Towards a free economy
In simple terms, a free economy can be defined as an array of exchanges that take place in society. Each exchange is a voluntary agreement between two parties who trade in the form of goods and services. According to economic experts, since in reality government interventions in the form of taxes, price controls and restrictions cannot be removed, therefore free market is a term used to describe a political or ideological viewpoint on policy and is not a field within economics.
A country’s capacity to derive benefits from a free economy primarily depends on its size and level of development. The pace of trade liberalization in Pakistan has been quite irregular compared with other developing countries. To develop a strong economy, it was considered prudent to emphasize on more important substitution policies. Government imposed restrictions and bans on import of industrial products, devices like quota, licencing etc., and bans were used to protect domestic producers. The new era of trade liberalization started in 1989.
There are three interrelated aspects hindering trade liberalization i.e. the country’s dependence on tariff as a source of revenue, incidence of illegal trade and dependence on import of intermediate goods. Government took number of steps towards freer economy, and gradually introduced comprehensive macroeconomic and structural reforms in the country e.g. shifting from fixed exchange rate to a policy of flexible exchange rate, privatization, removal of subsidies, tariff reduction, etc. Since 1999, Pakistan embarked on an export-led growth strategy which is being managed through successive trade regimes.
Currently, Pakistan being a resource constrained economy needs to address the prevalent productivity gaps in the public and private sector. The most crucial problem for the economy is the abysmally low labour productivity. The low productivity levels in electricity, gas, water and services sectors in general, are also a significant concern. Dismal performance in transport, storage and communication also demand room for improvement in connectivity and domestic commerce. This low labour productivity, coupled with capital constraints, results in lower Total Factor Productivity (TFP).
To improve productivity, small indigenous innovations should be benchmarked and scaled up in order to achieve widespread benefits with lower costs. Competitive markets are the starting point towards sustained economic growth. Free and flexible markets should allow businesses, which have run the course, to exit and be replaced by more efficient firms. Instead of providing fiscal incentives based on sector-specific biases, markets should be allowed to determine optimal allocation of resources. Incentives should be formulated to cultivate innovation and entrepreneurship in the public and private sector as well as in rural and urban areas. The private sector can only operate freely once the government exits from the market and reorients its role as a facilitator. There is an immediate need to address missing and incomplete markets.
Any view of parochial protectionism can only result in harming the country through self-imposed isolation from the international trading community. By employing free economy measures, Pakistan could successfully move towards forming a regional building-block of greater multilateral integration in trade