Project of Macroeconomics

7/31/2019 Project of Macroeconomics

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Project of Macroeconomics Page 1

Project of Macroeconomics

Students Name & I.D : Mohammad Fahad (6306)

Souban Jilani (6312)

Shoaib Shafi (6323)


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ECONOMY OF PAKISTAN CHALLENGES AND PROSPECTS

Overview:

In 1947, Pakistan had 30 million people with per capita income of 100$. Agriculture accounted for almost50% of economic output with hardly any manufacturing, as all industries were located in India. Therefore, itwas unable to feed 30 million people and was dependent on PL-480 imports from the USA. From thereon,Pakistan has come a long way. Today with 170 million people, our per capita income in 2008 was 1000$

which was tentimes more. Pakistan is the third largest exporter of rice in the world and producing enoughfood grains to feed its people. 3 million tons of rice is exported every year by Pakistan which is surplus toour requirements. Pakistan is also one of the five major textile producing countries in the world. So if wemeasure in relation to where we were vis--vis structure of economy, agriculture has come down from 50%to 20%. Therefore, out of total national income, agricultures contribution is just 20%, but instead of beingdeficient in food production, we are actually surplus and that is what productivity means i.e. by using thesame land you produce more from the same inputs, that is how economic growth takes place. Agriculture isnot only crops, within agriculture there has been a significant change. Livestock, dairy, mutton, beef, poultryand similar other products is 50% of agriculture output in Pakistan. Pakistan also produces third largestquantity of milk in the world. So within agriculture sector, there is a change i.e. major crops are only 36% ofagriculture value added and 14% are minor crops, fisheries, orchards, fruits and vegetables. Thus, we are

moving in a direction where the same land and same resources are being used more efficiently in order toproduce more. As a contrast, agriculture is only 2.5% in the US having a population of 300 million, out ofwhich they not only feed the entire population, but also export to the rest of the world. Therefore, it isimportant to understand that when it is said that agriculture is producing/contributing more, it is theproductivity of agriculture rather than the share of agriculture in GDP. Manufacturing and industry now


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account for 25% of the income; when we recall there was not even a single industry worth its name at thetime of partition. So if we look where we were and where we are, I think the justification for Pakistan interms of betterment of economic conditions of Muslims in this part is very strong. But where we have failedis that we have not lived up to our potential.In 1969, Pakistan exports of manufactured goods were higher than the combined exports of Indonesia,Malaysia, Philippines and Thailand. In 1960s Korea emulated Pakistan in its five years planning process.The tragedy is that even a country such as Vietnam which was completely devastated by the war has nowovertaken Pakistan. Ten years ago, India which was way behind Pakistan (till 1990s) is now way ahead.

As an economist and student of globalization, the biggest challenge is: how can we organize ourselves toreach that position where at least we can be running not at the nine second a mile but at least ten second amile race which is going on in the global economy.

CHALLENGES OF PAKISTAN ECONOMY:

a. Out of every hundred rupees of our national income, we consume 85 rupees and save only 15 rupees,which means that the amount of money which is available to invest for economic growth and advancementis too little. Because to grow by 6%, you need at least 24-25% investment rate - and if you want to rely ondomestic savings, your saving rateshould be 25%. Indias saving rate was about the same, but last yearthey Recorded34% saving rates. Chinas saving rate is 50%, so this is the contrast as to why we are inserious difficulty because as a nation this is a problem which we Have to recognize. We have to at leastdouble on savings rate otherwise we will Remain dependent on foreign sources.

b. We Import More and Export Less. Till 2007-2008, 80% of our imports were Financed by our exportearnings. This ratio has come down to only 50%, it may go up to 60% but a gap of 40% of financing needsin order to keep with the Import level still exists. As a nation we prefer to use even the basic commodities of

foreign countries rather than locally manufactured goods. Unless we do not Change this attitude ofpreferring the imported goods we have to keep on relying on outsiders to fill in this gap b/w our imports andexports. Relying on outsidersMeans that there are cycles, ups, and downs i.e. when things are good, onegets Financing, and when things are bad one starves for financing. No nation which Strives to preserve itshonor must go through this particular route. The lower is this gap between our export earnings andexpenditure on imports - and that can be achieved only by expending our exports; our reliance on externalsources would be reduced.

c. Government spends more than it earns as Revenues. Fiscal deficit is the difference between therevenues which are collected in a year and the total expenditure incurred by the Government. Pakistansgovernment takes away 20% of national income as its own. 80% is left in the private sector and 20% in thehands of the government is spent on defence, debt servicing, development on education, health, general

administration etc. The revenue generated is only 15% of the GDP at best, and in the worst days it is 12 to13%. Out of the every rupee of income received by a Pakistani, on average, tax paid is only 9 paisas and91 paisas remain with the individual. In 2007-2008, Pakistans fiscal deficitwas more than 7% which meansits income or revenues were only 13% of GDP whereas, expenditures were 20%. Therefore, fiscal deficitshave to be financed from somewhere, so how do you finance them; you either go again begging theexternal donors, or to the State bank of Pakistan. The financing provided by the State bank of Pakistan isdangerous because it creates high inflation in the economy, which is injurious to the middle class, thoseearning fixed wages and salaries, and the poor. Therefore, there is an uproar in the country if the inflationrate goes up. In 1999, our Debt to GDP ratio was 100%, which means that the entire national income waspledged as debt. Every single penny was pledged to the creditors. This ratio was reduced gradually overnext six to seven years and brought down to 50%, an average for all the economies. However, the way thethings are going for the last two years, it has moved from 50% in last two yrs to 58%, and with all theborrowings it may go to 60%, while the Fiscal Responsibility Law 2005 says, that the government shouldnot exceed the debt GDP ratio more than 60% and is required to reduce it by 2.5%; and that is nothappening. The reason the fiscal deficit is widening is low revenue collection. How can you expect that onlynine paisas out of every rupee of income generated by Pakistani population suffices to meet the


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requirements of defence, infrastructure, development, debt servicing etc. This is just not possible. In India,tax GDP ratio is 15% and still they have fiscal deficit. So Pakistan is way below the norm for developingcountries. Many people say that defence takes away a lot of government expenditure. Whereas, the fact isthat defence expenditure is only 20% of government expenditure. It is only 4% of GDP, and is not such alarge expenditure as compared to debt servicing which is 7-8% of GDP and almost 40% of governmentexpenditure. Therefore, government has to contain its fiscal deficit by raising revenues. Agriculture incomesare exempt, professionals, retailers, wholesales, transport owners and many other service providers evadetaxes by paying a small fraction of what is due. Continuing large fiscal deficits year after year may plunge

the country into debt trap again.

d. Our Share in the World Trade is shrinking. In 1990, Pakistans share was 0.2% of the world trade.After 20 years it has come down to 0.12% in a very buoyant world economy. World trade has been growingfaster as compared to the world output. India in the same period had doubled its share from 0.7% to 1.4%,while Pakistan is going the other way and that is the reason why exports/imports imbalance is increasing.We are not taking advantage of the opportunities which a buoyant world economy is providing. Pakistan isstuck with only a few commodities textiles, leather, rice, sports, goods and the surgical goods. We havenot entered the markets for more dynamic products. All our exports are to a few markets the USA, EUand the Middle East. So this narrow export base and very limited geographical spread are not allowing usto expand our share. Unless we improve the quality of our products, go out and do the marketing abroad,invest in research and development, the prospects do not look promising. That is why we are lagging

behind other countries which from way back are over taking Pakistan.

e. We Badly Lag in Social Indicators. One of the most glaring weaknesses is that a country like Pakistanthat should have had best indicators in literacy, infant mortality, fertility rates, in access to water supply, inprimary enrolment ratios has social indicators which are more comparable to Africa rather than to theCountries of similar per capita income. Even Tajikistan, which is a very poor country, has better literacy rate

and primary enrolment ratios than Pakistan. What does it means? It means that if we had literacy rate of100% instead of 55%, then in 2009-2010 our per capita income would have been 2000$ rather than 1000$.Instead of 30 million middle class in Pakistan we would have 60-70 million middle class people; we wouldhave poverty reduced to 15-20%. We have committed to achieve the millennium development goals by2015 i.e. we will be able to reach 80-85% literacy rate, but it is doubtful that this will happen. Why do wehave regional inequalities? Why Baluchistan is lagging behind other provinces? It is because of literacyrates and primary enrolment ratios. There is a direct correlation between regional inequities andbackwardness with the level of education.

f. We Face Energy and Water Shortages. Another challenge we face today is energy and watershortages, and that is not because we are not generating enough electricity or we are not having enough

water. With the losses of KESC from the point it has generated to the point they realize the billing is 45%,so 55% people are paying for those who are stealing the electricity. Government of Pakistan out of its ownlimited resources is paying 200 billion rupees every year as subsidies for electricity. Our industry is at adisadvantage that they get the orders from foreign countries but they cannot execute the orders becausethere are electricity outages. In addition to economic losses it also creates inconvenience for pursuingnormal life. We have silting of our dams, but no additional dams have been constructed since Tarbela in1974. We have water course losses of about 20-25%. Even after these losses, the water is inequitablydistributed. The influential land lords are able to take greater share of water from the canals as compared topoor farmers. Therefore, the productivity of poor farmer is only one ton per acre as compared to 3 tons bylarge holders. If we provide the water equitably to the small farmer, he would also be able to increase theproductivity from one to at least two tons resulting into additional income, increase in exports of food grains,cotton and fruits and vegetables which will add to export earnings of Pakistan. With the climate change

taking place with all the glaciers in Himalayas which are going to melt, we are going to have difficulties infuture due to global warming.

g. Cost of Doing Business is High. Pakistan is ranked among the bottom half of the rankings of thecountries where cost of doing business is quite high. It is not high for any particular reason but because of


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our bureaucracy totally sitting on their seats without taking actions or decisions in time. Unless there issome pressure or incentive for them, the normal businesses particularly the small and medium businesseshave serious problems at the hands of bureaucracy. Even if we have investors who are welcomed by thefederal government, when it comes down to provincial and local governments there are given a run around the land is not available, the water is not available, the gas is not available, electricity is not available,road is not available. Lack of coordination among various government agencies, innumerable laws andregulations that are antiquated and outdated have proved to be serious impediments. Labour laws,inspections by multiple agencies, the delays in the court system, infringement of intellectual property rights

and evasion of taxes by competing firms in the informal sector have rendered some of the well establishedfirms unprofitable, or the feasibility of starting near ventures questionable.

h. Crisis of Governance and Implementation Weaknesses. If we glance on policy documents of variousgovernments on education, agriculture, health, trade policy etc, and look at the same policy forty years agoand the problems, there is hardly any significant record of implementation of those policies or plans overthis period. We produce five years plans and all kinds of medium term frameworks, but it is the poorgovernance and implementation that are the weak links in getting things done. Unless we strengthen civilservices and bring about a merit based system of recruitment, promotion, performance evaluation,compensation, disciplinary action, etc, we will not be able to see any difference in the quality ofgovernance. Orders are given by the higher ups but they are not carried out; summaries are approved, butthey remain buried in the files and therefore; whether it is education, health, water supply, revenue or law

and order, you can pin down the problem to the governance issues. Unless we fix the governanceissue, the economy is not going to take off at the speed which is required.

j. Uncertainty and Unpredictability due to Lack of Continuity. Every Government whether military orcivilian starts with a clean slate, as if nothing Happened before them and nothing will happen after them.

This is not the way the real world works. You take the projects and programmes which were initiated by theprevious governments, evaluate them as to what the strengths and Weaknesses were, fix thoseweaknesses and carry them forward. It will take only Few years to bring these inherited projects tocompletion and the country will benefit from new motor ways, new ports, highways, educational institutionsetc. But the blame game of successive governments results into abrupt termination of all such projects andprograms. When these are resumed the cost has escalated three times and it takes several additionalyears to complete them. In the meanwhile the people of Pakistan suffer because of this lack of continuity.When faced with such unpredictability about the future, the investors are pondering whether they shouldinvest in this country as they are uncertain whether the new government when comes in would stop or alterwhat the previous government was doing, or adhere to the commitments made to them. Take the exampleof Higher Education Commission, which was sending 1700 students for PhDs abroad but the newgovernment comes in and suspends the funding of those programmes. This solved down the process offaculty development for our universities at a time when we should have been sending twice as manyscholars.

k. Political Stability, Law and Order/Security. The overall arching theme is that for a robust economy weshould have political stability, law and order and security. The Armed Forces of Pakistan deserve gratitudefor what they have done in Malakand Division to bring about stability as far as the law and order situation isconcerned. The sooner the country is gotten rid of this image of political instability, poor law and ordersituation and insecurity, whereby investors from all over the world hesitate in coming to Pakistan andinvest, we will not be able to make any progress in this country. In 2007, Pakistan was one of the mostfavourite countries among the international investor community. A thirty year piece of paper was floatedwhich was a bond for Pakistan to be paid in 2037 and Pakistan got four times over subscription at a price

which was only 300 basis points above the US treasury. Very few countries can claim to have that kind ofcredibility with international fund managers. However, in two years time we have missed that boat.

Prospects/Solutions to Improve Economy:


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a. Change in National Psyche and Mindset. We as a nation are too much negative oriented and toomuch cynical where we find everything wrong in this country. Unless we change our mindset and unlesseverybody who is doing what he is supposed to do, carries out his or her task with sincerity and honesty,we are not going to go anywhere. We should not expect any Messiah to come and fix our problems wehave to do it ourselves individually and collectively. There are no short cuts available. Media is muddyingthe water by their sensational stories and inviting so called experts who contribute in projecting negativethinking and negative national psyche. Unless we have a positive can do mentality, it will be difficult toprogress. Unless each one of us changes our mindset rather than blame the government and the system,

we are not going to go anywhere in this race for global economic survival. This is easier said than done.But I expect our younger generation to be more responsive and responsible.

b. Building up of Human Capital. There is no substitute to building up human capital. Private sector,public sector, NGOs, local communities, philanthropists etc, all here to put their hands on deck andparticipate in making sure that every child goes to school. Every high school graduate has some technicaland vocational skill or goes for higher education. Unless we build up human capital,we are just going to be left behind because the world economy is going to be a knowledge based economy.It is not an economy where you memorize material or reproduce that in the exam and forget about it - thatis no longer the case. One has to acquire the knowledge and use it in order to apply to problem solving.This is a new paradigm where human capital is as important as machinery and equipment. Pakistan lagsbehind other countries in the institutions, infrastructure and incentives for human capital formation. We

have no choice but to accelerate the pace to catch up with others.

c. Use of Technology. The technology is spreading like a wild fire. How many people five years ago couldhave thought that even in a small towns and villages of Pakistan, one would access to mobile telephones.95 million Pakistanis have mobile phones today. You can use this technology in order to provide thembanking services, information on climate/weather, agriculture extension, health, education etc. It is a

powerful tool which can leapfrog a lot of time which we have wasted.Using technology particularly theinformation/communication technology for the betterment of social and economic problems of Pakistan issomething which needs to be done but it cannot be done the way we have compartmentalized this intodifferent ministries. A more holistic and comprehensive approach that deploys technology for povertyreduction has to be put in place.

d. Young Labour Force. Pakistan is one of the few countries which has a young labour force which can beharnessed for its own and global economy. Japan, Europe, USA and after 2050 China are going to haveaging population where the ratio of old to young people is going to increase. India and Pakistan are twocountries where the ratio of younger people to the older ones is going to increase. If we tool these youngmen and women properly, we increase the female labour force participation, give them skills andknowledge, they can become the labour force for the rest of the world. This will give a big boost toPakistans own economy. In 2001, worker remittances were less than a billion dollars; today we havealmost 7-8 billion dollars. Now this can be multiplied by three or four times if we have educated labour forcei.e. skilled labour force going for overseas employment. This is also a way to create employmentopportunities because if you have large number of younger people coming to labour force and you donthave job opportunities for them you can have social upheaval. Therefore, it is imperative to createemployment opportunities for them and one of the avenues is to train them in the kind of the skills whichare needed not only by the national economy but also by the international economy.

e. Governance, Devolution and Decentralization. As the population is increasing, one cannot governPakistan sitting in Islamabad, Karachi, Lahore, Peshawar or Quetta. One has to devolve powers,

decentralize and delegate authority, provide resources to the local/district governments so that they cantake decisions at their own. Those decisions would be very much in accordance with the requirements andthe needs of those communities. Sitting in Islamabad one cannot visualize what is needed in Chaghi orLoralai, but the people in Loralai and Chaghi know exactly whether they need water, fertilizers or fruitprocessing industry. Let us devolve powers to the people at the grassroots level and there would be much


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better allocation and utilization of resources. There must, however, be accountability of the localgovernments by the provincial governments and of provincial governments by the federal government butnot interference or usurpation of powers. If we do that, then a lot more can happen with same amount ofresources which are being wasted today, and the economic growth rate can be raised from 6-7 percentaverage to 8-9 percent annually.

PAKISTANS COMPETITIVENESS RANKINGS IN 2010For the last four years, the Competitiveness Support Fund has cooperated with the World Economic

Forum in implementing the Executive Opinion Survey in Pakistan and has annually analyzed Pakistansperformance on the Global Competitiveness Index (GCI) and other internationally recognized reportsrelated to Pakistans economic performance. The GCI is the most authoritative ranking of its kind havingbeen published annually for thirty years by the Geneva-based World Economic Forum. Containing over 140specific indicators, it is now applied in 139 countries. The report is based on a combination of hard dataindicators and the results of the annual Executive Opinion Survey, tabulated by the World EconomicForum.

PAKISTANS RANKING ON THE GLOBEL INDEX:Despite only a modest decline in its competitiveness score, Pakistans ranking on the GlobalCompetitiveness Index fell 22 points from 101st place to 123rd place. Released in September 2010, the

Global Competitiveness Index included six new countries.1Pakistans recent shift from being amongst thelowest 25% of countries, to the lowest 12%, suggests that new entrants are not the only explanation for thisdecline. The absolute score fell modestly from 3.58 to 3.48 (on a theoretical scale of 17): in practice, onlythree countries fell below 3.0, and only 20 countries were ranked 5.0 or above. Nearly all countries fallbetween 3.0 and 4.9 with countries often bunching around certain scores. Therefore, relatively modestchanges in absolute composite scores can lead to a change of five or ten places in the rankings.

PAKISTANS PERFORMANCE AGAINST OTHER COUNTRIESRelevant comparator countries did not share Pakistans significant decline. To gain insight into Pakistanscompetitiveness rankings, it is useful to compare it to countries with which it shares an economic orgeographic proximity, or countries which also have emerging economies with large populations. This reportcompares Pakistan with India, Indonesia, Brazil, Sri Lanka, and Indonesia. With the exception of Brazil,these are all factor-driven economies located in Asia. Brazil is included because it is a large, emergingeconomy that has been relatively successful in recent times, and therefore serves as a benchmark of

desirable performance.The rankings for these countries have either dropped slightly or, in the case of Sri Lanka and Indonesia,improved noticeably. Pakistan now ranks lower than all comparator countries, as compared to the previousyear where it was ahead of only Bangladesh. This suggests that the factors negatively influencingPakistans drop in rankings are either not affecting comparator countries, or are doing so to a lesser extent.Pakistans recent economic growth has also fallen behind a number of these comparator countries, such asIndia and Brazil, where economic growth has remained robust. Bangladesh has improved its market sharerelative to Pakistan in the global apparel market, and Sri Lanka is also expected to have robust levels ofgrowth, having now resolved the long-running threats posed by terrorism and insurgency.

World Economic Forum Reports: Global Enabling Trade Report

Pakistans overall score remained steady at 3.4, but its rank fell from 100th to 112th place among 125countries, suggesting that other countries are improving their trade situation more rapidly. The third GlobalEnabling Trade Report was published in May 2010. This report measures the extent to which variouseconomies have incorporated the necessary factors to enable trade and identifies where improvements areneeded. The report mirrors Pakistans recent lackluster performance in exports, but shows how it could be


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improved. Customs administration and procedures for exporting and importing performed relatively well.Pakistans worst score is related to physical security, consistent with the findings of this report overall.Market access also scored poorly indicating the need to pursue favorable trade agreements. The lack oftrade between Pakistan and India, whatever the political and security obstacles, takes a major toll onPakistans market access. Efforts to secure duty-free entry to the US market, perhaps throughReconstruction Opportunity Zones (ROZs), remains bottled up in the US Congress and it is unclearwhether a broader appeal for the entry of Pakistani products to the US market will be successful in a USelection year, notwithstanding the flood-related sympathies and the importance of Pakistans collaboration

in regional security efforts. The Government of Pakistan should make every effort to achieve further tradeconcessions where possible with its major trading partners.

PAKISTANS OVERALL ECONOMIC SITUATIONEconomic Performance:Pakistans GDP growth recovered from its sharp slide to 1.2% in FY2009 and rose to 4.1% in FY2010. Thiswas still much lower than in recent years and is not sufficient to make significant improvements in livingstandards. Pakistans growth grew significantly in the mid-2000s but it has faltered recently, although anotable increase has been realized in 2009-2010. Pakistan is under-performing relative to nearby Asianeconomies.Several common explanations for Pakistans lowgrowth rates are not valid when compared tonearby economies, for example, the global economic downturn has had a dampening effect on international

demand, lowering growth rates in Europe and the US. However, economic growth in China and India hasremainedhigh despite the global financial crisis. Sri Lankas growth remained relatively robust despite thefact that it too faced a major civil war, which required military mobilization in an all-out effort to restorenational sovereignty, defeat terrorism by Tamil Tigers, and restore peace to the citizenry. War does notnecessarily result in economic contraction and in many cases it can stimulate economic growth aswitnessed during World War II.Living standards in Pakistan hit a plateau and are now growing more slowly. Robust rates of economicgrowth and job creation must be achieved if Pakistan is to reduce poverty levels and improve the standardsof living for Pakistanis. However, income per-capita, after rising significantly, has now slowed. Pakistanspopulation growth means that it must achieve robust rates of growth for living standards to improve on aper-capita basis.

ECONOMIC GROWTH DRIVERS IN FY2010:Manufacturing and services contributed to economic growth. In FY2010 the 4.1% of GDP growth wasachieved mainly by a 5.2% expansion in the manufacturing sector, and a 4.6% increase in services, whileagriculture grew by only 2%. In manufacturing, both large and small-scale enterprises have played a rolegrowing at 4.4% and 7.5% respectively. Agricultures slower overall rate of growth was nonetheless buoyed

by a 4.1% growth in livestock, while major and minor crops actually contracted by 0.2% and 1.1%respectively. Growth in services was propelled by transport and communication (4.5%) as well aswholesale and retail trade (5.1%). Sector contribution to GDP growth is shown.The services sector nowconstitutes over 50% of Pakistans GDP.GDP growth in FY2011 is expected to remain modest at 4.5%.13Estimates currently predict a 3.8% growthin agriculture, a 5.6% growth in manufacturing, and a 4.7% growth in services.14 This rate of growth issignificantly lower than that achieved earlier in the decade. This earlier high growth resulted from economicreforms including privatization, deregulation and liberalization, robust levels of private investment, stronggrowth in remittances, the US government-led Paris Club rescheduling of Pakistans USD 12 billion debt onexceptionally favorable terms, and substantial international economic assistance, including directassistance from the US Government in the form of USD 3.1 billion in economic aid, and USD 8.1 billion insecurity-related aid during 200208.Nonetheless, most of the economic growth achieved during that period

was driven by consumption and was not export-led growth.Pakistan continues to be over-reliant on consumption to drive growth. Net exports have not contributedsignificantly to growth, raising questions regarding the international competitiveness of Pakistansindustries. 16While net exports contributed 2.2 percentage points to the GDP growth of 3.6% in FY2009,they have contributed very little to growth in FY 2010. Much of the net export growth in 2009 came from a


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decline in imports, rather than an increase in exports. Total investment made a negative contribution of 0.3percentage points, while net exports contributed a meager 0.6 percentage points to growth.Public and private investment has fallen off sharply from the higher levels of preceding years. Afterincreasing from around 17% of GDP in FY2003, to a record high of almost 23% of GDP in FY2007, totalinvestment in Pakistan declined to a little over 16.6% in FY2010. Fixed investment decreased from 20.5%of GDP in FY2007 to 15% in FY2010. Public sector investment, critical for facilitating private investmentand for social and infrastructure development, is not only low, but also decreased as a percentage of GDPduring the last three years.Overall private investment decreased from 11.3% of GDP in FY2003 to 10.7% of

GDP in FY2010: public sector investment increased slightly from 4% of the GDP to 4.3% of the GDP overthe same period.Foreign direct investment (FDI) has been pivotal in driving recent growth by bridging thechronic saving-investment gap, while financing the current account deficit. Nevertheless the total flow offoreign investment in Pakistan has been consistently declining since FY2008. After reaching USD 5.4 billionin 2008, FDI has fallen to just over USD 2 billion for FY2010. During the first eight months of FY2010, FDIdeclined by USD 1.5 billion, or 52.8%. According to the most recent figures, FDI for 2010 stands at USD2.2 billion as compared to USD 3.7 billion for FY2009.A vibrant agricultural economy is very important in mitigating rural poverty but its overall growth has beenquite modest despite the volatility of its subcomponents and weather-related fluctuations. Fishery andforestry performance has been quite volatile, but as mentioned earlier, livestock performed relatively well inFY2010 compared to agriculture. The performance of major crops has been highly volatile during thedecade, especially when compared to that of minor crops. Future growth and stability in Pakistans

economy greatly depends on large-scale agriculture diversification, including promotion of horticulturalcrops, floriculture and value-addition.Almost half of the manufacturing sector activities are related to the cotton, textile, and apparel industry,which account for around two-thirds of Pakistans exports. This industry has failed to become a real engineof growth despite its natural resource advantages and abundance of labor. China and Bangladesh howevergained market share after the expiration of textile quotas in 2005 while the Pakistani industry has struggledwith comparatively high interest rates, labor productivity issues, uneven electricity supply, costly logisticsand other unfavorable aspects of the business environment. In FY2009 the manufacturing sectorcontracted by 3.7% as compared to 4.8% expansion in FY2008 and the annual average of 7.8%. Manufacturing sector performace greatly depends on large-scale manufacturing growth, which hasstagnated since FY2005; some Pakistani textile and apparel companies have relocated abroad.

Remittances have been a driver of recent growth and have contributed to improved living standards. Theincrease in per capita income noted earlier benefitted from over USD 6 billion in remittances from workersabroad. Current remittance levels are over three times the amount remitted in FY2003 (USD 2.4 billion).Workers remittances have continued to grow for the calendar year 2010 with some estimates suggestingUSD 15 billion by 2015: Pakistan is the worlds 12thlargest recipient of remittances. Almost 80 % originatefrom North America, Saudi Arabia, and the United Arab Emirates (UAE). In 2007, Pakistan received USD37 per capita in remittances, compared with USD 33 for South Asia. New steps taken by the State BankPakistan (SBP) and the Ministry of Finance, such as launching the Pakistan Remittance Initiative to attractgreater amounts of remittances through normal banking channels, have also helped to substantiallyincrease these inflows.

EMPLOYEMENT:Unemployment increased to 5.5%, which is low by historical standards although anecdotal evidencesuggests this may understate the current situation. The Government has sought to mitigate the effects ofthe economic downturn by establishing the Benazir Income Support Program (BISP), which provides cashtransfers to poor and vulnerable households.Slow implementation, fiscal pressures, and stabilization

requirements may limit the ability of programs like BISP to fulfill its goals. Robust levels of economicgrowth, of from 68% may be required to accommodate new entrants to the labor force while addressingredundant labor in agriculture and responding adequately to unemployment and underemployment.


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CAPITAL MARKET PERFORMANCE:The KSE has recovered somewhat from its severe economic contraction. The global financial crisis, thevolatile political and security situation, and the growing specter of low growth turned investor sentimentssharply negative.This uncertainty and low confidence took its toll on the capital markets and the KSE-100index succumbed in March 2008. The index fell by 40% in FY2009, declining to around 5,800 points byFebruary 2009. It has since partially recovered. The Governments decision to impose a capital gains tax(CGT) on trading of shares in the upcoming fiscal year is not expected to have a major dampening effect onthe market and may even promote stability and long-term investment.

MACROECONOMICS CONSTRAINS:The rapid deterioration in foreign reserves was arrested, and has now recovered. Pakistan approached the

IMF in late 2008 in the wake of a considerable depletion of the countrys foreign exchange reserves. Foreign exchange reserves have been rebuilt to reach USD 15 billion in January 2010, with the help of IMFfunding and strong workers remittances. By agreement, a total of USD 11.3 billion will be disbursed, ofwhich USD 7.3 billion has been already received. IMF assistance has helped to allay fears of sovereigndefault, and has stemmed capital flight and currency depreciation.However, Pakistan has a major imbalance between fiscal revenues and expenditures. Taxes declined to9% of the GDP. Revenue generation capacity as a percentage of GDP declined from 13% in FY1999 to 9%in FY2009, the first decline in almost two decades. A tax-to-GDP ratio of 18% is common in otherdeveloping countries and much higher in some. This is in part due to the burden of taxes carried bymanufacturing with agriculture and services not fully incorporated Into an equitable tax system.Despite fiscal reform efforts over the last two decades, the persistence of fiscal deficit is one of the keycauses of recurrent macroeconomic instability in Pakistan. Although revenue generation activities haveincreased, the Government continues to face difficulties in meeting its fiscal deficit target. The current fiscalyears deficit is shown to be 6.3% of GDP. The fiscal deficit increased during JulyMarch of FY2010,despite revenue increases brought about by the Petroleum Development Levy (PDL), thanks to higher oilimports.The long-awaited imposition of an integrated Value-added tax (VAT) has been replaced by a proposal toreform the existing General Sales Tax (GST) by removing un-warranted exemptions. It is hoped that areformed GST system will be introduced by October 1st, 2010 after securing the consensus of national andprovincial legislatures. It is hoped that these tax reforms will help the Government to increase its tax-to-

GDP ratio to 15% by 2014. The implementation of the reformed GST scheme is important for Pakistan tomobilize additional revenues while doing so fairly transparently.

To address the fiscal deficit, the Government has set a tax collection target for FY2011 of around Rs.1778

billion with total revenue generation estimated to be around Rs.2410 billion. The planned launch ofconvertible bonds of three large state enterprises is critical for filling the fiscal deficit, as the move isexpected to generate around USD 3 billion.Consumer inflation was reported at 13% in the year, up to February 2010. This increase was driven byincreases in electricity tariffs, petroleum products, and commodities such as wheat. High inflation resultedfrom robust demand, chronic supply-side bottlenecks, monetization of the fiscal deficit, and highinternational commodity prices. Headline inflation is expected to be around 12% this fiscal year beforeeasing to around 8% next year, with help from improvements in food supplies and a tight monetary policy.The persistence of a large fiscal deficit is recognized as one of the main causes of inflation in Pakistan.TheSBP continues to encounter coordination problems impeding the critical balancing of monetary and fiscalpolicy to keep inflation at bay. The supply-side problems require further trade liberalization, a move thatwould also improve the timely supply of key commodities in adequate quantities in order to avoid sudden

price shocks. The SBP needs to pay greater attention to inflation-targeting through monetarymanagement.50 despite continued inflation; Pakistans currency has remained relatively stable after itsearlier devaluation.


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MICROECONOMIC CONSTRIANT:Electricity:The macroeconomic picture has been stabilized, although high inflation rates continue to meanaccompanying high interest rates, which deter investment. Meanwhile, there are many microeconomicconstraints to competiveness. Many of these have been addressed in previous SPCR reports. Given itsimportance, electricity will be addressed below.Electricity shortages persist in taking a toll on productivity. The imbalance between supply and demand isbeing addressed, but the margins of surplus will remain narrow.If Pakistan is to achieve significant growth itwill require a concomitant growth in electricity.The Government has designed an Integrated Energy Development Program to address the prevalentenergy crisis in an environmentally friendly manner. The 25-year National Energy Plan aims to secureenergy supplies for achieving GDP growth of over 7.5%. The Government is already working toconsiderably increase the share of coal-based and hydro-based electricity generation in total energyrequirements in the next 15 years (see Figure 2.40). This will enable an increase in per capita energyconsumption from the current 14 MMBTU to 42 MMBTU through indigenous resources including oil, gas,coal, hydropower, and renewable sources. Since the share of gas in indigenous fuels is declining, thegrowing gaps will have to be met by imported oil and gas.

GLOBAL TRADE OUTLOOK:Global growth, led by emerging economies, is expected to be around 4% while trade is expected to

resume its growth at a more modest level of 56% per year. Faced with weaker demand in its traditionalmarkets, Pakistan needs to aggressively diversify markets and redouble efforts to improve the businessenvironment for existing and prospective exporters.Although most advanced economies are officially out of the Great Recession, recovery is fragile and fearscontinue of a double-dip recession, either because economic stimuli will be removed too soon, or becauseof the large debt overhang caused by the economic stimulus package to date. Most advanced economiesare experiencing ballooning debts and its reverberations are routinely felt in the jittery and choppy tradingpatterns of leading financial markets around the world. Emerging economies in the Middle East and EastAsia, especially in China and India. will act as the main engines of global trade and growth.

CONCLUSION AND RECOMANDATION:The Government of Pakistan has successfully responded to the near-term macroeconomic and foreignexchange crisis, and economic recovery has returned, albeit at modest levels. However, the dependencyon foreign transfers has emphasized the need for Pakistan to improve its export competitiveness and toachieve both fiscal and trade balances. The Competitiveness Support Fund has consistently advocatedaddressing the microeconomic constraints to growth. Achieving higher levels of growth is now imperative.To achieve this, the following steps must be taken:

1. Export Growth: Facilitate increased exports by working with Pakistans leading export industries toremove obstacles to competitiveness, lower costs of inputs, enhance efficiency of trade logistics, increaseproductivity, and introduce innovative technology and business practices.

2. Investment Growth: Target robust rates of growth for investment, especially private, productive,greenfield investment, whether foreign or domestic.

3. Financial Sector Modernization, Moderate Interest Rates and Improved Access to Finance:Encourage gradual expansion and diversification of financial products and competitive real rates of interestmodernization and supervision. Create a policy environment that enables the financial markets to naturallybring down real interest rates consistent with sound macroeconomic management and financialsupervision.

4. Electricity: Restore the supply-demand balance in electricity in the short term and ensure that theappropriate investments are made for long-term energy supplies that are reliable and cost-effective.


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5. Supporting infrastructure: Implement Special Economic Zones, Export Processing Zones, IndustrialParks, and other specialized infrastructure that can make investment more productive and encouragegreater levels of that investment.

6. Workforce Development: Develop partnerships between specific industries and their education andtraining providers to achieve more effective results for workforce development.

7. Innovation: Institutionalize mechanisms for commercialization of research at Pakistans universities,implement legal frameworks for protecting intellectual property rights (IPR), and provide direct assistance to

those seeking to file patents with local and international patent offices.

8. Entrepreneurship: Foster entrepreneurship within educational institutions, encourage entrepreneurialcenters of excellence and incubators, facilitate proof-of-concept financing and lower the cost ofentrepreneurial failure in terms of cost, time and reputation.

9. Provincial and Regional Development: Implement annual Competitiveness Index at the provinciallevel, implement annual provincial competitiveness reports.

INSTITUTIONAL REFORMS FOR COMPETITIVENESS:Each year, the State of Pakistans Competitiveness Report (SPCR) includes one or more areas of specialfocus. This year, the SPCR provides a special focus on the importance of institutions. This focus is timely in

being chosen, given the context of recent institutional changes at federal government level, including thepassage of the 18th Amendment . The Global Competitiveness Index highlighted the importance ofinstitutions inPakistans competitiveness while also indicating a decline in Pakistans ranking in this area.The objective of this chapter is to explain why institutions are critical for Pakistans prosperity, to analyzethe specific reasons for this deterioration, and to offer constructive inputs that can lead to a consensus forstrengthening Pakistans institutions as they relate to Pakistans economic growth.

Why Institutions Matter for Growth and CompetitivenessThe design and implementation of an effective strategy for sustained economic growth requires strongpolitical will, implemented through effective institutions. Pakistans leaders and economic team cannotimplement an effective economic strategy without strong institutions. Ministries working at cross-purposeswith each other, or pursuing independent objectives, send mixed signals. Furthermore, over-dependence ofeconomic policy on a few key individuals will create uncertainty.Successful high growth countries have demonstrated that strong institutions implementing a clear economicstrategy can achieve very high rates of economic growth. China, Korea, Chile, Taiwan, Singapore, andIreland demonstrate that strong institutions are one of the key driving forces for sustainabe high growth.Countries that have achieved high standards of living are highly correlated with high institutional rankingson the Global Competitiveness Index. While having good institutions does not ensure high rates of growth,it is now recognized that it is one of the most important areas of focus for building competitiveness.Institutions comprise one of the twelve pillars of the GCI and are an essential basic requirement for thecompetitiveness of factor-driven economies such as Pakistan.

Without sound institutions, it is impossible to implement a strategy for building competitiveness. Manycountries have developed excellent economic plans and strategies for investment, exports, workforcedevelopment, infrastructure, small and medium enterprise, and other areas. However, these efforts cannotbe sustained without good institutions: over-reliance on a particular leader makes a country vulnerable tosudden change.Institutions include a complex set of the rules of the game in society that shape the incentives foreconomic actors.Institutions shape the legal and regulatory frameworks, the informal norms, and the

enforcement mechanisms of economic incentives, therefore having a profound impact on economicdecisions. The importance of good institutions for growth and competitiveness has its foundation in thetheory of New Institutional Economics, according to which individuals, firms, and governments interact in aworld of positive transaction costs, information asymmetry, and unequal political power.


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Without sound institutions, it is impossible to implement a strategy for building competitiveness.Many countries have developed excellent economic plans and strategies for investment, exports, workforcedevelopment, infrastructure, small and medium enterprise, and other areas. However, these efforts cannotbe sustained without good institutions: over-reliance on a particular leader makes a country vulnerable tosudden change.Institutions include a complex set of the rules of the game in society that shape the incentives foreconomic actors.65 Institutions shape the legal and regulatory frameworks, the informal norms, and theenforcement mechanisms of economic incentives, therefore having a profound impact on economic

decisions. The importance of good institutions for growth and competitiveness has its foundation in thetheory of New Institutional Economics, according to which individuals, firms, and governments interact in aworld of positive transaction costs, information asymmetry, and unequal political power.Countries that provide a business friendly, secure, transparent environment and a competitive levelplaying field become prime destinations for investment and job creation. A business friendlyenvironment in no way means to suggest lack of compliance with world-class standards regarding workersafety, child labor, consumer protection, food safety, fair tax compliance or environmental protection.Rather, it means that red tape is kept to a minimum and that the country is serious about doing business.With good institutions, supporting infrastructure, services, utilities and public services function in ways thatare conducive to firm-level productivity.

STATE OF INSTITUTIONS IN PAKISTAN:The World Economic Forum measured the quality of public and private institutions through expertopinion surveys of those managing economic entities in Pakistan exposed to global competition.The Institutions Ranking includes twenty-one indicators related to both public and private institutions. Thesefindings are also cross-checked and supplemented with other international benchmarking sources such asthe World Banks Doing Business indicators, the Worldwide Governance Indicators, and the TransparencyInternationals Corruption Perceptions Index. This section will identify strengths and weaknesses inPakistans institutions and will also provide comparative analysis between Pakistan and comparablecountries (comparator countries) that are either from the region (India, Sri Lanka, Bangladesh) or are high-growth developing countries (Brazil, Thailand).

Pakistan: The Institutions Scorecard

Pakistans current rank for institutions on the Global Competitiveness Index is 112th

out of 139 countries,having fallen by 17 places. Pakistan actually showed absolute improvement in a majority of the 21indicators. Pakistan performs poorly in comparison with India (58), Thailand (64) and Sri Lanka (55)although its rankings are comparable to that of Bangladesh (115) and Brazil (93). Pakistans performancehas deteriorated consistently in recent years reflecting declining confidence in the quality of its institutions .Pakistans recent performance on the GCI highlights a number of aspects of public and private institutionsthat present obstacles to improving the growth and competitiveness prospects of the country. Pakistancontinued to rank poorly in some sub-indicators involving public institutions, such as property rights (107),efficiency of the legal framework in dispute settlement (103), and transparency of government policy (115).However, both intellectual property protection (86) and judicial independence (74) improved their rankings.The worsening security environment is reflected by significant ranking drops related to the business costsof terrorism (138), business costs of crime and violence (126), organized crime (127), and reliability of

police services (119). These are particularly worrying. The concern for security is often reduced to the focuson terrorism and insurgency but this survey reveals that the impact of security on business is morepervasive and more complex. Successful ending of the civil conflict, while extremely important, is not the

only factor affecting security.

Institutional Constraints to Competitiveness


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Institutional constraints to competitiveness include the inadequate provision of security, ineffectivepublic utilities, red tape, weak property rights, inadequate contract enforcement, perceived lack oftransparency, and inadequate corporate governance.Each will be benchmarked and discussed in turn.These weak institutions hurt Pakistans economic performance today. They may also be restrictingPakistans ability to make the necessary structural transformations for the future. Moreover, weakinstitutions also prevent the fair distribution of the benefits of growth efficiently and effectively todisadvantaged groups: this section examines in detail specific institutional constraints.1. Weak property rights hinder the mobilization of investment and its productivity

Formal property rights and their effective enforcement encourage investment by securing theowners against unlawful expropriation and providing access to credit markets. They also helppromote the efficient functioning of land markets and productive use of land. Furthermore, property rightsencourage formal registration of business as well as personal property, bringing assets into the formalsector and thus contributing to a broader base of tax-payments.In the 21stcentury knowledge economy, intellectually property rights are becoming as important asproperty rights in land.75Insufficient intellectual property rights protection may be a contributing factor to Pakistans relatively poorperformance in the export of IT-enabled services and in knowledge products and services. Pakistan has notbeen notably successful in establishing global brand names or in attracting international investment in R&Dwithin Pakistans borders.In the 201011 GCI ranking, Pakistan placed 107thout of 139 economies in protecting property

rights.This is far below that of India (61), Sri Lanka (64), Brazil (72) and Thailand (89). Land distribution,registration and titling are elements of property rights enforcement. The highly unequal distribution of landin Pakistan and the tenure sharecropping system of agricultural production may be related not only to lowlevels of agricultural productivity (as shown in Chapter 2) but also low levels of educational attainment andliteracy. Those doing menial work under a sharecropping system are often families that have to rely onchild labor at home rather than sending children to school. 76

Pakistans performance in the property rights sub-indicator of the GCI (107th), is mirrored in theWorld Bank Doing Business report where it ranks similarly low at 119thout of 183for the indicator of registering property.improvement is entirely under the control of the Government of Pakistan, and is not dependent on any

external markets or authority to improve its performance. According to documentation that forms the basisof the Report, it takes 6 procedures, 50 days and an average cost of 7.2% of property value to registerproperty in Pakistan. Illegal possession, informal occupation and disputed titling remain major hurdles increating efficient and well-functioning land markets. Registration and land record management remaindisaggregated, as multiple institutions are involved.78The land record systems are old and obsolete. At themost basic and local level of land registrations, the patwaris (land record keepers and administrators) arevulnerable to political influence and exploitation. The land registration and record management system isopaque, obsolete, and fragmented, and it fails to provide secure property rights. Meanwhile, land marketsremain thin, and land prices do not reflect the true productive capacity of the land. Higher land valuesbased on more secure titles could trigger access to credit that could in turn lead to expanded economicactivity.In the area of intellectual property rights, Pakistan has improved 9 ranks over the past year (up to86) but continues to perform below India (66), Sri Lanka (46), and Thailand (84).Pakistan put in placeits first integrated Intellectual Property Rights (IPR) regime, governed by the Intellectual PropertyOrganization (IPO) of Pakistan Ordinance 2005, which provided for the establishment of an IPO Officeattached to the Cabinet Division. Despite this stronger regulatory framework, Pakistan lags behind India inpatent filing. 79Intellectual property rights enforcement remains weak, as piracy, counterfeiting, andplagiarism are prevalent.

2. Current legal, regulatory and administrative frameworks governing private sector activity areinefficient and they unnecessarily raise the cost of doing business


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Well-functioning legal, regulatory, and administrative frameworks encourage investment and create anenabling business environment. Pakistan lags behind in modernizing various commercial laws that governprivate sector activity. This is evident from Pakistans ranking on the GCI sub-indicator efficiency of legalframework in settling disputes and efficiency of legal framework in challenging regulationsPresently there are a number of obsolete and fragmented laws regulating commercial arbitration andalternative dispute resolution that do not provide adequate protection to foreign investors.80The currentinsolvency laws have failed to facilitate orderly adjustment and exit from declining industries.81The laws arealso unfriendly for entrepreneurs and venture capitalists as they are skewed towards liquidation rather than

rehabilitation, thus discouraging innovation and risk-taking. Pakistan, like many other countries in theregion, has also created special economic and industrial zones to support the development of new andexport-oriented industries, but the absence of a unified legal and policy framework governing theseenclaves has caused substantial misuse of policy incentives.Private sector activity in agricultural markets is restricted due to the old Provincial Marketing Acts thatcontinue to involve the government in fixing prices and controlling markets down to the small town level.82These laws govern the sale and purchase of agricultural produce including fruits, vegetables, dairy andmeat products, and have prevented the development of modern and efficient agricultural markets.Progress has recently been made through the introduction of a modern anti-trust law to foster competitionand protect consumers. 83Pakistan has also facilitated new business registration by reducing the number ofsteps and fees and by improving access to registration offices. However, making a business fullyoperational by registering property, dealing with construction permits, and getting utility connections

continues to be difficult, time consuming, and costly. Firms also encounter a number of impediments inpaying taxes, employing workers and enforcing contracts. Labor laws dating from the 1970s socialist erarestrict overtime and the number of hours that can be worked, leading to substantial rigidity in labormarkets, discouragement of formal business registration, and encouragement of informality, which in turnimpedes growth and productivity. Facilitating tax compliance would also improve Pakistans low rate ofdomestic tax collection, thereby reducing dependency on foreign transfers.Presently there are a number of obsolete and fragmented laws regulating commercial arbitration andalternative dispute resolution that do not provide adequate protection to foreign investors. 80 The currentinsolvency laws have failed to facilitate orderly adjustment and exit from declining industries.81The laws arealso unfriendly for entrepreneurs and venture capitalists as they are skewed towards liquidation rather thanrehabilitation, thus discouraging innovation and risk-taking. Pakistan, like many other countries in theregion, has also created special economic and industrial zones to support the development of new and

export-oriented industries, but the absence of a unified legal and policy framework governing theseenclaves has caused substantial misuse of policy incentives.Private sector activity in agricultural markets is restricted due to the old Provincial Marketing Acts thatcontinue to involve the government in fixing prices and controlling markets down to the small town level.These laws govern the sale and purchase of agricultural produce including fruits, vegetables, dairy andmeat products, and have prevented the development of modern and efficient agricultural markets.Progress has recently been made through the introduction of a modern anti-trust law to foster competitionand protect consumers. 83Pakistan has also facilitated new business registration by reducing the number ofsteps and fees and by improving access to registration offices. However, making a business fullyoperational by registering property, dealing with construction permits, and getting utility connectionscontinues to be difficult, time consuming, and costly. Firms also encounter a number of impediments inpaying taxes, employing workers and enforcing contracts. Labor laws dating from the 1970s socialist erarestrict overtime and the number of hours that can be worked, leading to substantial rigidity in labormarkets, discouragement of formal business registration, and encouragement of informality, which in turnimpedes growth and productivity. Facilitating tax compliance would also improve Pakistans low rate ofdomestic tax collection, thereby reducing dependency on foreign transfers.

Pakistan needs to improve transparency and check corruption


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Corruption acts as a tax on investment and growth by raising the costs of viable projects and by divertingresources from productive activity to private pockets. Pakistan performs poorly on the GCI sub-indicatormeasuring favoritism by government officials (87) as discussed above, and diversion of public funds (92).On the latter indicator, it fares poorly as compared to India (71), Thailand (65) and Sri Lanka (61).According to Transparency Internationals Corruption Perception Index in 2009 Pakistan is placed wellbelow Thailand, Brazil, Sri Lanka and India (see Figure 3.3).88The National Corruption Perception Survey2009 carried out by Transparency International Pakistan reveals that perceptions of corruption are greatestin the Police, followed by Power, Health, Land, Education, Taxation, Judiciary, Local Government, Customs

and Tendering. The survey cites lack of accountability, lack of transparency, and discretionary powers ofoffice holders as roots of corruption.

Security costs are taking their toll on the competitiveness of Pakistans firms.According to Pakistani business leaders surveyed for the Global Competitiveness Index, security costs areimposing much higher costs for them than for their competitors in other countries. Pakistan rankedparticularly low in these GCI sub-indicators: business costs of terrorism (138), business costs of crime andviolence (126) and organized crime (127). As mentioned above, the crisis of confidence in theGovernments ability to provide basic security is not only related to the current insurgency, civil conflict andterrorism, but is more pervasive. It includes perceptions of growing costs of criminality, including aperception of growing threats from organized crime. Confidence in the institution of police services is low.This is particularly worrying and needs to be addressed as a priority.

Pakistan ranks below the comparator economies on indicators related to the business costs of security andcrime.91 Anecdotal evidence also suggests that a number of international companies are hesitant to set upoffices or send their international staff to Pakistan for extended periods because of security concerns.Fractures in the ruling coalition and constitutional disputes, combined with continued civil unrest in thenorthwest and more sporadic incidents elsewhere, act as dampeners for both domestic as well asinternational investors. Travel advisories deter international visitors, while necessary precautionary securitymeasures add to the difficulty of doing business across borders.

CONCLUSION:The proposeddirection for reform builds on, and does not aim to replace the Government of Pakistansexisting programs. It does, however, aim to add value to these efforts by identifying the gaps and assessing

the effectiveness of the present program in achieving the objectives of enhanced growth andcompetitiveness by improving the overall economic and business environment. The recommendations alsoemphasize the responsibility of federal, provincial, and local governments to undertake efforts in theirrespective jurisdictions.Institutional strengthening and reform also involves private institutions and recommendations have beenmade for strengthening corporate governance, auditing, investor protection and contract enforcement.Private institutions also have a role to play in helping to guide Government policy, monitor results andmobilize broad public understanding and support for its economic growth program.Thus the institutional framework encompasses more than civil service reform and governmentalorganization, it requires an institutional framework capable of mobilizing the energies of a diverse privatesector, provincial and district level administration and supporting institutions such as industry associations,universities and research institutes.

The central message of the proposed institutional reform framework is to provide a business friendly,secure, transparent, and level playing field for private sector development together with policy andregulatory regimes that incentivize investment, efficiency, innovation, and productivity enhancement. Theseefforts require strong political commitment, consensus building and coordination across ministries andbetween the federal and provincial levels. Implementing a coordinated reform will boost Pakistans futuregrowth and competitiveness and help make further economic progress consistent. The costs of inaction aresimply too high.

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