Freeing Pakistan’s economy

Australia taught me much of what I know about effective economic deregulation. Australia was a highly regulated economy after World War II. Protectionist measures such as high tariffs and import controls were well implemented. The financial sector was strictly regulated. The government exercised price control through agricultural boards.

This atmosphere hampered competition, created inefficiencies, and limited productivity potential. A similar story holds back the potential of the Pakistani economy to this day.

Australia’s unique journey towards economic deregulation began in the mid-1970s. Since then, it has been an impactful and transformative process that has been pursued by successive Australian governments over the decades. The authorities developed and implemented the regulatory review themselves, based on economic thinking rather than relying on external factors. A path that Pakistan seems to consistently miss.

Some key deregulatory measures included liquidity of the Australian dollar, deregulation of financial markets, removal of controls on foreign capital flows, decentralization of industrial relations, pushing competition policy, broadening the tax base and corporatization of state-owned enterprises. These reforms were aimed at increasing economic freedom, reaching new international markets, shaping competitive behavior and improving the flexibility of the economy. The same history that Pakistan must create for itself.

Important areas of deregulation also included strengthening global trade by lowering trade barriers and tariffs, and liberalizing sectors such as government-dominated telecommunications by removing bans on new entrants. Government authorities have engaged private sector business development service providers to provide legal services and training to job seekers. Australia has moved away from centralized wage setting to business-to-business negotiations. All worth learning for policymakers in Pakistan.

The authorities responded to reports from the Australian Industry Commission on the benefits and risks of corporatization and privatization of utilities. The recommendations included administrative reform of utilities and structural reform of the entire sector. The result was the introduction of competition in the areas of power generation and retail sales and the privatization of public generation, transmission and distribution assets. This is a valuable insight into Pakistan’s declining energy sector. The deregulation process in the energy sector gained momentum in the early 1990s. Australia has pushed for the development of a domestic electricity market. The creation of an energy market in Pakistan has been a long time coming.

Australia’s National Competition Policy (NCP) framework removes regulatory barriers to competition, providing suppliers with stronger incentives to operate efficiently, remain price competitive and pursue innovation. An important element of the NCP was the Legislative Review Program. This reform assessed whether regulatory restrictions on competition were in the public interest. It covered a large area of ​​the economy, including, but not limited to, occupational licensing, agricultural markets, insurance, and transportation.

The competition framework is a less understood area and the missing link in reforming the Pakistani economy. As a result, most businesses are not comfortable operating beyond our borders, protected by generous government concessions, exemptions and subsidies, and barriers to competition.

It is argued that deregulation has largely benefited 26 million Australians. Competition has improved service quality, ensured long-term price stability and increased consumer choice. Workers have significantly higher wages, and citizens have experienced an increase in wealth and living standards. Importantly, decades of economic growth have been driven by private investment, not debt-financed fiscal largesse. Unfortunately, many of us are still unable to internalize this history for Pakistan. It is probably overly optimistic to think that foreign-funded projects, niche area investments and outsourced thought processes can help us get out of the mess. These actions can only help on the periphery.

The current regulatory system in Pakistan is a relic of a bygone era, intended to control and manage rather than facilitate and enable. We are still not comfortable with market signals and rely on controls in many markets. It is time to recognize that undertaking economic reforms and liberalizing price and quota controls creates a flexible and resilient economy. By prioritizing deregulatory policies, Pakistan can unlock productivity growth and start on the path to competitiveness in the global economy.

Australia has conducted several studies to calculate the costs of complying with current regulations. These studies also took into account regulatory flow. They then established new guidelines to help reduce the flow. With little supporting evidence, most policymakers in Pakistan are unable to address the high costs of regulatory compliance that stifle entrepreneurship, create excessive paperwork, delay decision-making and reduce economic efficiency. In Pakistan, the circulation of new regulations and the creation of bodies continues.

Australia’s success highlights the value to Pakistan in reducing unnecessary compliance costs, increasing productivity and driving economic growth. Deregulation is a potential factor in increasing productivity. Accelerating gross domestic product (GDP) growth is possible by freeing the economy, reducing efficiency costs and improving competition in the few markets where it is currently limited. The greatest benefits from deregulatory efforts could be achieved by prioritizing reducing compliance costs that apply to a large number of people and businesses, including an estimated 5.2 million small and medium-sized businesses, and their tax laws.

In 2016, I helped develop the government’s Doing Business reform strategy. The reform agenda focused on smart regulation, simplified procedures and competitive costs. This was intended to lay the foundations for much broader efforts to deregulate the economy. In less than a decade, the government has made several attempts through initiatives such as the Pakistan Regulatory Modernization Initiative, SMART, the Digital Economy Enhancement Project and the Punjab Government’s Zero Time Startup Policy to signal regulatory reforms; although to our disappointment, we are far from home.

Research highlights that compliance costs in some sectors can be as high as 40 percent of GDP in Pakistan. An unnecessary and outdated regulatory system burdens the investment climate in Pakistan. The economy is being strangled at the federal, provincial and municipal levels by a multitude of agencies. Regulatory overhang distorts markets and hinders business activity, while inflating costs and harming the ease of doing business.

The guillotine regulatory efforts, approach to determining legality, necessity, business friendliness and associated regulatory costs remain in balance because the Asaan Karobar Act must work. The much talked about business portal in Pakistan, which is a single window for business and investment, is not yet fully functional.

Reflecting on the technically sound noises raised over the last decade around regulatory reforms and seeing their limited impact on the ground, one gets the impression that a serious action-oriented effort needs to be made to remove regulations that are no longer considered necessary; streamlining and harmonizing regulations across jurisdictions; and a shift towards technology or digitalization to ease friction should be the hallmark of the economy over the next few years

Sometimes life can be fulfilling. The hard hours of writing my PhD, working with a team of research advisors and working in industry in Australia gave me an invaluable insider’s perspective on the reconstruction of a well-regulated market economy. You could always feel the sense of this transformation in the air.

One can understand the mindset of Pakistani policymakers who focus on visible results. However, simplifying rules and regulations shows the state’s ability to make deeper reforms. It is time for Pakistan to realize the depth and breadth of work required to achieve such a transformation – it is sincerely hoped that we can influence the nation’s attitude towards working hard to achieve a seriously deregulated competitive economy. God bless Pakistan.

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The author is a former advisor to the Ministry of Finance. KhaqanNajeeb tweets and can be reached at: khaqanhnajeebgmail.com