Pakistan held a general election on February 8th, 2024, and the Pakistan Muslim League-Nawaz (PML-N) formed its government on March 4th, 2024. Mian Shehbaz Sharif, who led the previous government under the Pakistan Democratic Movement (PDM) coalition, is the current Prime Minister. However, according to major macroeconomic indicators like inflation, growth rate, and unemployment, the performance of the PDM government hasn't been impressive.
Certainly, when PDM assumed office in April 2022, the economy was not functioning well. However, that was a good time to introduce reform. Rather than pursuing structural reforms that could bring long-term gains, the government decided to maintain the status quo and stabilize the economy using conventional tools that have had a long history of failure. As a result, almost two years have passed, and the economic situation remains dire. The new government may repeat past mistakes, but good hope remains for economic reforms. In this article, I propose four major reforms that can benefit the economy in the long run.
Firstly, rationalizing the current economic model is a complex but necessary task. The model has failed and will only produce the same results if it remains in its present form. It has weak institutions, relies on debts and foreign remittances, has an uncompetitive industrial structure, declining exports, brain drain, a declining tax base, economic uncertainty, regulatory burden and large government size. To survive, the government is raising taxes at the cost of savings, consumption, and citizens' welfare.
It is necessary to audit the entire economic structure, analyzing what works and what does not, and removing all inefficiencies. Without it, no policy is effective since these inefficiencies are deeply embedded in the present model. This long, continuous process needs improvement at each stage but must be completed as soon as possible.
Rationalizing the current economic model is a complex but necessary task. The model has failed and will only produce the same results if it remains in its present form. It has weak institutions, relies on debts and foreign remittances, has an uncompetitive industrial structure, declining exports, brain drain, a declining tax base, economic uncertainty, regulatory burden and large government size.
Secondly, creating state institutions that ensure the rule of law and accountability is key. It also requires a strong political commitment despite the high political costs to the dominant state institutions, especially those representing the establishment, that maintain the status quo. They may prefer to keep their present position. But if they are concerned about the country's development, they must not create barriers to institutional reforms. Otherwise, maintaining the current status quo in economic policies will have disastrous consequences for the country.
Navigating The Economic Storm: Pakistan's Perilous Path After Elections Thirdly, we require market-led reforms that facilitate the growth of the private sector in the market. The private sector is the main driving force behind economic development, job creation, tax revenue, lower inflation, and an improved standard of living for the citizens. A stronger market paves the way for a stronger economy. Privatizing government-run companies that lack strategic economic advantage and are unrelated to public goods provision makes sense. Selling these companies to local buyers, who add value to their business model, can give Pakistan's economy a competitive advantage. Otherwise, selling to international companies can result in the transfer of knowledge and technology to the domestic economy, thus creating knowledge spillover.
A study conducted by the Pakistan Institute of Development Economics (PIDE) has found that the government's footprint in the economy is as high as 67% of the total economy. This is significantly impeding the growth of the private sector, as it cannot flourish with such a large presence of the government. In simpler terms, the government's involvement is like a big elephant in the room that is preventing private businesses from thriving.
Doing business in Pakistan is not easy due to other factors as well. Some are institutional, such as corruption and regulatory burdens, while others are structural, such as a lower comparative advantage in the competitive market. To address these issues, we need institutional reforms to tackle the former and industrial policy to address the latter.
My fourth suggestion concerns industrial policy. It doesn't involve creating an even bigger government footprint in the market while eliminating some. Its economic justification is simple: internalising externalities to capture learning and innovation and offsetting those externalities which cause market failure. Its objective is to promote industrial development in order to improve productive capacity and diversification in the economy and to facilitate some industries to gain comparative advantage in the local and international markets. It will ultimately increase the market size and boost the export sector.
Charting Pakistan's Path Post-Elections 2024: Insights from Former Governor of Sindh In order to compete with countries like Bangladesh, China, and Vietnam, which can produce better-quality goods at lower costs than us, we need to have a comparative advantage in a few key industries in the international market.
It is not easy to compete in international markets merely by manufacturing cheaper goods through lower wages and a depreciated exchange rate. Although some countries, such as China, have been successful in international trade using this approach, it is not a guaranteed formula for success. China's success can also be attributed to its effective industrial policies. Other industrializing countries in East Asia, like South Korea, Taiwan, Singapore, are also good case studies of successful industrial policies.
In order to compete with countries like Bangladesh, China, and Vietnam, which can produce better-quality goods at lower costs than us, we need to have a comparative advantage in a few key industries in the international market. This means that we should be able to manufacture high-quality products at a lower cost than our competitors. By doing so, we can better penetrate the international market and succeed in the global economy.
Achieving this requires a well-designed industrial policy that takes into account positive externalities, such as knowledge spillover and innovation, while minimizing negative externalities, such as political and economic uncertainties. This is a difficult task; therefore, the current government must seek advice from industrial economists to create and implement an industrial policy.
However, we must also be aware that failed industrial policies can have severe economic consequences. Dani Rodrik is a highly influential economist who advocates for industrial policy. He warns: "The kind of discipline that’s required (in the industrial policy) is the discipline of monitoring, figuring out whether what you’re doing is working, and being able to move away from mistakes when things aren’t working. Successful industrial policy is not about picking winners, it’s about letting the losers go. Some of the worst cases of industrial policy are when you keep putting good money after bad."
Clearing The Path For Women’s Inclusion In Electoral Politics Therefore, before starting the industrial policy, Pakistan must ensure its policymakers and political economy are efficient enough to maintain that discipline Rodrik advises. Otherwise, a new industrial policy will create new evils.
Almost all industrialized countries, including East Asian economies, have achieved economic success due to the abovementioned factors. These are not easy to implement and require strong political commitment, which is why not all countries are successful economically. However, the evidence confirms that these policies work and have contributed to the economic success of many countries.
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