EDITORIAL: As Pakistan attempts to implement far-reaching reforms to restructure its economy, the aim is to remove the lags that stifle growth and reduce the oversized role of the state in economic affairs, something which has led to dismal levels of economic freedom in the country, where the interests of certain segments are protected through preferential treatment while the majority struggles for equal opportunities and access to resources.
This lack of economic freedom has resulted in Pakistan languishing in various international rankings that measure this very aspect, and as was pointed out in a local daily recently, the country is ranked 147th out of 184 countries according to the Heritage Index of Economic Freedom published in 2023.
Moreover, it was classified as a “repressed” economy, the lowest category on the index. Similarly, the Fraser Institute has ranked Pakistan in the third quartile in its Economic Freedom of the World Index 2023.
Simply put, economic freedom is the ability of individuals and businesses to make their own economic decisions without undue interference from government entities, with the presence of certain basic conditions essential to ensure this, including a legal system that guarantees property rights and enforcement of contracts, an equitable taxation system, rule of law, a transparent regulatory framework and minimal hindrances to trade and investment.
However, the economic model currently in vogue in the country ensures that we lag significantly on all these aspects. As the IMF has also pointed out in its latest report on the country, numerous policy-related restrictions have contributed to this state of affairs, including protectionist interventions and an unwieldy regulatory environment, which also pose substantial threats to the current reform momentum and our delicate economic recovery.
The overarching cause of the abysmal levels of economic freedom in Pakistan remains profligate levels of government spending financed by massive government borrowing, and the consequent expansion of state presence in myriad spheres, which crowds out private enterprise, stifles market dynamics and leads to resource misallocation.
This situation has not only necessitated the imposition of elevated levels of tax from a very narrow tax base to sustain the oversized state presence, the excessive borrowing also opens up the government to default risk. Moreover, preferential treatment to certain segments, particularly through tax concessions and subsidies, has also played its role.
A classic example of preferential government policy leading to lack of economic freedom is of the agriculture sector where, according to the IMF, preferential taxation treatment has led to stagnation and inefficiency at the expense of more productive segments of the economy. The sector remains perennially trapped in low-productivity activities, draining large portions of public funds while remaining inefficient and uncompetitive.
Furthermore, a challenging regulatory environment has deterred both domestic and foreign direct investment as businesses spend substantial resources in traversing complex bureaucratic processes and unfavourable tariff regimes.
This directly impacts economic freedom, as the ability of businesses, especially those that are involved in manufacturing high-value products, to operate efficiently and competitively has been significantly hampered. According to the IMF, tariffs on intermediate and final goods have acted as obstacles to competitiveness and hinder the growth of the domestic market, thereby obstructing the country’s progress towards more advanced manufacturing capabilities.
Among the various threats that could still derail Pakistan’s uncertain march towards economic reforms, and ultimately economic freedom, are the challenges associated with reducing the size of the public sector and the pressure from vested interests, which would be loath to give up the substantial concessions they have enjoyed thus far.
Nevertheless, policymakers must remain committed to the reform of archaic economic structures and eliminate protections for inefficient sectors while striving to improve the entrepreneurial environment in the face of institutional resistance.
Copyright Business Recorder, 2024
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