufacturing sector performace greatly depends on large-scale manufacturing growth, which has stagnated since FY2005; some Pakistani textile and apparel companies have relocated abroad.
Remittances have been a driver of recent growth and have contributed to improved living standards. The increase in per capita income noted earlier benefitted from over USD 6 billion in remittances from workers abroad. Current remittance levels are over three times the amount remitted in FY2003 (USD 2.4 billion). Workers remittances have continued to grow for the calendar year 2010 with some estimates suggesting USD 15 billion by 2015: Pakistan is the worlds 12th largest recipient of remittances. Almost 80 % originate from North America, Saudi Arabia, and the United Arab Emirates (UAE). In 2007, Pakistan received USD 37 per capita in remittances, compared with USD 33 for South Asia. New steps taken by the State Bank Pakistan (SBP) and the Ministry of Finance, such as launching the Pakistan Remittance Initiative to attract greater amounts of remittances through normal banking channels, have also helped to substantially increase these inflows.
EMPLOYEMENT:
Unemployment increased to 5.5%, which is low by historical standards although anecdotal evidence suggests this may understate the current situation. The Government has sought to mitigate the effects of the economic downturn by establishing the Benazir Income Support Program (BISP), which provides cash transfers to poor and vulnerable households.Slow implementation, fiscal pressures, and stabilization requirements may limit the ability of programs like BISP to fulfill its goals. Robust levels of economic growth, of from 68% may be required to accommodate new entrants to the labor force while addressing redundant labor in agriculture and responding adequately to unemployment and underemployment.
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MACROECONOMICS CONSTRAINS:
The rapid deterioration in foreign reserves was arrested, and has now recovered. Pakistan approached the IMF in late 2008 in the wake of a considerable depletion of the countrys foreign exchange reserves. Foreign exchange reserves have been rebuilt to reach USD 15 billion in January 2010, with the help of IMF funding and strong workers remittances. By agreement, a total of USD 11.3 billion will be disbursed, of which USD 7.3 billion has been already received. IMF assistance has helped to allay fears of sovereign default, and has stemmed capital flight and currency depreciation. However, Pakistan has a major imbalance between fiscal revenues and expenditures. Taxes declined to 9% of the GDP. Revenue generation capacity as a percentage of GDP declined from 13% in FY1999 to 9% in FY2009, the first decline in almost two decades. A tax-to-GDP ratio of 18% is common in other developing countries and much higher in some. This is in part due to the burden of taxes carried by manufacturing with agriculture and services not fully incorporated Into an equitable tax system. Despite fiscal reform efforts over the last two decades, the persistence of fiscal deficit is one of the key causes of recurrent macroeconomic instability in Pakistan. Although revenue generation activities have increased, the Government continues to face difficulties in meeting its fiscal deficit target. The current fiscal years deficit is shown to be 6.3% of GDP. The fiscal deficit increased during JulyMarch of FY2010, despite revenue increases brought about by the Petroleum Development Levy (PDL), thanks to higher oil imports. The long-awaited imposition of an integrated Value-added tax (VAT) has been replaced by a proposal to reform the existing General Sales Tax (GST) by removing un-warranted exemptions. It is hoped that a reformed GST system will be introduced by October 1st, 2010 after securing the consensus of national and provincial legislatures. It is hoped that these tax reforms will help the Government to increase its tax-toGDP ratio to 15% by 2014. The implementation of the reformed GST scheme is important for Pakistan to mobilize additional revenues while doing so fairly transparently.
To address the fiscal deficit, the Government has set a tax collection target for FY2011 of around Rs.1778 billion with total revenue generation estimated to be around Rs.2410 billion. The planned launch of convertible bonds of three large state enterprises is critical for filling the fiscal deficit, as the move is expected to generate around USD 3 billion. Consumer inflation was reported at 13% in the year, up to February 2010. This increase was driven by increases in electricity tariffs, petroleum products, and commodities such as wheat. High inflation resulted from robust demand, chronic supply-side bottlenecks, monetization of the fiscal deficit, and high international commodity prices. Headline inflation is expected to be around 12% this fiscal year before easing to around 8% next year, with help from improvements in food supplies and a tight monetary policy. The persistence of a large fiscal deficit is recognized as one of the main causes of inflation in Pakistan. The SBP continues to encounter coordination problems impeding the critical balancing of monetary and fiscal policy to keep inflation at bay. The supply-side problems require further trade liberalization, a move that would also improve the timely supply of key commodities in adequate quantities in order to avoid sudden price shocks. The SBP needs to pay greater attention to inflation-targeting through monetary management.50 despite continued inflation; Pakistans currency has remained relatively stable after its earlier devaluation.
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MICROECONOMIC CONSTRIANT:
Electricity:
The macroeconomic picture has been stabilized, although high inflation rates continue to mean accompanying high interest rates, which deter investment. Meanwhile, there are many microeconomic constraints to competiveness. Many of these have been addressed in previous SPCR reports. Given its importance, electricity will be addressed below. Electricity shortages persist in taking a toll on productivity. The imbalance between supply and demand is being addressed, but the margins of surplus will remain narrow.If Pakistan is to achieve significant growth it will require a concomitant growth in electricity. The Government has designed an Integrated Energy Development Program to address the prevalent energy crisis in an environmentally friendly manner. The 25-year National Energy Plan aims to secure energy supplies for achieving GDP growth of over 7.5%. The Government is already working to considerably increase the share of coal-based and hydro-based electricity generation in total energy requirements in the next 15 years (see Figure 2.40). This will enable an increase in per capita energy consumption from the current 14 MMBTU to 42 MMBTU through indigenous resources including oil, gas, coal, hydropower, and renewable sources. Since the share of gas in indigenous fuels is declining, the growing gaps will have to be met by imported oil and gas.
1. Export Growth: Facilitate increased exports by working with Pakistans leading export industries to remove obstacles to competitiveness, lower costs of inputs, enhance efficiency of trade logistics, increase productivity, and introduce innovative technology and business practices. 2. Investment Growth: Target robust rates of growth for investment, especially private, productive, greenfield investment, whether foreign or domestic. 3. Financial Sector Modernization, Moderate Interest Rates and Improved Access to Finance: Encourage gradual expansion and diversification of financial products and competitive real rates of interest modernization and supervision. Create a policy environment that enables the financial markets to naturally bring down real interest rates consistent with sound macroeconomic management and financial supervision. 4. Electricity: Restore the supply-demand balance in electricity in the short term and ensure that the appropriate investments are made for long-term energy supplies that are reliable and cost-effective.
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5. Supporting infrastructure: Implement Special Economic Zones, Export Processing Zones, Industrial Parks, and other specialized infrastructure that can make investment more productive and encourage greater levels of that investment. 6. Workforce Development: Develop partnerships between specific industries and their education and training providers to achieve more effective results for workforce development. 7. Innovation: Institutionalize mechanisms for commercialization of research at Pakistans universities, implement legal frameworks for protecting intellectual property rights (IPR), and provide direct assistance to those seeking to file patents with local and international patent offices. 8. Entrepreneurship: Foster entrepreneurship within educational institutions, encourage entrepreneurial centers of excellence and incubators, facilitate proof-of-concept financing and lower the cost of entrepreneurial failure in terms of cost, time and reputation. 9. Provincial and Regional Development: Implement annual Competitiveness Index at the provincial level, implement annual provincial competitiveness reports.
Without sound institutions, it is impossible to implement a strategy for building competitiveness. Many countries have developed excellent economic plans and strategies for investment, exports, workforce development, infrastructure, small and medium enterprise, and other areas. However, these efforts cannot be sustained without good institutions: over-reliance on a particular leader makes a country vulnerable to sudden change. Institutions include a complex set of the rules of the game in society that shape the incentives for economic actors.Institutions shape the legal and regulatory frameworks, the informal norms, and the enforcement mechanisms of economic incentives, therefore having a profound impact on economic decisions. The importance of good institutions for growth and competitiveness has its foundation in the theory of New Institutional Economics, according to which individuals, firms, and governments interact in a world of positive transaction costs, information asymmetry, and unequal political power. Project of Macroeconomics Page 12
Without sound institutions, it is impossible to implement a strategy for building competitiveness. Many countries have developed excellent economic plans and strategies for investment, exports, workforce development, infrastructure, small and medium enterprise, and other areas. However, these efforts cannot be sustained without good institutions: over-reliance on a particular leader makes a country vulnerable to sudden change. Institutions include a complex set of the rules of the game in society that shape the incentives for economic actors.65 Institutions shape the legal and regulatory frameworks, the informal norms, and the enforcement mechanisms of economic incentives, therefore having a profound impact on economic decisions. The importance of good institutions for growth and competitiveness has its foundation in the theory of New Institutional Economics, according to which individuals, firms, and governments interact in a world of positive transaction costs, information asymmetry, and unequal political power. Countries that provide a business friendly, secure, transparent environment and a competitive level playing field become prime destinations for investment and job creation. A business friendly environment in no way means to suggest lack of compliance with world-class standards regarding worker safety, child labor, consumer protection, food safety, fair tax compliance or environmental protection. Rather, it means that red tape is kept to a minimum and that the country is serious about doing business. With good institutions, supporting infrastructure, services, utilities and public services function in ways that are conducive to firm-level productivity.
police services (119). These are particularly worrying. The concern for security is often reduced to the focus on terrorism and insurgency but this survey reveals that the impact of security on business is more pervasive and more complex. Successful ending of the civil conflict, while extremely important, is not the only factor affecting security. Institutional Constraints to Competitiveness
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Institutional constraints to competitiveness include the inadequate provision of security, ineffective public utilities, red tape, weak property rights, inadequate contract enforcement, perceived lack of transparency, and inadequate corporate governance. Each will be benchmarked and discussed in turn. These weak institutions hurt Pakistans economic performance today. They may also be restricting Pakistans ability to make the necessary structural transformations for the future. Moreover, weak institutions also prevent the fair distribution of the benefits of growth efficiently and effectively to disadvantaged groups: this section examines in detail specific institutional constraints. 1. Weak property rights hinder the mobilization of investment and its productivity Formal property rights and their effective enforcement encourage investment by securing the owners against unlawful expropriation and providing access to credit markets. They also help promote the efficient functioning of land markets and productive use of land. Furthermore, property rights encourage formal registration of business as well as personal property, bringing assets into the formal sector and thus contributing to a broader base of tax-payments. In the 21st century knowledge economy, intellectually property rights are becoming as important as property rights in land.75 Insufficient intellectual property rights protection may be a contributing factor to Pakistans relatively poor performance in the export of IT-enabled services and in knowledge products and services. Pakistan has not been notably successful in establishing global brand names or in attracting international investment in R&D within Pakistans borders. In the 201011 GCI ranking, Pakistan placed 107th out of 139 economies in protecting property rights. This is far below that of India (61), Sri Lanka (64), Brazil (72) and Thailand (89). Land distribution, registration and titling are elements of property rights enforcement. The highly unequal distribution of land in Pakistan and the tenure sharecropping system of agricultural production may be related not only to low levels of agricultural productivity (as shown in Chapter 2) but also low levels of educational attainment and literacy. Those doing menial work under a sharecropping system are often families that have to rely on child labor at home rather than sending children to school. 76 Pakistans performance in the property rights sub-indicator of the GCI (107th), is mirrored in the World Bank Doing Business report where it ranks similarly low at 119th out of 183 for the indicator of registering property. improvement is entirely under the control of the Government of Pakistan, and is not dependent on any external markets or authority to improve its performance. According to documentation that forms the basis of the Report, it takes 6 procedures, 50 days and an average cost of 7.2% of property value to register property in Pakistan. Illegal possession, informal occupation and disputed titling remain major hurdles in creating efficient and well-functioning land markets. Registration and land record management remain disaggregated, as multiple institutions are involved.78The land record systems are old and obsolete. At the most basic and local level of land registrations, the patwaris (land record keepers and administrators) are vulnerable to political influence and exploitation. The land registration and record management system is opaque, obsolete, and fragmented, and it fails to provide secure property rights. Meanwhile, land markets remain thin, and land prices do not reflect the true productive capacity of the land. Higher land values based on more secure titles could trigger access to credit that could in turn lead to expanded economic activity. In the area of intellectual property rights, Pakistan has improved 9 ranks over the past year (up to 86) but continues to perform below India (66), Sri Lanka (46), and Thailand (84). Pakistan put in place its first integrated Intellectual Property Rights (IPR) regime, governed by the Intellectual Property Organization (IPO) of Pakistan Ordinance 2005, which provided for the establishment of an IPO Office attached to the Cabinet Division. Despite this stronger regulatory framework, Pakistan lags behind India in patent filing. 79Intellectual property rights enforcement remains weak, as piracy, counterfeiting, and plagiarism are prevalent.
2. Current legal, regulatory and administrative frameworks governing private sector activity are inefficient and they unnecessarily raise the cost of doing business
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Well-functioning legal, regulatory, and administrative frameworks encourage investment and create an enabling business environment. Pakistan lags behind in modernizing various commercial laws that govern private sector activity. This is evident from Pakistans ranking on the GCI sub-indicator efficiency of legal framework in settling disputes and efficiency of legal framework in challenging regulations Presently there are a number of obsolete and fragmented laws regulating commercial arbitration and alternative dispute resolution that do not provide adequate protection to foreign investors.80 The current insolvency laws have failed to facilitate orderly adjustment and exit from declining industries.81The laws are also unfriendly for entrepreneurs and venture capitalists as they are skewed towards liquidation rather than rehabilitation, thus discouraging innovation and risk-taking. Pakistan, like many other countries in the region, has also created special economic and industrial zones to support the development of new and export-oriented industries, but the absence of a unified legal and policy framework governing these enclaves has caused substantial misuse of policy incentives. Private sector activity in agricultural markets is restricted due to the old Provincial Marketing Acts that continue to involve the government in fixing prices and controlling markets down to the small town level. 82These laws govern the sale and purchase of agricultural produce including fruits, vegetables, dairy and meat products, and have prevented the development of modern and efficient agricultural markets. Progress has recently been made through the introduction of a modern anti-trust law to foster competition and protect consumers. 83 Pakistan has also facilitated new business registration by reducing the number of steps and fees and by improving access to registration offices. However, making a business fully operational by registering property, dealing with construction permits, and getting utility connections continues to be difficult, time consuming, and costly. Firms also encounter a number of impediments in paying taxes, employing workers and enforcing contracts. Labor laws dating from the 1970s socialist era restrict overtime and the number of hours that can be worked, leading to substantial rigidity in labor markets, discouragement of formal business registration, and encouragement of informality, which in turn impedes growth and productivity. Facilitating tax compliance would also improve Pakistans low rate of domestic tax collection, thereby reducing dependency on foreign transfers. Presently there are a number of obsolete and fragmented laws regulating commercial arbitration and alternative dispute resolution that do not provide adequate protection to foreign investors.80 The current insolvency laws have failed to facilitate orderly adjustment and exit from declining industries. 81The laws are also unfriendly for entrepreneurs and venture capitalists as they are skewed towards liquidation rather than rehabilitation, thus discouraging innovation and risk-taking. Pakistan, like many other countries in the region, has also created special economic and industrial zones to support the development of new and export-oriented industries, but the absence of a unified legal and policy framework governing these enclaves has caused substantial misuse of policy incentives. Private sector activity in agricultural markets is restricted due to the old Provincial Marketing Acts that continue to involve the government in fixing prices and controlling markets down to the small town level. These laws govern the sale and purchase of agricultural produce including fruits, vegetables, dairy and meat products, and have prevented the development of modern and efficient agricultural markets. Progress has recently been made through the introduction of a modern anti-trust law to foster competition and protect consumers. 83 Pakistan has also facilitated new business registration by reducing the number of steps and fees and by improving access to registration offices. However, making a business fully operational by registering property, dealing with construction permits, and getting utility connections continues to be difficult, time consuming, and costly. Firms also encounter a number of impediments in paying taxes, employing workers and enforcing contracts. Labor laws dating from the 1970s socialist era restrict overtime and the number of hours that can be worked, leading to substantial rigidity in labor markets, discouragement of formal business registration, and encouragement of informality, which in turn impedes growth and productivity. Facilitating tax compliance would also improve Pakistans low rate of domestic tax collection, thereby reducing dependency on foreign transfers.
Pakistan needs to improve transparency and check corruption Project of Macroeconomics Page 15
Corruption acts as a tax on investment and growth by raising the costs of viable projects and by diverting resources from productive activity to private pockets. Pakistan performs poorly on the GCI sub-indicator measuring favoritism by government officials (87) as discussed above, and diversion of public funds (92). On the latter indicator, it fares poorly as compared to India (71), Thailand (65) and Sri Lanka (61). According to Transparency Internationals Corruption Perception Index in 2009 Pakistan is placed well below Thailand, Brazil, Sri Lanka and India (see Figure 3.3).88The National Corruption Perception Survey 2009 carried out by Transparency International Pakistan reveals that perceptions of corruption are greatest in the Police, followed by Power, Health, Land, Education, Taxation, Judiciary, Local Government, Customs and Tendering. The survey cites lack of accountability, lack of transparency, and discretionary powers of office holders as roots of corruption. Security costs are taking their toll on the competitiveness of Pakistans firms. According to Pakistani business leaders surveyed for the Global Competitiveness Index, security costs are imposing much higher costs for them than for their competitors in other countries. Pakistan ranked particularly low in these GCI sub-indicators: business costs of terrorism (138), business costs of crime and violence (126) and organized crime (127). As mentioned above, the crisis of confidence in the Governments ability to provide basic security is not only related to the current insurgency, civil conflict and terrorism, but is more pervasive. It includes perceptions of growing costs of criminality, including a perception of growing threats from organized crime. Confidence in the institution of police services is low. This is particularly worrying and needs to be addressed as a priority. Pakistan ranks below the comparator economies on indicators related to the business costs of security and crime.91 Anecdotal evidence also suggests that a number of international companies are hesitant to set up offices or send their international staff to Pakistan for extended periods because of security concerns. Fractures in the ruling coalition and constitutional disputes, combined with continued civil unrest in the northwest and more sporadic incidents elsewhere, act as dampeners for both domestic as well as international investors. Travel advisories deter international visitors, while necessary precautionary security measures add to the difficulty of doing business across borders.
CONCLUSION:
The proposed direction for reform builds on, and does not aim to replace the Government of Pakistans existing programs. It does, however, aim to add value to these efforts by identifying the gaps and assessing the effectiveness of the present program in achieving the objectives of enhanced growth and competitiveness by improving the overall economic and business environment. The recommendations also emphasize the responsibility of federal, provincial, and local governments to undertake efforts in their respective jurisdictions. Institutional strengthening and reform also involves private institutions and recommendations have been made for strengthening corporate governance, auditing, investor protection and contract enforcement. Private institutions also have a role to play in helping to guide Government policy, monitor results and mobilize broad public understanding and support for its economic growth program. Thus the institutional framework encompasses more than civil service reform and governmental organization, it requires an institutional framework capable of mobilizing the energies of a diverse private sector, provincial and district level administration and supporting institutions such as industry associations, universities and research institutes. The central message of the proposed institutional reform framework is to provide a business friendly, secure, transparent, and level playing field for private sector development together with policy and regulatory regimes that incentivize investment, efficiency, innovation, and productivity enhancement. These efforts require strong political commitment, consensus building and coordination across ministries and between the federal and provincial levels. Implementing a coordinated reform will boost Pakistans future growth and competitiveness and help make further economic progress consistent. The costs of inaction are simply too high.
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