Uzair Younus on the decline in competitiveness in Pakistan

Decline in competitiveness

By Uzair Younus

Where is Pakistan’s economy going? If you believe what the government has to say, then Pakistan is on the verge of takeoff. Multibillion-dollar investments in the China-Pakistan Economic Corridor, new LNG and gas pipeline projects, and an international bond market keen to lend money at record-low rates have indeed brought stability. Despite this progress, one cannot deny the reality that structural problems continue to paralyse and plague the economy.

The Global Competitiveness Report 2016-17, recently released by the World Economic Forum (WEF), paints a sorry picture of the economy. Ranked 122nd out of 138 countries, Pakistan is at the bottom in South Asia and behind countries like Mongolia, Nepal, Ghana, and Uganda. The report makes special mention of Pakistan, arguing that “since 2007, the gap between the best- and worst-performing economies in the region [South Asia] has increased…mostly as a result of the deteriorating situation in Pakistan”.

According to the report, Pakistan is “the only economy that fails to improve its macroeconomic environment and health and primary education levels”. While the country has advanced four places, the country’s score is still below the 2007 level.

The macroeconomic environment, both internal and external, presents Pakistan with a unique opportunity.

The rankings are based on a grouping of three categories: basic requirements, efficiency enhancers, and innovation and sophistication factors. While Pakistan ranks 85th in the world in innovation and sophistication, it struggles in the basic requirements (126th) and efficiency enhancers (113th) categories. These include key areas such as institutions (111th), infrastructure (116th), health and education (128th), labour market efficiency (129th), and technological readiness (119th).

The data leads to the conclusion that Pakistan’s poor competitiveness is a direct result of structural weaknesses that have built up over the decades. The result has been a slow and continuous erosion of the country’s industrial base, decline in exports, and a reliance on imports to meet the country’s key economic needs.

To its credit, the government is making a big push in fixing the infrastructural issues in the economy. Investments in transportation networks and power plants will alleviate the electricity and logistical issues that have paralysed the economy. However, these will not go far enough to make Pakistan competitive in the region.

A decent ranking in innovation and sophistication shows a path forward for the country. Key structural reforms that take advantage of innovation and sophistication can help develop a modern industrial base. Core industries where Pakistan can have a competitive edge must be recognised and both short- and long-term reforms implemented to ensure their growth. Given that issues such as education and healthcare are generational, the government will have to achieve political consensus to ensure that the reforms that are implemented today will not be rolled back by the next administration.

Public-private partnerships will play a central role in this long-term strategy. The government and industrial representatives must set expectations and agree upon a framework of cooperation. Under such a framework the government must commit to providing incentives to business in exchange for results. To ensure that policy translates into action, a unified body with representation from the various ministries, industry bodies, and economic experts should be formed. The goal of this body would be to develop a unified policy and oversee its implementation. To further the reform process, each province should have its own task force that ensures that federal goals are translated into provincial actions.

Give Pakistan’s dysfunctional politics, the suggested strategy sounds like a political and bureaucratic nightmare. Past experience makes one pessimistic about chances of success. However, the current set of problems facing Pakistan’s economy have emanated from uncoordinated policies in the past. For example, investments in expensive power projects made in the 1990s ignored the impact expensive power would have on industry. The result was a substantial erosion of competitiveness which continues to plague the country.

The WEF report clearly highlights that Pakistan’s problems emanate from multiple sources that need to be tackled in a coordinated fashion. Without an understanding of the needs of the industry, reforms made in education would fail to train and equip a workforce capable of competing in a global economy. Failure to create opportunities for the country’s youth would lead to continuous brain drain. Progress made in incentivising the growth of select industries will fall short without needed labour market reforms. Without ensuring that the country’s technological readiness improves, Pakistan will fail to develop a modern industrial base.

A consensus on the various reforms needed, both short- and long-term, is needed to revitalise the economy. As difficult as this might be, it is the only way forward for Pakistan. Top-down strategies have been implemented for decades and have failed to achieve prosperity. With no buy-in from substantial parts of society, they have either been poorly executed or rolled back as soon as there has been a change of governments. The result has been spurts of growth followed by economic stagnation and a continuous decline in economic competitiveness.

The current macroeconomic environment, both internal and external, presents Pakistan with a unique opportunity. Inflation has eased, cheap loans have bolstered foreign reserves, and ongoing infrastructure investments are beginning to have an impact. What is missing is a coordinated policy response to significantly boost competitiveness and economic growth over the five per cent level.

The PML-N government, especially the finance minister, continue to iterate that the economy is recovering. While this is true, the current recovery is based on short-term measures and their effect will wear off in the coming months. To sustain this growth, the government needs to implement a vision that seeks to make Pakistan a regionally competitive economy.