Reviving the economy

Published: December 21, 2012
The writer is an economist and a former adviser to the Sindh chief minister on planning and development

The writer is an economist and a former adviser to the Sindh chief minister on planning and development

The government’s admission of a rise in poverty along with a worsening employment situation and the rupee’s creeping depreciation are indicative of the fact that the economy is stagnating.  The situation demands an innovative big push and a series of fiscal and administrative measures to jump start the economy. And the sector that cries out for attention is manufacturing, which is the engine that drives the economy and creates income, jobs and surpluses for export.

Unfortunately, however, industry has been rendered uncompetitive over the last quarter of a century by the fact that the rate of increase of manufacturing input cost has been about 15 per cent higher than that of the output price. Furthermore, over the last two decades, a macroeconomic regime has emerged that unduly favours non-commodity producing sectors and which competes with industry for investment funds. These sectors are import trade, land market and the stock market, in ascending order of importance.

Thus, any attempt to revive the economy will have to begin with a macroeconomic and fiscal policy framework that explicitly favours industry vis-a-vis non-commodity producing sectors. A range of measures are in order, beginning with reforming the tax regime. Currently, almost two-thirds of indirect tax revenues are contributed by the manufacturing sector. This undue burden will have to be reduced and the tax regime will instead have to become biased against sectors competing with industry. Consideration may be given to tax goods at half the rate that is levied on services and trade.

Import trading suffers from pervasive under-invoicing and ‘out-prices’ locally-manufactured products. One relatively simple administrative measure can, perhaps, provide the necessary protection to local industry from unfair competition from imports. And that is to introduce the principle of ‘right of first purchase’ on imported goods to enable any private party to have the first right of purchase of an imported consignment at a premium of, say, 25 per cent over and above the CIF (cost, insurance and freight) value of the imported goods.

For this purpose, all letters of credit or bills of lading should mandatorily be placed on a website for a period of, say, 10 working days to enable any interested party to bid for the consignment.  No consignment should be allowed to be released from the port or airport until after the expiry of this period. This measure is likely to minimise the extent of under-invoicing, as importers who under-invoice heavily are liable to have to sell the consignment below cost, i.e., at lower than the import value.

Real estate trading has emerged as a major competitor to industry for investment funds, given that profitability from real estate generally exceeds that from manufacturing. In fact, land and property cost is now the single-largest item in fixed capital cost in many cases. However, investment in real estate does not accrue gains for the economy or society. This is because land is a finite commodity and increase in land prices does not imply wealth creation. Real estate purchase is an investment for an individual, but not for the economy, since there is only a change of hands.

The key to real estate speculation is cornering of plots by dealers, which is facilitated by under-valuation of the value of the real estate when registering a sale. This malpractice can likely be checked through two relatively simple administrative measures. The first is to introduce the principle of ‘right of first purchase’ on any land and property that is put up for sale to enable any private party to have the first right of purchase of the real estate in question at a premium of, say, 15 per cent over and above the value at which it is being registered for sale.

For this purpose, all real estate sales agreements should mandatorily be placed on a website for a period of, say, 10 working days to enable any interested party to bid for it. No sale should be registered until after the expiry of this period. The second measure is to introduce a capital gains tax on property sales if the sale occurs within three years of its purchase. The combination of the two measures is likely to minimise the practice of undervaluation, as sellers who undervalue heavily are liable to have to sell the real estate at lower than the actual sale value.

The stock market is the third, and perhaps the largest, competitor to industry for investment funds. In theory, the stock market is supposed to mobilise capital for industry and other gainful economic activities. The reality in Pakistan is different. Here, the stock market is a speculative trading house and largely trades in the same shares of companies that are listed on the stock exchange. Empirical evidence shows that there is little functional relationship between the performance of the stock market and economic variables like GDP, exports, etc., and in many cases, even with company profitability. Capital gains tax is designed to discourage speculative trading and encourage genuine investors.

The measures relating to taxation of industry and to trading in imported goods, real estate and stock market are likely to raise relative profitability in manufacturing and reduce relative profitability in competing sectors. And manufacturing growth is likely to spur jobs, incomes, exports and government revenues.

Published in The Express Tribune, December 22nd, 2012.

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Reader Comments (9)

  • meekal a ahmed
    Dec 22, 2012 - 12:20AM


    Nice to see you write here. I agree with the thrust of your article.

    But, I would humbly say, first things first: address the energy constraint that has crippled the economy and do something to improve the security situation. If these things are done, according to IMF calculations, Pakistan’s potential growth rate can be realized: 7-7.5% per annum with modest inflation and balance of payments viability.


  • F
    Dec 22, 2012 - 12:37AM

    Economic revivable without stable politics, responsible leadership and society is hard if not impossible. Why would any investor, Pakistani included, want to invest in a country where people are killed and property destroyed everyday. Worse yet there is NO will to do anything about it.


  • Mirza
    Dec 22, 2012 - 1:48AM

    @F: I agree with you 100%. Why would anybody including Pakistanis invest in a country over-run by terrorists? Yet there are people who do not see the elephant in the room and continue to deny it.


  • Mirza
    Dec 22, 2012 - 1:54AM

    A good common sense Op Ed by the ET. I am not an economist but these are simple but great solutions to the corruption which is a part of our society. Your suggestion of right of first purchase is great and inexpensive. It can be implemented promptly with great results.
    I know when people buy property they not only undervalue it they buy it on power of attorney to deprive the govt of all taxes. The irrevocable power of attorney should only be granted to a lawyer of good repute or family member not to unrelated buyers.


  • Rao Amjad Ali
    Dec 22, 2012 - 9:51AM

    The rather well documented fact is that the decline in capital formation, including the somewhat widely misunderstood Musharraf boom years, over the last two decades is owed to high cost of doing business which, apart from other factors, was caused by poor electric power distribution system, as distinct from power production capacity, ominous security environment, growing geopolitical uncertainty and indeed the overarching debility caused by abysmal national literacy rates.

    As for tax collection, the generally accepted norm is that higher the incidence of moral hazard the lower the government’s ability to collect direct taxes, no mystery in this. And the tax exempted status of the ag sector compounds the state’s inability to increase revenue from taxation.

    Surprisingly, relatively little attention is given to microeconomics in Pakistan which is where I believe the more daunting challenges confront its economy. For example, agriculture and its numerous sub-sectors including, horticulture, floriculture, food processing, leather and livestock have laid to neglect for far too long. As the 5th (some argue that its standing is now 4th) largest milk producing country in the world, we still do not have proper collection, storage, distribution, and quality control systems in place. Several other sectors suffer from weak and captive value chains as well and are, therefore, inefficient and fall way below the internationally accepted benchmarks for competitiveness and profitability.

    Policy planners and captains of trade and industry should also concentrate on the enormous opportunities that Pakistan can and should capitalize as China begins to transfer some of its manufacturing to foreign destinations, a prospect that looms large on the economic horizon. IF Pakistan get its act in gear, no small requirement indeed, it can hugely benefit from the opening of floodgates of Chinese outsourcing. .


  • wonderer
    Dec 22, 2012 - 10:16AM

    Wonderful ideas which give much hope, but to expect the present bunch of thugs ruling this land-of-the-pure to take any action is unrealistic. One can be absolutely sure they are not going to lessen their loot chances even the smallest bit. Who will make all the necessary laws and rules?

    Allah has to be more active.


  • Sharjeel Jawaid Jawaid
    Dec 22, 2012 - 2:26PM

    Among inputs to economy; intentions should not be discounted!


  • Dec 22, 2012 - 2:31PM

    Kaiser –
    While the idea sounds great, I wonder if this has been adopted by any other country. I think the devil is in the details. Either we will have to assume high levels of computer literacy to push this model or separate centralized department will be required for processing such requests. Furthermore, this process will add to the execution timeline of the transaction and the title transference and registration process will all have to be moved to this new entity. Moreover, unless buyer and seller identity is concealed from each other, what prevents them from colluding offline for such a transaction? Lastly, you have suggested putting capital gains tax on property re-sales within 3 years. Wouldn’t that kick-off another side-effect where more capital will end in getting locked up systemically in real estate over time? and as you have suggested, real estate investment is one of the economically lease productive investments, so that will further reduce the rate of capital formation.


  • Dec 22, 2012 - 3:13PM

    Revival of economy and achieving the sustained level of economic growth with favorable trickle down effect on poor people does not fall in the priority list of the two main stream parties. A cursory look on the PPP and PML(N) economic policies,while in power, has repeatedly revealed this fact. It was in the second tenure of PML(N) that economy swiftly moved to the verge of default. The incumbent PPP government has mismanaged the economy so much so that its revival will be a Herculean task for the next government.


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