Free market mechanism: driving efficiency and innovation

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According to political analyst Nadeem Akhtar, “Double-digit growth in India and China was unimaginable 40 years ago. It was not until they finally embraced the market economy and opened up to international trade that the pace of development accelerated. The Pakistani economy must free itself from political shackles for the sake of the future of millions of people.

Pakistan’s economy has hovered at a growth rate of about 4%, which is well below the rate required for significant economic growth. The country is experiencing rapid population growth which, unfortunately, has not been tapped to its true potential. In order to create employment opportunities for this growing population, it is necessary that growth be maintained at around 7-8% for at least another decade. Therefore, the problems that have kept the growth rate in the country at an undesirable level must be actively addressed and solutions must be sought.

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Pakistan’s GDP growth rate over the period 2012-2021

The country’s economic performance can be characterized by structural bottlenecks, low savings and investment, and high and persistent circular debt. In addition, political challenges, bureaucratic procedures, lack of security and the undesirable state of the domestic industry, due to the absence of effective government policies and reforms, have limited the ease of doing business in the country. and resulted in high costs and a lack of productivity and innovation. in domestic industry.

Government intervention in the market has strained businesses and sabotaged their ability to work to their full potential. The Pakistani government exercises control through various state-owned enterprises, direct market interventions, and massive ownership of land and capital. Industries in Pakistan face lengthy and time-consuming government regulatory frameworks that lead to excessive paperwork, rent seeking, high transaction costs, trade barriers and overall pressure on the business environment in the country, ranking the Pakistan at bottom of ‘regulatory quality’ index. . Furthermore, excessive government protectionist policies have inhibited the growth of competitive markets, leading to deep-rooted inefficiencies.

An evolving and perhaps the most pressing issue prevalent in the country is persistently high cumulative energy costs, better known as circular debt. The last 4-5 governments have failed to address this problem and it has continued to proliferate such that it has now reached an alarming level of atomic catastrophe. There is an extremely high circular debt of Rs 2.5 trillion in the electricity sector and that of Rs 1.2 trillion in the gas sector. Basically, this is due to a skewed energy price structure in the country, which makes it difficult for consumers to take over and subsidize unprofitable supplies. These discrepancies strongly signal the inefficiencies, mismanagement, corruption, and inadequate planning exhibited by government-owned distribution companies and agencies in the country.

The electricity sector’s recent initiative in the Competitive Bilateral Exchange Contract Market (CTBCM), aimed at fostering wholesale competition in the electricity sector, is a classic case study of how not to develop a framework for reforms. The initiative is very late for practical reasons. With long-term generation contracts in the power sector, there is no room for open suppliers, so generation competition is unlikely to be achieved in the near future. Renegotiating all power purchase amendment agreements from existing independent power plants is a way to release some power generation and guarantee 50% of capacity, with the balance negotiated by transmission or sold directly from a power exchange on a B2B basis.

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Rolling or third party access in the gas and electricity sector is the first step towards development

However, NEPRA has long been unable to implement taxiing, despite repeated instructions to DISCOs to implement. Obstacles such as the unreasonable and irrational costs of transmission charges under the CAPP proposal have hindered the formation of a free and competitive electricity market.

In Pakistan, the government is immersed in almost all major sectors such as agriculture, electricity and gas sector, banking, construction, as well as day-to-day market activities. In addition, government regulations implemented by the RBF in the form of statutory regulatory orders are a regular source of government intervention and hamper market competitiveness in the economy.

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An article published by Mr. Raja Rafiullah and Dr. Nadeem ul Haque reveals that the total government footprint reaches 67% of the total economy. This confirms the unavoidable and dominant presence of the State and the consequent crowding out of private investment. Pakistan has long been trapped in low savings and investment. Factors such as low income, high double-digit inflation, persistent macroeconomic instability and low growth rate in Pakistan have all led to a historically low savings rate in the country.

Low income indicates that there is not enough money to save and generally a lower propensity to save, especially in the face of rising costs and rising inflation. Additionally, the country’s growing population and a high unemployment rate have led to a high dependency ratio, which has put additional pressure on savings. Other important determinants of savings behavior include culture and preferences which reveal that in Pakistan people are more likely to spend than to save. A low savings rate in turn degenerates the volume of funds available for investment, resulting in a lack of capital accumulation, which is an important prerequisite for the industrialization and economic growth the country has much needed.

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Another major reason for the low investment rates in the country is the over-the-top government regulations in the country which discourage the ease of doing business. “Although a series of factors combine to lead to low investment rates, one of the reasons hindering private investment is the government’s heavy footprint on the economy,” according to an article published by Mr. Raja. Rafiullah and Dr Nadeem ul Haque. All of these factors, along with the country’s political and economic instability, have led to exorbitant savings and investments in the country.

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Investment as a percentage of GDP in Pakistan and countries in the region

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To embark on a path of sustainable economic growth, it is essential to increase investment in the country through increased savings which can be brought in by encouraging a culture of savings in the country through programs financial instruments and better incentives to save. Providing employment opportunities to the vast majority of the unemployed population will reduce the dependency ratio in the country and people will have enough income to be able to save.

Increased savings will lead to increased investment and capital accumulation in the country

Both are important facets of economic growth and prosperity. In addition, improving the general business environment in the country is of utmost importance. There is a need to put an end to inefficient government practices to ensure productivity, efficiency, innovation and competitiveness, which would only be possible through deregulation, decentralization and privatization of the market and ultimately l adoption of a free market economy.

In a market economy, there is the free play of supply and demand which is driven by businesses and consumers, each working in their own interest, leading to a reduction in the cost of goods and innovation, by the lack of disruption caused by government regulations that artificially inflate costs. Sellers are incentivized to reap the benefits of innovation, in the form of increased profits, by selling creative new products that have an edge over their competitors. Therefore, free markets give rise to competition and, therefore, induce efficiency, improving the overall state of business in the country.

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Evidenced by the edifying performance of the country’s textile industry, reflecting a real market, with a large share of goods sold internationally. Most of the textile products are exported, promoting high innovation, technological progress and added value, higher than any other sector in the country.

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Innovation can further be achieved through better management, which can be ensured through investment in human capital in the form of training programs for employees. If we take the example of China, the number of workers in the textile industry working on 100,000 spindles is 1/10and that of Pakistan. This reveals a huge gap in the labor efficiency of the two countries. Therefore, learning from Chinese workers, under the umbrella of CPEC, will be particularly beneficial for the country’s workers.

Pakistani foremen must be trained to adopt Chinese work practices and methodology. In Pakistan, the textile sector employs about 40% of the total labor force. In the light of proper training of Chinese workers in the country, employed under the China-Pakistan Economic Corridor, textile workers can further improve their productivity and ensure ingenious results at a faster pace, which will result by an even greater share of the country’s textile exports.

Providing such an enabling environment for all sectors in the country is vital for their growth and prosperity, enabling them to increase their export capacity and, therefore, rescue the Pakistani economy from persistent trade imbalances due to exports significantly lower than imports. Without undue government intervention, companies will move towards open competition and strive to stay in business.

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Free Markets Precipitate Lower Costs, Innovation, Rapid Progress, Increased Competitiveness, Improved Productivity, Improved Brand Recognition, New Partnerships, Increased Revenue and, through this channel, increased profitability. Businesses and industries need to be provided with a conducive environment for growth that would enable them to thrive and thereby increase their capabilities, thereby creating a greater market share of Pakistani products across the world.

By: Shahid Sattar and Zainab Malik

Mr. Shahid Sattar, now Executive Director and Secretary General of All Pakistan Textile Mills Association (APTMA), previously served as a member of the Planning Commission of Pakistan and Advisor to the Ministry of Finance, Ministry of Petroleum and Ministry of Water and Energy.

The opinions expressed by the authors do not necessarily represent the editorial policy of Global Village Space

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