SPCR2010

The State of Pakistans Competitiveness Report 2010-2011
Recovery and Rebuilding The Foundations of Pakistans Competitiveness
About the State of Pakistans Competitiveness Report and the Competitiveness Support Fund
This report serves as an annual benchmark of the state of competitiveness in the economy, while also providing a useful snapshot of the Pakistani economy. The key objectives of this exercise are to inform Pakistans public and private sector leaders regarding pressing competitiveness issues, and to stimulate public-private dialogues for developing a policy framework to position Pakistans economy on a more competitive footing globally. The current report comes at a time when policy makers are focusing on recovery from natural disasters and the global economic downturn. In the changing global economic landscape, competitiveness is essential for sustained recovery, economic growth, productivity, job creation, and consequently, poverty alleviation. It is hoped that this report will contribute to fostering an open dialogue on issues of competitiveness in Pakistan. CSF is the partner institution of the World Economic Forum in Pakistan. In addition to independent work, CSF has engaged in partnerships with the Board of Investment, Trade Development Authority Pakistan, Higher Education Commission, Pakistan Business Council, Ministry of Food and Agriculture, and the Governments of Sindh, Balochistan, and Punjab. CSFs work is fully described in its Annual Reports, which are available on its website at www.competitiveness.org.pk. At the request of the Government of Pakistan, the CSF receives co-financing from the United States Agency for International Development (USAID), which shares and supports the Government of Pakistans objective of achieving sustainable economic growth and poverty reduction. This State of Pakistans Competitiveness Report for 2010 was prepared by a joint team from CSF and J.E. Austin Associates Inc. (JAA), a Washington DC based consulting firm specializing in competitiveness issues. The CSF would also like to acknowledge and thank all those who helped with the preparation of this report including the World Economic Forum, Government of Pakistan line ministries and agencies, a number of economists, persons from the business community, and civil society members who have contributed to this Report and helped in its review. The information provided in this report does not necessarily represent the views of the Government of Pakistan, the United States Government (USAID), or the World Economic Forum. The World Economic Forum rankings are compiled in part from secondary sources, and no warranties or guarantees are provided as to their accuracy or completeness.
TABLE OF CONTENTS
Acronyms ........................................................................................................................... iv EXECUTIVE SUMMARY ...................................................................................................... v 1. PAKISTANS COMPETITIVENESS RANKINGS IN 2010 ............................................. 1 1.1 Overview of Pakistans Ranking on the Global Competitiveness Index ........................ 1 1.2 Overview of Pakistans performance on 12 competitiveness pillars ............................. 2 1.3 Notable achievements and challenges ........................................................................ 4 1.4 Pakistans performance against comparator countries ................................................. 7 1.5 Discussion of the 12 Pillars .......................................................................................... 8 1.6 Other World Economic Forum Reports: The Global Enabling Trade Report .............. 20 1.7 Conclusion................................................................................................................. 21 2. PAKISTANS OVERALL ECONOMIC SITUATION ........................................................ 22 2.1 Economic Performance ............................................................................................. 22 2.2 Drivers of Economic Growth in FY2010 ..................................................................... 23 2.3 Employment .............................................................................................................. 30 2.4 Capital Market Performance ...................................................................................... 31 2.5 Macroeconomic Constraints to Growth and Competitiveness .................................... 32 2.6 Microeconomic Constraint to Growth: Electricity ........................................................ 40 2.7 Global Trade Outlook................................................................................................. 42 2.8 Conclusion and Recommendations ........................................................................... 43 3. INSTITUTIONAL REFORMS FOR COMPETITIVENESS RECENT DEVELOPMENTS ........................................................................................................................................... 44 3.1 Why Institutions Matter for Growth and Competitiveness ........................................... 45 3.2 The State of Institutions in Pakistan ........................................................................... 48 3.3 Institutional Reform: Review of Recent Progress ....................................................... 58 3.4 Objectives and Framework for Institutional Reform .................................................... 61 3.5 Conclusion................................................................................................................. 75 BIBLIOGRAPHY ................................................................................................................ 76
PAKISTAN COMPETITIVENESS REPORT
LIST of FIGURES
Figure 1.1 Figure 1.2 Figure 1.3 Figure 1.4 Figure 1.5 Figure 1.6 Figure 1.7 Figure 1.8 Figure 1.9 Figure 1.10 Figure 1.11 Figure 1.12 Figure 1.13 Figure 1.14 Figure 2.1 Figure 2.2 Figure 2.3 Figure 2.4 Figure 2.5 Figure 2.6 Figure 2.7 Figure 2.8 Figure 2.9 Figure 2.10 Figure 2.11 Figure 2.12 Figure 2.13 Figure 2.14 Figure 2.15 Figure 2.16 Figure 2.17 Figure 2.18 Figure 2.19 Figure 2.20 Figure 2.21 Figure 2.22 Figure 2.23 Figure 2.24 Figure 2.25 Figure 2.26 Figure 2.27 Figure 2.28 Figure 2.29 Figure 2.30 Figure 2.31 Figure 2.32 Figure 2.33 Pakistan's Rank and Score on the Global Competitiveness Index GCI Rankings for Pakistan and five Comparator Countries Institutions Infrastructure Macroeconomic Stability Health and Primary Education Higher Education and Training Goods Market Efficiency Labor Market Efficiency Financial Market Sophistication Technological Readiness Market Size Business Sophistication Innovation Pakistan's GDP Growth (Percentage) GDP Growth in other Asian Countries (Percentage) Per Capita Real Income (US $) Sector Growth (Percentage) Sector Share in GDP (Percentage) Composition of GDP Growth Point Contribution of Consumption in Growth (Percentage) Point Contribution of Investment in Growth (Percentage) Investment and Saving as percentage of GDP Investment as percentage of GDP current market prices Total Foreign Investment Inflows (US$ Million) Total FDI in Pakistan (US $ Million) Point Contribution of Trade in Growth Agriculture Sector Growth Rate (Percentage) Services Sector Growth Rate (Percentage) Manufacturing Sector Growth Rate (Percentage) Workers Remittances (US $ Billion) Unemployment Rate (Percentage) Employment Trends (Million) KSE-100 KSE-100 Volume (Million) Total Liquid Foreign Exchange Reserves (US $ Billion) Net Foreign Exchange Reserves (US $ Billion) Expenditure as Percentage of GDP Revenue as Percentage of GDP Fiscal Deficit as Percentage of GDP Fiscal Indicators as Percentage of GDP Inflation and Growth (Percentage) Benchmark Policy Rate (Percentage) Pakistan Rupee to 1 US Dollar Exports, Imports and Trade Balance (MP US $ Million) Trade Deficit (US $ Billions) Terms of Trade (Base Year 1990-91 = 100) PAKISTAN COMPETITIVENESS REPORT
Pg. No 2 7 8 9 10 11 12 13 14 15 16 17 18 19 22 22 23 23 23 24 24 25 25 26 26 26 27 28 28 28 29 30 30 31 31 32 32 33 33 34 34 35 35 36 36 37 37
ii
Figure 2.34 Figure 2.35 Figure 2.36 Figure 2.37 Figure 2.38 Figure 2.39 Figure 2.40 Figure 2.41 Figure 2.42 Figure 2.43 Figure 3.1 Figure 3.2 Figure 3.3 Figure 3.4
Current Account Deficit (US $ Billion) Current Account Deficit as Percentage of GDP Pakistan's Debt Profile as Percentage of GDP EDL as Percentage of Foreign Exchange Earnings EDL / Foreign Exchange Reserves Ratio Electricity Supply and Demand Position 2008-2012 (MW) Energy Demand Forecasts by Fuel (MTOE) Indigenous Fuel Supply Forecasts (MTOE) World GDP Growth (Percentage) World Trade Growth (Percentage) Relationship between Institutional Strength and Economic Growth Efficiency of Legal Framework in Pakistan Judicial Independence Transparency Internationals Corruption Perception Index
37 37 38 39 39 40 41 41 42 42 45 51 53 56
LIST OF TABLES
Table1.1 Table 1.2 Table 1.3 Table 1.4 Table 3.1 Table 3.2 Table 3.3 Pakistans Rank and Score on the Global Competitiveness Index Largest Gains in Pakistans competitiveness Ranking in 2010 Largest Reversals in country rank for Pakistan 2010 Enabling Trade Index Rating Global Competitiveness Index (GCI) - Overall Institutions Ranking Pakistans Ranking on 21 Institution Indicators (GCI 2010) Problematic Factors for Doing Business
Pg. No 1 4 5 20 48 49 53 Pg. No 47 55
LIST OF BOXES
Box 3.1 Box 3.2 Pakistan: Economic Instability and the Need for Stronger Institutions National Finance Commission Award and the Challenges Ahead
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Acronyms
ADB ADP BISP CGT CSF EDL FBR FDI Asian Development Bank Annual Development Plan Benazir Income Support Program Capital Gains Tax Competitiveness Support Fund External Debt and Liabilities Federal Board of Revenue Foreign Direct Investment MTOE NCGR NFC NGP PCSIR PDL PPIB PPP PPRA FRDLA FY GCI GCR GDP GST IMF IPO IPR IRS KSE Fiscal Responsibility and Debt Limitation Act Fiscal Year Global Competitiveness Index Global Competitiveness Report Gross Domestic Product General Sales Tax International Monetary Fund Intellectual Property Organization Intellectual Property Rights Inland Revenue Services Karachi Stock Exchange PSF SBP SEZ SME SMEDA SPCR TIC UAE US VAT WEF WGI WWII Million Tonne of Oil Equivalent National Commission on Governance Reforms National Finance Commission National Governance Plan Pakistan Council of Scientific and Industrial Research Petroleum Development Levy Private Power Infrastructure Board Purchasing Power Parity Public Procurement Regulatory Authority Pakistan Science Foundation State Bank of Pakistan Special Economic Zones Small and Medium Enterprise Small and Medium Enterprise Development Authority State of Pakistan's Competitiveness Report Technology Incubation Center United Arab Emirates United States Value Added Tax World Economic Forum World Wide Governance Indicators Second World War
MMBTU Million British Thermal Unit MP Market Prices
iv
EXECUTIVE SUMMARY
Despite only a modest decline in its absolute numerical score, Pakistans ranking on the World Economic Forum Global Competitiveness Index fell from 101st place to 123rd place. This has placed Pakistan ahead of approximately 12% of the countries listed, down from 25% in the previous year. The rankings and scores, summarized in Chapter 1, provide policy makers and business leaders with a picture of Pakistans strengths and weaknesses. This decline is explained partially by the addition of new countries, changes in the sub-indicators measured, and methodological reasons. Six countries were added to this years report: Angola, Cape Verde, Iran, Lebanon, Rwanda, and Swaziland. Many of these newly-ranked countries outperform Pakistan in several areas, which has directly led to lowered ranks in some instances. In addition, many previous sub-indicators have been excluded from the GCI while new sub-indicators were added. Finally, there are many countries with scores very close to those of Pakistan, meaning that even a small change in Pakistans absolute score has a relatively large impact on country rankings. Although Pakistans score declined from only 3.58 to 3.50 (on a scale of 17), many countries are making improvements more quickly than Pakistan, something which also affects the ranking. That being said, the Report usefully points out both strengths and weaknesses and thereby provides guidance for policy priorities that must be urgently addressed. Critical areas of decline were largely related to macroeconomic policy, human resources, infrastructure and institutions. Labor market efficiency ranks very low, as do scores related to primary, secondary and tertiary enrollment rates. The debilitating energy and electricity situation also brings down Pakistans score in the infrastructure category, and in addition, the security situation is taking its toll on business. Of Pakistans lowest ten scores, all are related to security, macroeconomic policy, or human resources (see attached Excel spreadsheets): of the six categories that dropped the most this year, five were related to macroeconomic policy. Other business environment constraints are also evident. Pakistan scored relatively well in the areas of innovation and sophistication. These pillars, along with market size, continue to hold competitive advantages for Pakistan. It will be important to develop a strategy that leverages these advantages while addressing shortcomings in the key areas mentioned above. This decline brings many priority areas for action to the urgent attention of the policy makers, and can thus be seen in a constructive light. These opportunities, coupled with an improved performance in certain strategic indicators, provide distinct prospects for Pakistan to improve its competitiveness rankings. The review that follows highlights strengths and weaknesses in Pakistans economy. In the short term, Pakistans competitiveness ranking could be quickly improved if progress is made in bringing down inflation. However, the flood may temporarily put pressure on a number of macroeconomic indicators including inflation, government deficits, and the government debt.
The most important positive impacts on Pakistans competitiveness would come from improving the security situation, a greater investment in people, and improving the business environment. Dramatic increases in primary, secondary, and tertiary enrollment rates, especially focusing on female education, would also help significantly. Restoring and extending the electricity service in a reliable and cost-effective manner would be the single most important achievement in the area of infrastructure, followed by the continued expansion of cell phone networks throughout rural, as well as urban, areas. This report is designed to help policy makers, and to inform public-private dialogue leading to timely action. It is designed to inform the current dialogue among Pakistans leaders so that consensus can be reached on a comprehensive economic growth strategy leading to rapid poverty reduction. The economic rebuilding efforts should go beyond the mere rebuilding of yesterdays infrastructure and focus instead on 21st century infrastructure, skills, and policies that will enable Pakistanis to prosper. As Pakistan sets about the urgent task of recovery and rebuilding, it is given the opportunity to rebuild transportation, storage, telecommunication, and information infrastructure in ways that will transform rural areas and incorporate them into the knowledge economy. It has the opportunity to rebuild education and training infrastructures, to better address the human resource constraints evidenced in this report. The State of Pakistans Competitiveness Report can be used by Pakistans decision makers to disseminate their economic policy. The SPCR will contribute to a broader understanding of Pakistans current competitiveness relative to other countries. It will also encourage constructive action by all sectors of Pakistans society the Federal Government, provincial governments, private sector leaders, economists, and university sector leaders. While the SPCR benchmarks Pakistans performance, its objective is not simply to issue a report, but to motivate and stimulate effective action leading directly to economic growth, productivity, job creation, and the repositioning of Pakistan as one of the worlds most competitive emerging economies.
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CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN
1.
PAKISTANS COMPETITIVENESS RANKINGS IN 2010
For 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 Pakistans performance on the Global Competitiveness Index (GCI) and other internationally recognized reports related to Pakistans economic performance. The GCI is the most authoritative ranking of its kind having been published annually for thirty years by the Geneva-based World Economic Forum. Containing over 140 specific indicators, it is now applied in 139 countries. The report is based on a combination of hard data indicators and the results of the annual Executive Opinion Survey, tabulated by the World Economic Forum.
1.1 Overview of Pakistans Ranking on the Global Competitiveness Index

Despite only a modest decline in its competitiveness score, Pakistans ranking on the Global Competitiveness Index fell 22 points from 101st place to 123rd place. Released in September 2010, the Global Competitiveness Index included six new countries. 1 Pakistans recent shift from being amongst the lowest 25% of countries, to the lowest 12%, suggests that new entrants are not the only explanation for this decline. The absolute score fell modestly from 3.58 to 3.48 (on a theoretical scale of 17): in practice, only three countries fell below 3.0, and only 20 countries were ranked 5.0 or above. Nearly all countries fall between 3.0 and 4.9 with countries often bunching around certain scores. Therefore, relatively modest changes in absolute composite scores can lead to a change of five or ten places in the rankings. The lowest scores related to macroeconomic policy, security, and human resources. Large downturns were experienced in the pillars for health and primary education, infrastructure, and macroeconomic performance (see Figure 1.1). Many of the pillars that experienced downturns, such as macroeconomic stability, had individual sub-indicators that had improved substantially, such as the government debt, which fell, and national savings, which rose substantially. This years report emphasizes the areas where improvement is needed.
Table 1.1: Pakistans Rank and Score on the Global Competitiveness Index Pakistan fell from 101st to 123rd place despite a modest fall in its score from 3.6 to 3.5
GCR Report Rank Out of Hard Score
2007 2008 92 131 3.77
2008 2009 101 134 3.65
2009 2010 101 133 3.58
2010 2011 123 139 3.50
New entrants for 20102011 include Angola, Cape Verde, Iran, Lebanon, Rwanda, and Swaziland
1.2 Overview of Pakistans performance on 12 competitiveness pillars

The GCI uses 140 indicators to rank countries according to twelve competitiveness pillars. The impact each pillar has on the competitiveness ranking depends on the countrys stage of development, which is decided according to the economys reliance on: factors (unskilled labor, natural resources); efficiency (higher product quality and improved production process); innovation (ability to compete with new and unique products). Pakistan is currently classified as a factor-driven economy, meaning that emphasis is placed on the indicators related to institutions, infrastructure, health and primary education, and macroeconomic stability (see Figure 1.1). Improvements in these areas will lead to a substantial increase in Pakistans competitiveness score. Pakistan continues to exhibit strong competitive advantages in innovation and sophistication while facing ongoing challenges in many of the more fundamental and factor-driven indicators. Pakistans ranking for innovation (Pillar 11) and business sophistication (Pillar 12) continued to improve.
Figure 1.1: Pakistans Rank and Score on the Global Competitiveness Index
Pakistans ranking was explained by low scores in Pillars 1-5, Pillar 7 and Pillar 9
PILLAR
RANK 2009 2010

104 112 89 110 114 133 113 123 118 123 83 91 124 131 64 73 104 109 30 31 81 79 79 75 = = = = =
SCORE 2009 2010

3.3 3.3 3.1 2.8 3.8 3.2 3.9 4.3 2.9 2.9 4.0 3.9 3.5 3.5 4.2 4.1 2.9 2.9 4.7 4.6 3.8 3.7 3.0 3.0
1. Institutions BASIC REQUIREMENTS 2. Infrastructure 3. Macroeconomic Environment 4. Health and Primary Education 5. Higher Education and Training 6. Goods Market Efficiency 7. Labor Market Efficiency 8. Financial Market Development 9. Technological Readiness 10. Market Size
EFFICIENCY ENHANCERS
INNOVATION 11. Business AND Sophistication SOPHISTICATION 12. Innovation
Pakistan ranks below 100th place on 7 pillars. These include institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, labor market efficiency, and technological readiness. Absolute scores stayed the same for five pillars and improved in one pillar: Pakistans ranking often fell indicating that other countries are improving their competitiveness in these areas more rapidly than Pakistan.
1.3 Notable achievements and challenges

Pakistan scored some impressive year-on-year gains related to specific indicators (Table1.2). The national savings rate increased, while the government debt was reduced. Perceptions regarding judicial independence scored similarly impressive gains. Table 1.2 presents those indicators that have improved the most. Some macroeconomic policy indicators made impressive gains in rankings, most notably the national savings rate (+25) and government debt (+21), both of which experienced a substantial rise as compared to the previous year. However, these were not sufficient to overcome the negative effect of inflation and higher interest rate spreads. Innovation and finance showed strength in 2010. Noted improvements are seen in access to equity and loans (+13), and venture capital (+15). There has been continued growth in innovation-driven indicators such as firm-level technology absorption (+11), company spending on R&D (+13), and university-industry research collaboration (+11). Table 1.2 Largest Gains in Pakistans Competitiveness Rankings in 2010
Indicators
National savings rate Government debt (% of GDP) Judicial independence Venture capital availability Government surplus/deficit Buyer sophistication Company spending on R&D Ease of access to loans Quality of educational system University-industry research collaboration Firm-level technology absorption Production process sophistication
2008-2009
91 93 93 86 118 94 86 52 104 82 84 110
2009-2010
114 103 95 66 105 76 80 53 99 92 99 86
2010-2011
89 82 74 51 90 62 67 40 87 81 88 76
Difference (one year)

+25 +21 +21 +15 +15 +14 +13 +13 +12 +11 +11 +10
2 3
Taken from the WEF Global Competitiveness Report 2008-2009. Taken from the WEF Global Competitiveness Report 2009-2010. 4 Taken from the WEF Global Competitiveness Report 2010-2011.
The largest year-on-year declines in specific indicators in 2010, were related to security, macroeconomic policy, and human resources (see Table 1.3). Of these, macroeconomic policy was the most affected, claiming five of the six largest declines. Pakistans results were disappointing in areas such as inflation (-34) and interest rate spread (-30). The debilitating energy and electricity situation also brought down Pakistans score in the infrastructure category (-13). The cost of agricultural policies was also seen as worsening (-18). Although the total number of Internet users continues to increase in Pakistan, other countries are doing much more to connect people and so enable them to use the Internet. Pakistan has therefore fallen from 85th place to 100th place, which does not bode well for the countrys ability to compete in the 21st century knowledge economy.
Table 1.3 Largest Reversals in Country Rank for Pakistan 2010

Difference (one year) -34 -30 -28 -23 -18 -15 -15 -13 -13 -13 -13 -11 -11 -11 -10
Indicators Inflation (change in CPI) Interest rate spread Trade Tariffs/ Tariff barriers Rigidity of employment Agricultural policy costs Total tax rate Internet users Burden of government regulation Strength of auditing and reporting standards Quality of overall infrastructure Hiring and firing practices Organized crime Tuberculosis incidence (per 100K people) Flexibility of wage determination Transparency of government in policymaking
20082009 95 87 120 84 90 58 96 78 67 83 31 114 102 95 109
20092010 103 64 105 87 88 22 85 59 84 87 38 116 102 93 105
20102011 137 94 133 110 106 37 100 72 97 100 51 127 113 104 115
Labor market efficiency continues to be a constraint to Pakistans competitiveness. There was continued deterioration in Pakistans ranking related to hiring and firing practices (-13) and flexibility of wage determination (-11). Reversals in scores related to trade tariffs and trade barriers also declined significantly (-28). In addition, more general business environment rankings fell, such as the overall burden of government regulation (-13). Transparency of government in policy making also declined (-11). Perceptions regarding the incidence and business cost of organized crime showed a deterioration of -11, and Pakistan now ranks in 127th place. Less understandable are the lower scores for auditing and reporting standards, although these remain higher than many of Pakistans other scores. The Government of Pakistan has recently taken steps to strengthen auditing and reporting standards in Pakistan but these perhaps have yet to show their full impact.
1.4
Pakistans performance against comparator countries
Relevant comparator countries did not share Pakistans significant decline. To gain insight into Pakistans competitiveness rankings, it is useful to compare it to countries with which it shares an economic or geographic proximity, or countries which also have emerging economies with large populations. This report compares Pakistan with India, Indonesia, Brazil, Sri Lanka, and Indonesia (see Figure 1.2). With the exception of Brazil, these are all factor-driven economies located in Asia. Brazil is included because it is a large, emerging economy 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 previous year where it was ahead of only Bangladesh. This suggests that the factors negatively influencing Pakistans 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 as India and Brazil, where economic growth has remained robust. Bangladesh has improved its market share relative to Pakistan in the global apparel market, and Sri Lanka is also expected to have robust levels of growth, having now resolved the long-running threats posed by terrorism and insurgency.
Figure 1.2 GCI Rankings for Pakistan and five comparator countries Among comparator countries, only Pakistan has fallen sharply in the rankings
India Indonesia Brazil Sri Lanka Bangladesh Pakistan 0 20 40
-2 +10 -2 +17 -1 -22 60 80 100 120 140 2008 2009 2010 2011
1.5
Discussion of the 12 Pillars
PILLAR 1: INSTITUTIONS GCR report 20062007 5 Rank 79 Score
20072008 6 81
20082009 7 95 3.5
20092010 8 104 3.3
20102011 9 112 3.3
Figure 1.3 Institutions Institutional rankings remain low in Pakistan, especially those related to security
Strength of investor protection Wastefulness of government spending Burden of government regulation Judicial indepdendence Intellectual Property Protection Favoritism in decisions of government officials Public trust of politicians Diversion of public funds Protection of minority shareholders' interests Efficiency of legal framework in challenging Strength of auditing and reporting standards Ethical behavior of firms Efficiency of legal framework in settling disputes Property Rights Efficacy of corporate boards Transparency of government in policymaking Irregular payments and bribes Reliability of police services Business costs of crime and violence Organized crime Business costs of terrorism 0 20 40 60 80 100
2009-2010 2010-2011
120
140
Security-related concerns accounted for the four lowest sub-pillar scores: terrorism, organized crime, business costs of crime and violence, and the reliability of police services. Perceptions of lack of transparency, irregular payments, and similar issues, also lowered Pakistans rankings.
5 6
2007 rankings based on Draft Competitiveness Report for 2007 2008 rankings based on CSF State of Pakistans Competitiveness Report for 2009 7 Scores and rankings based on CSF State of Pakistans Competitiveness Report for 2009 8 Scores and rankings based on WEFs 2009-2010 Global Competitiveness Report 9 Scores and rankings based on WEFs 2010-2011 Global Competitiveness Report
Pakistan did see year-on-year improvements related to reduced wastefulness of government spending (+9), intellectual property protection (+9), and efficacy of corporate boards (+2), while all other factors experienced downturns. Two new indicators were introduced this year: strength of investor protection (a competitively-ranked strength at 27), and irregular payments and bribes (where Pakistan ranked 117). It should be noted that the indicators for this pillar are almost entirely based upon the Executive Opinion Survey, so this data provide more of a reflection of perceptions, than measurable, real-world data.
PILLAR 2: INFRASTRUCTURE GCR report 2006-2007 Rank 67 Score 3.36

Figure 1.4 Infrastructure
2007-2008 72
2008-2009 85 3.0
2009-2010 89 3.1
2010-2011 110 2.8
Electricity supply remains a key challenge to Pakistans overall infrastructure

Available seat kilometers Quality of railroad infrastructure Quality of roads Quality of port infrastructure Quality of air transport infrastructure Quality of overall infrastructure Mobile telephone subscriptions Telephone lines Quality of electric supply 0 20 40 60 80 100 120 140 2009-2010 2010-2011
Infrastructure in Pakistan continues to present an obstacle to economic competitiveness with electricity supply being the most damaging constraint. Constant load-shedding, an unreliable electricity supply, and the need for more costly private generators now impose a significant cost on the economy. Small businesses that have no generators suffer lower production levels. Airline transportation, with a high relative availability of seat kilometers, remains a competitive advantage, along with railroad infrastructure (ranked at 55). Quality of port infrastructure also maintained its rank from the previous year, due in part to the previously predicted gains from the recently opened, Port of Gwadar. Mobile telephone rates according to the Pakistan Telecommunications Authority were reported at 55.9% of the total population in 2008, with projections of 68.6% by the end of 2010. However, the rapid expansion of mobile telephones in other countries surpasses the diffusion of cell phones to date in Pakistan.
PILLAR 3: MACROECONOMIC STABILITY GCR report 2006-2007 2007-2008 Rank 86 101 Score
2008-2009 2009-2010 116 114 4.2 3.8
2010-2011 133 3.2
Figure 1.5 Macroeconomic Stability Macroeconomic indicators included both impressive advances and declines
Government debt (% of GDP) National savings rate, % of GDP Government surplus/deficit Interest rate spread Country credit rating Inflation (change in CPI) 0 20 40 60 80 100 120 140 2009-2010 2010-2011
Despite an impressive performance in reducing government debt, trimming the budget deficit, and boosting national savings, Pakistan suffered from increased inflation, high interest rate spreads, and a relatively low country credit rating. This pillar is made up entirely of hard data, providing an economic outlook that is not swayed by subjective opinions or survey results. Both government debt (+21) and national savings rate (+25) reversed their negative trends through a substantial turnaround. However, disappointing performances related to inflation and interest rate spread have led to an overall decline. This decline was strengthened by the introduction of a new indicator, country credit rating, for which Pakistan is ranked at 125th. The current interest rate spread of about 7.7%, close to the currently quoted figures of the State Bank of Pakistan, is indeed quite high, although this is part of the effort to tame inflation and will hopefully be reduced over time. Official inflation rates, although significantly lower than those cited by the WEF, were still running at 12.9% in August 2010, which are among the highest inflation rates globally and would still rank Pakistan among the ten worst performing countries for inflation, even using the current official inflation data. Pakistans deterioration in its underlying score for this pillar has been substantial, falling from 4.2 to 3.2 in one year. Country competitiveness scores theoretically range from 16, but in practical terms most countries fall in the 3s and 4s. A drop of a full point is quite large. This occurred despite progress related to the government debt and budget deficit. These indicators can be susceptible to sharp improvements with sound macroeconomic policy management in the relatively short term,if improvements can be made related to inflation, credit ratings, and interest rate spread.
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PILLAR 4: HEALTH AND PRIMARY EDUCATION GCR report 2006-2007 2007-2008 2008-2009 rank 108 115 116 score 4
2009-2010 113 3.9
2010-2011 123 4.3
Figure 1.6 Health and Primary Education Pakistan must improve its investment in people, if its economy is to be productive and competitive.
HIV prevalence (% of adults) Business impact of HIV/AIDS Quality of primary education Life expectancy in years Malaria incidence (per 100K people) Business impact of malaria Tuberculosis incidence (per 100K people) Business impact of tuberculosis Infant mortality ( per 1,000 births) Primary enrollment Education expenditure (as % of GNI) 0 20 40 60 80 100 120 140
2009-2010 2010-2011
Primary enrollment rates are indeed low in Pakistan. Although gross primary school education rates were 84.8% in 2008 according to the World Development Indicators of the World Bank, the net primary enrollment rate was only 66.1%. Net enrollment refers to only those in the age cohort, not those who are older than primary school age but are still in primary school. This means that Pakistan is only educating about two-thirds of its children with primary level educationa statistic that is far too low to be acceptable for a competitive economy and a competitive workforce. Pakistan ranks very well with regard to HIV prevalence but TB has been on the rise. While HIV has affected Sub-Saharan Africa, low rates in Pakistan prevail, although businesses perceive a more negative impact than the data seems to justify. The reported incidence of tuberculosis, on the other hand, has been on the rise. Pakistan ranks 105th on the life expectancy indicator with a current life expectancy of 66.5 years in 2010 (the World Bank recording a slightly higher figure of 67 in 2008), which places Pakistan at 105th place among the GCI ranked countries. Infant mortality was recorded at 71.9 per thousand in 2010 placing Pakistan at 123rd place as other countries are improving their infant mortality more rapidly than Pakistan.
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PILLAR 5: HIGHER EDUCATION AND TRAINING GCR report 2006-2007 2007-2008 2008-2009 Rank 104 116 123 Score 2.7 Figure 1.7 Higher Education and Training
2009-2010 118 2.9
2010-2011 123 2.9
Secondary and tertiary enrollment remains low for Pakistan, which has negative implications for the countrys workforce competitiveness.
Quality of mgmt schools Internet access in schools Quality of educational system Quality of math and science ed Local availability of specialized research Extent of staff training Tertiary enrollment Secondary enrollment 0 50 100 150
2009-2010 2010-2011
Pakistans score remained steady but unacceptably low for higher education. The fall of five ranks is largely explained by new entrants such as Iran, where education and training are more advanced. Many of Pakistans low scores (basic education, higher education, labor markets) are related to under-investment in human resources. The previously mentioned workforce and human resource needs of Pakistan make the higher education and training pillar an especially important one for driving competitive growth. A promising improvement was experienced in perceived educational system quality (+12), but declines were seen in tertiary enrollment (-5) and secondary enrollment (-8). These declines, alongside the fall in rankings for primary enrollment in the previous pillar, point to an overall drop in education enrollment for Pakistan. Natural disasters and the security situation have combined to interfere with the rapid expansion of normal educational enrollment and achievement in many rural areas. Only 32.9% of Pakistans children are receiving secondary education according to the WEF, which is corroborated by UNESCO and the World Bank. This low figure for educational enrollment brings down Pakistans rank to 125th place. Only 5% are enrolled at the tertiary level. The private sector is also under-investing in staff training. Reasons for this are many and complex: firms that compete on the basis of low cost and cheap labor have little incentive to invest in skills, and small family firms often fear that if they invest in training, their employees may be lured away by other businesses.
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PILLAR 6: GOODS MARKET EFFICIENCY GCR report 20062007 20072008 Rank 83 Score
20082009 101 3.9
20092010 83 4.0
20102011 91 3.9
Figure 1.8 Goods Market Efficiency Pakistan continues to offer a highly competitive tax environment, although tariff rates are a growing concern.
Total tax rate Extent and effect of taxation Buyer sophistication Extent of market dominance Time required to start a business Business impact of rules on FDI Effectiveness of anti-monopoly policy Intensity of local competition Degree of customer orientation Burden of customs procedures Number of procedures required to start a business Prevalence of trade barriers Agricultural policy costs Prevalence of foreign ownership Trade-weighted tariff rate 0 50 100
2009-2010 2010-2011
150
Pakistans score for goods market efficiency has remained relatively constant. Despite maintaining a comparatively consistent score, Pakistans rankings for goods market efficiency have fluctuated between 83 and 101 over the past several years. Although the current score is identical to the 20082009 score, it places Pakistan ten ranks higher in the index, as other countries have stepped back from liberal policies in the wake of the global economic downturn. Total tax rates profit tax, labor tax, property tax, turnover taxes, corporate taxes and other taxes are extremely low in Pakistan, although this is a mixed blessing. Pakistans tax revenues are close to 1011% of GDP, which is extremely low. While businesses and individuals enjoy the benefit of low taxation and Pakistans score benefits from this, it is widely believed that this low rate of taxation is unsustainable and thus makes Pakistan dangerously dependent on foreign transfers. Tariff and trade barriers deserve closer examination and there are still too many procedures that have to be followed in order to start a business, meaning unnecessary obstacles to entrepreneurs who could be creating jobs in the formal private sector.
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PILLAR 7: LABOR MARKET EFFICIENCY GCR report 20062007 20072008 Rank 113 Score
20082009 121 3.8
20092010 124 3.5
20102011 131 3.5
Figure 1.9 Labor Market Efficiency Labor market efficiency is one of Pakistans key challenges if jobs are to be created in the formal private sector. Pakistans ranking in this pillar is quite low, and female participation in the labor force also remains low compared to most other countries.
Hiring and firing practices Brain drain Reliance on professional management Pay and productivity Flexibility of wage determination Cooperation in labor-employer relations Rigidity of employment Redundancy costs Female participation in labor forces Firing costs 0 20 40 60 80 100 120 140 2009-2010 2010-2011
Pakistan could substantially improve its competitiveness ranking by implementing labor market reforms. Formal companies face substantial compliance costs not faced by informal companies, and labor market reforms could improve the prospects of job creation in the formal private sector. Pakistans rankings in labor market efficiency fell by 7. Aside from an improvement in brain drain (+4) and improved perceptions regarding the rigidity of employment (-23), the decline in rankings was largely consistent across all indicators. These low scores are confirmed by other studies such as the Doing Business Report where Pakistan ranks 146th (out of 183 countries) in the Employing Workers category, which includes difficulty of hiring, rigidity of hours, difficulty of redundancy and cost of redundancy. Low labor force participation also brings down Pakistans score. Pakistan has one of the lowest rates of female participation in the workforce. Furthermore, brain drain is a problem, with many Pakistanis having to emigrate to find economic opportunities.
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PILLAR 8: FINANCIAL MARKET SOPHISTICATION GCR report 20062007 20072008 20082009 Rank 65 71 Score 4.2
20092010 64 4.2
20102011 73 4.1
Figure 1.10 Financial Market Sophistication The financial market is a relative bright spot for Pakistan but broader access to financial services is needed.
Ease of access to loans Financing through local equity market Venture capital availability Legal rights index Regulation and security exchanges Restriction on capital flows Affordability of financial services Soundness of banks Availability of financial services Strength of investor protection Financial market sophistication 0 20 40 60 80 100 120 140 2009-2010 2010-2011
Access to loans, equity market finance, and venture capital availability have been notable bright spots in Pakistan. Small declines were seen in the legal rights index (-2), regulation and security exchanges (-1) and soundness of banks (-3), while most indicators on capital and financing improved their rankings. Over the past year this pillar has added two new sub-indicators, both of which are not competitive for Pakistan (affordability and availability of financial services), and excluded two others of which one was competitive (strength of investor protection and financial market sophistication). This has contributed to the overall decline in rank and score. Interest rates and interest rate spreads noted in the macroeconomic pillar, while not shown here, are areas where future progress can be made. These scores indicate relative confidence in Pakistans financial sector and in the regulation of security exchanges. Further modernization of the financial sector and expanding the (well-supervised) access by more Pakistanis to financial services, could further improve the situation.
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PILLAR 9: TECHNOLOGICAL READINESS GCR report 20062007 20072008 20082009 Rank 89 89 100 Score 2.7
20092010 104 2.9
20102011 109 2.9
Figure 1.11 Technological Readiness Despite ongoing improvements in the pillars for innovation and sophistication, Pakistans technological readiness remains quite low.
Firm-level technology absorption Availability of latest technologies Internet users FDI and technology transfer Broadband internet subscribers Internet bandwidth Personal computers Mobile telephone subscribers Laws relating to ICT 0 20 40 60 80 100 120 140 2009-2010 2010-2011
Pakistans unchanged score led to a fall of five country ranks. As other countries have moved rapidly to expand Internet access for their population, Pakistans rank has fallen behind (-15) with only 11.3% of the population having access, according to the International Telecommunications Union. FDI and technology transfer also fell (-14). However, rankings rose for firm-level technology absorption (+11) and availability of the latest technologies (+3). This pillar experienced significant restructuring, with the exclusion of several sub-indicators (personal computers, mobile telephone subscribers, laws relating to ICT) and the introduction of a new one (internet bandwidth). Pakistan will need to expand Broadband Internet access, facilitate access to computers, and ensure the requisite education and training in schools. Without urgent attention to computer literacy, and without an IT infrastructure, Pakistan will fall behind neighboring countries in technological readinessan area essential for competitiveness in the 21st century.
16
PILLAR 10: MARKET SIZE GCR report 20062007 Rank Score
20072008 28
20082009 29 4.6
20092010 30 4.7
20102011 31 4.6
Figure 1.12 Market Size Pakistans large domestic market continues to be among its greatest assets in global economic competitiveness although access to foreign markets should be aggressively pursued.
Domestic market size index 2009-2010 Foreign market size index 0 20 40 60 80 100 120 140 2010-2011
Pakistans domestic market is among its greatest strengths. Brazil, China, and India have been able to maintain high growth rates during the global economic downturn by ensuring robust domestic demand. Improvements in the business environment can help enable local firms to respond effectively to growing domestic demand, with both greater efficiency and innovation. The market size pillar also reflects access to adjacent or overseas markets under favorable trade agreements and here Pakistan fares less well. Despite the political and security obstacles involved, normalized trade between Pakistan and India must be addressed at some point. This would open one of the worlds largest markets to Pakistani exporters while introducing efficiencies and providing other goods more cheaply to Pakistani consumers. Pakistans score would be higher, and Pakistans exports would receive a considerable boost if there were normalized trade relations with India. Pakistan should pursue favorable trade agreements with all-important trading partners. Pending legislation that would allow Pakistan duty-free access to the US market for products manufactured in Reconstruction Opportunity Zones (ROZs) has been tied up in Congress and is unlikely to be passed in an election year. There has also been talk of reviving the case for favored access for Pakistans exports because of the recent flood, and because of joint efforts to address regional security. The UK is also considering ways to strengthen UK-Pakistan trade. Trade with China and Central Asia will continue to expand.
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PILLAR 11: BUSINESS SOPHISTICATION GCR report 20062007 20072008 Rank 66 79 Score
20082009 87 3.8
20092010 81 3.8
20102011 79 3.7
Figure 1.13 Business Sophistication Pakistan does relatively well in competitiveness indicators related to business and industry cluster development.
State of cluster development Value chain breadth Production process sophistication Nature of competitive advantage Willingness to delegate authority Local supplier quantity Control of international distribution Extent of marketing Local supplier quality 0 20 40 60 80 100 120 140 2009-2010 2010-2011
Last years rankings reversed a downward trend of the previous four years for the business sophistication pillar, and the current rankings have continued this reversal with the rankings improving by 2. With all nine business sophistication indicators coming from the Executive Opinion Survey, this pillar is an important tool in understanding perceptions of the private sector actors in Pakistan. With the exception of control of international distribution (-8) and local supplier quality (-7), all indicators improved their ranking and contributed to an overall increase in rankings. The state of industry cluster development was ranked relatively high. This may be due in part to conscious industry cluster development strategies implemented in recent years by the pioneering private-public partnerships related to dairy, gems and jewelry, marble and granite, horticulture, leather, sports goods, and other areas. The innovative programs implemented by SMEDA have brought industry clusters together and provided support for implementing strategic initiatives designed to improve the competitive position of these Pakistani industries in the global markets. Pursuing an intelligent strategy, the Government of Pakistan has not tried to create clusters or pick winners and losers, but has sought to expand cluster development organically and strengthen the value chain linkages within existing industries.
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PILLAR 12: INNOVATION GCR report 20062007 Rank 60 Score Figure 1.14 Innovation
20072008 69
20082009 82 3.0
20092010 79 3.0
20102011 75 3.0
Pakistan continues to score well in terms of innovation, with the majority of subindicators improving in rank.
Capacity for innovation Company spending on R&D Quality of scientific research institutions Availability of scientists and engineers University-industry research collaboration Government procurement of advanced technology products Utility patents 0 20 40 60 80 100 120 140 2009-2010 2010-2011
Pakistans ranking in innovation has been relatively strong over the last five years and its ranking improved this year from 79th to 75th place. This may possibly reflect the recent initiatives by the Higher Education Commission to support innovation and universityindustry linkages that could result in greater commercialization of the work being done by research institutes and university faculties. The Government of Pakistan also recently brought together some fifty private and public sector leaders in innovation to help develop a national innovation strategy with specific policy recommendations. Pakistan has recently focused on developing a national innovation strategy. Coordination and cooperation among the triple helix of government, industry, and universities will help continue to foster further strength in this area. Linking schools of design with schools of engineering and with industry will further strengthen innovation, as will stronger protection of intellectual property rights and support for patents and proof-ofconcept stage innovations that provide the key bridge between invention and commercialization.
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1.6 Other World Economic Forum Reports: The Global Enabling Trade Report
Pakistans overall score remained steady at 3.4, but its rank fell from 100th to 112th place among 125 countries, suggesting that other countries are improving their trade situation more rapidly. The third Global Enabling Trade Report was published in May 2010. This report measures the extent to which various economies have incorporated the necessary factors to enable trade and identifies where improvements are needed. The report mirrors Pakistans recent lackluster performance in exports, but shows how it could be 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 of trade between Pakistan and India, whatever the political and security obstacles, takes a major toll on Pakistans market access. Efforts to secure duty-free entry to the US market, perhaps through Reconstruction Opportunity Zones (ROZs), remains bottled up in the US Congress and it is unclear whether a broader appeal for the entry of Pakistani products to the US market will be successful in a US election 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 trade concessions where possible with its major trading partners.
Table 1.4 Enabling Trade Index Rating 2009 rank (out of 121) 100 100 111 111 63 56 57 80 80 56 80 98 102 76 112 2010 rank (out of (125) 112 120 73 60 69 100 92 72 91 97 117 80 125
Overall index Market access 1. Tariff and non-tariff barriers 2. Proclivity to trade Border administration 3. Efficiency of customs administration 4. Efficiency of import-export procedures 5. Transparency of border administration Transport and communications infrastructure 6. Availability and quality of transport infrastructure 7. Availability and quality of transport services 8. Availability and use of ICT Business environment 9. Regulatory environment 10. Physical security
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1.7 Conclusion
The security situation, electricity shortages, low educational attainment, and continued constraints in the business environment reduced Pakistans competitiveness. Pakistan cannot be globally competitive when only two-thirds of its people are in primary education and one-third in secondary education. Load-shedding and inadequate electricity continues to take its toll on productivity. Most importantly, the lack of security related to terrorism, civil conflict, and crime are taking their toll on business. The SPCR 2010-11 highlights how these challenges may be effectively addressed, which could result in a significant improvement if the necessary measures are taken. The reduction in Pakistans rank is predominantly based on the feedback from Pakistans own business community and therefore reflects the real challenges that must be addressed if Pakistan is to successfully arrest this decline. These issues are cross-cutting and improvement of one will promote the growth of others. It is also important for Pakistan to continue to highlight and promote those areas in which it is consistently competitive, such as innovation and sophistication. A comprehensive strategy that improves upon key challenges while leveraging competitive strengths will enable Pakistan to improve its overall competitiveness ranks. It is hoped that this chapter will have helped such a strategy to become a reality. The Government of Pakistan should analyze how to dramatically improve its competitiveness rankings and encourage a dynamic economy. Saudi Arabia has recently focused on improving its competitiveness scores leading to important legal and regulatory reforms. Other countries have adopted comprehensive strategies and policies leading to high rates of growth. Some of these measures, such as inflation rates and interest rate spreads, could be improved very quickly with sound economic policies while others, such as the quality of educational institutions, may take more time. It is hoped that this report will encourage constructive public-private dialogue on how to address the urgent constraints identified in the specific areas noted above. The importance of this report is not to document the rise and fall of indicators, but rather to call attention to urgent priorities that can be addressed. The purpose of this report is to create awareness, inform policy, and provide constructive inputs as decisions are taken regarding government budget priorities and strategic business decisions. With timely action by Pakistans public, private, and academic sectors, these challenges can be addressed and measurable progress can be made over the course of the next year. The Competitiveness Support Fund stands ready to support this effort as a partner.
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CHAPTER 2: PAKISTANS OVERALL ECONOMIC SITUATION
2. PAKISTANS OVERALL ECONOMIC SITUATION

2.1 Economic Performance
Pakistans GDP growth recovered from its sharp slide to 1.2% in FY2009 and rose to 4.1% in FY2010. This was still much lower than in recent years and is not sufficient to make significant improvements in living standards. Pakistans growth grew significantly in the mid2000s but it has faltered recently, although a notable increase has been realized in 20092010 (Figure 2.1). Figures 2.1 and 2.2 10
Pakistan's GDP Growth (%)

9.0 7.5 3.9 2.0 4.7 3.1 5.8 6.8 3.7 4.1 1.2
12.0 10.0 8.0 6.0 4.0 2.0 0.0
GDP Growth in Other Asian Countries (%)
2006 Bangladesh Sri Lanka
2007 India China
2008
2009 Indonesia Pakistan
Pakistan is under-performing relative to nearby Asian economies (Figure 2.2). Several common explanations for Pakistans low growth rates are not valid when compared to nearby 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 has remained high despite the global financial crisis. Sri Lankas growth remained relatively robust despite the fact that it too faced a major civil war, which required military mobilization in an all-out effort to restore national sovereignty, defeat terrorism by Tamil Tigers, and restore peace to the citizenry. War does not necessarily result in economic contraction and in many cases it can stimulate economic growth as witnessed during World War II. Living standards in Pakistan hit a plateau and are now growing more slowly. Robust rates of economic growth and job creation must be achieved if Pakistan is to reduce poverty levels and improve the standards of living for Pakistanis. However, income per-capita, after rising significantly, has now slowed. Pakistans population growth means that it must achieve robust rates of growth for living standards to improve on a per-capita basis.
10
Pakistan Economic Survey (2008-09: 6-7). Also see Pakistan Economic Survey (2007-08: Table 1.3) and Economic and Social Indicators (2007-08), Pakistan Economic Survey (2009-10: 2). http://finance.gov.pk/survey_0910.html, for GDP growth rates in Asia see World Development Indicators 2010.
22
Figure 2.311 Per Capita Real Income (US $)

1200 1100 1000 900 800 700 600 500 400
669 526 501 503 582
733
836
921
1038
1095 1018
2.2 Drivers of Economic Growth in FY2010

Manufacturing and services contributed to economic growth. In FY2010 the 4.1% of GDP growth was achieved mainly by a 5.2% expansion in the manufacturing sector, and a 4.6% increase in services, while agriculture grew by only 2%. In manufacturing, both large and small-scale enterprises have played a role growing 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 as wholesale and retail trade (5.1%). Sector contribution to GDP growth is shown in Figure 2.4. The services sector now constitutes over 50% of Pakistans GDP (Figure 2.5). Figure 2.4 and 2.5 12 Sectoral Growth(%)
20 15 10 5 0 -5 60 50 40 30 20 10 0 1969-70 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Agriculture Industry Services Agriculture Industry Services
Sectoral Shares in GDP (%)
11 12
Pakistan Economic Survey (2008-09:14) and Pakistan Economic Survey (2009-10: Table 1.5). Pakistan Economic Survey (2009-10: Table 1.2 and Table 1.3)
23
GDP growth in FY2011 is expected to remain modest at 4.5%. 13 Estimates currently predict a 3.8% growth in agriculture, a 5.6% growth in manufacturing, and a 4.7% growth in services. 14 This rate of growth is significantly lower than that achieved earlier in the decade. This earlier high growth resulted from economic reforms including privatization, deregulation and liberalization, robust levels of private investment, strong growth in remittances, the US government-led Paris Club rescheduling of Pakistans USD 12 billion debt on exceptionally favorable terms, and substantial international economic assistance, including direct assistance from the US Government in the form of USD 3.1 billion in economic aid, and USD 8.1 billion in security-related aid during 200208. 15 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 contributed significantly to growth, raising questions regarding the international competitiveness of Pakistans industries. 16 While 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 decline in imports, rather than an increase in exports. Total investment made a negative contribution of 0.3 percentage points, while net exports contributed a meager 0.6 percentage points to growth.
Figures 2.6 and 2.7 17 Composition of GDP Growth (%)

9.4 7.2 4.7 2.3 1.9 3.5 4.0 12 10 8 6 4 2 0 -2 -4 -6 Consumption Net Exports Investment GDP MP Private Consumption Total Consumption Public Consumption
10 8 6 4
Point Contribution of Consumption in Growth (%)
2 0.9 0 -2 -4
For details see Aazim, M., Economy Grows Amid Lingering Concerns. Dawn. May 31, 2010. http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-andbusiness/economy-grows-amid-lingering-concerns-150 14 For details see Kiani, K., Risks Embedded in Making Budget. Dawn. May 31. 2010. http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/risksembedded-in-making-budget-150 15 For details see Wadhams et. al., (2008), p.4. 16 See Pakistan Economic Survey (2007-08: 9). Also see, Pakistan Economic Survey 2008-09, Table 1.6. 17 Pakistan Economic Survey (2009-10: Table 1.4); for point contribution of consumption, investment, and net exports to GDP growth see Pakistan Economic Survey (2008-09: 12), and authors calculations based on Pakistan Economic Survey (2009-10: Table 1.4)
13
24
Domestic savings are extremely low and have consistently lagged behind the investment needs of the economy. The domestic savings rate fluctuated at around 15% of GDP over the last decade before declining to 9.9% in FY2010 (see Figure 2.8 and 2.9). Low domestic savings are partly due to very low Government tax collection. Investment rates are also low. Gross Fixed Capital Formation has decreased by -0.6% after increasing 5.5% from FY2008 to FY2009. There has been lower private sector investment in manufacturing, electricity, gas, transportation, communications, finance and insurance. On the other hand, government fixed investment has recorded an increase of 9.8%. 18 Figures 2.8 and 2.9 19 Point Contribution of Investment in Growth (%) Investment and Saving as % of GDP (MP)
4 3 2 1 0 -1 -2 -3
25 23 21 19 17 15 13 11 9 7
Fixed Investment Change in Stocks
Total Investment
Total Investment
Domestic Saving
Public and private investment has fallen off sharply from the higher levels of preceding years. After increasing from around 17% of GDP in FY2003, to a record high of almost 23% of GDP in FY2007, total investment 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 investment and for social and infrastructure development, is not only low, but also decreased as a percentage of GDP during the last three years (Figure 2.9). 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 over the same period (see Figure 2.10).
18 19
Pakistan Economic Survey (2009-10: 5) Pakistan Economic Survey (2008-9: 5), authors calculations based on Pakistan Economic Survey (2009-10: Table 1.4) Economic and Social Indicators, Pakistan Economic Survey (2009-10).
25
Figure 2.1020 Investment as % of GDP (MP)

25 20 15 10 5 0
Fixed Investment Private Investment
Public Investent Total Investment
Foreign direct investment (FDI) has been pivotal in driving recent growth by bridging the chronic saving-investment gap, while financing the current account deficit. Nevertheless the total flow of foreign investment in Pakistan has been consistently declining since FY2008. After reaching USD 5.4 billion in 2008, FDI has fallen to just over USD 2 billion for FY2010. During the first eight months of FY2010, FDI declined by USD 1.5 billion, or 52.8%. According to the most recent figures, FDI for 2010 stands at USD 2.2 billion as compared to USD 3.7 billion for FY2009 (see Figures 2.11). 21
Figures 2.11 and 2.12 22 Total Foreign Investment Inflows (US $ Billion)
8 7 6 5 4 3 2 1 0
Total FDI in Pakistan (US$ Million)

6000 5000 4000 3000 2000 1000 0
Pakistan Economic Survey (2008-09: 15), and Economic and Social Indicators, Pakistan Economic Survey (2009-10). For details see Business Recorder. March 16, 2010. http://www.brecorder.com/index.php?id=1031399&currPageNo=1&query=&search=&term=&supDate= 22 Pakistan Economic Survey Statistical Appendix (2007-08: 77-79), Mid-year Review of Economic Situation (JulyDecember 2008: 11-12) Economic Survey Statistical Supplement. http://www.finance.gov.pk/admin/images/survey/chapters/Chapter1 percent2008-09.pdf and State Bank Pakistan Economic Data http://sbp.org.pk/ecodata/index2.asp
21
20
26
Despite increasing openness, Pakistan has failed to achieve export competitiveness. The countrys export base remains narrow and undiversified, hindering its development as a long-term driver of growth. Five items (cotton, leather, rice, synthetic textiles and sporting goods) account for almost two thirds of Pakistans total exports: cotton and textiles alone account for more than half of Pakistans total exports. 23 As noted and demonstrated in Figure 2.13, net exports contributed only 0.6% to GDP growth. Achieving export competitiveness remains a key challenge for Pakistans policy makers.
Figure 2.13 24 Point Contribution of Trade in Growth

6 5 4 3 2 1 0 -1 -2 -3 -4 -5
Exports Imports Net Exports
A vibrant agricultural economy is very important in mitigating rural poverty but its overall growth has been quite modest despite the volatility of its subcomponents and weatherrelated fluctuations. Fishery and forestry performance has been quite volatile, but as mentioned earlier, livestock performed relatively well in FY2010 compared to agriculture. The performance of major crops has been highly volatile during the decade, 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 horticultural crops, floriculture and value-addition.
23
Pakistan Economic Survey (2008-09: 120). The other major export items are rice, fish products, leather goods, surgical instruments, sporting goods, light engineering goods, and petro products 24 Pakistan Economic Survey (2008-09: 5) and authors calculations based on Pakistan Economic Survey (2009-10: Table 1.4)
27
Figure 2.1425 Agriculture Sector Growth Rate (%)

25 15 5 -5 -15 -25 -35
Agriculture Livestock Major Crops Fishery Minor Crops Forestry
Although the services sector continues to be the mainstay of Pakistans growth, finance and insurance have been extremely volatile. The wholesale and retail trade sector was also adversely affected by the global economic downturn (Figure 2.15). In the manufacturing sector, small-scale manufacturers fared relatively better than large-scale manufacturers in the most recent economic downturn (Figure 2.16).
Figure 2.15 and 2.16 26 Services Sector Growth Rate (%)

30 20 10 0 -10 -20 -30
Services Sector Transport, Storage &Communication Wholesale & Retail Finance & Insuranc
45 35 25 15 5 -5 -15
Manufacturing Sector Growth Rates (%)
Manufacturing
Large Scale
Small Scale
25
Authors calculations based on Pakistan Economic Survey (2009-10:2-3) and Pakistan Economic Survey (2009-10: Table 1.3) 26 Pakistan Economic Survey (2009-10: Table 1.3)
28
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 engine of growth despite its natural resource advantages and abundance of labor. China and Bangladesh however gained market share after the expiration of textile quotas in 2005 while the Pakistani industry has struggled with comparatively high interest rates, labor productivity issues, uneven electricity supply, costly logistics and other unfavorable aspects of the business environment. In FY2009 the manufacturing sector contracted by 3.7% as compared to 4.8% expansion in FY2008 and the annual average of 7.8%. 27 Manufacturing sector performace greatly depends on largescale manufacturing growth, which has stagnated 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. The increase in per capita income noted earlier benefitted from over USD 6 billion in remittances from workers abroad. 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 suggesting USD 15 billion by 2015: Pakistan is the worlds 12th largest recipient of remittances. Almost 80 % originate from North America, Saudi Arabia, and the United Arab Emirates (UAE). 28 In 2007, Pakistan received USD 37 per capita in remittances, compared with USD 33 for South Asia. 29 New steps taken by the State Bank Pakistan (SBP) and the Ministry of Finance, such as launching the Pakistan Remittance Initiative to attract greater amounts of remittances through normal banking channels, have also helped to substantially increase these inflows. 30 Figure 2.1731 Workers Remittance - US $ Billion
7.8 8.9
4.2 3.9 4.2 4.6 1.4 1.5 1.1 1.0 1.1 2.4
5.5
6.5
0.8 0.9
27
It is noted that the manufacturing sector has been hard hit by international and domestic factors. Political instability and frequent eruptions of incidents detrimental to law and order have created an uncertain environment resulting in loss of working hours. This sector has also fallen victim to the acute energy shortages. Continuous power breakdowns are preventing industries from operating at far less than their optimal level. In unison with the increasing cost of doing business, all these factors have caused a slowdown in output (Pakistan Economic Survey (2008-09: 9). 28 The two largest regions accounting for the bulk of the remittances into Pakistan are North America and the Gulf. Any protracted downturn in the US will also drive international commodity prices lower, especially oil prices. (Planning Commissions Panel of Economists, October, 2008: 18). 29 http://hdrstats.undp.org/en/countries/country_fact_sheets/cty_fs_PAK.html 30 Pakistan Remittance Initiative offers special incentives to all overseas entities remitting between US$100 million and US$400 million will be reimbursed 0.50 percent as marketing expenses. The time it takes to deliver remittances to beneficiaries has also been reduced. 31 Pakistan Economic Survey (2007-08: 146 and 2008-09: 131-132) and Pakistan Economic Survey (2009-10:Table 7.9)
29
2.3 Employment
Unemployment increased to 5.5%, which is low by historical standards although anecdotal evidence suggests this may understate the current situation. The Government has sought to mitigate the effects of the economic downturn by establishing the Benazir Income Support Program (BISP), which provides cash transfers to poor and vulnerable households. 32 Slow implementation, fiscal pressures, and stabilization requirements may limit the ability of programs like BISP to fulfill its goals. Robust levels of economic growth, of from 68% may be required to accommodate new entrants to the labor force while addressing redundant labor in agriculture and responding adequately to unemployment and underemployment. 33 Figures 2.18 and 2.19 present the employment trends. 34 Figures 2.18 and 2.19 35 Unemployment Rate (%)
9 8 7 6 5 4 Total Rural Urban
6.1 6.1 6.0 6.1 7.8 7.8 8.3 7.7 7.6 6.2 5.5 5.2 5.2
Employment Trends (Mn)

4 3 2 1 0
Small and medium enterprises (SMEs), that account for nearly 99% of the more than 3.2 million business enterprises in Pakistan, have a strong potential to become the key engine of job creation. 36 Construction and domestic commerce also have great potential to create rapid growth.
While making the Budget 2009-10 Speech, Minister of State for Economic Affairs, Hina Rabbani Khar, reiterated the governments commitment to transparent implementation of BISP. The Minister argued, I hold out an assurance that the government is committed to ensuring complete transparency in the management of BISP. A census would be completed within three months in 16 districts of Pakistan as a pilot to bench mark incomes. This would be extended to the entire country within the calendar year. The Benazir Income Support cards would serve as vehicles of transparent management and addressing the needs of the vulnerable (Ibid., P 11). 33 Dr. Salman Shah, the former Finance Minister of Pakistan argued that Economic growth is a question of life and death for our country. If we have to eradicate poverty and provide employment to the work force entering the job market every year, our GDP should grow by eight per cent a year. At two per cent growth rate we are only adding to the already large pool of the poor and the unemployed. For details see Jamal, N., Inhospitable Climate for Growth. Dawn. May 03, 2010. http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-andbusiness/inhospitable-climate-for-high-growth-350 34 Pakistan Economic Survey (2008-09: 14) and Pakistan Economic Survey (2009-10: Table 1.5), For Workers Remittances see Pakistan Economic Survey (2007-08: 146 and 2008-09: 131-132) and Pakistan Economic Survey (2009-10:Table 7.9) 35 Pakistan Economic Survey Economic and Social Indicators (2009-10) and Labor Force Survey 2008-09. 36 For a useful account of the potential role of SMEs in job creation and poverty reduction see Khawaja, S., Unleashing the Potential of SME Sector with a Focus on Productivity Improvement. The Author is former CEO of Small and Medium Enterprise Development Authority and serving as Federal Secretary in the Government of Pakistan. Paper presented at Pakistan Development Forum, 2006. http://www.scribd.com/doc/27519866/Unleashing-the-Growth-Potential-of-SMEs-inPakistan-Through-Productivity-Enhancement
32
30
2.4 Capital Market Performance

The KSE has recovered somewhat from its severe economic contraction. The global financial crisis, the volatile political and security situation, and the growing specter of low growth turned investor sentiments sharply negative. 37 This uncertainty and low confidence took its toll on the capital markets and the KSE-100 index succumbed in March 2008. The index fell by 40% in FY2009, declining to around 5,800 points by February 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 on the market and may even promote stability and long-term investment. 38
Figures 2.20 and 2.21 39
KSE 100
16000 14000 12000 10000 8000 6000 4000 2000 0
Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10
KSE 100 Turnover

400 350 300 250 200 150 100 50 0 Million
The World Bank in its "Global Economic Prospects-2010" noted that investors are continuing to exit Pakistan due to concerns over its rising domestic and external imbalances. See Business Recorder, 22 January, 2010. http://www.brecorder.com/index.php?id=1011036&currPageNo=1&query=&search=&term=&supDate= 38 Jamal noted that the capital gains tax on stock trading has initially been levied for two years at 10 per cent where holding period is less than six months and at 7.5 per cent where holding period exceeds six months but is less than a year. The tax will not be charged where equity holding period is over 12 months. The exemption has been allowed in order to encourage long-term investment in the equities market and promote savings and capital formation. For details see Jamal, th N., Dividends of Capital Gains Tax. Dawn. April 29 , 2010. http://www.dawn.com/wps/wcm/connect/dawn-contentlibrary/dawn/in-paper-magazine/economic-and-business/dividends-of-capital-gains-tax-130 39 For Karachi Stock Exchange 100 Index see http://en.wikipedia.org/wiki/KSE_100_Index.
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2.5 Macroeconomic Constraints to Growth and Competitiveness

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. 40 Foreign exchange reserves have been rebuilt to reach USD 15 billion in January 2010, with the help of IMF funding and strong workers remittances. By agreement, a total of USD 11.3 billion will be disbursed, of which USD 7.3 billion has been already received. 41 IMF assistance has helped to allay fears of sovereign default, and has stemmed capital flight and currency depreciation.
Figures 2.22 and 2.23 42 Total Liquid FX Reserves

18000 16000 14000 12000 10000 8000 6000 4000 2000 0 15000 10000 5000 0
Net Foreign Exchange Reserves
Net Reserves with SBP Net Reserves with Banks
However, Pakistan has a major imbalance between fiscal revenues and expenditures. Taxes declined to 9% 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 other developing countries and much higher in some. This is in part due to the burden of taxes carried by manufacturing with agriculture and services not fully incorporated into an equitable tax system. 43 The gap between development and non40
For details see IMF to Lend Pakistan $3.2 Billion More to Support Social Costs, Build Reserves. IMF Survey Online. August 7, 2009. http://www.imf.org/external/pubs/ft/survey/so/2009/car080709b.htm 41 http://www.imf.org/external/np/sec/pr/2010/pr10326.htm 42 State Bank of Pakistan Economic data. www.sbp.org.pk/ecodata/forex.pdf. 43 According to the Economic Survey of Pakistan, the government recognizes the need to broaden the tax base and reduce marginal tax rates which would stimulate investment and production. This would also promote voluntary tax compliance. Broadening of the tax base will also ensure the fair distribution of the tax burden among various sectors of the economy. The overall services sector including wholesale and retail trade as well as agriculture, are potential candidates for broadening of the tax bases (2007-08: 64). In order to broaden the tax net, the Planning Commissions Panel of Economists suggested the imposition of a number of taxes including: i) services tax per the Indian model, ii) excise duty on non-essential consumer items and durables, iii) provincial government to impose capital gains tax on properties, and iv) an
32
development spending remains wide with the former largely financed through foreign assistance. Developmental expenditures were near 5% of the GDP in FY2010, while nondevelopment expenditures on defense, administration, subsidies, debt-servicing, and lending to public-sector enterprises, remained high, particularly in comparison to other developing countries (see Figure 2.24).

Expenditure (% of GDP)
25 20 15 10 5 0 25 20 15 10 5 0
Revenue (% of GDP)
Total Expenditure
Current
Development
Total Revenue
Tax
Non Tax
Despite fiscal reform efforts over the last two decades, the persistence of fiscal deficit is one of the key causes of recurrent macroeconomic instability in Pakistan. Although revenue generation activities have increased, the Government continues to face difficulties in meeting its fiscal deficit target. The current fiscal years deficit is shown to be 6.3% of GDP (see Figure 2.26). The fiscal deficit increased during JulyMarch of FY2010, despite revenue increases brought about by the Petroleum Development Levy (PDL), thanks to higher oil imports. 45 Although the alignment of fuel prices with the international market and the gradual removal of electricity subsidies will enhance fiscal space, debt and losses of key public sector enterprises continue to exert pressures on budgetary decisions. The long-awaited imposition of an integrated Value-added tax (VAT) has been replaced by a proposal to reform the existing General Sales Tax (GST) by removing un-warranted exemptions. It is hoped that a reformed GST system will be introduced by October 1st, 2010 after securing the consensus of national and provincial 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 to mobilize additional revenues while doing so fairly transparently.
agricultural income tax by provinces (Government of Pakistan, Interim Report on Economic Stabilization with a Human Face, Planning Commission: Islamabad, October 2008, p. 3). 44 Pakistan Economic Survey (2008-09: 56) and Pakistan Economic Survey (2009-10:Table 4.2) 45 SBPs Monetary Policy Statement, March 27, 2010, p.1. Also see Kiani, S., IMF Tranche and Fiscal Squeeze. Dawn. May 03, 2010. http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-andbusiness/imf-tranche-and-fiscal-squeeze-350
33
Figures 2.26 and 2.27 46 Fiscal Deficit (% of GDP)

8 7 6 5 4 3 2 Total Revenue Total Expenditure
2.3 7.7 7.6 6.3 5.4 4.3 4.3 3.3 5.7 4.3 4.4 5.5
Fiscal Indicators (% of GDP)

25 20 15 10
6.1
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 of convertible bonds of three large state enterprises is critical for filling the fiscal deficit, as the move is expected to generate around USD 3 billion. 47 Despite these efforts the persistence of a large fiscal deficit and weak currency will continue to undermine growth, investment, prices, and any efforts to curtail public debt. Consumer inflation was reported at 13% in the year, up to February 2010. This increase was driven by increases in electricity tariffs, petroleum products, and commodities such as wheat. High inflation resulted from robust demand, chronic supply-side bottlenecks, monetization of the fiscal deficit, and high international commodity prices. Headline inflation is expected to be around 12% this fiscal year before easing to around 8% next year, with help from improvements in food supplies and a tight monetary policy.
46 47
Pakistan Economic Survey (2008-09: 56) and Pakistan Economic Survey (2009-10:Table 4.2) The government is aiming to issue convertible bonds of Oil and Gas Development Authority, Pakistan State Oil and Pakistan Petroleum Limited. For details see http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/thenewspaper/business/issuance-of-ogdcl-bonds-pc-wants-margin-financing-in-stock-markets-840
34
Figure 2.28 and 2.29 48 Inflation and Growth (%)

Inflation Growth
17 15 13 11 9 7 5 12-Nov-02 23-May-08 13-Nov-08 27-Mar-10 11-Apr-02 1-Aug-07 23-Jan-02 22-Jul-06 2-Feb-08 21-Apr-09 17-Aug-09 30-Jul-08 22nd Oct 01 30-Jul-10
Benchmark Policy Rate (%)
The persistence of a large fiscal deficit is recognized as one of the main causes of inflation in Pakistan. 49 The SBP continues to encounter coordination problems impeding the critical balancing of monetary and fiscal policy to keep inflation at bay. The supply-side problems require further trade liberalization, a move that would 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 monetary management. 50 Despite continued inflation, Pakistans currency has remained relatively stable after its earlier devaluation.
48 49
Pakistan Economic Survey Economic and Social Indicators (2009-10) On fiscal deficit and inflation in Pakistan see Shabir and Ahmad (1994), Chaudhary and Ahmad (1995) and Khan (The News [Business and Finance Review], Taxation, Inflation and Development, [Pakistan] May 17 2010. Pakistans double-digit inflation during the 1990s has been caused by deficit financing and as well as by supply-side bottlenecks, the adjustment in government-administered prices, the imported inflation (pass through of exchange rate adjustment), escalation in indirect taxes, inflationary expectations (Economic Survey, 2002-03: 120). 50 Inflation-targeting demands complete independence of SBP, which remain elusive in Pakistan. Inflation targeting has helped many developing economies such as Brazil, Chile, Egypt, Poland, South Africa and Turkey to enhance macroeconomic framework and achieve price stability and impressive economic growth. For an account of the use of monetary policy as an inflation-targeting tool see Masson et al., (1998). With regard to Pakistan see Akbari and Rankaduwa (2006), Khalid (2006). Chaudhry and Chaudhry (2006) argued that Pakistan should not adopt an inflation targeting strategy at all, because its inflation is usually cost-push in nature caused by rising import prices; a tightening of monetary policy will only result in recession.
35
Figure 2.30 and 2.31 51 Pakistan Rupee to 1 US Dollar

90
40
Exports, Imports and Trade Balance (US$ Billion)

35 30 25 20 15 10 5 0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2008-09 2009-10 P 2007-08
80 70 60 50 40
Exports
Imports
Despite the earlier currency depreciation, did not increase export revenues. Barriers to export competitiveness go beyond the exchange rate. Exports have declined in absolute terms, limiting the ability to import and contributing to a large trade deficit (Figure 2.31). Imports have been growing at a much faster pace than exports, resulting in a fast growing trade defecit. The trade deficit reached USD 15 billion in FY2008 before contracting to around USD13 billion in FY2009 in the wake of sharp slowdown in economic activities. The contraction in imports has narrowed the trade deficit and the terms of trade, which had moved progressively against Pakistans low-value exports, have stabilized. Considerable downward price pressure on textile and apparel exports relative to the price of imports has worked against the country throughout the decade (Figure 2.33). 52 This is despite the fact that the country has been gradually moving away from the exports of primary and semimanufactured exports to fully-manufactured exports, especially since the early 1990s.
51 52
Pakistan Economic Survey (2009-10: Table 7.4) Imports into Pakistan are dominated by eight very expensive items that include machinery, transport equipments oil and & petroleum products, chemicals, edible oil, iron & steel, fertilizer and tea. These items account for over 75.5% of Pakistans total imports. For details see Pakistan Economic Survey (2007-08: 133 and 142).
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Figures 2.32 and 2.33 53 Trade Deficit (US$ billion)

100 90 80 70 60 50
Terms of Trade (Base Year 1990-91 = 100)
Recent provisional data suggest that strong remittances and a narrowing trade balance will bring Pakistans current account deficit to -5% of the GDP for FY2010. The first half of FY20092010 witnessed a USD 2.5 billion decrease in the trade deficit due to a fall in imports that outweighed the decline in exports. 54 According to provisional estimates for July March of FY2010, exports increased by 5.83%, while imports declined by 3.89%, leading to a contraction in the trade balance of 14.1% (see Figures 2.34 and 2.35).

Current Account Balance (US $ Billion)
10% 5% 0%
Current Account Deficit (% of GDP)
FY03
FY04
FY05
FY06
FY07 FY08
FY09 FY10 P
-5% -10% -15% -20%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 P
53 54
Pakistan Economic Survey (2009-10: Table 7.4 and 7.5) Saleem (2010) noted that according to analysts, recent improvement in current account deficit is not based on some fundamental restructuring of the economy like increase in non-tradition exports which could be considered as a permanent feature. Imports could again shoot and easily the previous [high] levels when the domestic economy tends to recover or the price of oil go up in the international market. Saleem, K., EDL to Cause Trouble in Long Term. Pakistan and Gulf Economist, 1-7 February, 2010. 55 Pakistan Economic Survey (2009-10: Table 7.1 and Table 7.3)
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The public debt burden came down to manageable levels during the last decade. Debt ratios of 5060% are seen as manageable and not excessive, although IMF authorities now indicate that lower levels of debt are desirable in order to create the fiscal space required to deal with future economic downturns (see Figure 2.36).
Figure 2.36 56 Pakistan's Debt Profile (% of GDP)

90 80 70 60 50 40 30 20 10 0
Total Debt
Domestic debt
Foreign Currency Debt
The countrys external debt liabilities or EDL profile remains manageable, but the current economic stabilization and recovery efforts have further increased Pakistans external debt level, which may undermine future growth. 57 The IMF estimates that Pakistans EDLs would increase to around USD 73 billion by 2015. However, Pakistans EDLs declined from 52% in June 2000 to 28.1% of GDP in June 2008, before increasing to over 31.8% of GDP by June 2009. EDL as a percentage of GDP is also expected to rise to over 32.5% by 2011. 58 Debt sustainability indicators, including GDP to foreign exchange earnings and foreign exchange reserves, are deteriorating since FY2008 after substantial improvement since FY2000. 59 The countrys EDL as a percentage of foreign exchange earnings have decreased from 297.2% at the end of FY2000 to 150% in March 2010 (see Figure 2.37 and 2.38). The ratio of EDL to foreign exchange reserves improved from 19.3 in FY19992000 to 3.6 in March 2010. 60
56 57
Pakistan Economic Survey (2008-09:148) and Pakistan Economic Survey (2009-10:111), 2009-10 data is till March 2010. The Economic Survey of Pakistan noted that empirical evidence suggests that external debt slows growth only if it crosses the threshold level of 50 percent of GDP (2007-08: 155). Also see Pakistan Economic Survey (2008-09: 140). For a useful account of Pakistans current debt profile see: http://www.sbp.org.pk/ecodata/pakdebt.pdf. 58 Saleem, K., EDL to Cause Trouble in Long Term. Pakistan and Gulf Economist, 1-7 February, 2010. 59 According to SBP, most of the debt sustainability indicators are showing deterioration since FY08 (Monetary Policy Statement, January-2010: 16). 60 See Pakistan Economic Survey (2008-09:145).
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Figures 2.37 and 2.38 61 EDL % of Foreign Exchange Earnings

350 300 250 200 150 100 20 15 10 5 0
EDL/Foreign Exchange Reserves
61
Pakistan Economic Survey (2008-09:144) and Pakistan Economic Survey (2009-10:123), data for 2009-10 is till March 2010.
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2.6 Microeconomic Constraint to Growth: Electricity

The macroeconomic picture has been stabilized, although high inflation rates continue to mean accompanying high interest rates, which deter investment. Meanwhile, there are many microeconomic constraints to competiveness. Many of these have been addressed in previous SPCR reports. Given its importance, electricity will be addressed below. Electricity shortages persist in taking a toll on productivity. The imbalance between supply and demand is being addressed, but the margins of surplus will remain narrow (see Figure 2.39). If Pakistan is to achieve significant growth it will require a concomitant growth in electricity.
Figure 2.39 62 Electricity Supply and Demand Position 200812 (MW)
25000 20000 15000 10000 5000 0 -5000
Total Generation Capacity Peak Demand
Firm Generation Capability Surplus/Deficit
The Government has designed an Integrated Energy Development Program to address the prevalent energy crisis in an environmentally friendly manner. The 25-year National Energy Plan aims to secure energy supplies for achieving GDP growth of over 7.5%. The Government is already working to considerably increase the share of coal-based and hydrobased electricity generation in total energy requirements in the next 15 years (see Figure 2.40). This will enable an increase in per capita energy consumption 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, the growing gaps will have to be met by imported oil and gas (see Figure2.41).
62
See Private Power Infrastructure Board. http://www.ppib.gov.pk/SupplyDemand.htm, accessed January 2010.
40
Figures 2.40 and 2.41 63 Energy Demand Forcasts by Fuel (MTOE) Indigenous Fuel Supply Forecasts (MTOE)
40 30 20 50 10 0
150
100
OIL HYDEL
GAS RENEWABLE
COAL NUCLEAR
OIL HYDEL
GAS RENEWABLE
COAL NUCLEAR
63
See Ahmad, M.B., (2006), Pakistan Asias Emerging Energy Hub. http://www.ssgc.com.pk/ssgc/media_center/presentations/pdf/pakistan_asia.pdf
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2.7 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 traditional markets, Pakistan needs to aggressively diversify markets and redouble efforts to improve the business environment for existing and prospective exporters.
Figures 2.42 and 2.43 64 World GDP Growth (%)

6 5 4 3 2 1 0 -1 -2 -3 PPP Market Exchange Rate 10 8 6 4 2 0 -2 -4 -6 -8 -10
World Trade Growth (%)
Although most advanced economies are officially out of the Great Recession, recovery is fragile and fears continue of a double-dip recession, either because economic stimuli will be removed too soon, or because of the large debt overhang caused by the economic stimulus package to date. Most advanced economies are experiencing ballooning debts and its reverberations are routinely felt in the jittery and choppy trading patterns of leading financial markets around the world. Emerging economies in the Middle East and East Asia, especially in China and India. will act as the main engines of global trade and growth.
64
Economist Intelligence Unit, accessed May 10, 2010. For details see online: http://viewswire.eiu.com/index.asp?layout=VWArticleVW3&article_id=1375300522&region_id=1510000351&rf=0
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2.8 Conclusion and Recommendations

The Government of Pakistan has successfully responded to the near-term macroeconomic and foreign exchange crisis, and economic recovery has returned, albeit at modest levels. However, the dependency on foreign transfers has emphasized the need for Pakistan to improve its export competitiveness and to achieve both fiscal and trade balances. The Competitiveness Support Fund has consistently advocated addressing 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 to remove obstacles to competitiveness, lower costs of inputs, enhance efficiency of trade logistics, increase productivity, 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 interest modernization and supervision. Create a policy environment that enables the financial markets to naturally bring down real interest rates consistent with sound macroeconomic management and financial supervision. 4. Electricity: Restore the supply-demand balance in electricity in the short term and ensure that the appropriate investments are made for long-term energy supplies that are reliable and cost-effective. 5. Supporting infrastructure: Implement Special Economic Zones, Export Processing Zones, Industrial Parks, and other specialized infrastructure that can make investment more productive and encourage greater levels of that investment. 6. Workforce Development: Develop partnerships between specific industries and their education and training 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 entrepreneurial centers of excellence and incubators, facilitate proof-of-concept financing and lower the cost of entrepreneurial failure in terms of cost, time and reputation. 9. Provincial and Regional Development: Implement annual Competitiveness Index at the provincial level, implement annual provincial competitiveness reports. 43
CHAPTER 3: INSTITUTIONAL REFORMS FOR COMPETITIVNESS
3. INSTITUTIONAL REFORMS FOR COMPETITIVENESS: RECENT DEVELOPMENTS

Each year, the State of Pakistans Competitiveness Report (SPCR) includes one or more areas of special focus. 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 the passage of the 18th Amendment . The Global Competitiveness Index presented in Chapter 1 highlighted the importance of institutions in Pakistans 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 analyze the specific reasons for this deterioration, and to offer constructive inputs that can lead to a consensus for strengthening Pakistans institutions as they relate to Pakistans economic growth.
3.1 Why Institutions Matter for Growth and Competitiveness

The design and implementation of an effective strategy for sustained economic growth requires strong political will, implemented through effective institutions. Pakistans leaders and economic team cannot implement an effective economic strategy without strong institutions. Ministries working at cross-purposes with each other, or pursuing independent objectives, send mixed signals. Furthermore, over-dependence of economic policy on a few key individuals will create uncertainty. Successful high growth countries have demonstrated that strong institutions implementing a clear economic strategy can achieve very high rates of economic growth. China, Korea, Chile, Taiwan, Singapore, and Ireland demonstrate that strong institutions are one of the key driving forces for sustainabe high growth (see Figure 3.1). Countries that have achieved high standards of living are highly correlated with high institutional rankings on 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 the competitiveness of factor-driven economies such as Pakistan.
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Figure 3.1: Relationship between Institutional Strength and Economic Growth

160 140 120
Chad Bangladesh Pakistan Moldova Cambodia Brazil Latvia Thailand Korea India Sri Lanka China Montenegro Uruguay Chile Taiwan Oman Singapore Switzerland
GCI Institutional Ranking
100 80 60 40 20 0 0 -20
United States Belgium Ireland
10000
20000
30000
40000
50000
60000
70000
80000
GDP Per Capita
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, workforce development, infrastructure, small and medium enterprise, and other areas. However, these efforts cannot be sustained without good institutions: over-reliance on a particular leader makes a country vulnerable to sudden change. Institutions include a complex set of the rules of the game in society that shape the incentives for economic actors. 65 Institutions shape the legal and regulatory frameworks, the informal norms, and the enforcement 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 the theory of New Institutional Economics, according to which individuals, firms, and governments interact in a world of positive transaction costs, information asymmetry, and unequal political power. 66
65
Douglass C. North, Institutions, Institutional Change, and Economic Performance, (University of Cambridge Press: 1990), p.3. 66 Douglass C. North, The New Institutional Economics and Development, (Mimeo, Washington University, 1993)
45
Research has clearly established the importance of a countrys institutional environment for its growth and development prospects. 67 Institutions that set up transparent, predictable, enforceable, and investment-friendly rules are critical when facilitating economic transactions by protecting private property from expropriation and enabling contract enforcement by reducing transaction costs, lending credibility to contracts, and addressing the problem of incomplete information. 68 This facilitates investment, creates jobs, and stimulates entrepreneurship. Public institutions affect nearly all areas of economic life and decision-making. The legal, regulatory, and administrative frameworks reduce transaction costs of economic exchange, thus helping markets work and boosting productivity. Good public institutions lead to well-prioritized infrastructure investments and transparency in procurement. Good institutions create productive people through the effective administration of health and educational services, and benefit from a fair and effective judicial system, including commercial courts. 69 Good institutions include an effective security and police system that reduces the security costs of doing business, and they also protect the financial system by providing adequate supervision. A modern society requires many kinds of tax, health, safety, labor, and consumer regulations but good institutions enforce these impartially and effectively while not unnecessarily increasing the cost of compliance. Furthermore, weak institutions related to utilities, such as electricity supply, can cripple the productivity of a nation if they lead to an inadequate or unreliable supply. Good institutions are not just about Government agencies; good private institutions are also critical for sustained economic growth. These include: good corporate governance practices; protection of minority shareholder interests; the integrity of the accounting and audit profession; transparency to ensure that businesses abide by ethics in dealings with the government, other firms, and the public at large. 70 Together, strong public and private institutions improve the prospects for high economic growth and social solidarity. Sound public and private institutions improve the prospects for growth. Good institutions encourage foreign and domestic investment; ensure the most efficient allocation of loan and equity capital; create competition that works for the public interest; and facilitate trade and exchange. Good institutions enhance both current and future economic performance by providing an environment with equitable distribution of economic opportunity and social safety nets for those who are not yet participating in the benefits of growth. 71 On the one hand, good institutions encourage competition, innovation,
See for example, Daron Acemoglu, Simon Johnson, James Robinson, The Colonial Origins of Comparative Development: An Empirical Investigation.American Economic Review 2001, 91: 13691401; William Easterly, Ross Levine, Africas Growth Tragedy: Policies and Ethnic Divisions. Quarterly Journal of Economics 1997, CXII: 120350; Dani Rodrik, Arvind Subramanian, and Franceso Trebbi, Institutions Rule: The Primacy of Institutions over Geography and Integration in Economic Development. Mimeo, Harvard University, October 2002. 68 Daron Acemoglu, Simon Johnson, Unbundling Institutions, Journal of Political Economy, October 2005, 113(5): 949-995 69 Paulo Mauro, Corruption and Growth, Quarterly Journal of Economics, Aug 1995, 110 (3): 681-712, Stephen Knack, Phil Keefer, Institutions and economic performance: Cross-country tests using alternative institutional measures, Economics and Politics, 1995, 7(3): 207-227. 70 Andrei Shleifer, Robert Vishny, A Survey of Corporate Governance. Nobel Symposium on Law and Finance, Journal of Finance June1997, 52: 73783; Luigi Zingales, Corporate Governance. In P. Newman, ed. The New Palgrave Dictionary of Economics and the Law. New York: Macmillan, 1998. 71 Daron Acemoglu, Simon Johnson, Institutions as Fundamental cause of Long-Run Growth in Handbook of Economic Growth, Dec2005, Chapter 6, Vol1.
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and efficiency enhancement by channeling resources and talent to the most productive uses, thereby laying the foundation for sustained and competitive growth. On the other hand, good institutions also ensure a sense of fairness while ensuring that the benefits of growth include poverty reduction and targeted assistance to the poorest of the poor. Countries that provide a business friendly, secure, transparent environment and a competitive level playing field become prime destinations for investment and job creation. A business friendly environment in no way means to suggest lack of compliance with world-class standards regarding worker safety, 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 that are conducive to firm-level productivity.
Box 3.1 Pakistan: Economic Instability and the Need for Stronger Institutions
Pakistans economic history is one of high volatility in growth rates. This stop-go growth was a feature of Pakistans history from the 1950s to the present day regardless of the party in power or whether the Government was in the hands of military or civilian rulers. The uneven economic performance was neither caused by global market conditions nor by the policies of other nations or international financial institutions, but by Pakistans economic policies. Policy instability was in many cases a matter of institutional instability. Prominent Pakistani economists such as Ishrat Husain and Akmal Hussain have argued that unstable growth and endemic poverty in Pakistan is partly a result of institutions that favor the status quo and restrict merit-based selection, competition, efficiency and 72 innovation. In recent years, disillusionment amongst some population groups in under-developed regions may have contributed to militancy and unrest, which has subordinated a sense of loyalty and identity with Pakistan as a nation. Good institutions, on the other hand, foster a sense of belonging to the nation.
Akmal Hussain, Power Dynamics, Institutional Instability and Economic Growth: The Case of Pakistan, Islamabad: The th Asia Foundation, 14 April 2008, p.2; Ishrat Husain, Pakistan the economy of an elitist state, Oxford University Press, 1999, p.xii, p.352.
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3.2 The State of Institutions in Pakistan

The World Economic Forum measured the quality of public and private institutions through expert opinion surveys of those managing economic entities in Pakistan exposed to global competition. 73 The Institutions Ranking includes twenty-one indicators related to both public and private institutions. These findings are also cross-checked and supplemented with other international benchmarking sources such as the World Banks Doing Business indicators, the Worldwide Governance Indicators, and the Transparency Internationals Corruption Perceptions Index. This section will identify strengths and weaknesses in Pakistans institutions and will also provide comparative analysis between Pakistan and comparable countries (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. 74 Pakistan actually showed absolute improvement in a majority of the 21 indicators. 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 performance has deteriorated consistently in recent years reflecting declining confidence in the quality of its institutions. Table 3.1 Global Competitiveness Index (GCI) - Overall Institutions Ranking
2008-9 Rank 127 91 53 95 66 57 2009-10 Rank 122 93 54 104 73 60 2010-11 Rank 115 93 58 112 55 64 Change 2008-11 2009-11 7 12 = -2 -4 -5 -8 -17 18 11 -4 -7
Country Bangladesh Brazil India Pakistan Sri Lanka Thailand
Source: Global Competitiveness Reports, 2008-9, 2009-10, 2010-2011 The ranking in 2008-09 was out of 134 countries, and in 2009-10 was out of 133 countries, and in 20102011 was out of 139 countries. A negative sign in the last two columns indicates a fall in the ranking.
The GCI institutions index like most cross-country comparable measures of institutions relies on subjective or perception-based data gathered using expert opinion surveys. While measuring institutional quality through perception based data may induce systematic error there are usually few or no objective measures of institutions available that record comparable data across countries. Even where objective or hard data is available to measure institutions using only this data one may capture the de jure nature of laws as they exist on the books. However this ignores the reality that laws are rarely perfectly implemented and thus the de jure law differs from the de facto law as it is practiced on the ground. Finally, perceptions matter because in a world of imperfect information economic agents base their decisions on their views, perceptions, and opinions. 74 The number of countries increased from 133 in 200910 to 139 in 201011. Although part of the decline in Pakistans rank can be attributed to the new additions in 200809, the increase in the number of countries is insufficient to explain the magnitude of the decline.
73
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Pakistans recent performance on the GCI highlights a number of aspects of public and private institutions that present obstacles to improving the growth and competitiveness prospects of the country. Pakistan continued 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 costs of 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 focus on terrorism and insurgency but this survey reveals that the impact of security on business is more pervasive and more complex. Successful ending of the civil conflict, while extremely important, is not the only factor affecting security. Table 3.2 Pakistans Rankings on 21 Institution Indicators (2010 Global Competitiveness Index)
Ranking 2008-09 Institutions Index: Overall Ranking Property Rights Intellectual property protection Diversion of public funds Public trust of politicians Irregular payments and bribes Judicial independence Favoritism in decisions of government officials Wastefulness of government spending Burden of government regulation Efficiency of legal framework in settling disputes Efficiency of legal framework in challenging regulations Transparency of government policymaking Business costs of terrorism Business costs of crime and violence Organized crime Reliability of police services Ethical behavior of firms Strength of auditing and reporting standards Efficacy of corporate boards Protection of minority shareholders' interests Strength of investor protection 95 93 84 78 82 93 98 90 78 94* 109 131 110 114 107 67 67 126 58 2009-10 104 100 95 89 82 95 87 67 59 103 103 105 131 119 116 114 100 84 117 91 2010-11 112 107 86 92 91 117 74 87 58 72 103 96 115 138 126 127 119 100 97 115 94 27 Change 2008-11 -17 -14 -2 -14 -9 19 11 32 6 -6 -7 -16 -13 -12 -33 -30 11 -36 2009-11 -8 -7 9 -3 -9 21 = 9 -13 = 7 -10 -7 -7 -11 -5 = -13 2 -3
Source: Global Competitiveness Reports 2008-9, 2009-10, 20010-11 The ranking in 2008-09 was out of 134 countries, in 2009-10 was out of 133 countries, and in 2010-11 was out of 139 countries. A negative sign in the last two columns indicates a fall in the ranking. * In 2009-10 efficiency of legal framework was split into two components, efficiency of legal framework in settling disputes and efficiency of legal framework in challenging regulations.
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3.2.1 Institutional Constraints to Competitiveness Institutional constraints to competitiveness include the inadequate provision of security, ineffective public utilities, red tape, weak property rights, inadequate contract enforcement, perceived lack of transparency, and inadequate corporate governance. Each will be benchmarked and discussed in turn. These weak institutions hurt Pakistans economic performance today. They may also be restricting Pakistans ability to make the necessary structural transformations for the future. Moreover, weak institutions also prevent the fair distribution of the benefits of growth efficiently and effectively to disadvantaged 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 the owners against unlawful expropriation and providing access to credit markets. They also help promote the efficient functioning of land markets and productive use of land. Furthermore, property rights encourage formal registration of business as well as personal property, bringing assets into the formal sector and thus contributing to a broader base of tax-payments. In the 21st century knowledge economy, intellectually property rights are becoming as important as property rights in land. 75 Insufficient intellectual property rights protection may be a contributing factor to Pakistans relatively poor performance in the export of ITenabled services and in knowledge products and services. Pakistan has not been notably successful in establishing global brand names or in attracting international investment in R&D within Pakistans borders. In the 201011 GCI ranking, Pakistan placed 107th out 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 land in Pakistan and the tenure sharecropping system of agricultural production may be related not only to low levels of agricultural productivity (as shown in Chapter 2) but also low levels of educational attainment and literacy. Those doing menial work under a sharecropping system are often families that have to rely on child 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 the World Bank Doing Business report where it ranks similarly low at 119th out of 183 for the indicator of registering property. 77 There is clearly room for improvement
Security of other property such as money, financial assets or physical assets other than land is captured in the other institutional constraints to competitiveness: control of corruption and law and order. 76 Akmal Hussain, Land Reforms Reconsidered, in Hamza Alavi and John Harris (eds.): South Asia, Macmillan Education Ltd., London 1989, pp. 59-69. 77 World Bank, Doing Business 2010 Pakistan, Washington DC: World Bank, August 2009. The Doing Business indicators rank countries based on the costs faced by a small-medium sized limited liability registered business located in the largest city in 10 stages of doing business. This includes the ease of starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. The limitation of these indicators is that an average firm may not be representative of the general population of firms in the economy. Also objective measures may not capture the true effective cost of doing business as de jure laws differ from de facto practices.
75
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and 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 basis of the Report, it takes 6 procedures, 50 days and an average cost of 7.2% of property value to register property in Pakistan. Illegal possession, informal occupation and disputed titling remain major hurdles in creating efficient and wellfunctioning land markets. Registration and land record management remain disaggregated, as multiple institutions are involved. 78 The land record systems are old and obsolete. At the most basic and local level of land registrations, the patwaris (land record keepers and administrators) are vulnerable to political influence and exploitation. The land registration and record management system is opaque, obsolete, and fragmented, and it fails to provide secure property rights. Meanwhile, land markets remain thin, and land prices do not reflect the true productive capacity of the land. Higher land values based on more secure titles could trigger access to credit that could in turn lead to expanded economic activity. In the area of intellectual property rights, Pakistan has improved 9 ranks over the past year (up to 86) but continues to perform below India (66), Sri Lanka (46), and Thailand (84). Pakistan put in place its first integrated Intellectual Property Rights (IPR) regime, governed by the Intellectual Property Organization (IPO) of Pakistan Ordinance 2005, which provided for the establishment of an IPO Office attached to the Cabinet Division. Despite this stronger regulatory framework, Pakistan lags behind India in patent filing. 79 Intellectual property rights enforcement remains weak, as piracy, counterfeiting, and plagiarism are prevalent. 2. Current legal, regulatory and administrative frameworks governing private sector activity are inefficient and they unnecessarily raise the cost of doing business Well-functioning legal, regulatory, and administrative frameworks encourage investment and create an enabling business environment. Pakistan lags behind in modernizing various commercial laws that govern private sector activity. This is evident from Pakistans ranking on the GCI sub-indicator efficiency of legal framework in settling disputes and efficiency of legal framework in challenging regulations: (see Figure 3.2). Figure 3.2: Efficiency of Legal Framework in Pakistan
Sri Lanka Thailand India Brazil Pakistan Bangladesh 0
78
Efficiency of legal framework in challenging regulations Efficiency of legal framework in settling disputes 20 40 60 80 100 120 140 160 180
This includes the Patwaris at the lowest administrative level of record management, supervised by a Girdawar and Kananugo, who are supervised by a Tehsildar who is the overall administrative officer in charge at the Tehsil level. The revenue supervisor at the District level is the District officer Revenue/Registrar who reports to the Board of Revenue and the District Coordination Officer, who reports to the elected Nazim. 79 Competitiveness Support Fund, The State of Pakistans Competitiveness Report 2008-09, Islamabad: Competitiveness Support Fund, 2009, p.93.
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Presently there are a number of obsolete and fragmented laws regulating commercial arbitration and alternative dispute resolution that do not provide adequate protection to foreign investors. 80 The current insolvency laws have failed to facilitate orderly adjustment and exit from declining industries. 81 The laws are also 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 the region, 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 these enclaves has caused substantial misuse of policy incentives. Private sector activity in agricultural markets is restricted due to the old Provincial Marketing Acts that continue to involve the government in fixing prices and controlling markets down to the small town level. 82 These laws govern the sale and purchase of agricultural produce including fruits, vegetables, dairy and meat 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 competition and protect consumers. 83 Pakistan has also facilitated new business registration by reducing the number of steps and fees and by improving access to registration offices. However, making a business fully operational 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 in paying taxes, employing workers and enforcing contracts. Labor laws dating from the 1970s socialist era restrict overtime and the number of hours that can be worked, leading to substantial rigidity in labor markets, discouragement of formal business registration, and encouragement of informality, which in turn impedes growth and productivity. Facilitating tax compliance would also improve Pakistans low rate of domestic tax collection, thereby reducing dependency on foreign transfers.
Arbitration Act 1940, Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Award) Ordinance 2007 and the Arbitration (international Investment Disputes) Ordinance 2007 81 Salman Ali Shaikh, Feisal Naqvi, A permanent solution for the sick industries: Corporate Rehabilitation I & II, Business Recorder June 19-20, 2008. 82 Shahid Javed Burki, Sectoral Interventions: Drilling Down to the Specifics, National Policy Platform for Competitiveness and Economic Growth Policy Note, 2009, p.13 83 However this law is currently in the shape of a Presidential Ordinance and still needs to be approved by the Senate and Parliament.
80
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Table 3.3 Problematic Factors for Doing Business

Indicator Registering property Getting electricity * Obtaining construction permits Rank out of 183 119
6 procedures, 50 days, cost = 7.2% of property value 5 procedures, 233 days, cost = 2334.7 % of income per capita 12 procedures, 223 days, cost = 716.3% of income per capita Rigidity of employment 43/100, Redundancy Costs = 90 wks of salary 560 hours per year, 47 payments, average rate = 31.6% 47 procedures, 976 days: cost = 23.8% of contract value
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Employing workers ** 146 Paying taxes 143 Enforcing contracts 158 Source: Doing Business 2010 *This is a pilot indicator introduced in Doing Business 2010.For details see: http://www.doingbusiness.org/ExploreTopics/GettingElectricity/ ** Rigidity of employment is based on rigidity of hours, difficulty of hiring, and redundancy costs
3. Better contract enforcement would improve productivity and encourage investment Timely and affordable contract enforcement is essential for the smooth functioning of markets. Problems associated with contract enforcement not only inhibit investments, but also disincentivize scaling up and increases in productivity. Pakistan not only lacks the appropriate legal frameworks for settling disputes efficiently as discussed above, but it also performs poorly in enforcing existing laws. According to the World Banks Doing Business Report in Pakistan, 47 procedures have to be followed for the enforcement of contracts. It takes on average 976 days to reach a settlement, with an enforcement cost of 23.8% of the total value of the contract. 84 Access to justice remains limited due to a number of factors. Inefficient court management processes, lack of appropriate infrastructure, and poor judicial capacity add up to many delays in settling disputes through the courts. Proposals to modernize laws and regulations to facilitate out of court settlement such as arbitration and alternate dispute resolution are stuck in the legislative process. Despite this, Pakistan has experienced a substantial increase in rankings on the GCI sub-indictor of judicial independence over the past year, but continues to be outperformed by India, Sri Lanka and Thailand (see Figure 3.2). Public trust of law enforcement agencies is also weak. There is a notable lack of confidence in police services, evident from Pakistans rank of 119th in comparison to India (68), Brazil (74), Thailand (87) and Sri Lanka (91). Figure 3.3: Judicial Independence
India Sri Lanka Thailand Brazil Bangladesh Pakistan 0
84
37 50 54 78 82 95 20 40 60 80 100 120 140 160 180 2009-10 2010-11
World Bank Doing Business 2010.
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4. Private sector institutions can be strengthened by improving corporate governance Sound corporate governance is critical for the efficient and ethical functioning of firms. This includes the reliability of company financial reports, protection of minority shareholder interests, the professionalism of the auditing and the effective supervisory role of Boards of Directors. Good accounting and information disclosure practices ensure that businesses behave ethically in dealing with the Government, other firms, and the public at large. On paper, Pakistan provides relatively strong laws governing publicly listed companies, ranking 27th out of 183 countries listed in the World Bank Doing Business Reports protecting investors indicator due to SECP regulations that introduced a code of corporate governance, disclosure rules, laws for accountability of directors, and protection of minority shareholders interests. The GCI expert opinion survey however, indicate these changes have yet to be felt at the ground level. Pakistan is doing poorly in strength of auditing and reporting coming in at 97th below India (45), Sri Lanka (40), Thailand (42) and Brazil (64); and efficacy of corporate boards Pakistan ranks at 115th well below Sri Lanka (34), Brazil (67), India (76) and Thailand (78). Pakistans performance in protecting minority shareholder interests and ethical behavior by firms demonstrates a similar need to increase compliance and effective enforcement of corporate governance standards. 5. Public sector effectiveness in service delivery, public investment and transparent governance needs strengthening Pakistan performs poorly in terms of governmental effectiveness in delivering public services, human development, poverty alleviation, and devising policies in an independent, transparent, and efficient manner. Public perceptions of civil servants and the Governments administrative machinery indicate a lack of confidence in efficacy, transparency, and responsiveness. The GCI data show that on transparency of government policy making Pakistan ranks at 115th below India (42),Thailand (63), Brazil (87) and Sri Lanka (107), while on favoritism by government officials Pakistan (87) also fares poorly in comparison to India (72),Thailand (76), Brazil (74) and Sri Lanka (60). The fragmented organization of the Federal Government, with many multiple ministries and agencies may be indicative of political patronage taking precedence over governmental efficiency. The system of local governance introduced in 2002 seems to have created space for democratic governance at the local level, but it has shown a mixed performance in meeting the objectives of enhancing public service delivery. Inadequate fiscal decentralization and issues between the provincial and local governments regarding appropriate functions, responsibilities, and levels of decentralization need to be addressed to make this system effective. 85 Pakistan has recently made headway in resolving the issue of Center-Provinces resource allocation through the National Finance Commission (NFC) Award (see Box 3.2). However, there are a number of challenges in ensuring adequate resource mobilization and utilization at the provincial level.
Government of Pakistan, Interim Report on Economic Stabilization with a Human Face, Islamabad: Planning Commission, October 2008, p14.
85
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Properly focused government investment is important for economic development. Although Pakistans rank on wastefulness of government spending (58) improved over the last year, it continues to narrowly lag behind India (57), Sri Lanka (56), and Thailand (45). The total share of development expenditures in the government budget was just over one-fifth (or 21.6%) in 2008-09, while current expenditures (defense, administration, subsidies, debtservicing, lending to public-sector enterprises, etc.) were 78.4% in the same period. 86 Meanwhile, losses reported by eight public sector enterprises amounted to more than Rs. 200 billion (well over USD 2 billion), a figure comparable to total development spending. Furthermore, it is often the development budget that is reduced first during times of fiscal tightening. Government spending on pro-poor sectors such as health, education, agriculture, water, sanitation and infrastructure, in particular rural infrastructure, has not been sufficient to keep pace with development goals. The Worldwide Governance Indicators (WGI), which aggregate perception data from a variety of sources including the GCI also raises further doubts regarding governmental effectiveness. Pakistans percentile rank for government effectiveness finds itself in the lowest 20% of countries ranked in 2009, falling well below Thailand (60), Brazil (58), India (54) and Sri Lanka (49). 87 Box 3.2 National Finance Commission Award and the Challenges Ahead
The successful conclusion of the 7 National Finance Commission (NFC) Award in December 2009 has created an opportunity for achieving substantive poverty reduction and for addressing provincial development needs. The National Finance Commission is constituted by the President under Article 160 of the Constitution to divide the Federal common resource pool using an appropriate mechanism of revenue sharing between the Federation and the Provinces. The 7 NFC Award introduced significant changes in resource distribution formula to the satisfaction of all units of the Federation. The Federal Government agreed to increase the share of Provinces in the divisible pool to 56.0% in the first year of NFC and to 57.5% in the remaining years of the award from existing level of 47.5%. The Federal Government also agreed to reduce its collection charges from 5% to 1% increasing the size of the divisible pool. Furthermore, the provinces have been given the option to collect GST on services directly. The Provinces also arrived at consensus-based horizontal resource sharing formula based on population, density, poverty and revenue generation under which the following allocation of the provincial pool was agreed upon: Punjab 51.74%, Sindh 24.55%, Khyber Pakhtoonkhwa 14.62% and Balochistan 9.09%. To increase Balochistans share, the three remaining provinces agreed to slash their percentage shares. An additional allocation was made available to, Khyber Pakhtoonkhwa due to the ongoing conflict in the northwestern areas. Post- NFC the challenge for the Federal Government is to undertake the necessary supporting reforms for increasing resource mobilization that would allow an effective increase in development spending. This will involve broadening the tax base by implementing the reformed General Sales Tax (GST) with minimal exemptions. It is also important that due to additional transfers from the Federal Government, provinces do not slacken their own efforts at resource mobilization. An important area,
86 87
th
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Government of Pakistan, Pakistan Economic Survey 2008-09, Islamabad: Ministry of Finance, 2009, p.55. Worldwide Governance Indicators 2009, http://info.worldbank.org/governance/wgi/index.asp, accessed September 24, 2010. The indicators measure governance along the following six dimensions for 212 countries over the period 1996-2008: Political Stability and No Violence, Voice and Accountability, Governmental Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption. The indicators are based on a variety of data sources that that combine the views of a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. Governmental Effectiveness captures the perceptions of the quality of public services, quality of civil service and its independence from political pressures, quality of policy formulation and implementation and credibility of the governments commitment to policies.
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CHAPTER 3: INSTITUTIONAL REFORMS FOR COMPETITIVNESS which will broaden the tax net under provincial ambit, is the effective implementation of agricultural income tax. Taxation of agricultural income can be achieved in a gradual manner by levying withholding taxes on income from major crops such as wheat, cotton, rice and sugarcane at the first stage and then extending the tax net to include other sources of agricultural income. This advance tax will be in lieu of the tax liability under the Agricultural Provincial Income Tax Ordinances, which were promulgated in 1997 and remain effective. Improving the tax collection and administration machinery at both the Federal and Provincial levels remains critically important. Steps to document the informal sector should also be initiated which would enable effective implementation of the reformed GST in the coming years. In addition to increasing tax revenue mobilization, the challenge for the Provinces is to ensure that the additional resources are spent on meeting development priorities and for redressing intra-provincial disparities. This will involve reviewing and restructuring public spending under the Annual Development Plans towards priority sectors such as Agriculture, Education, Health, Infrastructure, and giving special attention to projects in under-developed regions.
6. Pakistan needs to improve transparency and check corruption Corruption acts as a tax on investment and growth by raising the costs of viable projects and by diverting resources from productive activity to private pockets. Pakistan performs poorly on the GCI sub-indicator measuring 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 well below Thailand, Brazil, Sri Lanka and India (see Figure 3.3). 88 The National Corruption Perception Survey 2009 carried out by Transparency International Pakistan reveals that perceptions of corruption are greatest in 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 of office holders as roots of corruption. Figure 3.4: Transparency Internationals Corruption Perception Index
Brazil Thailand India Sri Lanka Pakistan Bangladesh 0 20 40 60 80 100 120 75 84 84 97 139 139 140 160 180
88
Transparency International, Corruption Perceptions Index http://transparency.org/policy_research/surveys_indices/cpi/2009, accessed September 24, 2010.
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The Worldwide Governance Indicators paint a similar picture. The Control of Corruption Index captures perceptions regarding the extent to which public power is exercised for private gain and the capture of the state by vested interests. Pakistan ranks at the 13th percentile (out of 100) placing well below Brazil (56), Sri Lanka (45), India (47) and Bangladesh (17). 89 Corruption and mismanagement of public resource creates a severe strain on the governments fiscal space available for spending on necessary public goods such as infrastructure and human resource development. Corruption during times of democratic government also erodes the political legitimacy of the system, creating conditions for instability and military coups. 90 7. 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 are imposing much higher costs for them than for their competitors in other countries. Pakistan ranked particularly low in these GCI sub-indicators: business costs of terrorism (138), business costs of crime and violence (126) and organized crime (127). As mentioned above, the crisis of confidence in the Governments ability to provide basic security is not only related to the current insurgency, civil conflict and terrorism, but is more pervasive. It includes perceptions of growing costs of criminality, including a perception 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 and crime. 91 Anecdotal evidence also suggests that a number of international companies are hesitant to set up offices 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 the northwest and more sporadic incidents elsewhere, act as dampeners for both domestic as well as international investors. Travel advisories deter international visitors, while necessary precautionary security measures add to the difficulty of doing business across borders.
89 90
Worldwide Governance Indicators 2009. Akmal Hussain, pp. 66-67. 91 Worldwide Governance Indicators 2009, http://info.worldbank.org/governance/wgi/index.asp, accessed September 24, 2010. This measure captures the perception that the Government will be overthrown by unconstitutional or violent means including politically motivated violence and terrorism.
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3.3 Institutional Reform: Review of Recent Progress

Before providing a framework for the institutional reforms required to achieve these objectives, it is important to recognize, applaud, and realistically appraise the recent reforms that have been undertaken or are being undertaken. The Government has formally recognized the importance of an efficient, transparent and competitive institutional environment for facilitating growth by initiating a number of reforms: improving property rights; reforming legal, regulatory and administrative requirements governing businesses; strengthening corporate governance; enhancing contract enforcement; enhancing contract enforcement; controlling corruption. To improve land property rights enforcement, the Government devolved the responsibility for land administration to the District and Local Governments in 2001. The Government of Punjab has initiated province-wide computerization of land records as a part of the Punjab Land Records Management Information System Project to provide accurate, reliable, and accessible information and improve the efficient functioning of land markets. 92 In addition to this, housing societies in urban areas have also started keeping digital records of land ownership. Despite these changes, a secure, reliable, and transparent system of property rights administration will require steps to regularize informal holdings, illegal occupations, and resolution of cases of disputed titling, as well as a systematic scaling up of the project to the national level. To improve the enforcement of intellectual property rights, in 2005 the IPO office was created under the Cabinet Division to establish an integrated IP protection regime. Yet the office remains riddled with capacity and procedural bottlenecks, which stall the benefits of an integrated IPR regime. The Government is working on the modernization of commercial laws including that are still in their draft stages: Corporate Rehabilitation Act to provide an efficient insolvency framework for easing adjustment of firms; Commercial Arbitration Act to safeguard interests of investors and create uniformity in the domestic and international trade laws for dispute settlement through arbitration, and; Special Economic Zones (SEZs) comprehensive legislation and regulation.
The Federal Board of Revenues (FBR) has launched initiatives to facilitate tax compliance. With the goal of facilitating tax compliance, a number of programs have been launched by the Federal Board of Revenue (FBR) in tax administration and collection using IT based solutions. These programs need to be scaled up based on evaluation and feasibility.
92
This project was started as a pilot program in one Kanungoi( land revenue unit) circle of District Kasur with the support of the World Bank. Key components of the project include revision of current business processes and associated legislation and regulations, digitization of land records to put in place a reliable, efficient and transparent system, setting up of Service Centers where land records will be maintained and available to the public in digital form, and establishing linkages between the land records system and the system for registration of deeds. The digitization of records is now being extended to the rest of the Province.
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District and city-level agencies also need to reduce the cost of approval for property transactions, construction approvals, business operations licenses and permits. One significant achievement in institutional reforms is the modern Competition Law, which established an independent Competition Commission to foster competition and protect consumers. The Competition Law has just been approved by the Parliament in order to enable the Commission to operate as a permanent regulatory agency. A modern Code of Corporate Governance was introduced in 2002. The SECP introduced this to protect the rights of investors and facilitate the development of an efficient corporate sector. It also provides a framework for transparent management, protection of investors, and disclosure of financial information. Some of the recently reported improvements in access to equity finance may be related to this reform. Financial sector supervision is regulated by the State Bank of Pakistans Prudential Regulations to supervise risk-management and governance of financial institutions. Despite these reforms, imperfections in governance, risk management, and disclosure practices are widespread. Lastly, in view of the recent stock market collapse and allegations of irregularities, capital market exchange and securities regulations also need to be reviewed and strengthened to promote transparency, depth, and breadth. To enable timely settlement of disputes, and effective contract enforcement for businesses and the public, the Government partnered with the Asian Development Bank (ADB) to implement the Access to Justice Program from 20022007. Through technical assistance, loans and a pilot project, the program sought to increase the efficiency and capacity of judiciary, courts and the Police. In 2002, new legislation was introduced to bring about changes in organization and management of law enforcement. The New Judicial Policy 2009, prepared by the Law and Justice Commission, renews the commitment to address backlogs and delays in justice administration at superior and subordinate courts. Notwithstanding these positive developments, there is a significant room for improvement in court process management, facilities, and the capacity of judges and other officers through a coordinated plan to implement these reforms at all tiers of the courts, and judiciary. Steps to neutralize, reorganize, and improve compensation of the Police is also critical to increasing the effectiveness of rule of law in the country. 93 The Government has also taken steps to institutionalize a stable, predictable and favorable environment for Private Sector Development. The Government has initiated a number of reforms for better economic management, reduction of wasteful spending and restructuration of the governments operations. In order to curb fiscal imprudence, a fiscal policy target was affirmed through the Fiscal Responsibility and Debt Limitation Act (FRDLA) in 2005 to bind the Government to achieving a revenue balance (total revenue minus total current expenditures) by the end of 200708. Although the targets of the FRDLA were not achieved, the Government is adhering to the Act in its medium term budgetary projections. It is also working on making the Federal Bureau of Statistics (FBS) an independent and modern agency for the timely and reliable provision of economic statistics.
93
The National Commission on Government Reforms (NCGR) has made detailed recommendations to the Prime Minister in 2008 to achieve these objectives in police reforms.
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Furthermore, the Government has approved an Austerity Plan 94 for rationalization of current expenditures, a restructuring plan for eight loss-making PSEs, 95 and successfully concluded the 7th NFC Award to provide a mechanism for center-province and inter-province resource sharing. It has also taken steps to improve the policy making process through greater involvement of the private sector and started preparing a National Governance Plan (NGP) to enhance the capacity of the Government to deliver on its commitments. Despite these notable measures, the Government needs to take urgent steps to increase resource mobilization to implement its development plans, review and prioritize allocations under the Public Sector development Program (PSDP) so that it might accelerate balanced growth while taking credible and permanent steps towards enhancing the capacity and efficiency of government functions. The most notable step taken by the Government to curtail corruption in public sector departments in recent years was the adoption of Public Procurement Rules in 2004 and the establishment of the Public Procurement Regulatory Authority (PPRA). 96 The Provinces have modified the Provincial rule of procurement in light of the Federal rules. Yet the Transparency International National Corruption Survey 2009 shows a number of government agencies are not following the PPRA rules. 97 The National Commission on Government Reforms (NCGR) has recommended the usage of e-government and simplification of procedures that empower the public to reveal corruption. Unfortunately, Pakistan has still not been able to achieve a consensus on an accountability and anticorruption law, and the devision of a strategy to combat corruption in a systematic manner. 98 Pakistan is engaged in a great struggle for security and rule of law. Progress has been made in extending security and rule of law in many regions, but much remains to be done. As is illustrated above, security is more than ending the insurrection. It is also related to reducing criminality and the costs to business of maintaining their own parallel commercial security operations.
The Austerity Plan approved by cabinet on Dec 16, 2009 recommends curtailment in perks and privileges of President, Prime Minister, Chief Ministers and Governors, Ministers and top bureaucracy including reduction in foreign visit allowances; restructuring of PSEs; reduction in federal ministries from 49 to 30 and divisions from 52 to 37; review of concurrent and Federal legislative lists with greater devolution to Provinces; measures for greater budgetary oversight by Parliament; measures to check cost overruns on development projects; review of pay package of bureaucracy and parliamentarians in line with recommendations of Pay and Pension Commission 95 The Cabinet Committee on Restructuring (CCoR) has proposed the formation of independent and professional Boards of Directors (by April 30) and appointment of CEOs (by June 30) as proposed by line ministries in consultation with the CCoR. The eight PSEs will include Pakistan International Airlines, Pakistan Steel Mills, Pakistan Electric Power Company, Railways, National Highways Authority, PASSCO, Trading Corporation Pakistan, and Utility Stores Corporation 96 Another significant development on the judicial front was the Supreme Court verdict declaring National Reconciliation Ordinance ab initio sets precedent against special/discriminatory indemnity given to politicians and public office holders 97 Transparency International Pakistan, National Corruption Perceptions Survey 2009, Karachi: Transparency International rd Pakistan, 3 August 2009, pp.6-7. 98 A National Anti-Corruption Strategy was proposed in 2002, using a system approach for preventing, monitoring, and combating corruption by strengthening horizontal accountability amongst the pillars of national integrity, including legislature, political system, executive, and public accountability bodies including the Auditor General, Public Accounts Committee and the Ombudsperson; anti-corruption agencies; legal system and judiciary; media; civil society and private sector
94
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3.4 Objectives and Framework for Institutional Reform

Despite the progress mentioned above, institutional strengthening and reform remains the most important priority for Pakistan because it enables all of the others for implementing a strategy of economic growth and competitiveness. The first step towards implementing the framework described below is to admit that institutional reform and strengthening is in fact needed and urgently. It is important to first recognize that institutions do need to be reformed, strengthened and coordinated. The benchmarking provided above should serve as an eye-opener. The temptation to deny reality or to explain away the data should be resisted. The multiple sources cited in this benchmarking cannot be explained away by methodological error or international bias. The stop-go nature of economic growth in Pakistan is the ultimate acid test of the effectiveness of its economic strategy and the institutions that implement it. If these have not delivered the results, it is time to focus on the strategy and to improve these institutions. The faltering rate of growth, now falling far behind that of China and India, provides ample evidence in support of the urgency of the situation. The current insurgency is not entirely unrelated to the inability to provide tangible benefits, economic opportunity, and public services, and also adds evidence to the urgency of addressing institutional strengthening. The framework below provides a way to do this. While one might debate the importance of one or other of the elements below, or indeed the inclusion of others, the urgency of addressing the situation should no longer be in question. Good institutions will be critical to implementing all the elements of Pakistans comprehensive competitiveness strategy and is therefore the most important priority. Pakistans comprehensive competitiveness strategy will need to include many simultaneous components such as macroeconomic stability, investment mobilization, export development, human resources development, infrastructure, financial sector modernization and the improvement of the legal and regulatory environment for business. Good Institutions are critical in the implementation of all of these efforts. Achieving ambitious goals for economic growth and poverty reduction will require building and reinforcing effective institutions. Pakistans competitiveness will largely depend on the success of this institutional strengthening and coordination. The framework below can be useful for Pakistans political leaders as a point of departure. 3.4.1 Objectives of Institutional Reform The objectives of institutional reform should include: 1) Providing a business friendly, secure, transparent and level playing field for rapidly expanding investment and economic activity in ways that create jobs; 2) Policy and regulatory regimes that incentivize efficiency, innovation, and productivity enhancement; 3) Re-orienting public sector spending in areas that are most effective in building long-term economic growth; 4) Increasing the access of the poor and marginalized to productive resources, while focusing on public policies to enhance the productive capacity of these resources; 61
3.4.2. Institutional Reform and Strengthening Framework: 7 Priorities A comprehensive institutional reform program is vital to Pakistans competitiveness strategy. The preceding sections have identified seven different areas for institutional reforms that require the attention of the policy makers. In this section, we propose future directions for reform in order to strengthen and complete the existing reform program. 1. Property Rights: Create incentives for investment and innovation Land record digitization needs to be supplemented with an integrated program to regularize both informal settlements (katchi abadis) and existing settlements of state-owned land in urban areas. It is equally important to address the problems of illegal occupation and resolve cases of disputed titling. Without these supporting reforms it will be hard to achieve the objectives of increasing accuracy, transparency, and reducing transaction costs in land exchange. Furthermore, there is a need to ensure the systematic digitization of records in urban areas by bringing the private housing authorities system under a uniform and integrated platform for compatibility and accessibility. The digitization project must be adopted at the national level with provincial and local governments taking ownership of the project. In order to reduce unnecessary delays and opportunities for rent seeking, it is also important to initiate programs for public awareness regarding basic steps and rules for land transactions. Creating an IP registration and protection regime that encourages innovation will require the government to improve the functioning of the IPO Office by streamlining the application and review procedures for granting patents, application review and building staff capacity. The IPO office should initiate a new help line for guiding researchers, inventors and innovators. A coordinated program that encourages patent filing from the university/research institution level up to the actual filing of patents at the IPO must be developed. The main institutions that can provide technical facilitation for patent applications and filing, as well as awards and incentives, include the Higher Education Commission, Pakistan Council of Scientific and Industrial Research (PCSIR), Pakistan Science Foundation (PSF)/ Pakistan Scientific & Technological Information Center, Technology Incubation Center (TIC), and the Small and Medium Enterprise Development Authority (SMEDA). The new IPR regime has been in place for four years now and an evaluation of regulatory framework should take place. Certain prohibitions such as limits to patenting software must be reviewed and amended in light of international best practices. Finally, in order to encourage innovation, it is important that the policy makers develop and implement a holistic national innovation strategy focusing on the entire innovation ecosystem. 99
99
Organization for Economic Cooperation and Development, National Innovation Framework, 1997, p.9. According to the OECD, the main facets of national innovation framework should focus on building industry alliances, industry-universityinteractions, technology diffusion and personnel mobility. The Competitiveness Support Fund has developed a comprehensive National Innovation Strategy for Pakistan based on this framework (Competitiveness Support Fund, 2009, pp.83-118).
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CHAPTER 3: INSTITUTIONAL REFORMS FOR COMPETITIVNESS 1. PROPERTY RIGHTS- Create incentives for investment and innovation Key Objectives: a. Create a secure, reliable and transparent system of property rights administration to encourage investment and innovation Recent Reforms in Pakistan Future Direction for Reform Medium term (3-5 years) 1.1. Improve land administration, titling and record keeping to create secure, reliable, accessible and transparent system of land management, increase title and tenant security, and to enhance functioning of land markets Launch integrated programs to regularize informal settlements (katchi abadis) and existing settlements on state land in urban areas, address illegal occupation and resolve cases of disputed titling Start a public awareness program regarding basic steps and rules for land transaction to reduce unnecessary delays and exploitation 1.2. Create an integrated IP registration and enforcement regime. IPO of Pakistan Ordinance 2005 established an integrated IPR regime with an office attached to the Cabinet Division reporting to the Prime Minister Expedite the application and review process for patent filing at IPO Patent help lines for guidance of researchers, inventors and innovators Coordinated program of technical facilitation and incentives to encourage patent filing through HEC, PCSIR, PSF, TIC, SMEDA Build capacity of IPO staff to improve interface between the innovators and the government Devolution of responsibility for land administration to district, tehsil, and union council governments in 2001 to improve governance and accountability in land administration Computerization of provincial land records underway as part of the Punjab Land Records Management Information System Project Systematic digitization of records in urban areas to ensure uniformity and compatibility of the record management systems put in place by private housing authorities Scale up digitization program to the national level with provincial and local governments taking ownership of the program Short term (1 year)
Initiate review of IPO laws in light of international best practices e.g. modify law to make software patentable Encourage innovation through a comprehensive strategy focusing on the entire innovation ecosystem
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2. Encourage efficiency and make it easy to do business by modernizing administrative laws, policies and administration The Government should implement existing initiatives related to insolvency, commercial arbitration, and Special Economic Zones (SEZs). The Government has initiated the modernization of the Insolvency framework, Commercial Arbitration Laws and a regulatory framework for Special Economic Zones (SEZs). The new Corporate Rehabilitation Act should provide a comprehensive legal framework that enables restructuring to be driven by creditors and debtors in a transparent manner. The proposed public-partnership restructuring vehicle Resolution Trust Corporation (RTC) should be integrated into the framework for the CRA to provide a professional institutional and operational arrangement for overseeing and administering restructuring and liquidations. In the area of commercial arbitration, the new Commercial Arbitration Act modeled on international laws should be instituted as soon possible and made binding without appeal. The SEZ legislation must be fast-tracked to provide a unified legal, policy and regulatory framework to coordinate the establishment, regulation and administration of SEZs. Review, simplify, and rationalize existing economic laws and regulations. The Government should implement the recommendation of the Planning Commissions Task Force on Private Sector Development to review all of the economic laws in order to simplify the legal and regulatory environment facing firms and to encourage private sector growth. 100 The Panel of Economists also recommended replacing antiquated Provincial Marketing Acts with a modern legal and regulatory framework that enables the private sector to play a greater role in agricultural markets. 101 Streamline compliance and obtaining of Government permits, licenses and services. To streamline tax administration and collection, the FBR should implement e-government facilitation amongst the business enterprises. The Federal and Provincial Governments must initiate procedural and regulatory reforms to convert the Board of Investment and Provincial Boards into one-stop shops for domestic and foreign investors. Labor laws and regulations must be reviewed to reduce compliance costs and increase flexibility in hiring, while protecting workers rights. The sub-national Doing Business rankings recently released by the World Bank can provide a useful trigger for jump-starting reforms at the provincial and city-level. In the medium term, there is a need to streamline and integrate procedures across the various district and city-level agencies responsible for property transactions and construction approvals, business operations, licenses and permits, and providing access to public utilities. IT based solutions and Online Procedures Enhancement for civil application (OPEN) will be instrumental in reducing the cost of doing business. 102
100 101
Shahid Javed Burki, Towards a New Development Paradigm, DAWN Business Review, February 22 2010. Government of Pakistan, Interim Report on Economic Stabilization with a Human Face, Report of the Panel of Economists, Islamabad: Planning Commission, October 2008, p.10. 102 Online Procedures Enhancement for civil applications (OPEN) enables citizens to file and handle applications using the Internet (Easy Access), provide access to real-time information (Transparency) and provide access to all relevant publicly available information for fairness and objectivity thereby removing public distrust (Credibility).
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CHAPTER 3: INSTITUTIONAL REFORMS FOR COMPETITIVNESS 2. LEGAL, REGULATORY AND ADMINISTRATIVE FRAMEWORK- Encourage efficiency and ease of doing business
Key Objectives: a. Simplify and modernize commercial laws to facilitate private sector participation and investment, enable development of export-oriented and value-added sectors, allow adjustment in declining industries, reduce opportunities for rent-seeking and create a level and competitive business environment. b. Streamline regulatory and administrative frameworks to enable reduction in firms cost of doing business to enable them to effectively compete in a highly globalized and evolving environment c. Regulate market failures and anti-competitive practices
Recent Reforms in Pakistan
Future Direction for Reform
Short term (1 year) Medium term (3-5 years) 2.1. Institute a modern insolvency legal framework that balances the rights of creditors and debtors and is able to maximize the economic benefits of restructuring from a societal point of view
Drafting of a modern insolvency law (Corporate Rehabilitation Act) underway at the SECP Ministry of Finance considering formation of a Resolution Trust Corporation (RTC) as a publicprivate venture to help in restructuring sick units through mergers with viable units in the textile sector Integrate RTC into the framework for the CRA and create a professional institutional and operational arrangement for overseeing and administering restructuring and liquidations Finalize and pass CRA to provide a legal framework that enables restructuring to be driven by the stakeholders (creditors and debtors) in a transparent manner
2.2. Implement Commercial Arbitration Act in accordance with international laws to safeguard interests of investors and create uniformity in the domestic and international trade laws for dispute settlement through arbitration Drafting of a modern Commercial Arbitration Act encompassing arbitration, conciliation, recognition and enforcement of foreign Arbitral Awards, and Arbitration under the Convention on the Settlement of Investment Disputes, based on the Model Law recommended by the UN Assembly for compliance and adoption Repeal the old laws as soon as possible, while making the new law binding without appeal Set up a National Arbitration and Conciliation Center under the new law for institutionalizing the services relating to arbitration, conciliation, and alternate dispute resolution in a systematic and regulated manner Develop uniform legal framework for regulations governing Alternative Dispute Resolution Improve transparency, quality, responsiveness and efficiency of the existing judiciary as commercial arbitration and international arbitration cannot replace a properly functioning judiciary
2.3. Adopt a comprehensive legal, policy and regulatory framework to coordinate the establishment, regulation and administration of Special Economic Zones (SEZ) Draft SEZ Act prepared by the Board of Investment approved by the Economic Coordination Committee (ECC) and ready for Fast track SEZ legislation and reduce reliance on ad-hoc ordinances to grant fiscal and other policy incentives to interest
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presentation to Parliament groups Ensure that the new law provides a unified legal framework for SEZs; defines incentives available to investors in all approved SEZs based on benchmarking with competitor countries and anticipated economic impact, evolve transparent and measurable criteria for giving policy incentives to pioneer industries and sectors, and set standards the zones must meet to qualify for these incentives.
2.4. Simplify the legal and regulatory environment for firms and enable greater private sector participation Initiate review of all economic laws on the books to simplify the legal environment for firms Streamline and integrate procedures across the various district and city-level agencies responsible for property transactions and construction approvals, various licenses and permits and public utilities; use IT based solutions to improve service delivery; set up SME facilitation desks Review and modernize labor laws to reduce costs of compliance and increase flexibility in hiring while protecting workers rights 2.5. Enforce an effective, fair and transparent anti-trust regime to foster competition and protect consumers Promulgation of a modern competition law and creation of an independent Competition Commission of Pakistan (CCP) through special ordinance in 2007 as a quasi-judicial, quasiregulatory, law enforcement agency to ensure free competition in all spheres of commercial and economic activity, to check anticompetitive behavior in order to promote economic efficiency and to protect the rights of the Competition Ordinance has been approved on a priority basis by the Parliament to grant CCP permanent legal status as an independent regulator Ensure new legislation provides for mechanism to enable timely disposal of cases and grants CCP adequate powers and financial independence to effectively enforce the law Tax administration reform underway at the FBR with a number of programs to encourage self-assessment, regional tax offices (RTOs), custom collectorates, e-filing, service call centers and other IT based solutions Ensure e-government facilitation amongst the business enterprises Initiate procedural and regulatory reforms to convert BoI and Provincial BoIs into one-stop shops Introduce modern Agricultural Marketing Law to allow efficient development of efficient agricultural markets
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general public
3. Strengthen Private Institutions to Encourage Investment and Safeguard Public Interest Although the SECP has introduced a modern Corporate Governance code for all publicly listed companies the GCI expert opinion surveys show that there are gaps in enforcement of these regulations. Therefore the SECP should undertake a diagnostic exercise to identify the problems in enforcement of SECP laws and steps to improve compliance. Similarly the SBP should continue to monitor the non-performing loans in commercial, agricultural, consumer and SME sector and take appropriate steps to strengthen the supervisory regime for financial risk management. Given the dominance of family owned enterprises in the Pakistani business landscape, in the medium term the SECP could launch a program to help SMEs and non-listed companies in improving internal governance, reporting and disclosure practices. It should continue review of laws governing stock exchanges management, securities, and other financial products trading regulations to enable development of efficient capital markets.
3. PRIVATE INSTITUTIONS - Support private sector development and safeguard public interest
Key Objectives: a. To protect rights of investors, provide an efficient and transparent regulatory framework b. Facilitate development of a modern, efficient corporate sector Recent Reforms in Pakistan Future Direction for Reform Short term (1 year) Medium term (3-5 years) 3.1. Corporate Governance reforms for protection of investors, enhanced disclosure and transparency Code of Corporate Governance 2002 introduced by the Securities and Exchange Commission Pakistan (SECP) for all publicly listed companies requiring them to include a compliance section in their annual reports, supplemented by a number of additional manuals and changes State Bank of Pakistans Prudential regulations to supervise risk-management and governance of financial institutions Diagnose problems in enforcement of SECP laws and take steps to improve compliance Monitor and strengthen supervisory regimes for risk management to control nonperforming loans in commercial, agricultural, consumer and SME financing Continue review of laws governing stock exchanges management, securities and other financial products trading regulations to enable development of efficient capital markets Facilitate family owned businesses, SMEs and non-listed companies in improving internal governance, reporting and disclosure
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4. Improve Impartial Commercial Justice: Reduce the Risk, Cost and Uncertainty Related to Contract Enforcement Address backlogs and delays in justice administration. In order to provide timely dispute settlement and effective contract enforcement for businesses and the public at large, the government, in partnership with the judicial and law enforcement machinery, needs to launch a comprehensive program for addressing backlogs and delays in justice administration at all levels of the courts. In order to continue the reform process set in motion by the Access to Justice Program, the Government should identify specific programs for judicial and law enforcement reform in view of the National Judicial Policy goals. Specific programs can involve improving case flow management and other court processes, modernizing court infrastructure and court management practices and achieving appropriate case load levels at the superior and sub-ordinate court levels. There are a number of donorfunded programs in place that need to be coordinated with an overall vision and strategy for achieving these changes in a time-bound manner. In the medium term, the government should also initiate efforts to produce a modern Alternate Dispute Resolution (ADR) legal framework (including Commercial Arbitration Act discussed above). ADR services should be institutionalized and made affordable for small business and the public at large. Encouraging arbitration, mediation, and conciliation, will lower the burden on the court system. To strengthen law enforcement, the government should review and implement the recommendations made by the National Commission on Government Reforms (NCGR), in particular steps to make police politically neutral, organize it functionally, improve compensation and incentives, and provide training and proper equipment for effective law enforcement. 103
103
Government of Pakistan, Report on the National Commission for Government Reforms on Reforming the Government in Pakistan, Islamabad: Prime Ministers Secretariat, Vol I, May 2008, pp. 241-251.
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4. CONTRACT ENFORCEMENT- Enable investment and exchange

Key Objectives: a. To encourage investment and FDI by enabling rapid and timely settlement of disputes for protection of property, enforcement of creditor rights Recent Reforms in Pakistan Future Direction for Reform Short term (1 year) Medium term (3-5 years) 4.1. Provide timely dispute settlement and effective contract enforcement for businesses and public at large Identification of specific programs Develop an integrated for judicial and law enforcement Alternate Dispute reform to continue the process Resolution Framework set in place by the Access to (including the Justice Program in view of the Commercial National Judicial Policy goals for Arbitration Act) and example: institutionalize o Improving case flow affordable Alternate management and other Dispute Resolution court processes services for small o Achieving appropriate business and public at case load levels large o Modernizing court infrastructure, facilities and court management practices Mobilize and coordinate donor support for achieving reforms in a time-bound manner 4.2. Police reform to enhance capacity for law enforcement in a transparent and accountable manner ADB funded the Access to Justice Program from 2002-07 to increase efficiency and capacity of judiciary, courts and police through technical assistance, loans and pilot projects New Judicial Policy 2009 prepared by the Law and Justice Commission articulates commitment to address backlogs and delays in justice administration at superior and sub-ordinate courts, fix time frame for disposal of civil and criminal cases and eradication of corruption in courts Implementation of Police Order 2002 to introduce changes in organization and management of law enforcement Review and implement the recommendations made by the National Commission on Government Reforms (NCGR), in particular: steps to neutralize police, organize it on a functional basis, improve compensation incentives, training & equipment
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5. Improve macroeconomic stability and improve the effectiveness of fiscal policy In order to provide a stable and predictable macroeconomic environment, a key policy objective should be to curb fiscal imprudence. The government should therefore reaffirm its commitment to the FRDLA and a rule based fiscal policy with limits on borrowing from the SBP. The FBS should be converted into an independent and modern statistics agency that provides accurate, timely, and reliable data for sound economic management. Rationalization of the current expenditures through austerity measures is a welcome step, but there is a need to promote a culture of careful and cost-effective stewardship of public resources on a permanent basis. It is equally important to focus on increasing the resource mobilization efforts through reforms in tax administration and tax policy, including broadening the base of collections, making rates reasonable, and easing compliance. On the spending side, it is important to free up budget space in the Federal and Provincial Public Sector development Programs to increase spending on sectors that are critical for sustained growth and competitiveness (infrastructure, power, agriculture, irrigation and human development).
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5. GOVERNMENTAL EFFECTIVENESS Ensure good economic management The National Governance Plan should be approved after consultation with stakeholders. Special attention should be paid to put in place institutional mechanisms such as policy planning and implementation hubs in key ministries to guide, monitor and evaluate the implementation of policies. It is also hoped that the re-organization of government departments will lead to better co-ordination of economic policies across Ministries, Agencies and Provincial Governments with clear delineation of responsibilities.
Key Objectives: a. Ensure macroeconomic stability for creating predictability and encouraging investment b. Improve public resource management and policy making to facilitate private sector development c. Increase capacity, efficiency and transparency in government operations to enhance government credibility and policy consistency Recent Reforms in Pakistan Future Direction for Reform
Short term (1 year) Medium term (3-5 years) 5.1. Implement rule-based fiscal policy to curb fiscal imprudence that poses a threat to inflation, balance of payments and overall macroeconomic stability Fiscal Responsibility and Debt Limitation Act (FRDLA) 2005 designed to bind the Government to achieve revenue balance (total revenue minus total current expenditures) by end 2007-08 Although the targets of the FRDLA were not achieved, the Government is adhering to the Act in its medium term budgetary projections Request Parliamentary resolution to affirm commitment to FRDLA including an amendment limiting the extent of government borrowing from Sate Bank Pakistan Focus on enhanced resource mobilization through reforms in taxation, revenue administration and collection and steps to prioritize and rationalize the current expenditure budget.
5.2. Ensure reliability, accuracy and accessibility of economic statistics Improve quality and timeliness of Build capacity of Government of Pakistan statistics provincial statistics by investing in human resource agencies to obtain development and enhancing reliable sub-national linkages with leading academic economic data institutions in the country to ensure best practices are followed in statistics collection 5.3. Reduce wasteful spending and orient expenditures towards priority sectors to support private sector development Plan to convert the Federal Bureau of Statistics (FBS) into a truly autonomous statistics agency with technical collaboration from Statistics Canada and Federal Statistics Office of Germany Approval of Austerity Plan by Cabinet on Dec 16, 2009 recommending rationalization in current expenditures by reducing top government and bureaucracy administrative expenses Restructuring of eight PSEs started by Cabinet Committee under the Austerity Plan with a time frame for appointment of Concrete efforts for resource mobilization at national and provincial levels through: broadening the tax base, introduction of a provincial advance agricultural income tax, and improving tax administration machinery at all tiers Review of Federal and Provincial Annual Development Plans (ADPs) Make recent austerityrelated rationalization measures permanent and promote culture of careful and costeffective stewardship of public resources
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CHAPTER 3: INSTITUTIONAL REFORMS FOR COMPETITIVNESS professional Boards and CEOs in consultation with line ministries th Conclusion of the 7 NFC Award (2010-2015) to provide a consensus based mechanism for center-province and interprovince resource sharing PSDPs to increase spending on infrastructure, power, agriculture, irrigation, human development
5.4. Improve the policy making process; increase efficiency and capacity of government to deliver on its policies Revival of dialogue and consensus Approve the National Governance Establish policy building with the private sector in Plan with consensus of key planning and formulation of public policy stakeholders and chart out a implementation hubs through Business Persons Council, detailed implementation plan in key ministries to various task forces and working monitoring and groups evaluation mechanism to verify Preparation of a National implementation and Governance Plan for better recommend human resource management, adjustments in policies process re-engineering, where necessary strengthening of regulatory institutions and restructuring of Co-ordinate economic government owned enterprises policies across Ministries, Agencies and Provincial Governments with clear delineation of responsibilities
6. Control of Corruption: Facilitate Investment and Growth Corruption in public sector departments and agencies acts as a tax on investment. It reduces growth by diminishing the resources available to address pressing economic constraints. To address negative perceptions, the government should announce a short-term action plan to address high profile instances of corruption in procurement, corruption by public office holders, and key government departments to create a deterrent effect and to create confidence in public institutions. Corruption in procurement and tendering can be combated with the adoption of uniform public procurement rules at the national and provincial level. Simultaneously, capacity building programs should be initiated to enable government departments at federal, provincial, and local levels to implement these rules effectively. Effective third party auditing of large-scale projects should be made routine in order to help check corruption. OPEN systems and IT based interfaces should be introduced in all civil administration matters starting with key agencies dealing with registration, licensing, regulation and other aspects of doing business. In the medium term, the government should adopt a consensus-based corruption control strategy, which should include establishing a single, independent anticorruption agency and devising a system wide comprehensive strategy for monitoring and combating corruption.
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6. CONTROL OF CORRUPTION- Facilitate Investment and Growth

Key Objectives: a. Stimulate private sector enterprise by increasing investor confidence in public institutions b. Reduce the corruption tax on doing business by reducing petty and middling corruption c. Move towards a consensus based strategy to control corruption in a systematic manner Recent Reforms in Pakistan Future Direction for Reform Short term (1 year) 6.1. Stop abuse of public office for private gains Adoption of Public Procurement Rules in 2004 and setting up of Public Procurement Regulatory Authority (PPRA), adoption of provincial public procurement rules by Sindh and Punjab in 2009, to ensure transparency and cost-effectiveness in procurement of quality goods and services in public departments Short-term action plan to address high profile instances of corruption in procurement, corruption by public office holders and key government departments to create a deterrent effect and win private sector confidence Implement uniform public procurement rules in all government agencies, bring provincial laws in line with federal rules and capacity building within departments to implement rules Ensure third party auditing of large scale projects Simplify rules and procedures in civil administration matters and empower public to reveal corruption through use of egovernment and OPEN procedures Formulate new law to set up a single independent anticorruption agency Review the National Anti-Corruption Strategy 2002 to devise a system wide strategy for monitoring and combating corruption Medium term (3-5 years)
7. Security: Gain investor and business confidence To protect commercial and business activities from the direct brunt of crime, violence, and terrorism, the government should immediately create and publish a credible strategy for lowering costs of security to businesses covering personal security as well as goods security. It should improve funding, equipment, transportation, communications, and responsiveness of police beginning with Pakistans major urban production centers and transport corridors on a priority basis. Longer term, the government should implement a National Police Reforms. The government will need to strengthen law enforcement in a sustained manner through a comprehensive police reform that takes account of the variations in security needs of various geographical areas. The government should also direct the relevant statistics departments to collect, publish and monitor data on the costs to businesses of crime, violence, and terrorism, as well as the cost of maintaining parallel private security and seek to bring down these costs over time. The government should also explore the possibility of strengthening frameworks for insurance protection against theft, crime and violence. To the extent that elements of the government security and police forces are themselves implicated in any irregularities, the government needs mechanisms to monitor and address these as well. 73
CHAPTER 3: INSTITUTIONAL REFORMS FOR COMPETITIVNESS 7. SECURITY AND LAW & ORDER- Gain investor and business confidence
Key Objectives: a. Provide a secure environment to reduce the business costs of crime, violence and terrorism and increase ease of doing business across borders Future Direction for Reform Recent Reforms in Pakistan Short term (1 year) 7.1. Improve security and law and order situation for business activities No defined strategy to protect business and commercial activity apart from enhanced security monitoring and checking at all incoming routes into major cities Create and publish a credible strategy for lowering costs of security to businesses (national security, personal security and goods security) Improve funding, equipment, transportation, communications and responsiveness of police beginning with Pakistans major urban production centers and transport corridors Medium term (3-5 years)
Strengthen law enforcement through comprehensive police reform (above) Explore framework for strengthening insurance protection against crime and violence Monitor costs of crime and violence and of parallel private security costs to business
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3.5 Conclusion
In this chapter, we have indentified seven institutional constraints to competitiveness, reviewed recent reforms, and proposed specific recommendations for further specific action. The proposed direction for reform builds on, and does not aim to replace the Government of Pakistans existing 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 and competitiveness by improving the overall economic and business environment. The recommendations also emphasize the responsibility of federal, provincial, and local governments to undertake efforts in their respective jurisdictions. Institutional strengthening and reform also involves private institutions and recommendations have been made 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 and mobilize broad public understanding and support for its economic growth program. Thus the institutional framework encompasses more than civil service reform and governmental organization, it requires an institutional framework capable of mobilizing the energies of a diverse private sector, 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 and regulatory regimes that incentivize investment, efficiency, innovation, and productivity enhancement. These efforts require strong political commitment, consensus building and coordination across ministries and between the federal and provincial levels. Implementing a coordinated reform will boost Pakistans future growth and competitiveness and help make further economic progress consistent. The costs of inaction are simply too high.
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The State of Pakistans Competitiveness Report 2010-2011

Recovery and Rebuilding The Foundations of Pakistans Competitiveness

PAKISTAN COMPETITIVENESS REPORT

PAKISTAN COMPETITIVENESS REPORT

MMBTU Million British Thermal Unit MP Market Prices

PAKISTAN COMPETITIVENESS REPORT

PAKISTAN COMPETITIVENESS REPORT

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

PAKISTANS COMPETITIVENESS RANKINGS IN 2010

1.1 Overview of Pakistans Ranking on the Global Competitiveness Index

GCR Report Rank Out of Hard Score

2007 2008 92 131 3.77

2008 2009 101 134 3.65

2009 2010 101 133 3.58

2010 2011 123 139 3.50

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

1.2 Overview of Pakistans performance on 12 competitiveness pillars

RANK 2009 2010

SCORE 2009 2010

INNOVATION 11. Business AND Sophistication SOPHISTICATION 12. Innovation

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

1.3 Notable achievements and challenges

Difference (one year)

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

Table 1.3 Largest Reversals in Country Rank for Pakistan 2010

20082009 95 87 120 84 90 58 96 78 67 83 31 114 102 95 109

20092010 103 64 105 87 88 22 85 59 84 87 38 116 102 93 105

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

Pakistans performance against comparator countries

India Indonesia Brazil Sri Lanka Bangladesh Pakistan 0 20 40

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

Discussion of the 12 Pillars

PILLAR 1: INSTITUTIONS GCR report 20062007 5 Rank 79 Score

20092010 8 104 3.3

20102011 9 112 3.3

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

PILLAR 2: INFRASTRUCTURE GCR report 2006-2007 Rank 67 Score 3.36

2010-2011 110 2.8

Electricity supply remains a key challenge to Pakistans overall infrastructure

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

2008-2009 2009-2010 116 114 4.2 3.8

2010-2011 133 3.2

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

2009-2010 113 3.9

2010-2011 123 4.3

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

2009-2010 118 2.9

2010-2011 123 2.9

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

20082009 101 3.9

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

20082009 121 3.8

20092010 124 3.5

20102011 131 3.5

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

20092010 104 2.9

20102011 109 2.9

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN

PILLAR 10: MARKET SIZE GCR report 20062007 Rank Score

CHAPTER 1:THE COMPETITIVENESS RANKINGS FOR PAKISTAN