Sludge economy of Pakistan: A dynamic CGE-Sludge Framework
Pakistan’s economy is hindered by bureaucratic inefficiencies, or “sludge.” The Pakistan Institute of Development Economics (PIDE) has undertaken various sludge audits (1-3) to examine this issue under the mentorship of Dr. Nadeem ul Haque. This study develops a Computable General Equilibrium (CGE) framework to account for the total economic cost of sludge across different sectors. Different sectors are impacted by sludge in varying degrees. The construction sector is hit hardest by permitting and red tape, while real estate might see growth by 2028 as construction-related sludge reduces. Household demand drops across the board, particularly in construction and pharmaceuticals. Increased demand for imported construction materials and drugs suggests weaknesses in domestic production. The study calls for reducing sludge by streamlining bureaucracy, boosting local production, and promoting R&D in pharmaceuticals.
Introduction
The sludge economy refers to the inefficiencies and administrative burdens that hinder economic productivity and individual welfare. Sludge makes basic tasks, regulatory compliance, and accessing services unnecessarily difficult for businesses and individuals. Reducing these frictions has become a key goal for policymakers aiming to streamline bureaucracy and foster economic growth. In Pakistan, the cost of sludge is 39% of the GDP, equivalent to over $132 billion in 2023 (PIDE, 2022). Studies show that digitization can reduce time and monetary costs by over 40% and 34%, respectively (Faraz & Qasim, 2022), though opportunity costs can only be reduced significantly if physical documents are eliminated.
The Pakistan Institute of Development Economics (PIDE) has undertaken various sludge audits to examine this issue.[1] These audits meticulously assess and quantify the impact of regulatory and procedural bottlenecks on various sectors. By identifying areas where administrative processes create unnecessary delays or barriers, PIDE provides guidelines how to streamline procedures and reduce the economic drag associated with bureaucratic red tape. The insights gained from these audits are crucial for formulating targeted reforms that can enhance the efficiency of governance and facilitate a more conducive environment for business growth and investment in Pakistan.
While sludge creates significant costs across many sectors, no study has yet examined its full effects using a general equilibrium approach. An inter-sector analysis is crucial to understand how sludge in one industry impacts others, both domestically and internationally. This gap calls for applying a Computable General Equilibrium (CGE) model, which can assess the total economic cost of sludge across sectors.
CGE models use a Social Accounting Matrix (SAM) to simulate the relationships between different economic activities. They help estimate changes in macroeconomic variables like GDP, employment, and prices in response to specific shocks.[2] Though originally for trade policy, CGE models have evolved to analyze a wide range of economic distortions, including market imperfections and institutional failures. Sludge fits into this category of market imperfections, as it distorts prices and reduces productivity by imposing unnecessary burdens on firms and consumers. However, no dedicated CGE model has yet been used to analyze the effects of sludge in a developing economy like Pakistan.
[1] https://pide.org.pk/research-category/sludge-audits/
[2] Our simulation results are based on GTAP data base version 11, and author is the solo contributor of the Pakistan input – output table to the GTAP data base: https://www.gtap.agecon.purdue.edu/resources/res_display.asp?RecordID=5957
