Pakistan remains economically shackled

Study reveals country lagging in fundamental factors

KARACHI:

Why is Pakistan’s economic engine not running? Traveling through Turkey, Sri Lanka, Indonesia and Thailand offers opportunities to witness their development in infrastructure, standard of living and civil discipline. Rule of law is respected, education is on the rise and there are no issues regarding transportation, energy and other basic needs like health care and other basic human amenities.

Where have we gone wrong? What fundamental factors are missing from our democratic culture, which impedes growth and prosperity? One key element present in every successful economy, unfortunately missing in Pakistan, is the concept of ‘economic freedom’.

Read: Economy growth: Pakistan set to miss target for second year

A study carried out by the ‘Economic Freedom of the World’ (EFW) project, reviews this factor across 152 countries. The basic pretext of this study is to categorise each country if their institutions and polices are working towards protecting individuals and businesses rights as well as to evaluate if ‘public goods’ are limited to only two functions and nothing beyond, namely, national defence and access to good sound money.



Pakistan’s ‘Economic Freedom of the World’ rating has, sadly, plummeted 13 places in the most recent report of 2014 and is the worst in the region.

This index is made up of five major areas, namely:  size of government, legal system and property rights, sound money, freedom to trade internationally and regulations. The data used is taken from external sources such as International Monetary Fund, World Bank, and World Economic Forum. Data provided directly by the country is rarely used.

Read: Pakistan’s economy enjoying period of optimism: report

Milton Friedman, the famous American economist and writer, encapsulates the true benefit of this index by saying that this study would allow governments to identify opportunities as well as key elements affecting the performance of their economy.

Size of government

This pertains to identifying how much political influence and process is involved in allocating resources such as goods and services. Economic freedom is reduced if the government spending is higher vis-à-vis spending by individuals, households and businesses. Indicators used to estimate include transfer and subsidies as a share of GDP, government spending as a percentage of total consumption, use of private investment to direct resources versus government investment, and finally the marginal tax rate. High tax rate for low-income levels deny individual the fruit of their labour and indicate more reliance on government.

 Legal system and property rights

This is any government’s ability to protect individual and business property, both intellectual and physical. To deliver this aspect of economic freedom, three factors play a critical role namely, rule of law, impartial and independent judiciary and ability to effectively enforce law and judgments. Weakness in this area overshadows all other areas of economic freedom.

Read: RAW at frontline to sabotage Economic Corridor, China warns Pakistan

Sound money

As they say money oils the wheel of exchange and lack of sound money undermines fair exchange and gains from trade. High inflation creates volatility in the economy, which distorts prices and makes it impossible for businesses to plan and forecast properly. When any government prints money to help finance its deficit and expenditures, they are violating the basic economic freedom of its citizens. Factors used to rate sound money include consistency in monetary policy, long-term price stability, ease of convertibility of local currency and use of foreign currency in trade.

International trade

Freedom of exchange across international borders resulting from low barriers, both in terms of custom duty and non-tariff barriers, is critical for economic freedom. A country gets a high rating if it offers low tariff, free convertible currency, and few controls, which means easy clearance processing and efficient boarder administration.

Regulations

Regulatory restrictions that limit the freedom of exchange in credit, labour and market mechanics, hurts your ratings. To gain economic freedom, regulations that restrict market entry or interfere with the freedom to engage in voluntary exchange must be discouraged. One area where regulations play a critical role is related to labour, economic freedom of employees and employers. If regulations allow market forces to determine wages, hiring and firing dynamics that enhances economic freedom.

Democracy and election now play a critical role in the shaping of Pakistan’s institutions. We need to single-mindedly focus on enhancing economic freedom and curtailing the power of the political leadership and government. We need to move towards minimal intervention by government to help business dynamics and allow market forces to drive free exchange of good, services and international trade. Without a bias towards ‘economic freedom’, our economic growth will continue to struggle.

The writer is a corporate leader, entrepreneur and a supporter of many social enterprises and foundations

Published in The Express Tribune, June 15^th,  2015.

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