How to fix the

Pakistani
economy?
Five of the nation’s top experts on what the government
should do in order to get the economy humming again.

By now, it is abundantly clear that the Pakistani economy is not working, at least not for
the overwhelming majority of the people in the country, and perhaps not even for the
politically well-connected rent-seeking elite for whom the entire economic structure
has been distorted in the first place. What, then, is the way forward? The Imran Khan
Administration’s economic team, led by Finance Minister Asad Umar, appear to be
taking a long time in getting settled in and appear indecisive about what to do next.
We thought we might try to help them along.

We contacted five of the top experts on the economy to get their version of what is the
right thing to do to put the economy on the right track in the backdrop of falling exports
and balance of payments crisis. All five have either directly worked in the government,
or else been in a position to advise the government or key figures in the country’s
ruling political parties. And four out of the five have doctoral degrees in economics or
related disciplines.

These accounts were narrated individually to Taimoor Hassan in Pakistan Today. They
are presented here, without comment from our usually opinionated editorial staff.

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 Stabilise the macroeconomy, then
focus on poverty alleviation
Shaukat Tarin is a banker and former federal finance minister.

Reduce taxes, rein in government spending, and then

prioritise poverty alleviation through programs to
incentivise and fund entrepreneurship.

Pakistan’s long-term economic strategy should focus on the welfare of the common
man. The economy should be tweaked so that in the long run, economic benefits such
as higher income levels and lower unemployment could be passed on to the common
man. The medium to long-term strategy to achieve these ends requires stabilizing the
macroeconomic environment to attract investors who are willing to invest on a
long-term basis. Key macroeconomic indicators such as inflation should be brought
down and exchange rate should be stabilized, complemented with lower interest rates.

Presently, our fiscal side is totally out of line with our expenditures exceeding our
income. The government takes most of the money and there is nothing left for the
private sector and businesses. There is a need to increase our revenues on a war
footing. Our tax-to-GDP ratio is very low so if we plan our economy to grow at a rate of
6-8%, the tax-to-GDP ratio needs to be increased to 20%, from the present around 13%,
in the next five years. The tax collection should be done across the board with a
primary emphasis on introducing new tax filers in the tax net instead of increasing
taxes on those who are already in the tax net. If we increase the number of taxpayers to
10 million in the next five years, we stand a chance.

Secondly, the rate of sales tax should also be reduced from 17.5%. Overall, we should
introduce a progressive tax regime in which all incomes are taxed, all consumptions are
taxed and any exemptions are expunged. In the same spirit, we have to rationalise our
expenditures, with the debt payments among them being the most sizeable after
defence expenditure. A major revenue affliction comes from our public sector
companies which incur losses to the tune of Rs700-750 billion per year. These
commercial organisations should be turned into profit-making entities through proper
structural reforms to enable them to earn profits to contribute towards the national
exchequer. Expenditures need to be rationalised and all unnecessary expenditures like
the number of ministries and divisions should be cut.

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On the external side, we always run into a problem when we run out of dollars and
during the past five years, our trade deficit has doubled. Instead of increasing, our
exports have decreased and this happened despite the fact that our oil imports
decreased due to a slump in oil prices and commodity prices also decreased. This is the
height of our under-performance. The problem lies in the fact that we don’t have a
proper export base which needs to be broadened.

We need to work on our imports side and curb frivolous and unnecessary imports. We
also need to work more on our exports. The issue with our exports is that we don’t have
an exports base which needs to be broadened. We need to export agriculture, IT and
engineering products and explore new areas where our export competitiveness can be
increased. Our existing exports should be more value added so that we don’t lose
competitive edge in the market for existing exports. In textiles, which are around 60%
of our exports, we are converting one million bales into $1 billion whereas China
converts the same one million bales into $4 billion. They are able to do that because
they add value to their products. If we convert one million bales into $4 billion, we will
be able to add over $45 billion through the 14 million bales in just textile exports. The
government should provide subsidies to the industries as long as they are making value
additions to their products.

The problem with value addition is that it requires consolidating. Presently, businesses
in Pakistan are being run by families and there are no foreign investors in the exports
sector. This essentially means that no capital comes into Pakistan from outside and
there is no solid connection with the international markets. It all needs to be
consolidated. The bankruptcy law, that we call the Corporate Restructuring Act (CRA),
needs to be made active. Smaller companies need to be consolidated and foreign
investors need to be brought in as they will bring the capital, technology and access to
the international markets. Moreover, the Special Economic Zones (SEZs) that China has
made should be encouraged to export. Pakistan should produce goods where it has
vertical competitiveness. We should also scale up the production of goods that are
essential for us to meet the domestic demand and then also export them.

Foreign currency reserves can also be beefed up through remittances by introducing

diaspora bonds to encourage the professionals who chose to keep their money outside
of Pakistan to bring it back to the country. Then there is Foreign Direct Investment
(FDI). The Board of Investment (BoI) needs to be strengthened to be able to provide a
one-stop shop for investors so that all of their problems are solved in one place. The

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office of the BoI should ideally be located in the office of the prime minister, should be
high-powered and be formed of people with high credibility.

The government should also provide a stimulus to the housing sector which further
stimulates at least 40 other industries which can generate a lot of jobs and generate
economic growth that will be widespread.

Once the macroeconomic environment has been stabilized and the housing sector has
been stimulated, the agriculture sector needs to be reformed. The first step into
developing the agriculture sector would be to increase productivity that can be done
through the usage of better quality of seeds and improving irrigation techniques. The
Zarai Taraqiati Bank Ltd (ZTBL), instead of just lending the money, should have an
attached services division in which experts advise people about seeds, water, levelling
of land and marketing of agricultural products etc. There is a need to strengthen
institutions altogether. Once the main trajectory is set, Pakistan needs to alleviate
poverty. Poverty should not just be left to the trickle-down effect. The lowest levels of
our society, which form about 6-6.5 million households, should be enabled to stand on
their feet through encouraging entrepreneurship in them rather than making them
beggars. They should be given money to start small businesses so that they can be
bread earners for themselves and others instead of just being beggars.

An overarching set of measures would be required for administrative reforms to

implement the policies in the right way. Having said all that, all plans made by the
government should have a buy-in of the stakeholders. From operating ministries down
to the common man, they should be a part of the plan. If the government is mulling over
a policy concerning agriculture, it should engage all stakeholders including the farmers.
If a policy is being devised about industries, the government should involve the
industrialists as well as the private sector, workers and buyers and sellers for their
input about particular problems faced by the industry.

The whole process, however, requires political will and competent people. As long as
mediocre people are hired to run policies, mediocre results will be produced. The
government institutions should be revamped by hiring very good and competent
people who should then be allowed the space to work. They should also be held
accountable provided that they are given the required authority and space they need to
do their work in the first place.

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 Move our exports up the value chain
Dr Hafiz A Pasha is Professor Emeritus at Beaconhouse National
University, former UN Assistant Secretary General and former
federal finance minister.
The government should formulate a clear trade strategy, and
then subsidise industries that can compete globally.

In the short term, we have no other option but to stabilise the country and the economy.
Hopefully, once we have stabilised it, in the next two or three years, we can probably
move on to somewhat higher growth trajectory of about 5-6%.

At this point in time, we would probably go down in terms of growth to about 3.5-4% at
the maximum. Historically, we have ended up with a balance of payment crisis because
we followed a policy of import substitution, which has limits to it in terms of internal
market growth. Had we followed an external export-led growth strategy, we would
probably have found ourselves in a better position. Other countries like India, in the
‘90s, switched to an export-led growth strategy and their exports went up almost six
times in just a decade. Bangladesh has done well and they have very solid results. Their
per capita income has, more or less, caught up with Pakistan and they have been able to
sustain their international transactions. The defect lies in the strategy which was not
focused on sustainable external relations through export-led growth. The other
problem we have had historically, which doesn’t explain the business cycle but explains
the long-term growth rate, is that our investment rates are relatively low. In the
Musharraf period, the investment rate approached to about 20%. In the Ayub Khan
period in the ‘60s, it was between about 20-25%. Now we are down to about 15-16%.
Pakistan’s two big constraints have been a lack of export-led growth and a lack of
relatively high level of investment.

The problem with the import-substitution strategy is that although we are a very large
country, our per capita income hasn’t been going up very rapidly. And then there are
limits to market growth. The other thing with the import substitution strategy is that it
is doomed to failure in the presence of free trade agreements (FTA) especially with
China, which counts to about 60-70% of our manufactured imports excluding POL
products. There is no way we can compete with the Chinese, particularly with the FTA.
They have wiped out a whole set of industries in Pakistan. They have access to
concessional tariffs and in some cases zero tariff.

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More importantly there is a massive under-invoicing going on. The only hope we have
is high-value added agriculture and value-added textiles. We have about 20 products
where our exports are $100-250 million dollars. That is where we need to diversify our
exports. Import substitution cannot work unless we cancel or renegotiate the FTAs.

Another sector where we have hope is the information technology (IT) sector. It has a
lot of potential. Indian technology companies want access to Pakistan’s IT labor force
because the Indian IT sector is overdeveloped. The result is that the IT technologists
and engineers in India are extremely highly paid whereas our salaries for these IT
engineers and graduates are today one half or less than what Indian technologists are
getting. But Indian companies are unable to enter the Pakistani market because we
don’t have an agreement yet on services. We really need to expand trade with India
especially in the IT sector because it will open up opportunities for Pakistani
technologists and engineers. There is scope there but while the South Asia Free Trade
Agreement (SAFTA) is partly functional and SAARC Agreement on Trade in Services
(SATIS) is non-functional.

Moreover, Pakistan has not yet granted MFN status to India and maintains a negative
list with its neighbor. We have a trade deficit with India which is about 2.5 times what
we export to India. The problem is that we never really had a very strong medium to
long-term strategic trade policy. There is no orientation towards exploiting
international opportunities and developing our agriculture and trade in line with
market opportunity. A shocking fact is that Indian export of jewelry is more than
Pakistan’s total exports. There was a time when Pakistan was able to get its export of
jewelry up to $1 billion, which is now less than $10 million. Pakistan never had a
strategic orientation towards developing exports.

One of the lessons of the development history is that small and medium enterprises are
often at the cutting-edge. That is where you really see the innovation, the ground-level
transfer of technology. Even to this day, 40% of South Korea’s exports are by small
enterprises. That is where our focus should be [for exports]. Even today, SMEs of
Pakistan, especially the ones located in Punjab, export up to 60% of their output,
whereas for our manufacturing industry (large scale industrial units), their exports are
not even 25% of their output. The government has an important role to define
industrial development but it should only be to the extent that there should be
regulations to prevent emergence of monopolies and cartels. We need to have a very
effective Competition Commission and the Securities and Exchange Commission to
check the manipulation going on in our industries. Take the example of sugar,
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automobiles, cement, pharmaceuticals and all these big industries. They are engaging in
monopoly and transfer pricing and we are doing nothing about it.

The government should, however, provide subsidies to agriculture. It is something that

is done globally. Following Partition, we exported agricultural products to India. Today,
we are importing cotton from them in large quantities. That is because India has
massively subsidised agriculture. India provides $27 billion in agriculture subsidies,
including $15 on fertilizer. Consequently, the price of urea in India is less than half in
Pakistan in dollar terms. To manage the external accounts, import rationalization
measures can also help achieve certain goals. We have tried a few things in the past.
The first thing we need to do, which we did after sanctions were imposed upon us
following the nuclear explosions and it worked very well, is that we need to use the
increasing interest rates more effectively to control imports. We need to introduce cash
margins of 10-30% across the board except for three items: petroleum products,
fertilizers and medicines. We have introduced some cash margins on luxury goods but
that is a very small import base. We have to do this across the board.

The second thing we need to do is check the under-invoicing of Chinese products by

imposing minimum import prices. We used to have a regime of international trade
prices in the late ‘90s but that was more to control valuation by customs. We have to go
for minimum import prices on key imports from China like iron and steel for example.
India is levying minimum import prices on 28 critical items, including some items from
China and a few items in FTA with Sri Lanka. This is admissible within WTO rules and
regulations. We also need to have stronger National Tariff Commission which can
explicitly identify under-invoicing. We also need to adopt a managed float regime to
manage our exchange rate. At no stage must our real effective exchange rate get
overvalued. In the Ishaq Dar era, our currency was 27% overvalued against a weighted
average of a few currencies including the dollar. After the latest devaluation, our
currency is more or less correctly valued. There are so many things that we can do to
improve our revenue side. But we need to have a revitalized revenue authority [to
collect taxes]. Our Federal Board of Revenue (FBR) needs fundamental reform. There is
enormous scope on the revenue side. Pakistan’s tax gap is close to 3-4% of the GDP.
Enhancing revenues does not require revolutionary steps. Through sensible and
rational steps, we can improve our tax-to-GDP ratio and extract an additional Rs1
trillion at least, for the national exchequer.

Unfortunately, however, Pakistan at this point in time does not have the capacity either
to conceive or implement strong structural reforms.
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 To solve the long-term balance of
payments problem, fix education first
Dr Akmal Hussain is a Distinguished Professor and Dean,
School of Humanities and Social Sciences at the Information
Technology University (ITU).

The key determinant of long-term economic growth of the

country is the depth and range of innovations that take place within that society.

The fundamental reason why Pakistan goes to the IMF repeatedly has to be sought in
the structural features of Pakistan’s economy. The pattern of Pakistan’s economic
growth is what can be called a ‘stop-go’ pattern. There are periods of relatively high
GDP growth followed by very slow growth, where per capita income is either stagnant
or even negative in some cases. The literature on new institutional economics shows
that the distinguishing feature between the developed and undeveloped countries is
that the developed countries are able to sustain their GDP growth rates and their per
capita income growth rates over long periods of time whereas the undeveloped
countries are unable to do so. Starting from Ayub’s period, or even earlier, whenever
Pakistan had high rates of growth, it ended up with a balance of payments crisis and
that is what lands it in the lap of the IMF. The fact that Pakistan grows in spurts
followed by periods of slow growth is intimately linked with the fact that we keep going
to the IMF. Their loans provide temporary relief and governments are able to avoid the
difficult task of making the structural changes necessary to become independent of IMF
bailout packages. The reason why high growth periods come to an end with a balance of
payments crisis is because of Pakistan’s exports structure, where the growth of exports
is incapable of keeping pace with the import expenditures that are associated with the
high GDP growth.

Whenever there is high GDP growth, there is a high import expenditure. More machines
have to be imported, more fuel, equipment and industrial raw materials are imported
to maintain economic growth. If the growth of exports is slow as compared to imports,
then inevitably – as we have seen from our experience – we will end up with essentially
a balance of trade crisis which translates into a balance of payments crisis. Therefore,
one of the hallmarks of Pakistan’s inability to sustain high GDP growth, and indeed one
of the hallmarks of Pakistan’s underdevelopment, is that we can’t export enough and so
our import capacity is constrained.
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Since independence, our exports have been concentrated in the textile industry and it
has predominantly been in the low-value end of the textile range. Internationally, the
textile industry is known as a ‘sunset industry’ because as global demand for goods and
services increases, a smaller and smaller percentage of increased demand goes into
expenditure on textiles. So growth of the global export demand for textiles is low.

On top of that, Pakistan has not even adequately graduated from the low-valued added
end to the high-value-added end of the textile range, let alone diversify out of textiles
altogether. Even within the textile sector, Pakistan is losing its share to its competitors.
That is because our exports are not only low-value-added, our cost of production is
very high. We are inefficient in the production of textile exportable and the quality is
very poor as compared to our competitors, which is why our export capacity is so
insufficient that we cannot finance the import requirements of high growth. In the
medium term, we have to diversify our exports out of textiles into high-value-added,
knowledge-intensive goods and services because an increasing share of the global
exports is coming in the form of demand for knowledge-intensive goods and services.
Predominantly, our export policy should concentrate on diversification of exports
towards high-value-added, knowledge-intensive goods and services, which will require
hard decisions on the part of the government and decisions which require deliberations
outside the narrow thinking of mainstream economics. Within orthodox economic
thinking it is difficult to grasp what is involved in export diversification towards
knowledge-intensive goods.

Recent work by Professor Aghion and others at Harvard University has shown that the
key determinant of long-term economic growth of the country is the depth and range of
innovations that take place within that society. In other words, the capacity to generate
long-term growth, and hence the ability to maintain high rates of export growth, is
dependent on the depth and range of innovations in the country. So when we talk about
export diversification, we are really talking about developing the capacity for
innovation in the country. Innovation requires research and building an innovation
infrastructure in the country. That essentially means bringing about a transformation
of the education system to produce people who have the capacity to do critical thinking
and do original work, in whatever field that is. Unless the schools and colleges and
universities are reconfigured, so as to produce such minds that are capable of original
thinking, Pakistan will not be able to develop an innovation infrastructure. Strangely
enough, education reforms are necessary to solve the balance of payments problem in
the long-run and a necessary dimension of export policy. And the research has to be at
the cutting-edge of knowledge in every field. Mediocrity in research will simply not do.
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Therefore, to boost exports and growth, there is a need to build new kinds of schools
which train students and children to do original thinking and build universities which
are capable of producing world-class research.

Presently, the government is trying to support the textile industry by giving them
subsidies. This is a policy that is misconceived and counter-productive. It is
misconceived because if the aim is diversification of exports, giving subsidies to the
industries that are inefficient, low-value-added and which are not competitive in the
international market, is throwing good money after bad. It is also counter-productive
because the more subsidies you give to such industries, the more difficult it will be to
diversify exports. If the government wants to subsidize industries, it should do it in an
intelligent way. An example is South Korea. They first worked out which particular
industrial units had the ability to innovate, to improve their technologies and had the
capacity to become export-competitive. It was not just a particular industry but
precisely the particular industrial units that were supported by the government
through subsidies.

At the moment, the category of industry which has to be given subsidy is not textiles
but industries such as software, electronics, renewable energy. If the government
cannot provide subsidies to tech startups, it can at least provide subsidized credit to
young talent freshly graduated with ideas to work on these startups. The government
also needs to think of subsidizing small-scale industries. Because of their smaller size
and management structure, these industries are much more likely to be innovative than
a very large industry, in Pakistan at least. The agrarian products such as high-value
dairy products, packaged meat fruits and vegetables also have considerable potential
for exports. Subsidizing inefficient industries like textiles is a rent you are giving them.
Rent can be seen in terms of unearned income. It is a rate of return on an asset
including skills which is higher than what you would get in the best alternative use. So
if you have an industry that would otherwise go into loss and you start giving them
subsidies, and it starts generating profit on the basis of the subsidies, that profit is
actually unearned. And that is a kind of rent.

Unfortunately, Pakistan’s institutional structure has been set up in such a way which
systematically generates rents for a small coalition of elites. This is the other
fundamental issue that needs to be addressed. If Pakistan wants to get out of
underdevelopment, get out of this repeated going back to the IMF for loans and avoid
getting into repeated balance of payments crisis, the rent-based institutional structure

10
that prevails in the economy needs to be changed. It has deliberately been set up by
power elites in such a way that unearned income or rents can be generated for them.

Prime Minister Imran Khan’s original vision was that Pakistan’s long-term development
has to be based on its people through the provision of health, education and social
protection for all so that the capabilities and potential of Pakistan’s people can be
actualized and brought to bear for development. That’s the sort of development we
want. But if Pakistan goes to the IMF, it will be going in the opposite direction because
the IMF will require cutting down public expenditure. They are going to try to control
the import expenditures through contracting the growth rate of the economy. When
interest rates are increased they knock out the dynamic, innovative export oriented
industrial units that are usually highly leveraged. So a misconceived short term policy
further undermines our potential for exports and increases our dependence on foreign
loans in the long run. Slowing down growth will also eventually lead to higher levels of
poverty and unemployment.

Study Notes by Aamir Mahar

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For the Pakistani economy to triumph,
we must develop our cities.
Dr Nadeemul Haque is former Deputy Chairman of the Planning
Commission and served for several decades as an economist at
the International Monetary Fund.

We need to deregulate our cities to allow more construction and

high-rise development.
Pakistan’s economic strategy started with the Harvard Advisory Group and Dr
Mahboobul Haq. However, we never changed it, nor did it evolve. We are still stuck
there. That was a very simple strategy. We were a new country. The international
development world had just started. They wanted to mend and look after us like
parents look after little babies. They created a model of which Dr. Mahboobul Haq was
a part. The model included development through establishing infrastructure on
borrowed money. They wanted to give us money as we were a low savings country.
Sadly enough, the world has changed, and we are still pursuing the old model.

But while we are a resource constrained economy dependent on foreign aid, we borrow
to postpone reform. We are also in love with vanity projects. Successive governments in
Pakistan prefer external borrowing to finance ill-planned and unnecessarily expensive
projects like Metro buses, Orange Line trains, Islamabad airport and an excessive
expansion of universities.

Everywhere, cost-benefit analysis is carefully done and considered before projects are
undertaken. In the past, this was done. Now politicians and civil servants realize
projects are a gravy train and refuse to do any real cost-benefit analysis. Without a
serious cost-benefit analysis, the Planning Commission is rendered useless. Projects
now follow political expediencies. And that too on borrowed money. No wonder we
repeatedly experience a balance of payments crisis and need the IMF. It is not
surprising that research, both inside the Planning Commission and in academia, has
found that the returns on the PSDP are low and perhaps even negative. Economics has
moved on. Planning is not considered useful or doable. Developing industry at any cost
or merely looking for dollars is considered old style “mercantilism.”

These old policy ideas have now been replaced with new thinking where growth is no
longer considered to be arising merely from projects and industry. Instead, the
economy grows when entrepreneurial and innovative activity thrives. Note an
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entrepreneur is not a man with money who got some license and cheap land and credit
to set up an industry. An entrepreneur is a person who sets up a new business or
businesses, taking on all financial risks without any help from the government. Do you
ever see Bill Gates or Steve Jobs asking for government help?

The government should also stop acting like a father and tell people what to do. In a
society, entrepreneurs, thinkers and innovators should be allowed to express
themselves. In the Mahboobul Haq period, the role of the government was of a socialist
which prompted the government to undertake excessive planning and control the
markets strictly. But that model had failed even in the Ayub period. The role of the
government is not to decide how to control the market: what should be bought and
what should be sold, but to define the limits of the economy very clearly, formulating
rules and policies that maintain a clean marketplace for the buyer and seller to interact.

Moreover, if the government knows where to invest it can make money doing so. We
have seen the government unable to run a business. Why then do we think that the
government knows where to invest? The government should not provide direction and
incentives without having the relevant knowledge. Without such knowledge, the
government cannot decide which businesses should be run and which supported. If an
industry is unable to stand on its feet, it is okay to let it die. Around the world,
industries die! Bankruptcy is not such a bad thing. Why are we stuck with the
70-year-old industries that we keep alive through subsidies?

What then should the government do? The government should monitor the economy
through research and analysis. Let the local businessmen devise a strategy according to
the economic conditions prevailing. If allowed to operate freely, the forces of supply
and demand will eventually bring everything to equilibrium, whether it is import
demand or export supply. Businesses must manage exports and imports to maximize
their profits. It is not the government’s job to export for them or to give them subsidies
to do their work.

The government must stand ready to resolve disputes in a timely manner as they arise
in business. A competent legal framework to facilitate economic transactions and
coupled with an effective and efficient judicial system, will foster innovation and
entrepreneurship to let the economy thrive and people to prosper. We estimated in the
Planning Commission Framework for Economic Growth that Pakistan’s youth bulge
requires a growth rate of over 8% if the growing labor force is to be absorbed. In recent
years because of a lack of reform our long run growth rate and productivity are both
13
declining. Our growth rate now oscillates between 3 and 5% which is far below
potential. I am surprised that finance ministers are claiming victory with growth rates
at about 5%. Let us be clear that for Pakistan a growth rate of less than 4% is a
recession. While anything less than 7% should be regarded as failure of policy. We
should not accept any growth rate of less than 7% as satisfactory performance. Hold
your finance ministers to a higher standard! They must give us a growth rate of 7% or
accept their failure.

An important hub of growth which we overlook, is cities. Our cities have been
overregulated to choke out investment. And so is the construction industry, which
stimulates growth and revitalizes many other industries. Expensive land in the cities is
being underutilized. Prime land is occupied by big houses instead of high-rise buildings,
which have more economic value. When cities are dense and properly developed,
entrepreneurship comes there inevitably. If developed properly, like in the western
economies, cities can add almost 4% of growth to the economy. Unfortunately,
government bureaucracy is vested in keeping the unproductive and slow-growth urban
sprawl alive. Cities are spreading at the cost of the environment and economic growth.
Yet there is no debate or thinking on this subject.

I have been asking for the last 20 years why there are no tower cranes in Pakistan.
Every country that is growing at a rapid rate has thousands of tower cranes in their
cities. Is it not odd that in our cities which are some of the largest in the world, there
are no tower cranes? This means that unlike the rest of the world we are not allowing
tall building to be made. Why is it that we are so different from the world? Or is it that
we are more stupid? Analysts who are looking for rapid export expansion and point to
the export performance of East Asia must also note that East Asian development
happened not only with rapid increase in exports but also with rapid urbanization and
high-rise development. Maybe the two – exports and high-rise development — are
related in ways that we have not studied yet.

Whichever way you look at it, we need to deregulate our cities to allow more
construction and high-rise development. To my mind this is a must for accelerating
growth. All this needs to be reinforced with civil service reform. As Max Weber pointed
out, the civil service is the keeper of the rules, the maker and implementer of policy and
regulation, and the monitor and evaluator of policy and programmes in all countries. It
is the name given to many bodies of diverse skills many organizations, numerous work
and reporting processes as well as a multiple checks and balances.

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In Pakistan, it has become concentrated and monopolized by a group of generalists. It
lacks skills and checks and balances and has no work processes or policymaking skills.

In most of the government, we have even lost the understanding of what a policy is. The
policy is now at the whims of politicians. Frequent policy changes are bad for business.
Policies such as tax policy should be very clear and defined for a long term, with no
room for arbitrary changes. Moreover, no policy or legislation should be passed which
the government is incapable of financing. Policies should be based on research and
there should be monitoring reports on how the policy is working. That is essentially the
work of the bureaucracy.

We are facing a crisis repeatedly for the last 40 years. The crisis in Pakistan’s economy
is essentially because of excessive dependence on unnecessary loans for wasteful
expenditures. Without reform for productivity, we can keep on this treadmill of a
crisis. If we make a more thoughtful government, deregulate our cities and markets,
stop trying to prop up tired old industries, develop new laws and justice system, we
will clear the room for entrepreneurship and innovation. If we let our cities have the
imagination to create all kinds of activities. The cities will create these activities
themselves, without the government’s support, if they have the space to do it.

If we develop a modern civil service capable of midwifing a 21st-century market and

city, we will generate large investment flows to generate the required 8% growth. If we
deregulate the market place so that for the ‘survival of the fittest’ and not coddling the
aged vested interest, we will grow exports and industry needed to absorb our youth
bulge.

Study Notes by Aamir Mahar

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Economic reform without
political consensus is
impossible.
Akbar Zaidi is a Political Economist based in
Karachi. He teaches at Columbia University in New
York, and at the IBA in Karachi.

Technocratic solutions are not enough; Pakistan

needs to have major political parties agree on
the broad contours of economic policy.

Reform of Pakistan’s economy should be undertaken after considering both economic

and political factors. In deciding policy directions and reforms, you have to get the
political parties together to form an agenda which all broadly agree upon, that certain
things vital for the economy and for the well-being of the people, like taxation reforms,
should not be messed with regardless of the party in power. There should be a minimal
consensus between all the political parties of letting a policy continue if a change is to
be expected. This predominantly requires one to know what a certain political party
wants to achieve and what it wants to do that is going to set the direction of the
economy for the long and medium term. Basically, what Pakistan requires today is a
robust taxation system, completely revamped and expanded.

Today, less than 1% of Pakistan’s population pays income tax, and most do so
involuntarily since their tax is deducted at source. The government should go after tax
defaulters and extract money from them. In revamping all this, technocratic solutions
are useless. All the parties know that revenue needs to be enhanced. If all the major
parties form a consensus, a lot can be achieved. There is a dire need to rationalize taxes
across all the verticals. Many sectors of the economy, like agriculture and industries,
decry multiple layers of taxation by the state which need to be rationalized in such a
way that they are uniform as well as progressive. There are certain categories which
can be taxed, like income, wealth and consumption. Tax should be based on income and
wealth, not through an indiscriminate indirect tax mechanism. A major part of the
expenditure goes to defense which needs to be waned and directed towards
expenditure on social sectors such as healthcare and education. Pakistan should invest
more on schools, hospitals, social development infrastructure, and the knowledge
economy. Things have changed now. Our exports are particularly poor and I do not yet
see hope in achieving anything through our existing exports. Our exports are hopeless,

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we have hardly diversified and been dependent on the same export mix for 50 years.
There is nothing we can do with our current exports. All we have is kinoos, dates and
some textiles. There is little of value that we have that can be exported to increase
foreign exchange. No matter how much we devalue our currency, our exports cannot be
increased in their present form. We need to be brave enough to accept this.

The export structure needs a complete overhaul and we need to explore new areas,
products and services, where we can gain something in the medium to long-term. The
challenge lies in investing in the knowledge economy, information technology (IT) and
software. That is where we should be heading now. Our industries are outdated. In the
current circumstances, we should forget that we can capture any market through
exports. Any efforts to improve the old export model will be counter-productive. In
trying something new, we should focus on developing the IT sector in the country and
improve health infrastructure so that people can come to Pakistan to get healthcare,
just like India. India is an exporter of health services now, which Pakistan can achieve
as well if we prioritize our health sector. Pakistan can also venture into the
pharmaceutical industry and encourage exports in that sector.

With textile and cotton, our exports have been static for a long time. We have devalued
our currency by almost 35% in just one year and yet our exports have fallen. This will
give an idea of our export competitiveness and also about how little devaluation helps
our exports. So, it is a completely different restructuring of the economy that we need
to direct it towards growth. The import substitution strategy that the current
government is trying to embark upon cannot work in the present circumstances,
especially in the presence of a free trade agreement (FTA) with China. The FTA has
destroyed the local market. Import substitution is a good slogan but cannot be given
importance in the current circumstances. If import substitution is to work, Pakistan
should venture towards the knowledge economy and build the capacity to substitute.

The government should provide incentives to certain industries where it sees a high
potential for investment, exports, and foreign exchange. Such industries should be
protected but not for an indefinite period of time. There should be a timeline and scale
defining how the government is going to intervene in a particular sector or industry,
and how it is going to be incentivized for a certain period before it becomes uniform for
everyone. Incentives should not be for life but they should be there in a rational way if
the government wants to increase income and reduce unemployment. Things can
improve considerably if Pakistan’s agriculture sector is reformed, which requires
improvement in the irrigation and water distribution system.
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Pakistan should actually stop cultivating sugarcane because it consumes a lot of water.
We are a water scarce country. There are other healthier alternatives to sugarcane that
consume less water. Importing sugar would be a more sensible decision than producing
it locally because the international price for sugar has fallen but our prices are higher.
But the local price is protected here. There is a considerable political rent that the sugar
barons extract out of this sector. There is a potential to reform the whole sector but
there is a huge mafia behind the sugar industry so this would be particularly hard to
achieve. The sugar sector is patronized by powerful political interests who will not
allow any changes. We can grow wheat, barley, and cotton instead. But the government
needs to ban underproductive crops.

Import tariffs are a revenue measure but Pakistan cannot rationalize import tariffs as
long as it is a part of the World Trade Organization (WTO). And tariffs are a global
phenomenon. There is an ongoing tariff war between America and China. If one country
increases the tariff for the other, it is responded in a similar manner. The suffering and
loss are eventually mutual. Pakistan cannot increase import duties as such. But if we
are able to restructure the system of taxation, which has a component of value-added
tax and consumption tax, and income tax is structured in a way that taxes are paid by
those who have money, then there is no real need to impose import duty tariffs.
Governments levy import duties as a measure to increase revenue so if there is a
proper taxing system in place, there is no such need.

But the present trajectory of the government is unknown. It has been five months now
that the Pakistan Tehreek-e-Insaaf (PTI) government has been in office. That is almost
10% of the total tenure of the government and yet there is no clear policy direction,
vision or even a decision of what the government wants to do next. The growth rate has
been predicted to be around 3% for the year and inflation has started rising again.
Complacency and indecision by the government have marred the economy with
uncertainty, which can wreak havoc of monumental proportion.

These persisting problems have not been created by the PTI and they are not
responsible for them. However, they now have to take responsibility for what happens
over the next five or so years. They cannot keep blaming the past governments or
corruption and have to start by taking decisions to put things in order. Procrastination
and indecision, which have both created uncertainty regarding the economy, must
come to an end. It is time for the government to act and take decisions rather than
dilly-dally.
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