Loud Thinking

Building Pak Economy – Solid Suggestions

By Rizwan Ghani

Published by the daily “Pakistan Observer” 16 July, 2013

Government needs to take following steps after PM’s China visit to build Pakistan’s economy under its economic diplomacy.

Tax laws should be passed. Gwadar cannot become another Hong Kong with tax free zone. Investment of Chinese firms in US increased to $9.3bn in 2012 (cumulative $22.8 bn) from $1.77bn in 2007 due to advanced technology, management , and ease of business. Chinese investments are on the rise in US due to low costs of utilities, land use, green policies, US SelectUSA FDI initiative and Chinese government’s encouragement to domestic companies to invest abroad including US (More Chinese firms investing in US, July 9, China Daily). Islamabad needs to announce clear tax rates, anti-corruption policy and supporting infrastructure including courts and policing to investors to generate revenue from Gwadar instead funding private business and individual profits at the cost of public welfare and tax money.

Effective and accountable LG is must for strong economy. In Need for Neutral Monetary Policy (July 13, China Daily), it has been highlighted that local governments and poor banking practices have built China’s debt. The most significant medium- and long-term threat to China’s fiscal position lies in the system of implicit guarantees that the central government has established forlocal government (LG) debt ($1.7 tn) by 2011. It forced LG to sell their lands and central government to increase financial assistance by 78%, deal with shadow banking, resultant inflation and unemployment. Chinese government is using combination of steps to make LG viable and accountable such as cutting bank lending, transparency and zero tolerance for corruption. Pakistan needs to address these issues ahead of LG elections for sustainable economic growth, generation of jobs and revenue at grassroots.

Privatization has failed to build economies. China’s 64 State Owned Enterprises (SOEs) are inFortune 500. Central government’s 118 SOEs accounted for 43% of China’s GDP in 2012. There are 1,45,000 SOEs under local governments in China. The value of SOEs in China is 190bn yuan (Debate heats up on role of govt. giants, July 8, China Daily). Privatizations of SOEs in former USSR resulted in monopolies and 56 % increase in poverty. It also failed in Eastern Europe. British government spent £9bn to upgrade tracks and cut £3bn annual rail-access by half (£1,5bn) to attract £200 mn investment in British rail, but still it failed to reduce ticket prices. (Don’t be fooled …Virgin trains, June 24, the Guardian). Harbin province of China employs 7, 17,000 employees in 1800 SOEs and it earned 3.4bn yuan profit in 2012. SOEs are part of Beijing’s strategic planningincluding public welfare. Pakistan needs to reform SOEs instead of privatizing them to improve its economy, create and sustain jobs and save taxpayers for funding profits of privatized SOEs.

Pakistan needs to align its economic policies with new global development model. West’s trade liberalisation and financial deregulation systems have failed to deliver. China’s has used infrastructure and industrial policies under regulated trade and financial markets to transform its economy in last 30 years, and brought more than 600 million people out of poverty. Western policies, on the other hand have led to financial crises, slower growth, growing poverty, poor healthcare and education. Central Bank of China is lending more than World Bank for its policies without imposing conditions like liberalisation and fiscal austerity. If Chinese banks manage to incorporate environmental and social safeguards in their overseas operations it can boost global development (China’s dev banks…July 10, the Guardian).

Global poverty alleviation models can help revive Pakistan’s economy. China relocated 250 million people in last ten years under its poverty alleviation scheme. America used Homestead Law in 13 states under which state land was allotted to families as long as they continued to till it. There is a need to relocate 40-50 million people in KPK, Baluchistan, and Deserts of Sindh & Punjab to fight poverty, unemployment, and ensure food security through cultivation of unused land, value addition of agriculture, dairy, meat, poultry, fish, adopting renewable energy and vertical farming. Ethiopia expects to earn $2bn annually from sesame seed export to China by 2015 (Ethiopia’s sesame seed trade with China-a partnership of equals? July 10, the Guardian). It will help to end anti-state activities, improve security and become prosperous economy (Impact of changing demographics, July 10, China Daily).

SMEs, MSEs and alternate energy are the new future. Small and medium enterprises and micro and small enterprises are drivers of economy, generators of jobs and reducing poverty. Government can expand agriculture, manufacturing and services sector ten folds in next three years by ending indirect tax, imposing 7% stat tax on all earning and giving loans on 5% (EU, US interest rates). Government can realize this policy by generating 10GW power from alternate energy due to 10-15% annual decrease in its per unit cost. There are 13.7 million registered and 40.6 million self-employed companies in China in 2012. More than 99 percent of them were SMEs and MSEs. They contributed to more than 60 % of the annual GDP and 80 % of the jobs in cities (Thinking small begins to yield results, July 7, China Daily). SMEs part of China’s regional cooperation with 19 countries. Similarly, SMEs are the drivers of US and European economies. Pakistan needs to use country’s banking sector, universities, and local governments to use them in economic growth, job creation and social progress.