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Government Footprint On The Economy Is 67 Per Cent: PIDE Estimates

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For a second consecutive year, Pakistan’s economy has failed to achieve the target that it set for increasing investments. The investment rate currently stands at 15.4 per cent of the GDP which is about half the South Asian average. Factoring in the rate of depreciation shows that net investment in the economy is negligible, or put in layman’s terms there is hardly any new investment in the economy. Successive governments have expressed their desire to increase the investment in the economy to little or no avail. Private investment that represents major chunk of total investment is also chronically low at about 10 per cent of the GDP.

Although a range of factors amalgamate together to cause low investment rates, one reason that hinders private investment is the heavy footprint of the government on the economy. This has crowded out private investment.  According to our estimate, the total footprint is as high as 67 per cent of the total economy, something which is not apparent by observing government expenditure figures alone. (PIDE working paper)

In Pakistan the General Government Expenditure is 22 pc of the total GDP. However the government is much more than what it spends as it also controls nearly 200 State Owned Entities (SOEs), many of which are large public companies also listed on the Stock Exchange. In addition to direct control of these public companies, the government also influences the economy through arbitrary changes to tax regime in the shape of SROs and through regulations that restrict growth of competitive markets in the economy or cause delays due to excessive time consumed in seeking permissions.

In 2011, the Planning Commission while developing a new growth strategy for Pakistan, estimated that the government controls 44 per cent of Pakistan’s economy through State Owned Entities (SOEs). Come the year 2020, the situation has not changed much and if sectorial percentage changes were taken into account the figure still stands at 43 per cent.  The government is substantially involved in agriculture, construction, finance and banking, electricity and gas, and even in wholesale and retail.

Estimating the Government’s Share of the Economy

 

Sector

Govt. Share in

Sector (%)

Sector Share in

Economy (%)

Govt. Share in

Economy (%)

Agriculture 43.1 19.3 8.3
Manufacturing 11.9 12.5 1.5
Mining & Quarrying 79.6 2.5 2.0
Construction 75.0 2.5 1.9
Transport & Communication 73.4 12.3 9.0
Electricity Oil & Gas 77.6 1.8 1.4
Wholesale & Retail 7.9 18.2 1.4
Health & Education 49.3 6.5 3.2
Finance & Insurance 45.5 3.6 1.6
Other Services 60.0 20.8 12.5
Total 100 42.8

 

In addition to what the government directly influences, the regulatory frameworks in Pakistan are as such that they add to the growing footprint of government on the economy. Businesses in Pakistan face high transaction costs, excessive paperwork, barriers to trade and lengthy delays in getting permits. This is reflected in country’s percentile ranking on the Worldwide Governance Indicators’ ‘Quality of Regulation’ which ranks Pakistan in the bottom 30th percentile worldwide. Moreover, the country is ranked 108th for ‘Ease of Doing Business’ by the World Bank. For instance, it takes an average of 9 procedures to gain a construction permit for a warehouse in Pakistan and the associated cost of these procedures is around 8.8 pere cent of the total warehouse value, which is the highest in South Asia. Another example of cumbersome compliance system for businesses is the tax payment system which involves excessive paperwork and a plethora of both paper and online procedures. It takes a business an average of 283 hours and 34 procedures per year to file all taxes in the country compared to the world average of 233 hours and 23 procedures per year.

The aim here is not to criticize all business regulations as some regulations are necessary to make markets function, However, there are a lot many that make transactions difficult and inhibit competition.  The latter add to the regulatory burden and increase the government footprint in the economy while the former facilitate markets to create competition, jobs and growth.

Estimating the cost of regulatory burden is a more complex process than estimating direct footprint. Nonetheless, we at PIDE estimate that unnecessary government regulations cost the Pakistan’s economy an average of 24 per cent of the GDP. The methods behind this calculation among others are explained in our recently published PIDE working paper. Thus, with 43 per cent as the government’s direct share in the economy and 24 per cent as the cost of compliance with inhibiting regulations, puts the total footprint of the government on the economy at 67 per cent.

A significant facet of government’s footprint which we have not included in our estimates is the share of the government in the economy through ownership of public land. One example is the government’s ownership of prime real estate in most Pakistani cities used for government offices and for providing housing to public officials. If the opportunity cost of such land ownership is taken into account, the footprint of the government in the economy increases further.

Given the high government footprint on the economy, there is little space for private invests to operate. In such a scenario, there is an urgent need to reduce government’s footprint through; privatization of loss making SOEs and doing away with unnecessary regulations that inhibit growth of competitive private market or curb efficiency in any manner.

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Naya Daur