Development Dichotomies: How Policy And Regulations Must Raise Economic Complexity In Pakistan

On the 9th of December 2021, the Economic Advisory Group (EAG) set up by the PRIME Institute, a private think tank invested deeply in the idea of free markets, launched a report on a new vision for Pakistan’s economic transformation. The launch was attended by some of Pakistan’s leading economists, social scientists and thinkers – including the Minister for Planning and Development, Mr Asad Umar. He proposed to have a dialogue amongst economists, much like a dialogue that takes place between politicians both within and outside the parliament. The dialogue, he believes, would lead to a consensus amongst economists that would be vital in determining the direction that the economy takes. While discourse is important, it was unclear if he related Pakistan’s economic problems to the lack of discourse or that discourse itself could act as a potential solution to the problems! In either case, one wonders if there could ever be a greater simplification of Pakistan’s economic conundrum and the best ways to address it.

While recognising the importance of free markets and liberalist economic ideas like privatization and deregulation, the report emphasises that markets in Pakistan have failed and the only way by which governments can avert efficiency losses and provide an enabling environment to innovators is by planning an economic transformation and enhancing the degree of complexity in the economy. It makes four proposals to enhance the degree of complexity in the economy:

• revisiting the current pricing regime


• revamping of the education sector with an aim to mainstream vocational training at the level of post-secondary or higher education


• reduction in tariff and non-tariff trade restrictions and integration into regional and international trading blocs


• rethinking industrial policy with the aim of improving land use in cities and simplification of the tax code

The authors also make several recommendations to realise the desired transformational impacts in each of the policy areas outlined above. One recommendation that attracts attention is to direct the productive resources of the economy towards their most efficient uses. Historically, subsidies, government policy and regulations have ensured that the returns of engaging in the production of less complex goods remain high, which has resulted in crowding out resources from the production of complex goods (high-tech and value-added goods). Taxes, subsidies and pricing regimes have all incentivised some sectors and commodities over others, which has led to an asymmetric development of some sectors and commodities. But, as the authors seem to argue, the sectors that such government support have developed have less to offer in terms of their role as multipliers and contributors to overall economic growth. Sectors and commodities that have a higher multiplier effect are seldom at the receiving end of the policy and regulatory benefits from the government. This has kept Pakistan beneath its growth and development potential.

The report emphasises that markets in Pakistan have failed and the only way by which governments can avert efficiency losses and provide an enabling environment to innovators is by planning an economic transformation and enhancing the degree of complexity in the economy

The report, however, does not talk about Pakistan’s growth potential: something which I believe is important to discuss in any studies that highlight the role of the private sector. Overall, the report carves out a subsidiary role for the government and proposes market reforms, each of which will ensure that government policy and regulations are fair, transparent and allow greater freedom to businesses to conduct their enterprise.

The developing world offers a particular challenge for liberal economists and free market fundamentalists. With high levels of multi-dimensional poverty and development and governance issues aplenty, it is hard to look beyond the “social function” of governments – which is why we have not gone any further from what I call “the age of government” to an age where we come to develop a passive or – rather euphemistically – a supportive role of the government.

One binary that has come to define the relationship between the government and the private sector is the policy - service delivery binary. It basically implies that services are best delivered through the private sector, which will ensure efficiency and distribute resources equitably through market forces and the pricing mechanism. Here, policy is the government’s job and its architects, the bureaucracy led by the political elite, shall have a great influence in how it is designed and implemented.

Free marketers who vehemently disregard the government as an adequate force to address our  21st-century development challenges must realise that the private sector – regardless of who inhibited its growth – is also an inadequate force

While the EAG has not explicitly ascribed to this binary, the report seems to provide an impression that despite the move towards market reforms and deregulations in certain sectors, for all policy and regulatory purposes, the government will continue to remain the dominant player. The binary, however, as both plain logic and empirics indicate, is flawed and does not produce results.

Here are a few reasons why the binary does not work and why thinking along the lines of an economic transformation must begin from a clear demarcation of the respective roles of the government and the private sector and the extent to which resource allocations between various commodities and sectors have to be done on the basis of uniformity.

While the EAG proposes uniform tariffs, it does factor in sectoral contexts as a guiding principle to distribute resources between sectors and commodities, and extends the role of the government from its social/development function to the role that it must perform to facilitate private enterprise, promote innovation and incubate startups, etc.

This binary hasn’t really worked in the developing world. And there are several reasons for its failure.

Firstly, those free marketers who vehemently disregard the government as an adequate force to address our  21st-century development challenges must realise that the private sector – regardless of who inhibited its growth – is also an inadequate force. The private sector falls short from the perspective of the efficiency gains that it has managed and the size of investments it can muster, to address the challenges that the extent and number of market failures in the developing world brings. Secondly, the argument that lies behind such a line of thinking is that markets and private firms are efficient and therefore must be the providers of services. However, it fails to recognise that the efficiency of markets is largely dependent upon policy and hence the binary fails to exist because of a strong inter-dependency of policy and service delivery. By giving the government discretion and control over policy, one strips the service delivery function of its necessary autonomy, which is vital for the efficiency with which the private sector can delivery services. Thirdly, the 18th amendment created a divide within the government to create an internal policy - service-delivery binary. Here the authority to design policy implicitly resides with the federal government and service delivery is devolved to the provinces. Fourthly, the binary was dismantled everywhere the government entered into public-private partnerships: engaging the private sector for technical consultations and providing them some control over policy and in many other cases, delivering services by outsourcing them to private firms.

While deregulation and market reforms are desirable, it will be interesting to see how differently the binary will work out and under what arrangement the government and the private sector will operate, so as to ensure that policies and regulations are efficient and responsive to the needs of the private sector.