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The Flawed Economic Model

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The fundamental problem with Pakistan’s economy is the economic model we have adopted. It is based on the doctrine of what is known as free market economy which rides on the back of deregulation, divestment and denial of safety nests, and flourishes in the hands of the private sector, writes Muhammad Ziauddin.

The ‘successful’ completion of the first quarter of the three-year $ 6 billion Extended Fund Facility (EFF) Programme signed between Pakistan and the IMF in May this year marks the conclusion of the easiest part of the reform programme.

This phase includes across-the-board price increases; withdrawal of subsidies that impact the lower-middle and poorer sections of society; upward adjustment of interest rates and; depreciation of the rupee.

Normally, these measures deal a crushing blow to those that usually suffer in silence. No government has ever found it difficult to implement this phase of ‘reforms’.

It is the next phase that gets stuck up as the richer classes refuse to suffer in silence the pain associated with these reforms. Trouble starts as most of the monetary and fiscal concessions allowed to big businesses such as export/import rebates, tax concessions, and concessionary credits, special SROs issued to specific sectors or/and individuals, etc. — are withdrawn and serious steps are taken to catch the tax evaders and avoiders through broadening of the tax base.

At this point, the big business invariably starts using its blackmailing clout threatening strikes, rallies, closure of businesses, slowing down investment, sometimes even stopping it completely and using media advertisements narrating harrowing stories of how a government lacking economic sense and the capacity to govern, was destroying the economy by adopting anti-business policies.

This second phase of reforms under the current EFF was launched in October this year and we saw the big business even calling on Chief of the Army Staff (COAS) General Qamar Bajwa with their complaints. Traders threatened to go on indefinite strikes. Some of them have already won a reprieve of four months thanks to Maulana Fazlur Rehman’s Azadi March.

No matter how a Fund programme has ended in the past – successfully, in a failure or even half successfully – Pakistan’s economy has continued to remain as dole-dependent as it has been all these 72 years. And it will remain so because the one-size-fits-all prescription of the Fund has never been known to have liberated the economy of an aid dependent developing country like Pakistan from the clutches of perpetual poverty.

Why is it so? Because the basic problem is with the very economic model itself that has been adopted by Pakistan all these years, especially since the mid-1980s. This model is based on the doctrine of what is known as free market economy which rides on the back of deregulation, divestment and denial of safety nests, and flourishes in the hands of the private sector. However, in countries like Pakistan that suffer perpetually from massive shortages of energy and capital and lack of access to technology — free market economy has only caused more poverty, more illiteracy and more health risks.

In order for such countries to reduce their dependence on dole and improve the lot of the nation, they need to adopt an economic model that is based on the principles of mixed economy with the commanding heights of the economy in the hands of the state and the private sector working under a strictly-regulated market with even their profit margins fixed by the state along with greater emphasis on human resource development.

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In the 1990s, successive governments in Pakistan used to vow to turn Pakistan into an economic tiger like the ones that had sprouted all over East Asia during the 1980s. Since around 2000 and lately, successive governments in Pakistan have been heard vowing to emulate China’s economic “miracle”. And off and on we have also been expressing our determination to outpace India on the economic front.

That we could neither become an economic tiger nor emulate the economic successes achieved by China or outpace India reflected the daylight that has continued to exist between our desire for the moon and our capacity to reach it. More than the capacity it was our policy of handing over the commanding heights of our economy to the private sector which as a class has continued to evade taxes, pilfer utilities and deny legitimate contractual rights to its employees. It believes in the dictum ‘greed is good’.

The Asian Tigers could not have become the export powerhouses they are today without extensive government interventions during the two decades since the 1980s. The Chinese “miracle” wouldn’t have been possible without the nation as a whole sacrificing to its bones — from cradle to grave — to create assets worth trillions of dollars. All this took place behind the so-called bamboo curtain, hidden from global glare, over three long decades since 1947.

We knew India went the import substitution way from day one using mixed economy with a predominant public sector and vast amounts of savings. We, on the other hand, continued on the dole path as we made fun of India’s Ambassador car (as we raced around in gleaming Japanese cars exported to us in lieu of war reparations) and what is called the Indian rate of growth (2-3%). In a nutshell, all three economies before opening up to their respective private sectors were being underpinned by predominantly extensive public sectors.

Governments in such poor countries need to be business-minded to be able to reduce the burden on the import bill by being experts of the market as are the international oil sharks who rake in millions on price fluctuations of as little as a minimal most fraction of a cent.

Donor-driven poor countries need business-savvy governments even more because if not well versed in what is happening in international trade, then you’ll likely end up returning almost the entire aid back to the donor country in import bills, shipping charges, consultation fee and transfer pricing.

Also, it is only a business-minded government, which can make a distinction between an enterprise that yields profits of immense social value and those that yield purely financial profits. The problem to understand in short is that not everything that is financially profitable is of social value and not everything of social value is profitable.

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A government has no business doing business. Sounds logical. But a government devoid of the necessary instincts of a businessman would find it almost impossible to frame socio-economic policies ensuring progress with equity. Such governments either end up widening the gap between the rich and poor, or failing them both miserably.

A government without business know – how would hardly be able to maximise social benefits of a public-sector entity at a minimal monetary cost. Also, their burden on the budget could be significantly eased if the government were to collect taxes from all citizens who earn taxable incomes, no matter what the source. Only a business-minded government would know the importance of enforcing tax laws strictly across the board without exception and exemption.

Meanwhile, we need to shift Pakistan’s growth policy from the failed import-led strategies towards policies that focus squarely on raising domestic productivity growth and exports. Pakistan has relied too much on borrowed capital to fund large-scale capital expenditures. It is politically expedient to showcase ‘success’ by having a foreign country develop large capital projects on borrowed money. But at the end of every political cycle, the overhang of excessive borrowing ends up depressing the entire economy. Indeed, a country cannot buy success from the outside, success has to be developed internally.

We need to invest heavily in education so our labour force becomes more productive. From technology to market design and governance structures, there is now a wealth of information on what works in improving learning outcomes.

And we need also to invest heavily in science, technology and human capital infrastructure. Pakistan should do everything it can to attract top talent in the country. This requires promoting a pluralistic society as, today the much sought-after global talent increasingly demands an open and free society.

And we also need to modernise the financial system in order to reduce the incidence of tax evasion and money laundering. Pakistan has one of the lowest tax collection rates that results in a high fiscal deficit. Pakistan also has an active black market in foreign exchange that siphons off ill-gotten wealth abroad. The black market facilitates tax evasion, further widening the fiscal deficit. It also increases the imbalance between the supply and demand for dollars. Both of these factors contribute to balance-of-payment problems in the long run.

Pakistan can reduce tax evasion and money laundering by moving the financial system towards a ‘cashless’ digital payment system that makes it easier to track and audit large financial transactions. The foreign exchange market should also be unified into a single market that integrates with the formal banking system.

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