Roadmap to reduce distortions in economy unveiled
By
Amin Ahmed
The World Bank, in its latest report, has observed that Pakistan’s inability to allocate all its talent and resources to the most productive uses has stunted the economic growth.
Pakistan’s economy can grow sustainably only if the country introduces productivity enhancing reforms that facilitate a better allocation of resources into more dynamic activities, and of talent to more productive uses, according to the World Bank report, “From Swimming in Sand to High and Sustainable Growth”, released on Friday.
The report presents a roadmap to reduce distortions in the economy that are currently acting as a deterrent to productivity growth. Critical reforms include: harmonizing direct taxes across sectors, so that more resources flow into dynamic tradable sectors like manufacturing and tradable services, instead of real estate and non-tradables; reduce the anti-export bias of trade policy by lowering import duties and reversing the anti-diversification bias of export incentives.
“Pakistan’s economy is at a critical stage. It could be a turning point where long-term structural imbalances that have prevented sustainable growth for too long ought to be addressed urgently. The report puts forward a series of policy recommendations to achieve this in a sequenced way,” said Gonzalo J. Varela, senior economist and co-author of the report.
World Bank report suggests ‘smart interventions’ rather than ‘blanket subsidies’
“First, reduce distortions that misallocate resources and talent. Second, support growth of firms through smart interventions, rather than through blanket subsidies. Third, create a positive, dynamic loop between evidence and policymaking, strengthening feasibility analysis of publicly funded projects or programmes,” the World Bank official said.
Positive impact on productivity
The report urges Pakistan to maximise positive impact on businesses and productivity across the board by: reducing regulatory complexity; harmonizing the general sales tax (GST) across provinces; reforming investment laws to attract more foreign direct investment; and upgrading insolvency laws to reduce the costs of liquidating non-viable firms.
The report focused on how Pakistan has performed in three areas that are at the core of the growth process: productivity, growth of firms and investment, and female labour force participation.
It presents new evidence on firms’ productivity dynamics across different sectors of the economy, the patterns of firms’ growth and investment, and the allocation of female talent.
Women’s participation
Productivity is further affected by the fact that Pakistan does not tap into all of its talent. “Women in Pakistan have made progress in educational attainment, but this accumulated human capital is underused because of constraints they face to participate in the labour force,” said World Bank Country Director for Pakistan, Najy Benhassine.
Pakistan displays far lower female labor force participation rates than expected for a country at its level of development. Pakistan can accrue GDP gains ranging between 5pc and 23pc by closing the female employment gap relative to its peers, depending on the extent of implementation of complementary labor market policies.
About 7.3m new jobs would be created if Pakistan were to close its female employment gap with Bangladesh.
The report pointed out that aggregate productivity in Pakistan has been stagnant or declining during the past decade, mostly driven by firms and farms becoming less productive over time. The Covid-19 pandemic exacerbated the decline in firms’ productivity, with a contraction of 23 per cent in 2020.
In the agriculture sector, focusing on Pakistan’s main crops, while yields have grown over the past decades, this has been due to a more intensive use of inputs. At the same time, total factor productivity has been falling for most crops, although, in this case, with provincial heterogeneity: Punjab and Sindh have been relatively good performers, compared with Khyber-Pakhtunkhwa or Balochistan.
Crop productivity in Pakistan is highly susceptible to elevated temperatures and rainfall variations, putting the crop segment at severe risk due to climate change.
‘Zombies’
Part of the borrowing of the government that crowds out private investment is used to support firms that may be unviable without state support.
Pakistan exhibits a relatively large share of firms known as ‘zombies’, that is, firms that are loss-making for at least three consecutive years state-owned enterprises (SOEs) and family-owned domestic firms are more likely to be zombie firms, according to this definition, and to display low investment rates.
To increase investment rates and bring in large firms that could add dynamism to markets, the country could leverage its untapped FDI potential – estimated at $2.8 billion annually.
Pakistan’s untapped FDI potential is estimated at around $2.8bn a year. Tapping that potential would lead to more than doubling current inflow levels.
