Is economy lagging behind military, diplomatic success?

Instead of finding ways to enhance production, govt is focusing on raising taxes

ISLAMABAD:

A great power rests on three pillars: military, diplomacy and economy. Pakistan has achieved many milestones on the military and diplomatic fronts. Two recent events further reinforced our strength.

First, the decisive victory in Operation Bunyan Marsoos strengthened Pakistan's credentials as a formidable military power. It elevated Pakistan's global profile. Countries began to show keen interest in establishing military linkages with Pakistan. It also opened the door to the sale of military equipment, weapons and fighter jets. The Saudi Arabia-Pakistan defence pact is derived from this victory.

Simultaneously, Pakistan was blessed with another major trump: mediation between Iran and the US. Pakistan brokered a ceasefire at a time when the world was counting down to the outbreak of war. President Trump had threatened the existence of Iranian civilisation. Pakistan took the initiative, and the ceasefire led to peace negotiations in Islamabad. It is considered the most significant event of the 21st century. It brought the world back from the brink of nuclear war.

The economy is the third pillar of a great power, and Pakistan is lagging behind. It is not even considered a major economy. The basic ingredients of a strong economy are missing. Despite a major push towards industrialisation and agricultural modernisation in the 1960s, Pakistan remains a primary commodity and few-product economy. Industry is key to the economy, but it is struggling to gain a foothold. The share of large-scale manufacturing is hovering around 20%. Textiles are the predominant industrial sector, contributing 60% to national exports. However, the sector relies solely on subsidies. Unfortunately, it could not diversify its products or build brands with global relevance.

The engineering products production system is weak and produces only a limited range of products. Its share of Pakistan's exports is around 4.8%, which is extremely low. Pakistan does not appear on the list of producers or exporters of modern machinery, electronics or IT products. Major export items include cutlery, surgical instruments and home appliances.

The share of textiles and engineering products is a cause for concern because it runs counter to the global trend. Globally, engineering products account for more than 50% of merchandise trade, while textiles account for only 3.6%. This clearly indicates that by relying on textiles, Pakistan can neither increase exports nor grow.

Agriculture is another major sector, often described as the mainstay of the economy. It has the potential to contribute to national exports, but it is struggling. Rising input prices, low-quality inputs, declining output prices and climate change have broken the back of farmers. Poor policy framework and governance left the sector on its own. Despite the resilience of agriculture, it seems impossible for it to withstand shocks for long. This has turned Pakistan into a net importer of food and agricultural commodities.

Instead of fixing problems, the government seems to be further complicating the situation. Instead of finding ways to enhance production, it is focusing on raising taxes. Pakistan is fast becoming a tax economy. It seems the government has only one job: to impose more and more taxes. Instead of expanding the tax base, it is squeezing existing taxpayers. This is against the basic laws of economics. Ibn Khaldun, the father of modern economic systems, said to lower the tax rate and expand the tax base. Furthermore, the tax system is so complicated that filing taxes is an uphill task. The government is also selling productive resources. It is rapidly increasing the state's dependence on taxes to run the country, which is not a wise policy.

Therefore, the government will have to focus on the real issues facing the economy, not on patchwork measures. It should work on two levels: shift the economy's focus and tackle deep-rooted governance issues. First, shift the focus from textiles to engineering products. Pakistan has products that can help it capture a decent market. However, it should follow a systematic, step-by-step approach, capitalising on low-hanging fruit and moving up the ladder.

In the short term, Pakistan should concentrate on cutlery, surgical instruments and home appliances such as fans. Pakistan has achieved excellence in these sectors but has not created a global market for them. Simultaneously, it should focus on agricultural exports by investing in transportation and storage and by meeting global standards.

The success of the short-term phase will provide a strong foundation for the medium and long term. These phases should be divided into manufacturing and agriculture. For manufacturing, Pakistan should prioritise IT, mobile devices, chemical products, laptops, engine and vehicle manufacturing, and modern technologies. For agriculture, it should focus on developing the food industry and completing the supply chain for food markets.

Apart from its potential, Pakistan also has strong opportunities to revive its economy. The most prominent is the China-Pakistan Economic Corridor (CPEC) and the recently signed action plan between China and Pakistan. Pakistan has also signed four protocols for agricultural exports with China, opening a $60 billion market. Moreover, Pakistan can attract investment from the Gulf region, especially from Saudi Arabia.

However, to realise its potential, Pakistan needs to focus on three areas. First, investment is required to develop high-quality human capital. Medium to long-term development is not possible without it. Second, Pakistan should invest in building brands and helping producers achieve economies of scale and brand recognition. Third, Pakistan needs to reform the governance system. Pakistan must understand that patchwork will not work; it needs comprehensive reforms.

It is worth noting that the government has taken an initiative to improve the business environment by establishing the Special Investment Facilitation Council (SIFC). Unfortunately, SIFC has not delivered on its perceived objectives, aside from a few successes here and there. Why? Because SIFC has been staffed with bureaucrats and army personnel who have nothing to do with economic or business planning. Furthermore, SIFC's structure does not allow it to operate freely. Creating SIFC is like bringing a tied-kneed horse to the Derby with the expectation of a trophy. It will not be able to compete, let alone win.

The discussion above indicates that Pakistan has the capacity and opportunities to revive and grow its economy. However, to realise this potential, it will have to resolve its issues. Without reviving the economy and strengthening economic development, military and diplomatic achievements will be short-lived, and Pakistan cannot become a major power. Therefore, the economy should be the top priority if Pakistan wants to become a major power.

THE WRITER IS A POLITICAL ECONOMIST AND A VISITING RESEARCH FELLOW AT HEBEI UNIVERSITY, CHINA