A World Bank study titled "Pakistan@100 Shaping the Future" indicates that in Pakistan distortions are manifest in different ways in sector specific policies, including agriculture, power sector, financial sector and foreign trade; and maintains that structural transformation, defined as how to reallocate resources for more productive uses, has been a major source of productivity increase and sustained economic growth in modern economies.
The report states that "up to the early 1990s, Pakistan had been following the same path as many countries and its agriculture sector was declining as the country became richer. But this trend has slowed down over the past few decades. The slow decline in agriculture has not been accompanied by an increasing share in manufacturing, and, as a result, the manufacturing sector is small compared with countries at similar income level...Pakistan's services sector is relatively large compared with countries at similar income levels....however most services sector growth has been in low skills services (wholesale and retail trade) and public administration." In 1992 agriculture contributed 46 percent to Pakistan's GDP, in 1999 47 percent and in 2014 around 40 percent in marked contrast to India and Bangladesh's around 17 and 18 percent respectively in 2014. Additionally, Pakistan's yield per hectare remains well below India's with a wide disparity between the yields of rich versus the poor farmers in Pakistan with the report stating that "an increasingly unequal distribution of land holdings...and failure to reform a land tenure and agricultural system that significantly favours large landlords gave rise to a politically influential landholding class in the agriculture sector." This accounts for sustained failure of successive federal governments to amend the constitution and bring net farm incomes into the tax net at levels comparable to what is payable by other sectors and of provincial governments to levy a tax commensurate with the rich landlords net income. The report is understandably silent on how to break this hold on policy by politically powerful rich landlords.
The industrialists, identified as another elite politically influential group in Pakistan, constantly seek protectionist economic policies and use their economic power to influence policies that facilitated their development into a politically connected industrialist class, the report maintains. And points out to a wide production disparity in Pakistani firms that lowers the country's average productivity levels: "a high degree of dispersion in productivity levels across firms in the same sector suggests that there is considerable room to improve productivity by facilitating resource allocation to more productive firms." It would be a serious challenge for any political government to seek to end this disparity in output (in Pakistan's case through further facilitating resources to those companies that are already more productive) and, at the same time, lower the incentive to join the legal economy of the large numbers operating in the informal sector.
Thus the two wealthy and politically influential elite groups - framers and industrialists from the private sector - have succeeded in consolidating their hold in the corridors of power - be it directly or indirectly. This accounts for their fiscal (lowering taxes and regulatory duties with a negative impact on revenue as well as outright subsidies including on key inputs that not only increases government expenditure but also exacerbates the financial problems of utilities) and monetary incentives (low interest rates, easy access to credit). Low tax collections and higher expenditure raise the budget deficit with the government compelled to: (i) borrow domestically through sale of risk free treasury bonds which accounts for crowding out credit to the private sector. This would also make any decision to slash the tax payable by banks on lending to small and medium enterprises (SMEs) not enough of an incentive; the report notes that credit provision is low in Pakistan and SME loans comprise less than 10 percent of all loans in Pakistan; Of concern as the report points out is the fact that "a mere 0.4 percent of bank borrowers account for 65 percent of all bank loans....a small number of influential firms receive a large share of credit, despite higher default rates, causing annual losses estimated at 1.6 percent of GDP;" (ii) raise taxes based on ease of collection from groups that are not as politically influential as the rich landlords and industrialists which accounts for rising reliance on indirect taxes (and withholding taxes in the sales tax mode - an indirect tax); and (iii) greater emphasis on remittances which is a function of external conditions (the need for labour) as well as domestic policies given that all remittance inflows are not through legal banking channels (though since a couple of years the State Bank has focused on this), and on borrowing domestically and from abroad.
This state of affairs supported by a flawed strategy continues to this day with the Khan administration having announced considerable incentives to industries (fiscal and monetary) including those that pertain to cartels (even in products whose price should be market-driven, for example, sugar and cement). Such market distortions account for diverting acreage from high cash crops like cotton to sugar resulting in sugar surplus produced at a cost higher than its international price which, in turn, requires massive state subsidies to export.
The other two elite groups noted in the World Bank report are from the public sector civil: civil servants and the military receiving the lion's share of budgetary allocations.
The report identifies six lacunas to structural transformation: (i) persistence of market distortions; (ii) regulatory complexity stemming from the perception amongst firms that it is unpredictable and inconsistently implemented with a major negative impact on ICT and digital development; and multiplicity of taxes (with a textile firm paying as many as 12 taxes, dealing with 47 different departments for approvals and provisions); (iii) financial sector not intermediating savings to most productive users and falling short of diversification and depth; (iv) power supply and its costs higher than the regional average; (v) ineffective governance in cities and inefficient use of scarce resources acting as an impediment to cities playing a role in supporting structural transformation; and (vi) governments' failure to implement corporate governance in state-owned entities (SOEs) as well as supporting SOE underperformers negatively impacting on private sector as preferential treatment of SOEs especially in areas of credit crowds out private sector activity.
However serious questions remain unanswered in the report. How can a political government end the wide disparity in yield per hectare between the poor and the rich farmers? Perhaps one way would be to encourage setting up of cooperatives for farmers with acreage less than 12 acres and extending loans and leasing government land, wherever available, to enable them to raise their yield. Mid level farmers - 12 acres to 20 acres - with a higher than the national average yield may also be leased government land and provided incentives with future incentives linked to a rise in their yield.
To conclude, much needs to change; but perhaps most of all a change in the mindset of our people is required of those operating in the public as well as in the private sector, a daunting task indeed. The World Bank is clearly hopeful that this is achievable by 2047 but to make this happen Pakistani administrations for the next 28 years need to ensure that those with a long history of receiving government largesse - not only the two private sector elite groups but also the two public sector elite groups - make the necessary, preferably voluntary, 'sacrifices' to start with followed by greater transparency and accountability of not only individual political families/parties but also of all sectors, productive and otherwise.
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