Abdullah Kamran
For Pakistan to achieve the desired 7-8% growth rate necessary to reduce its debt burden, a substantial investment of 28.8% is required, as calculated by the Pakistan Institute of Development Economics (PIDE) based on the current Incremental Capital Output Ratio (ICOR). However, the unstable business environment in Pakistan has not been conducive to attracting the required investments. Yet, with the right changes, Pakistan’s economy has the potential to grow and innovate at an unprecedented rate.
Introducing large, exporting, outward-looking, and professionally-run corporations is essential to achieve this goal. This can be facilitated through the introduction of a modernized regulatory framework. It is crucial to understand that in Pakistan, the term ‘authority’ often implies ‘absolute control.’ Consequently, regulatory authorities tend to impose rules that create friction and make tasks and business operations burdensome. For instance, the requirement of multiple licenses for a single business operation or the need to obtain a license from multiple authorities for a single product can be considered as over-regulation. Pakistan is perceived to be over-regulated, with regulators often creating more barriers through unnecessary licenses rather than facilitating businesses.
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According to PIDE’s findings, there are as many as 122 regulatory authorities at the federal level in Pakistan. This number not only multiplies across the three tiers of regulations (federal, provincial, and local) but also leads to overlapping regulations. This layering of regulatory authorities becomes a liability, accounting for 39% of GDP as the cost of regulations. The presence of numerous regulatory authorities in a “control-obsessed society” like Pakistan has serious consequences, as it creates significant impediments for potential investment.
Furthermore, the direct intervention of the government accounts for more than 67% of the GDP. Over-regulation and government intervention are significant barriers to investment and innovation, leading to rent-seeking behavior, market retardation, and time-consuming processes that open avenues for corruption.
In response to these challenges, efforts have been made to reduce regulations and improve the ease of doing business. This has resulted in a notable improvement, with Pakistan’s Trade Facilitation Score increasing from 57% in 2021 to 71% in 2023. However, the presence of multiple regulatory authorities for the same sector leads to overlapping, adding to the cost of goods and services due to over-regulation.
To address these issues, PIDE proposes the adoption of a modernized regulatory framework with an embedded “Regulation Impact Evaluation (RIE)” system. This system, following international best practices, involves the establishment of an office akin to the Office of Regulatory Affairs (ORA) in the USA. The urgency of these changes cannot be overstated. This office would evaluate the need, implementation, and impact of any regulation before its approval, employing key performance indicators to assess the performance of regulatory authorities. Digitization, market liberalization, and the introduction of rule-based, viable, and competitive regulations are also advocated by PIDE for efficient and functional markets.
In conclusion, overcoming regulatory barriers and introducing a modernized regulatory framework is crucial for Pakistan to create an efficient and effective business environment. The adoption of a Regulation Impact Evaluation system and the establishment of an office to evaluate regulations before approval are essential steps toward achieving this goal. These measures, accompanied by digitization and market liberalization, will not only create a conducive environment for investment and innovation but also pave the way for a brighter economic future for Pakistan.
