Once caught in the snares of the capitalistic leviathan, it is realistic to assume that escape won’t be easy. Reserves dwindle and attempt to weather the immense debt as nations beg for more bailouts, inadvertently digging their graves. So, the news of Pakistan and its most recent IMF loan/bailout for 7 billion must have rung ominous for many economically sound citizens. It may seem naïve, but it is possible to make this Pakistan’s Final Bailout.
The crux of structural economic change remains congruent for most developing economies, with the privatization of corrupt and inefficient state-owned enterprises, increased taxation and curbing of the informal sector, and a reigning in government spending, among others. These are logical macroeconomic steps leading the way to economic efficiency, productivity, and liberalization. However, many utopian dreams have been sold on theory alone, and reality often distorts the outcomes. A recent testament to bureaucratic incompetence is the broadening tax base that might increase government revenues at the cost of dousing Pakistani business operations with undue costs, high tariffs on electricity, and the uneven brunt of fiscal pressure on the middle class. So, the solution lies not in policies but in enhancing the apparatus that facilitates their deployment.
Pakistani governance often finds solace in exorbitant populist schemes. Long-term economic growth is waived for myopic political gains. Building on this, structural change must factor in public discontent with these radical shifts in economic policies. Under the premiership of Nawaz Sharif, the public applauded the notion of one hundred rupees being equal to one dollar. Yet, it wasn’t through robust economic growth and was instead due to the governance artificially pegging the rupee at that valuation. Short-term economic and political gain at the cost of nearly depleting every ounce of the foreign reserve. This tendency must be hampered at any cost. The governance can’t afford transfer payments and must focus on investments that provide tangible returns.
A great example lies at its helm with regional rival and the fifth largest economy in the world: India. The nation once nurtured a similar long relationship with the World Bank, its largest debtor to date. The debt relays the 1991 economic crisis when India endured a massive deficit with excessive imports and minuscule foreign reserves. Under economic liberalization, deregulation, and immense investment in infrastructure and the IT sector, India grew and never had to return to their creditors again. Pakistan has a similar young and active demographic that will be a perfect market for any international conglomerate. But two things stand in their way: Political stability and ease of doing business.
Political Stability in Pakistan: A Foundation for Investment
Residents of Islamabad will testify to the nation’s political volatility. The endless roadblockades and violent political uproar ensure that foreign direct investment remains wary. Blockades are a particularly pernicious tactic, incurring exponential logistics costs for foreign businesses. Additionally, political stability pillars the idea of predictability for the business owner. If the government policy regarding corporate tax remains consistent, the fiscal year can be planned accordingly.
Notoriously, no prime minister has ever finished their term in Pakistan; this rampant and unpredictable upheaval makes business planning difficult and impractical. Furthermore, the Pakistani government platforms political vengeance that often meddles with the economy, with active sabotage to muddle the approval of the following government. Reminisce on the artificial pegging of the rupee, when it finally unravelled in Imran Khan’s regime, he was blamed for the harsh inflationary pressure instead of his predecessor.
Ease of Doing Business
Moving from politics, we go to the ease of doing business. According to the recent World Bank’s Business Ready Report 2024, Pakistan scores highest in Business Entry, Financial Services, and Utility Services. Domestic and Foreign firms do not encounter many business entry restrictions. The economy implemented good practices regarding the types of movable assets, debts, and obligations that can be secured, as well as the provision of regulations for monitoring tariffs and service quality for the internet.
Unfortunately, Pakistan scored the lowest in Dispute Resolution, International Trade, and Market Competition. The economy underperformed in court transparency, lags in implementing Trusted Trader programs, and lacks digitalization of intellectual property services. Other general grievances with the business environment include bribes required to stay in business, cumbersome red tape, endless licensees, and novel operational taxes.
Leveraging Pakistan’s Comparative Advantage
Economics teaches comparative advantage, a concept that every nation should specialize in what they can make better than every other nation. Besides the football industry in Sialkot, Pakistani exports aren’t a valuable commodity for the international market. The developed world is entrenched in the service sector or advanced manufacturing, the middle-income countries in low-skill manufacturing, and the low-income countries in agriculture. Pakistan has no inedible mark in any of these sectors. Feudal lords and a dearth of investment in the agriculture sector have led to immense inefficiencies with a significant technological lag. Textile, a major manufactured good, can’t compete with India or Bangladesh in its production volume or quality. The service industry is practically 60% of the GDP share but suffers from a lack of government investment, and industries such as tourism suffer from Pakistan’s negative international image alongside general security issues.
Conclusion
Release from the beast of indebtedness requires a route illustrated by realistic and achievable goals. Making it business-friendly through generous concessions to international companies will propel foreign investment. Pakistan has a large, young, growing middle class, which is the perfect market that every conglomerate would happily serve.
Incubation centres and similar concessions to domestic businesses would invigorate the entrepreneurial spirit in Pakistan, like how Indian unicorns repackage Western business ideas. Pakistani entrepreneurs with government backing could do the same. A dedicated and logical investment plan should be outlined, which sector they would like to exploit and ameliorate, double down on the CPEC-related developments, extract its recent discovery of oil and gas reserves, develop the IT sector, enforce security for the tourism industry, etc.
The possibilities are endless, but they require adherence to structural reforms and religious observance of long-term economic growth that transcends political cycles and petty rivalries.
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The views and opinions expressed in this article/paper are the author’s own and do not necessarily reflect the editorial position of Paradigm Shift.
The author is studying Economics at the National University of Science and Technology (NUST) with a keen interest in financial affairs, international relations, and geo-politics.