Way ahead

LAHORE: To accelerate growth, Pakistan would need to lure in different industries. These industries would require some incentive. But those incentives must not be based on over protection through high duties or guarantees of high rate of return on investment.

In the past, such policies have failed to industrialise the country. Instead, the incentives given to those industries only burdened the economy unduly. Infant industries do need fair production that does not unduly encroach the free trade economy principle.

Pakistan can protect infant industries in a free trade regime through various mechanisms without compromising on free trade mechanisms. But it should do away with the guaranteed rate of return or high protection policies.

Instead of blocking imports completely, the government can impose tariffs or import quotas on specific goods to limit their imports and provide protection to domestic infant industries. This would help shield these industries from competition and allow them to grow and become competitive over time.

Government can provide financial support to infant industries through subsidies, grants, or low-interest loans. This helps offset the disadvantages faced by these industries and enables them to compete with established foreign competitors.

The state can allocate resources to support R&D activities in infant industries. This can include funding research institutions, providing tax incentives for R&D investments, or establishing partnerships between academic institutions and private enterprises.

In case of unfair trade practices, such as dumping (selling goods below cost) or subsidies provided by foreign governments to their industries, domestic governments can resort to trade remedies. These include anti-dumping duties, countervailing duties, or safeguards to

protect domestic infant industries from such practices.

These measures can provide temporary protection, they should be implemented judiciously and with a clear timeline. Excessive and prolonged protection can hinder the overall efficiency and competitiveness of an economy in the long run.

Pakistan’s economy can still be rebuilt from the debris if the economic managers focus their attention on policy instruments and put their foot down on political compromises. The country can embark on a sustainable growth path once our economic wizards muster the courage to pursue universally accepted economic principles and confront vested interests and political compromises.

The main areas of economy that need urgent attention of Pakistani planers include fiscal deficit, tax revenue, interest rates, exchange rates, trade policy and privatisation.

The planners must control the fiscal deficit that should be acceptable as long as it does not result in the debt-GNP ratio rising. Large and sustained fiscal deficits are a primary source of macroeconomic dislocation in the forms of inflation, payments deficits, and capital flight.

Unless the deficit financing is being used to finance productive infrastructure investment, an operational budget deficit in excess of around 1 to 2 percent of GNP is prima facie evidence of policy failure.

When a fiscal deficit needs to be cut, a choice arises as to whether this should be accomplished by increasing revenues or by reducing expenditures. Military expenditures are sometimes privately deplored, but in general they are regarded as the ultimate prerogative of sovereign governments and accordingly off limits to international technocrats.

Subsidies, especially indiscriminate subsidies (including subsidies to cover the losses of state enterprises) are regarded as prime candidates for reduction or preferably elimination. Increased tax revenues are the alternative to decreased public expenditures as a remedy for a fiscal deficit.

The economic managers should stick to the principle of increasing tax base so that the marginal tax rates should be moderate.

Real interest rates should be positive but moderate, so as to discourage capital flight and increase savings. Like interest rates, exchange rates may be determined by market forces, or their appropriateness may be judged on the basis of whether their level seems consistent with macroeconomic objectives

The main rationale for privatisation is the belief that private industry is managed more efficiently than state enterprises, because of the more direct incentives faced by a manager who either has a direct personal stake in the profits of an enterprise or else is accountable to those who do.