On January 4, 2024, CPPG organized a webinar on “The tale of a quarter century of economic governance in Pakistan: Is it headed to an economic blind street?”. Dr. Shafi U Khan Niazi is the Director Undergraduate at the Department of Business Law and Taxation, Monash Business School, Monash University Australia. An academic with rich experience in Taxation with the government of Pakistan. He was invited as a guest speaker to give a webinar on the subject.

Initiating his presentation, Dr. Khan,  overviewed the economic indicators in Pakistan over 25 years from 1995 to 2020. Since 1995, the GDP of Pakistan has multiplied five times from 64.4 billion dollars to 300.4 billion dollars. Comparing the increase in tax collection from 8 billion dollars to 25.57 billion dollars to a decrease in Tax to GDP ratio from 11 to 10.1 percent, he argued that the data and figures show one side of the story.

Moving on with the measurement of these economic indicators, Dr. Khan remarked that it is evident that Pakistan’s economy is in tatters and is facing dollar starvation. He observed a recent World Bank report depicting that the reason for this situation lies in the failure of the economic model of Pakistan. To elaborate, Dr. Khan used the Economic Complexity Index (ECI) to measure the 25 years of economic performance.  According to him, the ECI, as defined by the Harvard Growth Lab, captures a country’s diversity and complexity of its export basket. Put in simple words, it is dependent on what a country is selling in the international market and what kind of products are being produced. A country with more industrial and tech-based exports, termed as a high-complexity country, would have several sophisticated and specialized capabilities resulting in the production of a highly diversified set of complex products. On the other hand, a low-complexity country would, being primarily agrarian produce less sophisticated products. Pakistan belongs to the latter category as its economy is largely dependent on agriculture.

Dr. Khan pointed out that ECI also informs us about the capabilities of a country’s production capabilities. It expresses the diversity and sophistication of the productive capabilities rooted in the exported products. Comparing the case studies of Vietnam and Pakistan, he shared that Vietnam which was below Pakistan in 1995 in terms of ECI, has considerably climbed up the ladder due to the production of 50 highly sophisticated and diversified products. In addition to this, Vietnam also had a chain of economic spillovers, meaning that their per capita income increased to one thousand dollars. With that, their human development index i.e. life style, earning capacity, improved significantly. Whereas, the per capita income in Pakistan, with the production of 7-8 products, only increased to 2 to 3 dollars. The problem lies with the economic governance model of Pakistan which is solely agrarian based marked with vague policy choices, majorly relying on borrowing money from the international community.

Providing an overview of the indicators, Dr. Khan moved to the discussion of economic governance and policy making. He remarked that of all the various policy domains rooted in governance, economic governance occupies a distinct space. Defining the domains of economic governance, he said that it is a web of interconnected policies i.e. monetary policy, fiscal policy, subsidy policy, investment policy, trade policy, etc. All these domains collectively define the status of economic governance. If anything goes wrong with either of them, it creates a trickling effect. Analyzing the  Public economic policy, Dr. Khan said that it has a binary character. It is a fusion of economic theory and practice. Theory is a sufficiently tested truth or likely truth while practice encompasses the broader tools for implementing the tested facts. The theory is a skeleton with tools acting as flesh on the skeleton. Thus, we need to build upon a theory to build sustainable and effective models.

He asserted that the theoretical component of public policy builds on what he described as a “cause and effect” thesis. There are gaps in economic governance because of the lack of application of cause and effect rationale i.e. a scientific trait that attributes each outcome to its causal agent or mostly likely causal agents (the cause). It is a powerful tool for resolving a social scientific puzzle or providing optimal solution(s) to an economic conundrum. Whereas, our policies do not run on the cause-and-effect phenomenon. We tend to over-simplify things which leads to the neglect of basic issues and gaps. Which, Dr. Khan, called “the gap syndrome” in Pakistan. Pakistan has been running on this gap syndrome for a long.

Dr. Khan added that this is because the cause and effect gap cannot be studied beyond one year as it will not be possible to articulate the reasons and effects due to the presence of several indicators. The decade-long policies cannot be studied with it. Sharing an example of a real-life governance cause-and-effect dilemma with Pakistan, he shared that a recent and ongoing fiscal (tax) governance was introduced in the international domain. Around 140 nations initiated tax reforms in cross-border tax governance under the Organization for Economic Co-operation and Development (OECD) umbrella to overhaul 100-year-old rules inconsistent with current business models. Two nations took exception to the policy, Pakistan being one of them. He estimated that it could have brought  $200 billion in profits of giant MNEs to  Pakistan.

Dr. Khan concluded his presentation by suggesting that for Pakistan to overcome the economic blind street, it would take time, deliberation, or visionary leadership. Meanwhile, he said we need to devise a combination of short-, medium-, and long-term plans. These plans must be driven and guided by experts and all the stakeholders. The session was followed by a Q&A session. Dr. Shafqat, who moderated the session thanked Dr. Khan for a wide-ranging, data and theory driven insightful presentation.