How free is Pakistan economy for sustainable growth?

By Ashfak Bokhari

Pakistan’s economy is 56.8 per cent free, according to 2008 Index of Economic Freedom compiled by The Heritage Foundation and The Wall Street Journal. The index covers 162 countries across ten specific factors of economic freedom.

Pakistan’s rank is 93rd. Which means it is more free than India which is placed at 115th position with an overall score of 54.2 per cent and also China which stands at 126th rank with an overall score of 52.8.

Pakistan’s overall score this year is 1.7 percentage points lower than last year’s, faring badly in six of the 10 economic freedoms. In Asia-Pacific region, Pakistan is ranked 16th out of 30 countries.

Under the Index, the global economic freedom score this year is 60.3 per cent, which is the same as last year. In the years since the Index began in 1995, world economic freedom has improved by 2.6 percentage points.

The countries are judged by the authors of the report from the perspective of the advanced countries of the West in terms of the facilities and incentives they get while investing in or trading with the non-Western world.

Hence, economic freedom is considered the key to creating an environment that allows a cycle of entrepreneurship, innovation and sustained economic growth.

Economies with higher levels of economic freedom, the authors claim, also enjoy higher living standards.

Hong Kong has the highest level of economic freedom. Singapore comes second in the world and Ireland the third.

Following are the top ten freest economies with their overall scores in the bracket: Honk Kong (90.25), Singapore (87.38), Ireland (82.35), Australia (82), United States (80.56), New Zealand (80.25), Canada (80.18), Chile (79.79), Switzerland (79.72) and United Kingdom (79.55).

A majority of the freest economies are in Europe, five are in the Asia-Pacific region, one country (Mauritius) is from the sub-Saharan Africa region, and one (Bahrain) is from the Middle East/North Africa region. Only 30 countries have economic freedom scores higher than 70 per cent. The bulk of countries — 103 economies — have freedom scores of 50–70 per cent. Of those, about half are “moderately free ” ((60-70 per cent), and half are “mostly unfree. ”

The erosion of economic freedom in Latin America reflects reversals of free-market policies and ‘lack of perseverance’ in pursuing economic freedom in some countries. Asia-Pacific countries have the highest variance within their region, which means that there is a much wider gap between the heights of freedom in some economies and the lows in others that is nearly twice as variable as the norm.

Pakistan scores ‘moderately well’ in fiscal freedom, business freedom, and labour freedom, but its only exceptionally high score is for limited government size. The corporate tax rate is high, but tax revenue and government spending are low relative to GDP.

Commercial registration and licensing are historically inefficient, but efforts to liberalise the business climate are producing results. The labour market is flexible, although sacking procedures are costly.

According to the Index, Pakistan has ‘weak’ trade freedom, investment freedom, financial freedom and property rights. Imports are subject to a high average tariff rate and burdensome non-tariff barriers. The judicial system does not protect property rights effectively because of a serious case backlog, understaffed facilities, and poor security.

Serious corruption taints the judiciary and civil service, making Pakistan one of the most corrupt nations as rated by the Index.

Pakistan’s financial market, though advanced for the region, is constrained by regulation and bureaucracy.

Business freedom is rated at 70.8 per cent by the Index. The overall freedom to start, operate, and close a business is relatively well protected. Trade freedom is 65.2 per cent. Pakistan’s weighted average tariff rate was 12.4 per cent in 2005. Liberalisation has progressed, but import bans and restrictions, import taxes, ‘inconsistent’ standards administration, non-transparent government procurement, export subsidies, weak enforcement of intellectual property rights, and corruption add to the cost of trade.

Fiscal freedom is rated at 79.1 per cent. Pakistan has implemented some tax cuts and the top income tax rate was reduced to 25 per cent. The top corporate tax rate is 37 per cent. In the most recent year, overall tax revenue as a percentage of GDP was 10 per cent and government spending equalled 18.2 per cent of GDP. Privatisation has advanced in recent years.

Relatively unstable prices explain most of the monetary freedom score which is 72.2 per cent. The government controls pharmaceutical and fuel prices, subsidises agriculture, and ‘influences’ prices through state-owned enterprises and utilities, including electricity and water. An additional 10 percentage points is deducted from Pakistan’s monetary freedom score to account for policies that distort domestic prices.

Investment freedom is rated at 40 per cent. Foreign investors may own 100 per cent of most businesses, except in arms and munitions, high explosives, currency and mint operations, radioactive substances, etc.

Foreign ownership in agriculture is capped at 60 per cent. Total foreign equity control is permitted in the services sector. The government requires a minimum initial investment in agriculture, infrastructure, and social services and maintains local content requirements for 16 items in the automobile and motorcycle industries.

Deterrents include political violence, civil unrest, poor infrastructure, ‘inconsistent and arbitrary’ regulation and enforcement, and a lack of co-ordination between the federal and provincial governments. Restrictions on foreign exchange accounts include the need for government approval in some cases.

Financial freedom is only 30 per cent. Pakistan was supposed to have converted to an Islamic (interest-free) financial system by 2001, but the Supreme Court is still considering a final judgment.

Five domestic banks account for over 80 per cent of assets. The government has a majority stake in the largest bank and controls several specialised banks. New foreign banks must establish subsidiaries under 49 per cent control rather than opening branches.

Insurance is underdeveloped, and a state-owned firm controls over three-quarters of the life insurance market. Foreign investors may not own more than 51 per cent of a life or general insurance company. Domestic insurance companies must meet their reinsurance needs in Pakistan.

Property Rights are 30 per cent. Pakistan’s judiciary, by law separate from the executive, remains hampered by ineffective implementation of the laws, poor security for judges and witnesses, sentencing delays, a huge backlog of cases, and corruption. The government closed down several pirate optical disc factories and beefed up enforcement of intellectual property rights in 2006

Source: Daily Dawn, 1/9/2008

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