A recipe for rapid economic growth

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ISLAMABAD:

The recent speech by Mian Mohammad Mansha, one of Pakistan’s most successful entrepreneurs, at the Lahore Chamber of Commerce and Industry was indeed a breath of fresh air.

Unlike other industrialists, he did not ask for more protection for our underperforming industries but asked for the removal of trade barriers. Likewise, he was not asking for more subsidies but for a reduction in the economic footprint of the state on the economy.

The manufacturer’s recipe is very tempting. Such recipes have worked in many other developing countries.

A recent example is Vietnam, which was on the brink of economic collapse in the mid-1980s. A long war with the United States shattered its economy.

About 70% of its population lived below the poverty line, and inflation reached 700%. Vietnamese leaders had to find a way to protect their people from mass starvation.

He prioritized two areas for immediate reform: minimizing trade barriers and reducing the government’s footprint on the economy by restructuring state-owned enterprises.

Trade policy reforms were relatively simpler because, at the time, Vietnam had almost no international trade. The first decision was to shift the direction of trade from the distant countries of Eastern Europe to the interior of the region. It therefore joined ASEAN in 1995.

For longer-term trade policy reforms, it has applied for WTO membership. Over the next 10 years, it undertook extensive legislative and market-oriented reforms to meet the membership requirement.

In the meantime, it has started on the fast track of concluding free trade agreements (FTAs) with all major trading nations such as the United States, China, South Korea, Japan, the EU, Australia and India. Through its FTAs, it has managed to secure preferential access and has pledged to reduce its tariff and non-tariff barriers.

Reducing the government’s footprint on the economy has been relatively more difficult. Initially, public enterprises (EPs) were made independent in the early 1990s by giving them the power to hire and fire.

Those that failed to run without government support were either merged with others or closed. During this process, some 5,000 state enterprises were either liquidated or merged.

Following these reforms, the Vietnamese economy began to grow rapidly. In particular, exports began to grow at breakneck speed and grew from around $5 billion in 1995 to over $330 billion today.

Poverty has started to decline and is now estimated at less than 5%. The literacy rate has climbed to over 95%.

The example above shows that reducing trade barriers and the government footprint on the economy can have very beneficial effects and can be implemented in the relatively short term.

But can this be done in a diverse country like Pakistan? Also, it would not be easy to convince those who are the great beneficiaries of the current rent-seeking system.

Vietnam has reduced tariff and non-tariff trade barriers by concluding dozens of FTAs. Its trading partners in FTAs ​​now number 56 countries compared to less than five for Pakistan.

It’s not that Pakistan hasn’t made efforts, but every one of them has been stuck for years. For example, negotiations with Turkey have been ongoing since 2005.

The main reason why it is not concluded is that major Pakistani industries are not supportive. Instead of a bilateral deal, they are asking Turkey to unilaterally extend duty-free access like the EU is doing under its GSP Plus scheme.

Apart from Turkey, Pakistan has negotiated preferential trade agreements with several other countries such as South Korea, Thailand, Singapore and the Gulf States but has been unable to conclude any.

The IMF is now asking Pakistan to negotiate FTAs ​​with its major markets such as the US, EU and UK to expand its exports.

Yet this is unlikely to happen as our business community and government would rather try to seek unilateral concessions than any FTA where both parties commit to reducing trade barriers.

Reducing the government’s footprint on the economy would be even more difficult than reducing trade barriers.

According to a recent PIDE study, the government’s footprint on the economy is 67%. In addition to general public expenditure representing 22% of GDP, the government controls 200 public enterprises (EPs).

It is estimated that the combined losses of these state enterprises amount to 1.1 trillion rupees per year. These losses are equivalent to about $6 billion, the total IMF loan currently disbursed to Pakistan in semi-annual tranches.

What is unclear is why the government is clinging to some of these companies that have been posting losses for decades? For example, PIA loses about 50 billion rupees a year and AirHelp ranks it as the third worst airline in the world.

Many other airlines, notably European and Indian, which were making losses, were privatized, even if these countries could afford to subsidize them. Why can’t Pakistan follow such examples?

We can only hope that the dream of setting Pakistan on a path of rapid economic growth will come true in our lifetime.

The writer has served as Pakistan’s Ambassador to the WTO and FAO Representative to the United Nations in Geneva.

Published in The Express Tribune, February 14and2022.

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