Pakistan needs to switch from ‘borrowed growth’ to ‘earned growth’

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Setting the Scene

Setting the Scene

The Economic Advisory Group (EAG), an independent policy network, recognises the need for achieving high growth rate, as stated by the new Finance Minister. However, the EAG emphasises that for any such growth to be sustainable it must involve addressing the distortions in the prevailing incentive structure which have continued to undermine efficient allocation of resources in the economy. In this respect, the group has urged the government to remain committed to structural reforms and fiscal discipline. The group has cautioned that the economy will keep undergoing the boom-bust cycles that entails repeated balance of payment crises if governments continue to rely on expansionary macroeconomic policies to generate high growth. With elections only two years away, there is an increased likelihood that the government will be tempted to pursue this path, based on historical pattern.

EAG believes that as Pakistan moves from stabilization to growth, it needs a new framework for sustainable growth, which must accompany a rise in the productivity levels across board. This can be achieved, according to the group, by discontinuing the support of existing inefficient businesses and sectors, and instead promoting continuous reallocation of resources from less to more productive areas. Inefficient and poor performing businesses must be allowed to exit their industries and replaced with businesses that are not only more globally competitive but can also perform favourably in a challenging environment without the need to extract government support. Tax and trade policies shield dominant and sclerotic incumbent players from competition by innovative new entrants.

The group views that our export basket is concentrated in products which enjoy high effective protection, in addition to receiving other forms of disproportionate state largesse. This has prevented the economy from undergoing any transformation, contrary to the objectives of the policymakers. This static incentive structure must come to an end if we want Pakistan to change.

A core point of the new vision is that Pakistan has followed a path of “borrowed growth” that leads to repeated run on the foreign exchange reserves. It now needs to switch to a new path of “earned growth” that supports a globally competitive business environment and generates higher exports.

EAG is also of the view that the government should continue to undertake necessary adjustments in the form of power tariff rationalisation and improving the efficiency of the energy infrastructure, including recoveries, to prevent the circular debt from spiralling out of control. The group endorses the evolving competitive framework in the energy market and holds the view that all the energy distribution sector should be open to competition to enhance consumer welfare and industrial progress.  The government should also withdraw tax exemptions, and reduce losses in the state-owned enterprises by improving their governance structure and giving necessary autonomy from line ministries. The group also supports the cabinet approval of the central bank autonomy and considers it the right step towards improving fiscal discipline and monetary stability, while urging the need for further debate.

EAG is an independent policy network, comprising individuals from economics, policy and private sector which deliberate regularly on economic developments and shares its views with the government and public. It has made presentation to the Ministry of Planning, Development and Special Initiatives/Planning Commission outlining its vision for economic transformation based on the restructuring of the productive structures.

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Policy Research Institute of Market Economy

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