Govt policy scorecard

Liberalize and Integrate: EAG outlines its vision of a new auto policy

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Liberalize and integrate:
EAG outlines its vision of a new auto policy

Transformation of the Auto Industry needed from protection and indigenization to liberalization and integration

The independent Economic Advisory Group (EAG) convened detailed deliberations to assay the outcome of contemporary automotive development policy, and the initiatives proposed in the Finance Bill 2021-22. It observed that prevalent policies do not present a path for transformation for the sector to either meet the needs of the domestic consumer or become globally competitive. Specifically, these fall short at both providing a mechanism to bring down prices on sustainable basis and ensuring development of Pakistan’s industrial capabilities necessary for competing in international markets.

EAG observes that the incentive structure in place is not designed to leverage the country’s latent comparative advantage. This is precisely the reason why, despite decades of protection, the industry has failed to become competitive internationally. Instead, a more efficacious policy would focus on exploiting Pakistan’s inherent latent comparative advantage, which would incentivise greater concentration of resources in segments of auto-industry supply chain where Pakistan has necessary capabilities to compete globally. For example, although by no means guaranteed, an auto-policy which moves away from specializing in the end-product (e.g. assembly) and, instead, focuses on subsectors where comparative advantage is more probable is better suited for achieving policymakers’ objectives – consumer welfare and increase in industrial capabilities.

The auto industry has received protection from government for more than three decades without robust analysis of requisite pre-conditions, which has been standard practice in most trading blocs (e.g. EU) for several decades. For instance, researchers use empirical efficiency tests like the Mill test and Bastable test, and analyse of the welfare implications of the incentive structure to objectively measure the impact of protectionist measures in place. On both these measures, the auto industry and, implicitly, auto-policies fail. This relaxed approach to providing incentives at the expense of consumer explains why the industry continues to struggle at achieving the economies of scale necessary for competing globally.

The efficacy of any policy is contingent upon prudent allocation of resources. EAG argues that the prevailing policies have allocated country’s resources in production activities where Pakistan has an inherent disadvantage. The 1.8 million people currently employed throughout the supply chain could be reemployed across activities where Pakistan enjoys a latent comparative advantage. The misuse of resources remains the least appreciated point and EAG wishes to bring it to policymakers’ attention.

The evolution of trade has prompted countries to realize comparative advantage, cars made in Germany compete with cars made in Japan, and specialize in the stages of supply chain, it is impossible to say where a car is manufactured. Data shows we are likely to have a comparative advantage in auto-parts and two/three wheel automobiles, and for which, there are significant primary/secondary markets in Africa and Asia.

The EAG proposes that the upcoming auto policy should promote integration of domestic parts manufacturers with global value chains through two actions. First, liberalization of trade regime to give market access to international automobile manufacturers in exchange for integrating domestic parts manufacturers in their value chains. Second, identify and engage with key auto markets across the world with the aim to reduce frictions to cross border trade and provide certainty to international auto players vis-a-vis operating their supply chains from Pakistan.

Policy should focus on securing access to African and Asian markets to expand exports to primary/secondary markets, which can be accomplished through actively seeking FTAs with African Union, RCEP, and Central Asian countries.

Investment in the enhancement of domestic capabilities for the expansion of potential areas of comparative advantage should be the central stage of transformation. First, businesses need to be incentivized to invest in research and development and produce new products. Second, coordination between relevant business associations, domestic manufacturers, and global players is needed for the standardization of both products and production processes.

Furthermore, it is imperative to identify emerging skills’ requirements and liaise with engineering universities and NAVTTC to ensure appropriate intervention at the earlier stage.

EAG has also made available a presentation on auto-sector reforms on PRIME’s website with the aim to present an alternate set of policies than what is being currently proposed.

The Economic Advisory Group is an independent group of individuals from economics, policy and the private sector that deliberates regularly on economic developments and shares its views with the government and the public. It is supported by PRIME, an independent think tank.

Click below to read the complete presentation:

Auto-Industry-Presentation.pdf

For media inquiries, please contact Afzal Khan at [email protected] or 0333-0588885.

Economic Freedom Promotes Upward Income Mobility

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Economic Freedom Promotes Upward Income Mobility

New study shows increased economic freedom leads to greater income mobility for workers and entrepreneurs

Islamabad, Pakistan—Economic freedom enhances income mobility while the poor in unfree nations have fewer opportunities to escape poverty and build prosperity, finds a new study released today by Policy Research Institute of Market Economy (PRIME) in conjunction with Canada’s Fraser Institute, an independent, non-partisan public policy think-tank.

“The main purpose of economic development should be to provide opportunities for upward social mobility of a vast majority of citizens. This can be achieved through inclusive economic policies and re-allocation of resources from rent seeking to efficiency seeking activities” said Ali Salman, Executive Director PRIME.

Many factors contribute to economic freedom but the most important for income mobility are rule of law and restrictive regulations. In uneconomically free nations, domineering government and crony elites use the rule of law, not to protect the freedom of all but entrench the privilege of their cliques while undermining the rights of everyone else.

Similarly, regulations are too often used to exclude people from work and opportunity, even in nations with a relatively robust rule of law. Government regulation may require workers to purchase occupational licenses or train to acquire credentials before they can work.

Pakistan ranked 139 in rule of law, ranked 140 in economic freedom and 123 in regulations; the country stood at 137 in terms of labor market regulations and 109 in business regulations.

“Government regulations impede the ability of workers to make themselves better off by slowing the upward mobility of workers,” said Vincent Geloso, an assistant professor of economics at George Mason University, senior fellow at the Fraser Institute and co-author of Economic Freedom Promotes Upward Income Mobility

The study shows that labor regulations across industries slow wage growth for low-income workers. And, particularly, inappropriate minimum wages and occupational licencing tends to hurt income growth among the poor more than among higher-income workers.

The same effect is also observed for would-be entrepreneurs who face barriers to entering certain industries because of regulatory costs and fees.

“If governments are genuine in their desire to help low-income workers climb the income ladder during the COVID recovery and beyond, they should take a second look at regulations and look for ways to increase economic freedom in their respective jurisdictions,” Geloso said.

The Fraser Institute produces the annual Economic Freedom of the World report in cooperation with the Economic Freedom Network, a group of independent research and educational institutes in nearly 100 countries and territories, including PRIME Institute in Pakistan. It’s the world’s premier measurement of economic freedom.

Click below to read full report:

Economic-Freedom-Promotes-Upward-Income-Mobility.pdf

MEDIA CONTACT:
Afzal Khan:
[email protected] or call at 03330588885

A Case Study of Auto Industry in Pakistan (Draft Note for Discussion)

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A Case Study of Auto Industry in Pakistan (Draft Note for Discussion)

Vision for Economic Transformation

This is a Draft Note for Discussion authored by PRIME’s Research Economist Mr. Tuaha Adil. The policy note comprises valuable inputs from the members of the Economic Advisory Group.

The transformation of an economy is contingent upon the utilization of resources in the most productive manner. Sectors of the economy will operate at maximum potential when business conducive ambiance is created through favorable and ease promoting government policies. The economic transformation policy based on the identification and resolution of contemporary structural and sectoral inefficiencies and futile economic policies is inevitable for the prosperity of the country. The performance of the auto sector is analyzed as a case study to evaluate the efficiency of government industrial policies. The government’s policies and initiatives to expand the auto industry are based on the assumption of latent comparative advantage. Therefore, domestic auto companies are protected from international competition through tariffs and tax cuts. However, the outcome of policies and performance of the sector have been unsatisfactory due to confinement to assembly of vehicles and nonexistent localization of products. The policies adopted by countries having developed automobile industries have also been discussed to evaluate shortcomings of the policies adopted in Pakistan.

Click below to read the full report;

Auto-Policy-Note-10.8.21.pdf

Karachi Transformation Plan 2020

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Karachi Transformation Plan 2020

In 2014, government of Sindh requested the World Bank Group for its assistance in providing strategic
advice regarding improving the livability and competitiveness of Karachi. This non-lending technical
assistance was funded by the Korean Green Growth Trust. The World Bank Group committed to
present a City Diagnostic and Transformation Strategy, which they hoped will enable the Government
of Sindh to prepare an implementation of Karachi Strategic Development Plan 2020, prepared by the
City District Government Karachi, in 2007. The World Bank Group presented its report in 2018.
In August 2018, a new federal government was sworn in. On November 28 , 2018, President Dr. Arif
Alvi presided over the introductory meeting of Karachi Transformation Committee (KTC), held at Governor’s
House, Karachi. On 30 march 2019, while chairing a meeting of the committee at Karachi, Prime
Minister Imran Khan announced Rs. 162 billion development package for Karachi.
In August 2020, Karachi received its heaviest rainfall in a single day in 53 years. The rain claimed
more than 30 lives; electricity supply and cellular services in the city were disrupted for days. Against
this backdrop, on 31 August 2020, the PM directed the government to finalize the Karachi Transformation
Plan within the week.

Click Below to download the report:

Karachi-Transformation-Prime-Institute.pdf

Light at the End of the Tunnel (2018)

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PML-N Economic Performance: Light at the End of the Tunnel is the 10th and final federal tracking report under the Government Policy Scorecard project which reviews Pakistan’s economic performance by tracking the progress made on the implementation of the economic manifesto announced by the party in power in Islamabad, Pakistan Muslim League-Nawaz (PML-N). The purpose is to initiate and inform policy dialogue and public debate on the progress made on the economic agenda of PML-N. This tracking directly serves the basic principle of a functioning democracy: accountability. Current report covers progress made during July-December 2017

The report picks two distinct sections of the PML-N manifesto: Economic Revival and Energy Security, which it terms as ȃEconomic AgendaȄ. These two ȃAreasȄ are then divided into ȃComponentsȄ and ȃSub-componentsȄ. In most cases, these are based on a simple reproduction of text of the manifesto, and in some cases, some editing has been carried out for clarification and structure, but without altering the meaning of the authors of the manifesto. Under the area of Economic Revival, 10 components and 57 sub-components (or targets) have been identified. Energy Security includes 15 components (out of which 10 are targets) and 22 sub-components, making a total of 32 targets. In sum, the report tracks 89 targets. In its 10th and final instalment, the report assigns scores on 84 targets, subject to information availability, based on the progress recorded. On 5 targets, no score is awarded.

To read more, download the file:

Between promises and performance (2018)

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The objective of the report titled “PML-N Economic Agenda: between Promises and Performance” is to analyze the economic performance of PML-N over the past five years, based on a series of 10 reports under PRIME’s Government Policy Scorecard Project. The scope of this report is mostly confined to the performance over the governments’ tenure, based on the agenda targets, wherever applicable.

The performance analysis is further broken down to five major categories, namely: Tax Administration, International Trade, Public Debt, Energy, and State Owned Enterprises. This report has analyzed these five categories with respect to agenda targets, reforms or the lack thereof, and any other key issues surrounding the sector.

The annexure at the end of the report aims at critically evaluating and commenting on specific agenda targets, in the light of PRIME’s tracking scores. Each category is covered as a different chapter, entailing performance overview, major achievements, bottlenecks and recommendations for reforms’ sake.

To read more, download the file:

Between promises and performance (2018)

First Hundred Days Reform Agenda Report: Outcomes and Expectations

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PRIME Institute launched “100 Days Agenda: Tracking Performance” on Tuesday, 20th November. This report examines PTI’s performance within the first 100 days of taking charge of the Federal Government based on the six pillars identified by the party itself.

In Pakistan, where majority of the people lack literacy and are poor, identification of basic issues becomes necessary for the sustenance of livelihood of the average Pakistani. Signifying economic empowerment with provision of decent housing, clean drinking water, and basic consumer amenities such as internet, mobile phone, television, nutrition, education, health and insurance of safety.

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Analysis on Intergovernmental Transfers (2017)

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Fiscal decentralization represents devolution of spending responsibilities from higher level to lower level of government accompanied by transfer of fiscal resources and administrative authority. The rising demand for decentralization in developing countries in recent years is a consequence of broader process of liberalization, deregulation, and urge for democratization with a need to bring the government closer to people for articulation of their needs and preferences. There is an increasing demand from regional and local leaders for more autonomy and taxation powers to support their expenditures.

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Paradigm Shift (2017)

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This paper argues for a paradigm shift in assignment of tax bases. The decentralization of tax bases currently assigned to the federal government will increase the net revenue collected at the national level. The decentralization of tax bases will reduce the magnitude of transfers from the federal government to the provinces however transfers cannot be done away with altogether. Transfers from the federal government to the provinces are undertaken through the National Finance Commission which is constituted every five years decide upon the distribution of national financial resources among the center and the provinces and among the provinces. The NFC has faced deadlock several times during the past 65 years. To take care of the deadlock over distribution of national financial resources, this paper first offers an alternate institutional mechanism to make a decision on a resource distribution.

Macroeconomic Framework and Determinants of Benchmark for Receipts and Expenditures

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Macroeconomic framework2 and how an optimal level of receipts and expenditures can be achieved at federal and across provinces is one of the fundamental issues the prevailing National Finance Commission (NFC) negotiation is figuring it out. The optimal level of receipts and expenditures can help the provinces to maintain fiscal balance. Similarly, the optimal level of receipts and expenditures will also help to develop the homegrown macroeconomic framework. To avoid the complexities involved in the macroeconomic framework, and remain in line with NFC discourse we focused our discussion on the fiscal side of the macroeconomic framework. Over the years, narrow tax base, heavy concessions and exemptions, challenges in tax administration and inadequate tax compliance have resulted in a low tax-to-GDP ratio. To address these challenges and weaknesses, there is a dire need to introduce necessary fiscal measures. Fiscal reforms are needed to ensure a fair and efficient tax system to generate sufficient revenues, which however seems a big challenge in the presence of substantially low tax-to-GDP ratio.

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Policy Research Institute of Market Economy

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