From player to enabler

To provide employment to the increasing labour force entering the market and to sustain the country’s high level of debt, Pakistan’s economy must grow at a rate of 7-9 percent for decades to come, argues PIDE’s Reform Agenda for Accelerated and Sustained Growth.

Across the globe and across time, the role of the government in the economy has varied from passive to active to enabling. In Pakistan, the government seems to be playing an active role in the economy. This is visible in three forms. One, owning and running business ventures called state-owned enterprises. Two,through the constraining regulations. And three, by fixing prices of a host of goods. We take up all three.

The government exists in the economy as an active player through over 200 SOEs. Businesses flourish in a competitive environment with a level playing field for all the players. The edge that the government's ownership provides to an SOE kills the level playing field and hence the competition.

One example is the banking sector where the largest bank – the National Bank of Pakistan (NBP) – is owned by the government. Typically government departments are required to maintain their bank accounts with the NBP, which does not have to make an effort to seek deposits and woo customers otherwise. This keeps its cost of operations lower.

PASCO (Pakistan Agricultural Storage and Services Corporation), another state-owned enterprise enjoys a monopoly in the storage of agricultural products across the country. Its sheer size makes it difficult for private storage facilities, if any, to compete.

These are just two examples of how the government’s presence in the economy crowds out the private sector. However, the footprint of the government in the economy is not limited to just SOEs. The regulatory role of the government, rather than enabling players, constrains them. Here are some examples. Internet service providers have to go through 45 steps to seek approval for laying internet cable. Land developers have to obtain 22 NOCs before they can start developing land for housing. Nine steps are required to obtain a construction permit and this costs around nine percent of the construction value. These kinds of excessive regulations curb economic activity and hence growth.

Yet another way in which the government restricts economic activity is by fixing prices, especially of agricultural products. Every year, the government announces the support price of wheat on which the government buys a certain quantity from the farmers. This practice has neither helped increased production nor curb several flour crises. Fruits and vegetables are sold in wholesale markets operated by the government at DC rates. The end consumer never gets these at the government announced rates and the practice unnecessarily adds to the monitoring cost.

Prices of medicines have remained capped at a certain level for very long, while the cost of production kept on increasing. The decline in profits led many foreign pharmaceutical firms to move out of Pakistan.

Thus the consequences of meddling with prices include poor product quality, lesser investment, and higher monitoring cost – all these adversely affect economic growth.

GDP increases when buyers and sellers execute a transaction. The state is expected to facilitate a transaction between the two – acting as an ‘enabler’. To buy, buyers should have adequate information about the quality and price of the product. Moreover, to buy or sell without fear of being taken for a ride, the rights of both the buyers and sellers should be well defined by law and enforced by the state. Also, both the buyers and sellers should be solvent to fulfill their obligation of delivering the product and paying for it.

For several products, for example real estate, buyers might face difficulty in determining the true price. The role of the state or the regulator is important here – it has to devise laws and systems that would help in establishing the price and making it public. For example, systems can be developed to make public the price on which a piece of land has been bought or sold. Such a public declaration would convey important information to potential buyers.

The state can also help generate information on the solvency of the parties to the exchange through for example credit information bureaus. Laws and well-functioning systems should also be in place to deal with violations of contracts and offer quick and inexpensive justice to the aggrieved. This calls for an efficient judiciary that decides cases speedily. Only the state can establish an efficient judiciary. If this happens, housing societies' scams, which are quite common, will become extremely rare.

When the state plays this kind of an enabling role, people transact freely without fear of being dodged. The number of transactions increases. GDP, being the sum of transactions, also increases. This is how economic growth takes place.

To let the economy grow, the government must switch its role from an active ‘player’ in the economy to an ‘enabler’.

The writers are researchers at the Pakistan Institute of Development Economics, Islamabad. They can be reached at idreeskhawaja@pide.org.pk and mshaafnajib@pide.org.pk