Investment & Privatization Journal
January, 2020




By Mushtaq Khan and Salim Raza

Pakistan’s economy appears to have stabilised. There is growing optimism about the country’s economic outlook.

The government can rightly take credit for the improvement as it gears up to support the private sector drive the economy forward.
Against this backdrop, we make a distinction between policies that are pro-business and pro-market. Pro-market policies use market forces (i.e. the opportunity to make profits) to encourage new players into the economy while pro-business policies also focus on profits, but look exclusively at existing business groups.
At the risk of simplifying, we would characterise pro-business versus pro-market as:

l Protective/supportive policies for existing business interests versus policies that create a level playing field to encourage new players and new businesses.

l Pro-business delivers quick results as incentives to existing businesses bear fruit much sooner; for pro-market policies, results will take time.

l As pro-business targets established businesses, it does not create opportunities for others; pro-market policies create new opportunities and have a greater spill-over.

l Existing business interests have strong ties with the bureaucracy; new entrants do not.

l Pro-market requires fresh policy thinking and effort to legislate and ensure that policies stay in place for a number of years.
l Existing businesses have a latent wariness of the China-Pakistan Economic Corridor (CPEC) as they feel new players could undermine their position; on the other hand, CPEC will only gain traction if the government adopts pro-market policies.

The government’s preference for pro-business policies is simple to understand: (1) it’s easier to do (just call in the business leaders and support their efforts); (2) it appeals to people who have strong ties with the government machinery; (3) the government can claim quick results; (4) time-bound tax exemptions are easier than legislating new policies; and (5) the bureaucracy is always keen to maintain the status quo.
The question is: will pro-business policies work or simply take us back to square one when the next balance-of-payments crisis hits?

China’s way
China’s miraculous economic development since the 1980s needs to be analysed. In our view, China’s development model can best be described as heuristic (i.e. learning by doing) — there was no top-down agenda imposed by the Chinese Communist Party. We would argue that China’s experience gives us some key takeaways:

1. Economic reforms are disruptive and, therefore, require a clear vision of what is to be achieved. This is necessary to generate political support and push back the vested interests that oppose change. Furthermore, reforms can be managed to reduce the level of uncertainty and disruption.

2. China’s economic transformation was not ideologically driven, but implemented in a practical, bottom-up manner — China committed to pro-market policies with a social agenda. On the other hand, the Anglo-Saxon free-market paradigm of the Washington Consensus is deeply seeped in the infallibility of the free market and the pursuit to maximise individual gain.

3. China’s economic growth was led by the private sector, which created the world’s largest middle class. This did more to pull people out of poverty than specific policies for social development.

4. Reforms need a visionary and cannot be championed (or implemented) by the bureaucracy.

A different approach to reforms

  Let’s step back from the stabilisation programme of the International Monetary Fund (IMF) and prioritise those areas that need to be upgraded:

1. Pakistan’s agricultural yields are the lowest in the region. For an agri-based economy, this is the lowest hanging fruit. Rationalising major crop patterns, setting the right support prices, improving the quality of seeds, increasing the use of mechanisation, ensuring efficient water management, and reducing waste in harvesting and transportation are quick fixes. The politics driving agriculture must be resisted.

2. Develop new exports. While the government is busy securing funding to finance its structural trade deficit, policies are needed to narrow this gap. Policymakers need to understand why Pakistan’s non-traditional exports have been stagnant for decades, and identify new exports and potential export markets. This means looking beyond textiles.

3. Bangladesh and Vietnam do not grow cotton. Yet they have become dominant players in the global textile market because they are adaptive producers. The growing popularity of polyester-blended garments is making Pakistan’s textile sector obsolete. Other than adapting to changing global tastes, Pakistan’s textile sector should partner up with foreign companies to enter China’s global supply-chain in textiles and garments.

4. To narrow the trade deficit, Pakistan must adopt import substitution, even if this is unpopular with the Washington Consensus.

5. Pakistan should formulate an industrial policy to create jobs, train labour and build industrial cities to reduce pressure on its cities and absorb the vast number of people entering the labour force every year. This means both the government and the private sector must embrace CPEC.

Planning the future
Government intervention is not inherently counter-productive, but necessary — and not just for welfare concerns. So it is not a government vs. no-government debate, but what sort of government intervention Pakistan needs. China shows that big-picture planning is necessary, but the implementation of reforms needs subtlety, creativity and lots of learning on the job.
As it currently operates, Pakistan’s bureaucracy is not well suited to drive reforms. However, if a suitably empowered Planning Commission is revived, it should be able to identify the right people within the government that could drive the reforms.
Pakistan’s bureaucracy has a deep information base that has been developed over decades — if these sector specialists are given a fresh mandate and carry the full support of the executive, they should be able to come up with new ways to jumpstart the sectors mentioned above.

The narrowing external deficit and a new source of dollars have boosted market confidence. However, most people agree this will only generate another boom-bust cycle. To break out of this cycle, policymakers need to adopt pro-market policies even if these are resisted by the status quo. Pro-business policies are easier, but they are a quick fix, introverted and will not solve the structural problems in Pakistan’s tradable sector.

With a new Cold War unfolding between the United States and China, there may be echoes of this rivalry within Pakistan. Instead of taking sides, Pakistan must formulate its own economic strategy and defend this vision to both superpowers. It must stress that the country cannot sustain 6-7 per cent growth at the current level of investment. If this means pushing back against existing business interests, the latter should view this as tough love.

Pakistan needs its prominent businessmen and their experience, but it also needs them to be outward-looking and dynamic. This group must embrace change and put aside its focus on short-term profitability. Pro-market must prevail over pro-business?
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