During the last few years, Pakistan was successful in implementing a number of reforms on various fronts to stabilise and strengthen the economy. These reforms were generally agreed before-hand and carried out under the tutelage of the IMF and the country was consequently rewarded with much better economic indicators like improvement in the growth rate, reduction in fiscal deficit, stability in prices, rise in foreign exchange reserves and stability in exchange rate.
It was hoped that after the termination of the latest facility from the Fund, known as PRGF, the government would maintain the momentum of reforms to strengthen the macro-economic profile of the country further and try to distribute the fruits of development more equitably over time.
These hopes, though still alive, are, however, beginning to founder. One of the major planks of the reform process was to eliminate all kinds of subsidies with a view to removing various forms of distortions in the economy and lower their burden on the budget.
The latest developments indicate that the culture of extending subsidies that had become, more or less, extinct during the period of the IMF programme is resurfacing due mainly to the pressure of various lobbies and the inability of the government to defend its reform agenda. For instance, support prices of major agricultural commodities are now routinely prescribed and enhanced frequently by the cabinet.
Such a policy not only entails the provision of subsidies but invariably involves the government in trading activity, which obviously is not its domain. Recently, the Pakistan Readymade Garments Manufacturers and Exporters Association (Prgmea) prevailed upon the government to approve a six percent compensatory rebate for garment exporters to help them maintain their market share in the European Union (EU).
The garment industry, it was argued, had suffered the most after the expiry of duty-free access to EU market under the Generalised System of Preferences (GSP) scheme in January, had also sought five percent of the FOB value of their exports as incentive for research and development (R&D).
Exporters believe that they would now be better placed to bargain on prices with the EU importers who had been demanding an outright price reduction of 12 percent following Pakistan's graduation from the GSP scheme, but such an incentive cannot be without a cost to the budget. The Ministry of Commerce is now considering a proposal to allow freight subsidy in respect of exports from export processing zones.
The proposal covers a large number of items along with measures to expedite the clearance of subsidy claims. It is obvious that once the government starts yielding to the pressure of vested groups, there will be no end to subsidy requests and the reforms undertaken with so much efforts and resolve in the past few years would stand the risk of being reversed.
This is not to say that the government should not do anything to improve productivity and competitiveness of the country's products by designing appropriate policies but only to stress the point that provision of subsidies on a selective basis is not a desirable option to achieve the objectives of higher growth, export promotion or even providing assistance to the targeted groups or sectors.
It is true that countries like China, India, Thailand and Philippines are producing cheap goods in increasing quantities and capturing the international markets and in the process giving a very hard time and elbowing out countries like Pakistan but in a quota free regime market share can only be retained or enhanced through appropriate domestic policies and by keeping a careful watch on the policies of the competitors.
The best way to promote efficiency in production in Pakistan, in our view, is to remove the many impediments and irritants that retard productivity and raise the cost of production. The cost of power, water and transportation in Pakistan, for example, is not only relatively higher but the provision of these services is comparatively unreliable.
Entrepreneurs are still faced with an outdated labour code, infrastructure is rather inadequate, corruption is rampant and law and order situation is still a big problem. Besides, the country has so far not been able to evolve a proper political system, the gnawing gap between the de-jure and de-facto positions adds to the overall uncertainty.
The amount of foreign investment is an indication of the general perception about the country's economic prospects and the confidence in the continuity of its policies. If privatisation proceeds are excluded, the amount of direct foreign investment in the country, although better than before, still stands at an abysmally low level, considering the size of its economy and other countries.
Pakistan has to address all these problems on a priority basis, exploit its comparative advantage and find a foothold in the international market. Provision of subsidies only introduces complacency, inefficiency and distortions, misallocates resources leading to their sub-optimal use and is no solution to the real problem.
If at all such a policy is needed in some exceptional circumstances, it should be used very selectively and the crutches provided to any sector should be removed as soon as possible. Yes it is quite in order, in a way very necessary, to negotiate with other countries like US and EU for various kinds of concessions and the government seems to be doing what it possibly can, to increase the access of our products to these markets. But this is an altogether different matter.
Reverting back to subsidies, it feels very good to talk about second and third generation reforms, but, perhaps more important than this is to first preserve the basic elements of the first generation reforms.