September Issue 2015

By | Economy | Published 4 years ago

The increasingly interdependent world of today, it is wrong for individual nations to aspire for complete economic sovereignty. However, it is also wrong to use this as a pretext to do nothing to rationalise the overwhelming dependence of the national economy on external factors, especially on multilateral and bilateral dole.

Over-dependence on such external factors turns nations into mere puppets on a string, dancing to the tune orchestrated by donors — especially the bilateral ones — as they promote their global interests at the cost of the national interests of recipient countries.

This has been Pakistan’s experience over the close to seven decades of its existence. There has never been a time in our country’s economic history when we were not serving the global interests of one donor country or the other, in return for some financial crumbs called aid, which in actual fact is a loan, at times concessional and at others commercial.

Most other developing countries which started on the same lines did not take long to break the shackles of dependence on external assistance by exporting their way out of their economic doldrums.

Meanwhile, we have continued to remain an overwhelmingly import-dependent country with our external borrowing needs increasing by the year to fill the expanding payment gap between our escalating import bill and shrinking earning capacity.

The import-substitution policy that we followed until about the end of the 1980s further decreased our ability to export as the high walls of tariffs maintained to protect the inefficient local manufacturing sector only encouraged the smuggling of finished goods, while the increased need for raw materials and intermediaries to feed the local substitution industries, mostly of low-tech consumer goods, further added to our import bill.

In fact, we kept subsidising imports by sticking for years to an excessively artificial rupee exchange rate. This encouraged imports and discouraged exports because even our small list of exportable surpluses was being rendered non-competitive in world markets by other competitors maintaining realistic exchange rates of their currencies, which were at times even undervalued to help their exports.

And by the time we understood the need to promote exports to be able to cover our import bill, we had managed to create a private sector that had no idea of how to function in a free-market environment, and was overly dependent on concessional government largesse by way of tax exemptions and unearned rebates.

Most of the businesses of these tycoons were almost 100 per cent family-owned — against the normal international practice of keeping only about 30-35 per cent in the family and spreading the risk by unloading the remaining shares on the stock market. The 100 per cent ownership naturally increased the risks, thereby forcing these tycoons to protect their investments and margins by evading taxes and pilfering utilities, like electricity, gas and water, etc.

Furthermore, only 850,000 Pakistanis pay tax on their incomes. According to NADRA, there are still 500,000 potential taxpayers who continue to avoid their national obligation with complete impunity.

Retailers and wholesalers contribute 18 per cent to the GDP, but their contribution to taxes is only one per cent. Similarly, the agriculture sector contributes over 20 per cent to the GDP, but contributes below two percent to taxes.

This has led to an expanding sea of an informal economy, that has, it is conjectured, surpassed the formal economy three times over, rendering all the official data on the GDP, its growth rate, the budgetary deficit, the trade deficit, the current account balance and balance of payments, etc. completely irrelevant.

Clearly, the more we follow our traditional economic policies, the more we are likely to slide further down the national economic pole.

We need to innovate if we want to stop the rot and climb back to attain a reasonable level of economic sovereignty.

We have two very clear comparative advantages: our agriculture and our strategic location.

Agriculture is crucially dependent on irrigation water, the availability of which is shrinking daily. While we try to devise alternate schemes to generate more sources of irrigation water, we should try to overcome the impending shortages by adopting sprinkle and drip irrigation systems along  with conserving water that flows through the irrigation canals by plugging wastage, pilferage and leaks.

Simultaneously, we should expand our agro-based industry, especially focusing on value addition, storage and cooperatives with export markets in mind.

Since Pakistan is located right at the centre of a huge marketplace, extending from Casablanca in the South to Urumqi in the North and from Myanmar in the East, all the way to Europe in the West, we could turn the country into what is called a warehouse/transhipment economy.

The prerequisites of such a policy are: 1. Keeping the exchange rate of the rupee pegged to its realistic value; 2. Rationalisation of all kinds of tariff walls so as to encourage the unhindered imports of raw materials and intermediaries; 3. Warehousing these for value addition; 4. Building local technical capacities for value addition; 4. Moving the value added goods forward to the next stage of the value chain and; 5. Exporting the value added goods to their final destinations to all four corners of the globe.

Such a policy is expected to fit like a glove in the $46 billion China-Pakistan Economic Corridor (CPEC) project that envisages the building of road, railway and pipeline links from Gwadar port in Balochistan to Kashgar in China.

For a potentially two-way economic value-chain to develop in the CPEC that can also be linked to a transit trade route running from the Wagah border with India to the Durand Line border with Afghanistan  and onwards to Central Asia,  we need to set up value addition warehouses en route.

This would allow Pakistan to become a great hub of economic activity supplying finished and semi-finished goods, as well as kits in knock-down condition, all the way from South to North, East to West, in the process enhancing its economic sovereignty, and at the same time adding real meaning to the idea of interdependency.

This is, however, easier said than done. The most difficult part in achieving this goal would be the creation of required value addition capacities, especially well-trained and well-equipped manpower.

We would thus need to set up technical training institutes on the two sides of the CPEC, running across the country from South to North.  And to fund these endeavours we would have to seek financial assistance from sources like the World Bank to create the physical and social infrastructure for such institutes.

While we are building these capacities we should also prospect the possibilities of getting the Chinese private sector to relocate to Pakistan their low-and medium tech manufacturing units that are becoming economically unviable for them because of rising labour costs in China. Since we already have expertise of sorts in the textile industry, we could focus on the Chinese textile industry to start with for relocation, along with the transfer of the required technology for value addition.

Our next focus should be on agro-based industries, especially food processing and packaging units for warehousing and value addition. There is an immense export potential for exporting these goods to the rich Central Asian countries as well as to the wealthy and high-quality conscious Middle East markets.

However, a largely illiterate society existing in the most unhygienic conditions would be the biggest obstacle in the way of building a genuine warehouse economy. So, the state needs to gear up its efforts to provide affordable primary education and primary health cover to all its citizens.

The state must also be able to provide affordable two square meals per day per person, affordable housing, affordable transport, affordable communication facilities and affordable travel facilities so as to make all its citizens feel a sense of belonging to their country which is necessary for making them put service above self and work selflessly to build the nation.

But to fund all these activities the government needs resources which it can mobilise only by improving its tax-to-GDP ratio to around at least 15 per cent. And this can only be done by withdrawing all tax exemptions, including those allowed to specific sectors like agricultural income and also to individual industries.

At the same time, a complete overhaul of the Federal Bureau of Revenue is required to weed out the corrupt and digitise its processing to completely eliminate any contact between the tax-payer and the collector.

Meanwhile, the state should redefine the roles of the private and public sectors, allocating the former all the freedom it needs to make the most of its creative energies and its innovativeness while building up the regulatory capacities of the latter.

Experience demonstrates that a free-for-all that lets the market determine all kinds of allocations and prices ends up making the rich richer and the poor poorer. Government-controlled regulators have also failed to correct the waywardness of the markets.

The best way to regulate the private sector and, through it, the market, is through autonomous and statutory regulatory bodies, headed by a suitable chief selected by a bipartisan parliamentary body and enjoying a tenure job free from government interference.

This article was originally published in Newsline’s September 2015 issue.