Studies across the world show that political instability in a country is negatively related with its economic performance: it scares away capital, slows growth, pushes unemployment and increases poverty. Pakistan is facing the twin challenges of economic slowdown and militancy. The issues which create a political instability in the country take the government’s focus away from the real issues that need to be addressed to fix the economy to more populist policies for short-term political gains. That, in turn, creates uncertainty about economic policies.

Pakistan’s long spell of political uncertainty refuses to go away even after a smooth transition of power from an elected civilian setup to another. Like its predecessor, the Nawaz Sharif government also appears to be lurching from one crisis to another. The average man on the street, who must have frequently heard the cliché — ‘Pak economy requires structural changes’ — must be wondering what these are and why they are not implemented. The term which has literally become a buzzword amongst Pakistani economists refers to the opening up of an economy on market principles. However, going by the classic definition, the endeavour to bring about structural changes in an economy entails much more than mere liberalization, and relates to modifying the underlying composition of the way an economy is structured. To understand it deeply, one needs to dwell in the history of an economy, to correct an ill at the very roots from where an economy evolves.

Many Western economies are now indulging in an exercise of self-reflection to rectify policies that made them lose competitiveness in the Global Financial Crisis of 2008 and allowed their economic managers to amass unchecked-cum-unrealistic debt levels. Pakistan’s economic managers need to do the same in order to truly grasp why our economy has shaped up in a way where our tax to GDP ratio has wavered and the debt burden has accumulated to an extent where ironically, the only consistency that remains is of an ever-looming default!

When studying the history of the Pakistani economy, it is rather elementary to ascertain that our GDP growth post-1990 has mainly been on the back of debt or foreign aid. Further, corruption and the inefficient use of debt inflows compounded our problems since the funds borrowed by successive governments were almost never invested judiciously thereby rendering national investments unproductive and in return, naturally, their failure on repayment time lines. This, however, did not deter any government from borrowing more and in spite of failures to meet previous commitments, the borrowings continued unabated. The result being that while GDP expanded mainly due to debt accumulation, the corresponding growth in the legitimate documented sector of the economy could not keep pace with this artificial expansion. The corruption in debt spending coupled with unaccounted-for inflows has given shape to an economy where the markets on one hand are flushed with money (from the undocumented sector) and on the other hand, the overblown size of the GDP bears no real correlation to the fair potential of the tax base of the documented sector. Reduce the size of the debt-driven-GDP or the annual budgeted overlays based on deficit financing and suddenly the national tax to GDP ratio starts looking very respectable.

If Pakistan’s economy has to truly come out of the woods then its economic managers have to stop fanning this counterproductive economic structure and opt for structural changes that will reduce government’s debt footprint and provide more space to the private sector to generate a more productive growth momentum. Real economic activity based on legitimate domestic underpinning is the only way to shore up increased revenues on a sustainable basis, whereas coercive FBR drives to meet wishful tax targets in the present environment will not only backfire, but will also be detrimental to future investment.

The history of present-day emerging economies and especially of those in South Asia tell us that an unchecked, over-reliance on the private sector may not be enough to generate desired rates of growth. Large development projects require sizeable conduits and given the size and limitation of private sector in developing economies’ this function, in tandem, needs to also be performed by well managed state-owned enterprises (SOEs). A cursory look at the BRICS nations is enough to determine how key the role of SOEs is to an economy’s development and equitable well being. Run these state institutions to the ground and the entire economic structure collapses. And this is precisely what happened in Pakistan. The government needs to recognize this and concentrate on resurrecting key state-owned enterprises rather than endeavouring to sell them off.

In this age of global connectivity where capital transactions eventually culminate on the final returns they yield, governments of developing countries need to be in control of bilateral or even unilateral (primarily regional) transactions that affect economic development work. This helps in both, ensuring that they reap potential benefits and that an investment inflow does not stagnate into a liability.

By:Pervaiz Nazir


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