Rethinking Growth Model: From Hardware to Software

The Need for Rethinking Pakistan’s Growth Model

To absorb Pakistan’s youth bulge, into gainful employment, and to sustain the country’s high level of debt, PIDE’s estimates suggest that the country’s GDP should grow at a rate of 7-9 percent per annum for a fairly long period running into decades. 

What is Software of the Economy and the Society

Laws, rules and processes that and impact economic activity.

Growth-conducive software will facilitate economic activity (i.e. transactions) in lesser time, at low monetary cost to the stakeholders, will encourage competition and provide a level playing field to all

Pakistan’s present growth rate is not only low the long term trend of growth is declining as well. Productivity and investment the two key drivers of growth are also on a declining course (see Figures 1 and 2). Breaking away from this low growth trajectory calls for deep-rooted structural reforms. Realising this, the PIDE with active consultation of renowned economists and development practitioners from all over the country has developed the PIDE Reform Agenda for Accelerated and Sustained growth (2021).

    The development model which Pakistan has followed since the sixties emphasises investment in hardware—roads, dams and buildings etc. This model developed by Dr. Mahbub Ul Haq and the Harvard Advisory Group did serve the immediate needs of the economy at that time. However the recent thinking in economic literature North (1990); Acemoglu & Robinson (2013) and inadequate returns from the growth model being followed at home calls for a paradigm shift – from hardware to software – the software of the economy and the society.                              

From Hardware to Software

The PIDE Reform Agenda for Accelerated and Sustained Growth (2021) takes the view that bad laws and cumbersome procedures keep productivity and investment low in Pakistan. Therefore the development model needs to undergo a paradigm shift. The country should now focus more on developing growth-conducive software, which is; laws, rules and processes that influence economic activity.

The constraining laws, rules and processes lead to situations like where; forty-five steps are needed to lay a n optic fibre for internet connectivity. Firms on average spend 577 hours and wade through 47 procedures to pay all the taxes for the year. Nine procedures are needed for a construction permit and this can cost up to nine per cent of the construction value. Land developers must obtain 22 NOCs from different agencies in order to proceed. Some laws also provide an unfair advantage to one or few players in the economy thus killing the competitive environment.

The kind of constraining laws and rules operating in situations like the ones referred above are typically developed by the government, at times, in good faith to check unwanted and unfair practices. In practice these constraining laws and rules go beyond the intended objective, to the extent of hurting the much-needed fair economic activity.  The lengthy and obsolete processes too are practiced mostly at public entities. Therefore, it is the government which has to be reformed. We take this up after the next section on transaction costs.

Transaction Costs

GDP, as we know, is the sum of transactions between two parties to an exchange. Some costs have to be incurred to execute a transaction—lower the transaction costs greater the number and magnitude of transactions. The volume of transactions will be facilitated and hence GDP will increase if transaction costs can be reduced. Following are the different types of transaction costs:

• Search and information cost: the cost incurred to know the attributes of a product, its availability, and sellers.
• Bargaining cost: costs incurred to arrive at a price and terms of sale.
• Settlement cost: Terms of payment and flow of proceeds.
• Enforcement & policing cost: Enforcement of the terms of sale/exchange.                                                                     

Enhancing Productivity

Productivity will improve by amending our laws and procedures to cut down frictions involved in undertaking an activity or executing a transaction.

We recommend;

(1) Reviewing all laws, rules, and processes from the very scratch, to identify frictions.

(2) Work towards creating a suitable environment for amending frictions causing laws, rules and processes.

The increase in productivity will also improve the return on investment leading to increase in investment and hence growth.

It is not difficult to see that the transaction costs are higher in Pakistan (especially due to the constraining laws referred above). The government, through its legislative and regulatory authority can mandate or facilitate mechanisms that would reduce transaction costs. For example the availability of prevailing exchange rates on the website of State Bank and Forex Association of Pakistan reduces the Search and Information costs as well as the bargaining costs for those aiming to buy or sell one or the other currency. Following this pattern, the search and information costs, for example, in the land market can be reduced if the buyers, sellers, realtors or the government were to declare the price on which a transactions has been executed—declaration of prices can be mandated by law or the realtors association can license realtors and one of the condition of the membership could be the declaration of prices. All this is bound to increase the volume of trading in real estate. Similar mechanisms The use of technology helps reduce the settlement costs – the government, the SBP and the internet service providers together can facilitate technology led electronic settlement mechanisms. Finally the government has a responsibility to ensure secure property rights and that the contracts signed are enforced—sound regulatory and judicial performance will ensure this.

It can be easily seen that all the interventions discussed above are soft in nature and boil down to improving governance which does not involve huge investment in monetary terms. Therefore too wade on a high growth trajectory the government will have to be transformed into a well-functioning state. The entire public service including civil service Judiciary, regulatory bodies, and local governments, etc. will have to be reformed to serve as an ‘enabler’ in the economy.  Systems will have to be designed to make public servants work harder, better and faster. Host of NOCs and permissions required to engage in entrepreneurship will have to be cut. To augment efficiency of the government, technology and e-governance will have to be used.