PIDE’s Growth Reform Agenda (Blog)

Sustained economic growth has remained mostly elusive for Pakistan. When we seek growth, we focus on policy formation and the role of the government, but perhaps we need to adjust our lens and question the large footprint of the public sector in our policymaking landscape, along with the reliance on brick-and-mortar reforms and foreign aid. As a far more viable alternative, uplifting local businesses and fostering competitive markets with openness can bring forward champions and lead to much-needed investments. This is one of the key takeaways from the PIDE Reform Agenda.

For the last 60 years, Pakistan has been following a project-based growth model that relies heavily on foreign borrowing. Known as the HAQ/HAG Model, this may have held some weight back in the day, it is obsolete now. However it has continued to shape our policy, based around three things:

1. Building physical (‘brick and mortar’) projects

2. 5-year plans to justify the projects

3. Seeking foreign aid given the urgent need to build beyond domestic resources.

This hardware-based approach has led to the neglect of software i.e. capacity building, management, and optimizing yield on assets. Even today, 80% share of development spending is ‘brick and mortar’ (Pasha, 2012, Haque, 2020).

As shown by economic freedom indices scores, our economy has been mostly unfree since inception of the Index in 1995. Any GDP growth we have managed has been primarily a result of exports of cotton textiles. This gives us sufficient evidence of what the economy needs in order to remain stable. Rather than allowing foreign donors to be our crutches, we need to support our local exporters, investors and thought leaders. It is no surprise that private investment has been declining, given how rapidly investors have lost confidence in the economy.

As argued earlier, foreign aid in Pakistan erodes the quality of governance. It increases corruption, weakens accountability, and limits policy learning. Foreign aid programmes should have only been a temporary and short-term development tool. Yet we have let them balloon into much larger bodies and dominate the policy landscape in Pakistan. The approach to development has been imperial rather than people-oriented, and this must change.

We must gear our policies towards uplifting the local business community, exporting sectors and SMEs. As the world moves forward in technological up-gradation and value addition, our businesses remain unprofitable. Otherwise productive time and energy gets used up in meeting high tariffs, and demands of complicated regulations. It is no surprise that Pakistan ranks low in the ease of doing business and competitiveness indices. The cause is overregulation hindering many potential startups from taking off. Archaic technology, lack of policy continuity, and redundant business practices will persist as long as we keep donor agencies on a pedestal and neglect our business community.

Enhanced trade competitiveness leading to an increase in exports is undoubtedly a sustainable path to economic growth, and unlike aid, it is free from any form of liability. Export earnings serve as a valuable inflow to the economy. Paired with remittances, these amounts will be the forces that can eventually pull Pakistan out of its current account deficit. We can enhance our trade competitiveness through diversification, improved quality, and integration into global value chains.

Unreasonable anti-export biases, including tariffs and duties, exacerbate the unprofitable nature of the economy. This leaves firms in a quandary as exorbitant amounts have to be set aside to meet these requirements. For example, the textile sector remains under immense pressure to maintain a heavy chunk of Pakistan’s exports, and therefore must be critical for Pakistan’s economic prosperity. We should tackle its challenges head-on. These include several barriers: the lack of access to the latest seed technology for cotton farmers, high tariffs banning entry into value-added sectors and product diversification, and the fragmented nature of the textile chain which needs streamlining through new infrastructure.

The Haq/HAG model was framed when funding and physical capital development were taken as the defining features of the growth process. The PIDE Reform Agenda outlines key factors that will hold weight in today’s fast-paced environment, with key takeaways from countries that have maintained an exemplary path to development.

 1. Fostering competitive markets with openness

 2. The state’s role being limited to defining rules of the market and regulating fair play, allowing winners and losers to emerge without keeping alive obsolete industry through subsidy and protection (North, 1991)

 3. Ideas and innovation from thought and research. This causes an open and tolerant society which the state must maintain. (Romer, Aghion)

 4. A culture of competition, discipline, and risk-taking leading to entrepreneurship and opportunity (McCloskey, 2013).

 The government and the private sector must operate hand-in-hand, and engage with universities for specific research outcomes. The PIDE agenda proposes using at least 5% of the PSDP for research through government university collaborations. We should redesign tax and documentation to facilitate transactions and entrepreneurship. Archaic regulations and taxes have only hindered entrepreneurship, so we must adopt alternative technologies as they offer an opportunity to mainstream an intelligent research-based approach.

PIDE has looked at cities as agents for growth, along with asset classes, commodities, products, firms, and people. The formula for growth is well established: give vibrant young people a quality education, new ideas, and high ideals, strive for institutions that support free and fair markets, create a professional, well-trained civil service, achieve economies of scale through the domestic market and open up trade and investment; and keep public spending on infrastructure and social sectors limited and focused only on critical and essential projects (Buiter and Rahbari, 2011).

Technological advancement worldwide provides another challenge as we struggle to keep pace with the world, but opportunities also abound as we can achieve milestones once high-speed internet becomes accessible to all. The internet access would prove useful in raising the literacy rate through online education to the deprived ones, providing health advice remotely in far-flung areas, enabling farmers and handicraft manufacturers to connect wholesalers and retailers directly in cities without the intervention of middlemen, and providing freelancing opportunities to many more, accelerating e-commerce.

Implementing these core ideas in Pakistan’s context requires us to rethink our goals. These must be realistic and sustainable, by design supporting a long-term strategy that creates opportunities for all citizens. According to PIDE, to achieve the target of 7-9% percent annual GDP growth over 30 years, the economy must generate jobs for around 2.0 million entering the labor force annually.

Redefining the government’s role is essential, but this is not to deny that the government is at the center of the economy and must change foremost, in order to make the rest of the country change. PIDE recommends the start of a digital research-oriented government from the PM and the cabinet to the lowest level. The effort to mainstream R&D everywhere in Pakistan is a central aspect of this policy.