Pakistan’s economy has undergone significant structural change during the past seven decades. One aspect of this change has been a shift of resources from agriculture to manufacturing and services sectors. At independence, agriculture and primary exports were the mainstay, but now services and the manufacturing sectors respectively contribute 56% and 19% to GDP, whereas agriculture’s share has shrunk to 25%. Another aspect is reallocation of resources to more dynamic firms within the manufacturing and services sectors, and to modern farms in the agricultural sector.
As part of its vision for future, Pakistan should aim for an even greater contribution of manufacturing and services sectors to national economy; within all three sectors, a reallocation of resources to more dynamic firms and farms; their strategic positioning to benefit from changes in global trade environment; a shift to high-value production; reduced levels of complexity, opacity and unpredictability of the regulatory regime; and strengthened institutional capacity for research, support and regulation.
The uneven process of structural transformation has been characterized by persistent misallocation of resource across firms, both within and across sectors. It is also characterized by rather slow transformation within the firm; there is a long tail of unproductive firms which are not innovative and do not grow. This lack of productivity growth within firms is potentially the consequence of many factors, ranging from factors internal to the firm, like poor input quality and weak management, to those external to the firm, like firm entry barriers and trade costs.
From a policy perspective, key constraints to efficient reallocation and firm dynamism in Pakistan may be clubbed into three broad groups: 1) market imperfections and distortions, which persist due to institutional gaps and policy ineffectiveness; 2) market (coordination) failures, which may require a more active policy response; and 3) low market access, which is related to trade policy and logistical issues.
Pursuing the vision outlined above would require an integrated approach towards economic, regulatory and institutional reform. The reforms should enable markets and reduce distortions insofar as possible. These would include business regulation, financial markets, agricultural markets, and foreign trade reforms. A phased approach needs to be taken to address market failures that impede innovation with instruments and interventions growing in number, complexity and ambition as the local capability to implement and absorb programs grows.
Institutional reforms that go beyond technical capacity building of implementing agencies and help balance influence in the policy arena will complement the above policy reforms. Together, the three legs of the strategy – removing distortions, building basic firm capabilities, and enhancing avenue of feedback into policymaking – can strengthen the constituency for future reforms and make it harder to undermine them.