Pakistan Institute of Development Economics

Increasing Space For Investment & Entrepreneurship Through Reducing The Footprint Of Government On The Economy In Pakistan
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Increasing Space For Investment & Entrepreneurship Through Reducing The Footprint Of Government On The Economy In Pakistan

Publication Year : 2021
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Executive Summary
One of the main reasons behind Pakistan’s long term downward growth trajectory is the chronically low level of private investment in the economy which is one of the lowest in the region. Successive governments have tried to spur economic growth by encouraging private investment in economy with little success. One fundamental reason behind low private investment is the fact that owing to its large footprint on the economy, the government in Pakistan crowds out private investment. Using an innovative methodology, we have illustrated that the total footprint of government on the economy in Pakistan amounts to at least 67 percent of Pakistan’s GDP, which is substantially higher than what Pakistan government’s general yearly expenditure as a percentage of GDP (22 percent) might suggest.

In addition to general government expenditure, the government exerts significant control over the economy through an extensive regulatory framework, control of state owned entities, direct market interventions and ownership of land & capital.

With the imminent need to reduce the government footprint to attract private investment and involvement of private sector, three main policy approaches need to be adopted i.e deregulation, privatization and public private partnerships (PPPs).

Deregulation alone, if executed properly can reduce the footprint of the government; increase the GDP by approximately 24 percent.

Privatization of state owned entities (SOEs) is another useful policy instrument but is often hard to implement due to a range of factors. Nonetheless, we estimate that there is indeed scope for a reduction in government’s footprint through privatization, which can potentially be reduced by a further 6 percent using this particular policy strategy.

Public private partnerships (PPPs) can also be utilized to spur private sector investment in areas where it might be difficult for the government to fully divest its share to the private sector. Public private partnerships (PPPs) can particularly be utilized to make government owned land and capital more economically productive. Such assets can be leased out to private sector for development and value addition. This will not only increase their economic productivity but can also serve as a potentially significant source of revenue generation for a government that often struggles to balance its books.