Planning Commission issues observations on growth

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LAHORE The government should create space and incentives for the private sector to play the dominant role in the growth process and economic activity. The main argument in the new growth framework is that growth should be market-led and not state-led, private sector should be the main driver of growth, and if allowed to, the market will generate innovations, entrepreneurship, and transformation of cities and youth employment, the authors of a report recently prepared by the Planning Commission titled ‘Pakistan: New Growth Framework.’
A copy of the report made available to Pakistan Today stated that the government should move away from activities that compete with the private sector. It will provide public goods wherever the social rate of return is higher than the private rate of return. The report has thoroughly covered different topics and challenges being faced in growth. The report suggested the government should administer a well designed and transparent set of rules governing private economic activities.
Pakistan has no choice but to move in this direction. This is because the old growth model with its emphasis on public investment has not yielded the level of economic growth the country requires. Secondly, government finances are a binding constraint. The government simply cannot afford to undertake large scale capital expenditure without hitting financial constraints.
Public Sector Development Programme (PSDP) will continue to decline and foreign financing is not assured. It is essential to create the space and incentives for the private sector to play the dominant role in the growth process and economic activity.
New Growth Framework: The PC has said that the two key factors that have determined economic growth in the past are the external resource inflow and public sector projects. Public sector projects used to be mainly financed by the former. Pakistan, in the old model, has excessively focused on public sector investment and producing labour with low technical skills.
The new framework should now be based on elements of endogenous growth model, where the quantity of investment should be complimented by efforts to improve the quality of investments -their productivity and efficiency. The private sector must drive economic growth with public sector ensuring timely implementation of market reforms to promote competitiveness.
Pakistani cities presently are configured as suburban clusters instead of as creative cities which can become locomotives of economic growth. It alluded to the fact that it is essential for Pakistan to boost efforts to produce high-end human capital. Promoting innovation and entrepreneurship should be cornerstone of government’s facilitation to private sector.
The new approach represents a shift of emphasis in several dimensions. The new regime should develop software of economic growth, increase competitiveness, redefine the government’s role in markets, promote investments on the basis of innovation and entrepreneurship, exploit the huge potential of a large domestic market, make cities and regional clusters the locomotives of growth, improve governance and better public service delivery and enhance connectivity. The report underlines that the old planning regime can be distinguished from the new thinking in six major dimensions:
I. Hardware versus Software of Economic Growth: Although the gap between Pakistan and its competitors has narrowed considerably, current approach focuses on building physical infrastructure. It continue to fare poorly against our competitors on the software aspects/inputs critical to growth and needs to learn from global experience and generate sustained productivity and efficiency by emphasising the quality of investments in physical and human capital. Productivity and performance has to be measured in both the public and private sectors.
II The dominant role of Public Investment versus Markets: Public investment has for a long time been incorrectly viewed as the main source of economic growth. Policymakers have emphasised policies that crowd out private investments. The government should not be involved in markets, except to regulate misbehaviour, reduce transaction costs and promote competition.
III Exogenous versus Endogenous Competitiveness: Our past and present growth strategies view global indicators that measure competitiveness and cost of doing business as “beyond our control”. By minimising government intervention and making productivity endogenous we will be able to look beyond labour and capital accumulation to accelerate growth and improve risk adjusted returns. To this end, we need to identify reforms needed to develop competitive, innovative and efficient markets.
IV Government Incentives versus Entrepreneurship: Government policy favours specific sectors or sub-sectors through protection and subsidies. It also emphasises the importance of commodity producing sectors and continues to support non-competitive industries. The enabling environment for investment should maximize gains from new ideas and open up opportunities for entrepreneurs. A new approach should incentivise innovation and entrepreneurship which in turn will make growth more inclusive.
V New Role for Cities: Current development strategy views cities mainly as suburban clusters with an appended industrial park. Re-zoning cities so that they become dense centres of diverse and creative activity to facilitate commerce and economic activity in several areas but especially in retail, distribution, transport, leisure and entertainment. Construction will increase quickly in cities with new zoning laws that enable repressed but productive activities. More construction will create jobs for the poor and become an essential mode of inclusive growth.
VI Quantity versus Quality of Service Delivery: Increasingly, public service delivery has become costly and lacks in quality partly because governance has been found wanting in several areas. Efficient public service delivery with coordination between various government institutions and service-providers is much needed. Asking for consumer feedback will provide an on-going mechanism for assessing the impact of reforms.
The Need for Productivity: The report was adamant is that productivity in an economy can take place by either adding value to one’s produce or by producing the existing output in a technically efficient manner. Pakistan being a resource constraint economy needs to address the currently prevalent productivity gaps in the public and private sector. The contribution of factor productivity in the growth process of Pakistan has been trivial.
It was revealed that during the period 1960 to 2005, about 80 percent of the GDP growth rate in Pakistan was attributed to capital accumulation and labor expansion whereas Total Factor Productivity (TFP) contributed the remaining 20 percent of the overall growth. However, the contribution of TFP in GDP growth has fluctuated considerably during this period.
TFP explained almost 38 percent of GDP growth rate in the 1980s but this fell to merely 18 percent in the 1990s. TFP growth then recovered to some extent during 2001 to 2005 and contributed 22 percent of the GDP growth rate. It was also observed that the most crucial problem for the Pakistan economy is the abysmally low labor productivity. Cross country comparison of labour productivity indicates that among the regional competitors, Pakistani labor is the least productive and over the last two decades the performance is on a downward slide.
Different research studies have provided diverse reasons for this low productivity in Pakistan. Macroeconomic stability, foreign direct investment, and financial sector development play an important role in increasing. For Pakistan there is also a clear evidence of a relationship between the growth in TFP and the ailing science and technology apparatus.
Reforms for Productivity: In cross country comparison of TFP the report also illustrated that both the historical performance of Pakistan in terms of TFP and the future picture portrayed by the forecast for next decade is not encouraging. Pakistan has lowest TFP among the sample countries and the position does not seem to be improved in the future. This bleak picture points to the need for immediate and sincere efforts to uplift productivity and efficiency in all spheres of the economy.
The report stated that there is a need to replicate best practices within the country. Small indigenous innovations should be benchmarked and scaled up in order to achieve widespread benefits with lower sunk costs. Pakistan can improve its global position in doing business by adopting its own best practice benchmarks. It was also claimed that competitive markets are the starting point towards sustained economic growth.
Free and flexible markets should allow businesses, which have run the course, to exit and be replaced by more efficient firms. It also urged that instead of providing fiscal incentives based on sector-specific biases, markets should be allowed to determine optimal allocation of resources. Incentives should however, be formulated to cultivate innovation and entrepreneurship. The report also stressed that innovative practices can be introduced in public and private sector as well as in rural and urban areas.
Private sector can only operate freely once government exists from the market and reorients its role as a regulator and faciliator. Currently one observes government’s distorting presence even in relatively smaller sectors of the economy like transport (for example National Logistics Corporation) and storage (Pakistan Agricultural Storage and Services Corporation – PASSCO). In this it indicated that major initiatives include:
a. Limiting the role of government in goods and factor markets.
b. Strengthening the role of private sector enterprises.
c. Preserve Autonomy of State Bank of Pakistan in order to limit government borrowing.
d. Restructuring of PSEs and divesting the control to private sector.
e. Removing imperfections from farm to market channels including storage.
f. Promoting the culture of commercial research and development.
g. Respecting intellectual property rights to attract mature investments
Market Reforms: The authors of the report also outlined that traditionally, Pakistan’s growth strategy has followed a mercantilist approach with a skewed focus on import substitution and at times export promotion. Past policies have supported this approach through high tariff walls for consumer goods imports and by giving subsidies to chosen sectors for export promotion. The approach that Pakistan has followed has not worked primarily because of the inherent lacunas in the incentive structure which in turn gave rise to rent-seeking and the neglect of governance.
It was also revealed that agricultural markets are heavily regulated and domestic commerce has been ignored. Domestic commerce, despite having a share of over 30 percent in Pakistan’s GDP and employing about 20 percent of the total work force has never seen systematic and focused reform effort. The state of domestic commerce in Pakistan is partly apparent by the poor condition of the retail markets in our cities. They are mostly small, cramped and congested areas with limited square feet allocated to every shop.
There is an excess demand for not only retail space but also office space, hotels and mixed use areas. Excess demand for office space is evident by the high rent prices. Due to these high prices as well as poor provisions for office complexes, a large number of offices, small businesses, guest houses and salons are operating illegally through residential areas. It also pointed out that Pakistan Railways handles only four percent of domestic cargo, a decline from 14 percent in 1990.
The trucking fleet is aging, sizes are small, cargo facilities do not meet internationally certified standards and transport efficiency is very low. Both rail and trucking sectors are still heavily regulated. There is no zoning for warehousing and distribution and Pakistan has few facilities with very little spaces for modern and up to date storage facilities. Grain storage is primarily in the public sector.
Inadequate cold chain storage and refrigerated vehicles are a serious problem and lead to considerable wastage of perishable goods including vegetable and fruit wholesale and retail markets. The report identifies three main areas for reforms needed to promote competitive and vibrant markets. Firstly, city zoning laws and building regulations may be reformed to allow land use to respond to market demand.
Secondly, pushing for openness and competition to bring international quality goods to the market, deregulating agricultural markets and promote innovation and lastly, legal and judicial framework must be made supportive of the complex needs of market development.
Bringing international quality goods to consumers will promote innovation. This entails free entry and exit of participants in the market (without special privileges or licenses) as well as liberalizing policy allowing for mobility with greater fairness and competition for wholesalers. The Competition Commission of Pakistan (CCP) has proved successful in the past few years in dealing with non-competitive activities in various sectors including sugar, cement and textile.
Tax Reforms: Touching on tax reforms, the report also urged making amendments to the Income Tax Ordinance 2001 and Sales Tax Act 1990 to limit the discretionary power of the Federal Board of Revenue and improve administration, auditing system and tax refunds system. It also emphasised the need for simplifying the tax system and tax administration by creating one-window cells for tax registrations at the sub-national level to cater to all taxes and unifying NTN and GST registration to one Tax Registration Number through amendments to the Income Tax Ordinance 2001 and the General Sales Tax Act 1990. It also demanded that tax laws be modified to include deadlines for speedy disposal of pending and new court cases.
Agricultural and Rural Markets: The study also looked into measures to improve transport efficiency and storage facilities. It declared that private storage activity needs to be encouraged and space needs to be made available for warehouses. Moreover, good storage facilities will hopefully provide much needed hedging opportunities to farmers and facilitate the development of forward ad futures contracts with banks and open exchange markets.
With regards to packaging, it underscored that farmers need to be trained in packaging the agricultural produce and loading or unloading in order to minimise damage to perishable goods. As a bid to encouraging private sector involvement, it urged the ministry of food and agriculture to focus on repealing the Agriculture Produce Markets Act 1939 and replacing it with more updated and market friendly set of rules that allow small private farmers to sell their produce directly.
Trading Processes: Given the current proposals by the Strategic Trade Policy Framework 2009-12 which focus on looking at specific industries and businesses to develop for international trade with some changes suggested for overall facilitation of importing and exporting. Focusing on land clearing facilities, the report pointed out that with only 1,046 km of coastline, Pakistan needs to establish dry ports to effectively handle import and export.
These dry ports can reduce administrative delays and provide more capacity than otherwise available in inland cities. Regarding the enforcement of contracts, the report claimed that Pakistani businessmen consistently state that the current state of courts is one of the key constraints to investment. The national judicial policy (2009) has tried to bring justice to the local level besides the provincial and federal levels. The new policy aims to guarantee independence of judiciary, clear backlog of cases and reducing corruption. Some further measures may be taken to improve the situation.
With regards to the establishment of commercial courts, the authors of the report stated that a specialised environment for firms to deal with their problems was necessary. These courts can either be set up as separate entities or as a separate chamber in the existing courts.