Protective regime: Inputs and outputs – a glimpse from commanding heights
Companies should be at complete liberty to import required inputs.
ISLAMABAD:
The central planners of the defunct Soviet regime seriously believed that they could predict and plan the exact amount of inputs required by all sectors of the economy to produce the desired level of outputs.
They saw economic activity from a commanding height and issued detailed instructions to firms, all state-owned, for the desired level of production. Despite their splendid infrastructure and advanced technological breakthroughs, the Soviet business model miserably failed and the economic machinery licked the dust of history, leaving behind crony capitalism, corruption and highly skewed growth.
Once a world superpower, Russia today takes pride in being considered an emerging economy.
There are several institutions and policy-makers in Islamabad who still view economic activity from a commanding height. There is a central planning agency which maintains what is ostensibly called “Input-Output Coefficient Office”.
This office collects data of inputs required by hundreds of manufacturing firms, rations it, issues a permissible wastage level for thousands of products and defines a level of desired output. This function is boastfully run by what we know as the Engineering Development Board (EDB).
There is a 56-page document uploaded on the EDB website through which this government organisation defines an ideal ‘waste ratio’ of more than 1,000 manufacturing-related imported items.
It keeps the data and uses these trends to administer quotas for granting permission to the manufacturing concerns. This forces all engineering firms and manufacturers of the country in selected sectors to seek EDB approval for how much they can import.
On a typical day, one can witness senior business executives sitting in front of input-output coefficient officials, who have the audacity, or the bliss ignorance, to instruct the firms about the permissible level of imports.
When a business executive shares growth plans of his firm, requiring higher levels of import, the input-output coefficient officer would take previous year’s level of output as a benchmark. Indeed bureaucrats are trained by precedence and entrepreneurs are trained by future plan.
At the same time, this negotiation between the government official and business executive creates immense rent-seeking opportunities in which actual business decision-making is compromised.
EDB has no role to play
In order to fix this problem, at the very least, this input-output coefficient function should be immediately abandoned, and in the long run, the EDB must be abolished. Firms should be at complete liberty to import the inputs they need.
Such a demand is not being raised for the first time. Former deputy chairman of the Planning Commission, Dr Nadeemul Haque, is on record expressing his plans to at least curtail the discretionary powers of EDB.
According to Garry Pursell-Ashraf Khan study, out of the 1,006 products which the EDB lists as “locally produced”, 91% have only one producer, 4.5% have two producers and only 4% have three or more producers. This indicates a highly protective regime for these industries that has badly hurt the consumers, particularly in the auto sector.
To protect these industries, the EDB in liaison with different ministries is effectively involved in import licensing of inputs which are subject to a concessionary regime and in some cases prohibitive final product tariffs are used against import competition.
It is commonly believed that a major reason for failure of the central planning regime is its inability to accumulate, transmit and analyse complex information which market forces generate. Central planning failed in Russia and it continues to do Pakistan much harm.
Restricted imports
The rationing of imports not only protects selected industries, but it also hampers innovation, productivity and efficiency in firms. Managements of firms feel more secure on the desk of a section officer instead of concentrating in their workshops.
It is a norm in bureaucratic and media circles to place the blame for corruption and exploitation on the business firms. However, the opportunities of rent-seeking are created by the law. EDB has statutory powers to control levels of inputs and thus it is essentially a political decision.
On the other hand, business firms have an incentive in status quo instead of reforms. In this quagmire, larger economic surplus should become the criteria by considering the implications for the market as a whole instead of producers or consumers.
This will be a gigantic challenge for a government, which is considered pro-business, but not yet pro-market.
The writer is the executive director of PRIME Institute, an economic policy think tank based in Islamabad
Published in The Express Tribune, September 22nd, 2014.
The central planners of the defunct Soviet regime seriously believed that they could predict and plan the exact amount of inputs required by all sectors of the economy to produce the desired level of outputs.
They saw economic activity from a commanding height and issued detailed instructions to firms, all state-owned, for the desired level of production. Despite their splendid infrastructure and advanced technological breakthroughs, the Soviet business model miserably failed and the economic machinery licked the dust of history, leaving behind crony capitalism, corruption and highly skewed growth.
Once a world superpower, Russia today takes pride in being considered an emerging economy.
There are several institutions and policy-makers in Islamabad who still view economic activity from a commanding height. There is a central planning agency which maintains what is ostensibly called “Input-Output Coefficient Office”.
This office collects data of inputs required by hundreds of manufacturing firms, rations it, issues a permissible wastage level for thousands of products and defines a level of desired output. This function is boastfully run by what we know as the Engineering Development Board (EDB).
There is a 56-page document uploaded on the EDB website through which this government organisation defines an ideal ‘waste ratio’ of more than 1,000 manufacturing-related imported items.
It keeps the data and uses these trends to administer quotas for granting permission to the manufacturing concerns. This forces all engineering firms and manufacturers of the country in selected sectors to seek EDB approval for how much they can import.
On a typical day, one can witness senior business executives sitting in front of input-output coefficient officials, who have the audacity, or the bliss ignorance, to instruct the firms about the permissible level of imports.
When a business executive shares growth plans of his firm, requiring higher levels of import, the input-output coefficient officer would take previous year’s level of output as a benchmark. Indeed bureaucrats are trained by precedence and entrepreneurs are trained by future plan.
At the same time, this negotiation between the government official and business executive creates immense rent-seeking opportunities in which actual business decision-making is compromised.
EDB has no role to play
In order to fix this problem, at the very least, this input-output coefficient function should be immediately abandoned, and in the long run, the EDB must be abolished. Firms should be at complete liberty to import the inputs they need.
Such a demand is not being raised for the first time. Former deputy chairman of the Planning Commission, Dr Nadeemul Haque, is on record expressing his plans to at least curtail the discretionary powers of EDB.
According to Garry Pursell-Ashraf Khan study, out of the 1,006 products which the EDB lists as “locally produced”, 91% have only one producer, 4.5% have two producers and only 4% have three or more producers. This indicates a highly protective regime for these industries that has badly hurt the consumers, particularly in the auto sector.
To protect these industries, the EDB in liaison with different ministries is effectively involved in import licensing of inputs which are subject to a concessionary regime and in some cases prohibitive final product tariffs are used against import competition.
It is commonly believed that a major reason for failure of the central planning regime is its inability to accumulate, transmit and analyse complex information which market forces generate. Central planning failed in Russia and it continues to do Pakistan much harm.
Restricted imports
The rationing of imports not only protects selected industries, but it also hampers innovation, productivity and efficiency in firms. Managements of firms feel more secure on the desk of a section officer instead of concentrating in their workshops.
It is a norm in bureaucratic and media circles to place the blame for corruption and exploitation on the business firms. However, the opportunities of rent-seeking are created by the law. EDB has statutory powers to control levels of inputs and thus it is essentially a political decision.
On the other hand, business firms have an incentive in status quo instead of reforms. In this quagmire, larger economic surplus should become the criteria by considering the implications for the market as a whole instead of producers or consumers.
This will be a gigantic challenge for a government, which is considered pro-business, but not yet pro-market.
The writer is the executive director of PRIME Institute, an economic policy think tank based in Islamabad
Published in The Express Tribune, September 22nd, 2014.