Why Pakistan keeps choosing real estate over growth

सामने साहब दिना आज रात. Welcome back to another episode of thought behind things. आज हमारे साथ मौजूद हैं एक बहुत ही खास मेहमान जो कि actually पहले भी आ चुके हैं हमारे podcast के ऊपर and आजकल उनको बुराने का एक बड़ा खास reason था but उससे पहले मैं चाहूंगा कि मैं आपको बोलूं कि अगर आप यह episode देख रहे हैं if you are a regular viewer please do subscribe to our channel the button is down there somewhere below it'll help you get notification for future episodes as well इसी के साथ साथ अगर आप like का button दबाएंगे तो हमारी conversation ज़्यादा लोगों तक पहुंचेगी. I know कि थोड़ा सा annoying है. लेकिन अगर आप like करें तो उससे जो यह हम काम कर रहे हैं वो उसका ज़्यादा impact होगा, ज़्यादा लोगों तक पहुंचेगा. And hopefully we can educate more people, on areas of importance for Pakistan as well. Today we have with us गुनज़ालो Varela. He is the senior economist from the World Bank. बुलाने का मकसद एक major यह था कि you know Pakistan में जो आजकल economic crisis है और इस लिए आजकल problem नहीं है. It has happened consistently over the past twenty, thirty years, or as far as the living memory goes. And a lot of times when we talk about the economic crisis, short term, you know, solutions not withstanding. Mostly, you know, people come up with this thought process that we need structural changes, that are more long term. The the fundamental, problems need to be fixed, and so the economy will begin to give you results in the long term. And so I thought, you know, we'd we'd have that conversation with Gonzalo particularly, because he just authored a very interesting report. It's called from swimming in sand to high end sustainable growth, a road map to reduce distortions and the allocation of resources and talent in the पाकिस्तानी, economy. This is the report. I'm going to link it on, in the in the description section down below as well for you for those of you who want to read it. Gonzalo, thank you so much for being part of the show. Thank you for the invitation. I'm going to start the conversation. I can see a very interesting graph here. You know, Pakistan's growth challenges swimming out of the quick sand. If you can just sort of explain that, to us exactly. What do you think, is is really challenging Pakistan's economy? अगर आपने पैसे वक़्तंग के बारे में परेशान है ख़ासकर आजकल की economy में जहां पर already cash continuously burn हो रहा है और inflation हमें मार रही है. तो I'm proud to announce that this video is in partnership with समाया Financials. They're offering two very very cool trainings. Capital market fundamentals जिसमें आप stocks और mutual funds में invest करना सीखेंगे और understand करेंगे कि आखिर एक company के अंदर क्या ऐसे fundamentals होते हैं जिनको आपने देखना होता है to figure out कि वह एक अच्छी company है to invest in. और दूसरी training है technical analysis master class जिसमें आप सीखेंगे कि किस तरीके से हम tradable assets like commodities, forex, stocks, crypto के अंदर थोड़े से पैसे लगाकर बहुत ज़्यादा पैसे बना सकते हैं. Personally यह training मैंने भी ली है and it's absolutely phenomenal. The link to the trainings are in the description below. Check them out and become financially healthy. And now back to the podcast.

Right. Okay. So thank you again. Let me start with what the premise of this report is, and then I will go directly into, into that chart that you're mentioning. And the premise of this report is that Pakistan's growth, economic growth, has been stunted by the inability of Pakistan to allocate its talent and its resources to the best possible uses. Right. So there's an issue of allocation that is, determining that growth is lower than it could be. Right. And it's not only that growth is low, it's also that growth is volatile. So you end up in situations in which you you have fast growth, and then the economy can cope with how fast the growth is, and then you have a crisis. Right. So you have a boom, and then you have a bust. Then a boom and a bust. So that that volatility, that that, volatility in growth is also an issue. It's not just that growth is low, it's also that it's relatively, volatile, and you have boom and busts. And we argue that, the reason for those boom and busts, and and these busts are typically related, with balance of payments crisis. And why why is it that balance of payments crisis are relatively recurrent? Why is it that the current account deficit is a big problem in in Pakistan's economy? And, again, this comes back to the issue of allocation of resources. And and that brings me to that chart that you're mentioning there. So what is happening here? What is happening is that firms and agents respond to incentives in Pakistan and anywhere else in the world. And incentives are such that it is more profitable to allocate resources, to put your money in real estate than it is to put your money in productive activities related to tradable sectors.

Yeah? Okay. So for those of those of, the audience who don't know, what do you mean by productive sectors, and what do you mean by real estate being a nonproductive sector? Basically,

what I mean is that you're you have, sectors that are dynamic, sectors in which productivity grows, sectors that are associated with a lot of employment. Right. And this could be, for example, business services. The business services is a sector that has, exploded during the COVID pandemic, even before. But the COVID pandemic was a catalyzer, and, and, and it continues growing in Pakistan and elsewhere. You have manufacturing. Manufacturing is a very important sector for Pakistan. It has a capacity to employ, a lot of a lot of people, and and it's also a driver of productivity growth. So productivity tends to grow faster in these more dynamic tradable sectors, sectors in which you can produce things that you sell to the world. Things or or or services that you can sell to the world. Instead, what what so, basically, from an incentive point of view, what you have is that, taxes have been predominantly much higher on the income of the productive sectors, right, in manufacturing or in productive services than it has been if you park your money in real estate or in land. Where there is nothing happening. There's no employment. There's no work being done. No productivity. Very little productivity associated with with those investments. Yeah? So less dynamic, nontradable. So what happens is when you have a lot of resources that go into the real estate, instead of going into manufacturing or productive and tradable services, what happens is that the income that these activities generate, in the case of real estate, when you have profits from your real estate investments and your income grows, you're going to demand more imports. But you don't have any exports to supply. The little investments that go into tradable sectors, into manufacturing, into productive services, those, when your when your income from those investments grow, then what happens is that, yes, you will demand more imports, but also you will have something to supply to the global market. You will have exports to supply to the global markets. But because taxes are so low in real estate and much higher, relatively speaking, in manufacturing and productive services sectors. More resources go into this least productive, least dynamic, and more import generating sector that is real estate or or investments in land. So that's one level of distortions that we can say. The fact that tax rates are different by sector, and they they are benefiting or they are inducing agents to put their money in real estate because they are much lower there. So that would be the first the first, tier of distortions that we have there. There's a second tier of distortions. That is, if you do decide to invest in manufacturing or or or services that are tradable, There's another distortion that is introduced there, that is import duties. And what import duties do is they protect the local firms, but they protect them if they sell in the local market. So in the local market, these firms get higher profits because they are protected from import competitions through the import duty. But if they export, they are not protected by the import duty. So what these high import duties that Pakistan has do, in principle they are supposed to do import substitution. But in practice they do export substitution. I've mentioned this many times, the anti export bias of import duties. And so what happens is that a lot of the so, of the little resources that went into manufacturing, a big share goes into production for the local market, and a very tiny share goes into production for exporting. So that means that you are creating very little supply of exports even in those tradable dynamic sectors and more demand for imports. So in balance, what you end up happening is that when the economy grows and and these activities generate income, you have a lot of demand for imports from the gains of real estate or from the, manufacturing that is inward oriented and very little supply of exports. So at some point, you accumulated current account deficits that become very large. And over time, as you accumulate these current account deficits, those mean increased foreign liabilities that is difficult for you to to pay. And that's when the balance of payments crisis, comes up, when you don't have external financing enough to pay for that large current account deficit. So that system of incentives that makes resources flow predominantly into real estate, when real estate is a store of value, and agricultural land also, is something that leads to these boom and bust cycles. And it's something that is also associated with the key underlying challenge of low growth in Pakistan, that is low productivity. And let me give you just a couple of numbers here. And when we started this, this, the process of preparing this report, this was a key motivating factor. So I looked at what has been happening with the productivity of labor in Pakistan over the last thirty years, three decades. And I compare that to what has been happening in other countries. My my typical comparison is Vietnam. I really like Vietnam as a comparator, but I also compare it to Bangladesh. So we can, you know, different countries. We can compare it to many others. Over the past thirty years Three or 30? 30. 30. Past thirty years, three decades. Right. Over the past thirty years, the productivity of the average worker of Pakistan increased by 40%. Okay. Right? That means that in real terms, the income of that worker should have increased by 40%. Right. Right? If you look at same period for Vietnam, what we see is that the productivity increased by 330%. Right. Right? So that means that the average worker in Vietnam saw its wage increase over these last three decades, in real terms, by a factor 3.3. Mhmm. Whereas the Pakistani by point four. Right. Bangladesh, 170% increase in productivity over the period. And that is at the core of the growth challenge, the fact that productivity hasn't been increasing. And that, again, can be brought back to the issue of distortions. Distortions that are either introduced by policy or distortions that are unaddressed by policies.

Right. If I were to ask you, we'll we'll take it step by step. Said a lot of things. First, you mentioned the taxes, you know, being very, very low on the real estate sector, being relatively high in the sort of productive sectors, whether they're export or they're, for the local market. How do you propose or or rather what can you begin to propose? I'm not even asking for an exact solution. In terms of taxation, do we reduce the taxes for these sort of productive sectors and and and increase the ones on these nonproductive sectors? Or do you do you let the taxes as is, as they are today in these sectors, but but basically just focus on the nonproductive and tax them, aggressively? How would you go about that particular policy change in the context of Pakistan?

This is a very interesting question. Probably, it's it's one of the the the most crucial questions to answer, these days. I think the first thing to consider is, do we want a a level playing field? And my my answer to that would be yes. A level playing field would be desirable. And so just just so that we're clear, I'm not saying that taxes on manufacturing are high. What I'm saying is that they're relatively higher Compared to the real estate. Than what you get on income from real estate or what you get on taxes on on on land or on agricultural income. Right. Right? So we need to bring all sectors into the tax net, and we need to have rates that are harmonized. We don't we don't want these differences in taxes to be a factor that drives allocation of resources. And if we want, probably we don't want it in this way. So we don't want resources to go predominantly into real estate and not into dynamic, productivity enhancing, sectors. So the first step would be bring all sectors into the tax net, and and and have uniform income, or or profit taxes.

Okay.

There are there are other ways in which you can also, through tax policy, incentivize certain behaviors. And so if the behavior you want to incentivize, is exporting more Mhmm. For example, a few months back there was an introduction of a supertax on firms that were not exporting. So there was an additional profit tax at five percentage points that was levied on those firms that were producing for domestic market. So that acted as an incentive for firms to go and venture into export markets. So that that type of thing would be preferable to the current situation. So I think, in short, level the playing field when it comes to tax rates across sectors. Makes sense. And I think agriculture, we're going to go into deeper detail

as well, and and and we can talk more about that particular, or the tax regime there as well. And agriculture is is comparatively easy because when you talk about income tax on agriculture, it's a year on year productivity where you're, you know, making a certain amount of money and you can sort of tax that. What I'm I get really confused about is is and I'm sure you've seen them around. There are a lot of these sort of new societies being made where files are floated out in the market, and, and a lot of money is pumped into it. Nobody's buying those those pieces of land for the sake of building a house to live in. Mostly, they're being bought as a as a form of investment because, like you mentioned, they're a store of value. And everybody in their minds think, you know, this is the most risk free investment. There is a piece of tangible piece of land that I can see. And so doesn't matter if I don't do anything, even if I don't touch it for the next twenty years, it's going to give me at least a stable rate of return. And the problem with that is that it's difficult to begin to identify the gain on it or the income on it because, let's assume, I mean, theoretically, you can identify that gain where if you if you've bought something for, let's say, a million rupees and over the next five years it's now grown to 5,000,000 rupees, you can begin to say, okay, 4,000,000 is the gain and and and I'll every the next time you're gonna sell it, I can tax that gain. But what we've seen in Pakistan, and there have been sort of smaller interventions there in terms of real estate, selling real estate within the next first three years. You can have x amount of tax and so on and so forth. It's very easy to build these sort of workarounds around it. Right? So so we saw a huge problem with the DC rates versus the actual market rate. The market rate is so fluctuate so rapidly that for the government to be to constantly update their own rates is difficult. Then what they do is they they do transactions in this sort of weird way where they list a certain price, and then they do a cash based transaction separately outside. And so in in absolute real terms, when you talk about taxing on the gains, the the, you know, the the the impact hasn't been noted, unfortunately. So that's my first question of thought. And then secondly, for a lot of Pakistanis, what they've they've been doing is, you know, it's it's a it's a sort of a what a lot of people call a rent seeking economy. So they make their money wherever they make their money, and then they're going to buy out a bunch of these different properties, and they're going to rent them out. And if I were to I mean, if you talk about this particular property, and I've mentioned this on the podcast multiple times before. But if I have siblings in The US who'd who'd on average give 1% of their property, as property tax. And the idea is in a hundred years you've sort of paid off the that property and, you know, you sort of renewed your lease. In Pakistan, right now, we're paying almost 0.001%, tax on what this place is worth versus what the tax that we've we're we're asked to pay. And so if I have 15 other properties, I can very easily continue to have them even if they're completely closed down and nothing's happening there. So I don't even have an incentive to rent them out and and, you know, use those in productive ways. And so the tax regime around the real estate sector, not just so what I wanna understand is beyond the income tax, are there other taxes that can be levied, that can allow for controlling the real estate market, in a way that it just doesn't seem like a very good way or or a good place to just sort of pump your money into. And and people can begin to look at other, albeit a bit more riskier sectors, but with better returns like the stock market or or, you know, investing in some sort of a,

a hedge fund and so on. Mhmm. I think the answer to your question is is within your question. But let me give you a little bit of background before I I get into the into what I think is is the answer. What you said is, is exactly right. So agents find investments in real estate and in land store of value. Yeah? And the reason why they find it a store of value is because the other ways of investing are really volatile. And they're volatile because you have these boom and bust cycles. So the the the real economy, so to speak, it's it's volatile, and so there's uncertainty around it. And so they invest in real estate. But because they invest so much in real estate, the economy becomes volatile. Because, again, income from real estate creates demand for imports, no supply of exports. You end up with a current account deficit. That is difficult to finance. So this is a circular problem. Yeah? What do mean by circular problem? It's a circular problem in the sense that you are investing in real estate because that's a store of value, because investments in dynamic sectors are their returns are volatile. But by investing in real estate, you make the whole system volatile, and you make So the

you keep on feeding the problem and growing the problem, and and and you Exactly. And you're feeding it because you're scared of the problem, but you're the one who's creating the problem in the first place.

In a way, yes. So we are not blaming the, the specific individuals of Of course. Investing land. It's not up to them. Is, because it's a circular problem, this becomes a systemic. Right? It's a problem of the It's a problem of the way the system works. So the first step is to say, okay, so let's address here the distortion. And again, the distortion is on how the taxes operate. And you mentioned, so you mentioned income tax, but also you mentioned property taxes. So if you think, you can think about wealth taxes. So property taxes are used across the world. You mentioned the case of The United States, in which property taxes average point seven to point eight, percent of property values, and here are much lower. So thinking about introducing property taxes that could be progressive, right? So depending on the on the amount, I think that is, that is a way out. It's not it's not something new. It's something that has been done by so many other countries and has been used quite effectively. So it's it's it's something that should be considered also, in Pakistan. When it comes to what you mentioned about how, for example, incomes from real estate transactions get get, registered. I think that's that's an interesting, that's an interesting point. I think valuation tables have been updated, in in in many, in many provinces. I think there has been some progress in in this respect to align valuations to to market, to average market transaction values. Right? There are other ways to go around it. So now I'm gonna give you one that is being blamed for bringing this to for it's it's a little bit unrealistic. And it could be unrealistic, but I think it gives us a... You know, it's one of these ideas that could be now unrealistic, but it gives us a, a, a horizon, you know, a, a milepost to, to go and reach. And it's, a few years ago, a lawyer, an economist wrote a book that is called Radical, Markets. And in radical markets, what they are proposing, for this type of problem says, you know what? Okay. If you are declaring the value of your property at a 100 when your property is worth in the market 200. Mhmm. But you're you're reporting it to be a 100 so that you pay less in tax. Then you need to be willing to sell at a 100. Right. So the government can come, the state can come and say, okay, if you're reporting a 100, pay you a 100, this is mine. So, of course, this is, this gets complicated when you, when you think about putting it into practice, But it's an idea that is worth looking at and thinking, okay, how can we get to an implementation of this, that is not unrealistic as the, you know, as the naked idea looks like. But but I think there are ways around the issue with under underreporting. Again, the evaluation table's been updated is a step in the right direction, but we can we can think of creative ways of of getting rid of this of this program. That makes sense. Because another element that is crucial here. So why is it why is it that you can under report the value of a transaction? So if I if I sell a house to you, and in paper, I'm selling it to for for value a 100, but you're actually paying me 200, a 100 of which goes undocumented, Then they what what do I do with this a 100? So as a society, as as countries move up in the development ladder, what happens is that you get more, bancarization of transactions. And so transactions need to go through the banking system. Right. And if transactions go through the banking system, it's more difficult to do the type of, underreporting that we were, we were discussing. So as you bankarize... So if you're thinking about financial inclusion type of interventions that, bring more and more of the large transactions into, the banking sector, that is something that may help with the issue of of underreporting.

Do you think so the I'm I'm going to go towards a very contentious point in this region, but do you think the sort of demonetization that that, India did in 2016, And and and and I'm saying this because, you know, up a couple of days ago, someone from Karachi was over. And when you talk to people in Karachi, hear very interesting stories about, you know, this हवाला, industry of of sending money abroad. And and a lot of the the nonbanking, sort of, businessmen who are, you know, moving money in hundreds of millions, in cash. And when I when I was speaking to them, I just sort of my thought initial thought was, of course, that you could do a lot of policy interventions. You can do you can send it's illegal what they're doing, and so you can send in rate teams and so on and so forth. But in a corrupt environment, it's difficult to control, you know, the the person at the at at the bottom of the food chain who's actually executing these these issues. Alternatively, if if I say, for example, 5,000 and the 1,000 and the 500 rupee note is demonetized, then you're forced, one way or the other, to to go through the banks because every other form of transact transaction becomes tiresome, has a security risk because you'd be moving so much cash, you know, it could be stored at any given time. And, obviously, because, for a lot of people, I mean, if you if you're moving, let's say, a billion rupees in 50 or 100 rupee notes, it's it's going to fill up an entire house. So do you think such, those form of sort of radical interventions, could work in in in banking our our sort of, I don't know, cashed economy.

So let me, for full disclosure, this is not an area in which I specialize. Of course. This is just your opinion. Having said this, let me let me share a couple of, of thoughts on what you were mentioning. The first one is that the process by which economies formalize Mhmm. Are complex, and they are typically related to the level of development. And as as as economies develop, they they they formalize. It's difficult, and it has been, and the evidence that I know, of pushes for formalization are are are they have a lot of mixed results. I haven't seen to date a good impact evaluation and formalization of this, move of India to to to to demonetize or to, you know, retire or, like, big, big notes, big, big denomination notes. So I don't know if it has worked or not, honestly. I haven't seen, good work on that. Perhaps it exists. I haven't seen it. Now, what is it that other countries have done? So what I see when you're describing this intervention, what I see is, well, what they did was they increased the costs of doing transactions in in cash, and and that is the way forward. Right? So if I if I have to think, how would I do it? Of course, what you want is to create incentives so that agents move into, the the the the the formal economies or perhaps the bancarized economy. And what we know, we know in Latin America there have been a few interventions on this front. And, one intervention has been in the country where I come from, that is Uruguay. It's a small country, but I think some we can we can learn some lessons from it. And one of the things that was introduced about ten to fifteen years back was a law by which, transactions needed to be, large transactions needed to be made, through the banking system. But also, the introduction of mandatory, debit and credit card posts in businesses, no matter how large or small these businesses were. And at the same time, as they did that, they also said, if you pay by debit card, you get x percentage points of VAT off. Right. Right? And so what happened was that then consumers were going and saying, I want to pay with a debit card, and I want you to reduce the price of what you're selling because you're, you you know, you get a three, four percentage points off. And and it started working. And, of course, the the the tax collecting agency organized a big party to celebrate that I increased dramatically, the revenues. So the taxes actually increased even though you were giving tax breaks? Because a lot of it, a lot more came into the tax net. Right? Transactions that were before undocumented, small businesses that will sell you, I don't know, two kilos of oranges and and not perhaps the two kilos oranges are not transacted through debit cards, but, you know, like, a week's groceries that you would buy in the market, and they would just give you a piece of paper saying, okay, a 100 pesos. And now you pay with a debit card, so there's a tax that you pay on it. So that both the the tax is divided. Right? Part of it is is is a burden to the consumer, part of it is a burden to the to the producer. But before the producer, many cases, was not passing the tax to the tax collecting agency. And now, because everything goes through, or a lot of the transactions go through debit or credit cards, then there's no, there's way out. Yeah, There's no way out. You need to declare those taxes. So that increased dramatically, levels of formalization. Not completely. There is still a lot of transactions that happen, in the informal economy. But basically, what I'm trying to say here is There are other ways to incentivize as well. There are other ways to incentivize. There are many ways to incentivize. The important thing is to to increase the costs of doing transactions that are cash based. Again, demonetization could be one. I do not know what the the the impact has been in India,

but I think there are other ways. And so if I were to add to this particular question, you know, in terms of developing economies like Pakistan, when we talk about the banked population, a lot of times we're also stuck in a in a in a chicken and egg problem because if we were well developed with better systems and better consumer understanding of how all of this works and how all of the paperwork works. I don't think it would have been that difficult to get them onto the to the banked sector. But we do have the whole FATF situation, and then we have the whole, you know, we have to there's a lot of KYC and there's a lot of processes when you come into the formal economy. But because you're a developing economy, most people don't understand a lot of that. Right? They don't have the accountants. They don't have the requisite paperwork. They're fairly sloppy with a lot of that. And so how does one, in your opinion, have you seen examples of countries similar with similar, demographics as Pakistan being able to formalize their economy while because, again, so to give to give context, one really simple way is, you know, you you mentioned lower the cost of doing banked transactions. But in Pakistan, a lot of people aren't even in the banking system because when they go and try to open a bank account, it's such a tiresome process because they ask you for so many different details. And when you ask the bankers then I've been following this trail on the podcast. And I've I've I've went from the consumer, then I went to the bankers, then I went to the policy folks. And and it seems like everybody has their own fair share of problems. It's not sure. It may be inefficient in certain ways. But in a lot of ways, you know, the bankers are saying we have to comply to a lot of these regulations, which, are are are fairly tough for a for a country, for a very sort of immature economy like Pakistan, where the consumer isn't ready for for or or or does not have the opportunity to provide all of these certain documents. So, for example, State Bank wants the banks to ask for where the money is coming from in terms of their employment status. A lot of the people or I would say 70% are working in small and medium enterprises and, you know, are are doing jobs like they're they're working as a shopkeeper. They're working doing this, that. And they it's it's a very informal way of how these people are hired and fired and and find a job. Right? And so they don't have a salary slip. They don't have an employment letter. And so they go to a bank. The bank tells them, you know, give me this, this, this. They don't even know who to talk to in their place of employment, and they come back, and they're like, listen. Just let's just deal in cash. And so do you think there could be some interventions where while we can say, okay, we can push the customer towards we can make it costly, but in a lot of ways, I just feel like the customer doesn't even have the opportunity to be able to get banked, because the system is so difficult. Have you seen other examples in other economies that were as sort of primitive as our, our own but were able to sort of bank their customers?

Again, I think this goes back to what why why is it that economists operate in an informal manner, and and what does it take to formalize? And I think, again, what I will mention is the process of formalization is a complex process, and there's no, silver bullet here. There are a number of interventions, some of which work, some of which don't work. And they're very context specific. So it's very difficult for me to say, you know, if you do this, then I think perhaps the the the crucial element is, as I mentioned before, increase the costs of transacting in cash and decrease the costs of being bancarized. And what you're mentioning, I've I've heard this I've heard this many times, is is is is is a complex process that you need to open a bank account or to keep a bank account active in in some cases. I think they know your customer regulations, etcetera. Countries in the world, across the world do it. And I would not underestimate the Pakistani people. Pakistanis can handle, you know, they they they they they are clever enough so that they can deal with, you know, the banks, etcetera. Now if regulations inside Pakistan or or or systems inside Pakistan make processes extremely complex, then that's going to reduce incentives to ankaraize. So that can be considered another distortion. And these distortions, we see them not only deterring formalization, we see them deterring, productivity upgrading,

productivity upgrading too. Makes sense. You mentioned Uruguay fifteen, sixteen years ago. And and, you know, before we started the podcast, you mentioned very interesting insight on how they made a lot of changes, structural changes in 2000, 2001, 2002. And we've seen that happening with with Turkey around the same time as well, with India in 1991, with Indonesia in 1998. A lot of these countries, you know, when I when I try to understand the the I don't know. You can call it a success story or you can call it a a better direction for these economies, but a lot of times, that direction always starts with a crisis. And in Pakistan, unfortunately, we crisis tend is is something that we're just so used to every few years. But this time around, the crisis just seems or at least in my the living memory of my generation, it seems like a a crisis that you can't recover from. It seems like a crisis that's just going to end everything, and so there is a lot of despondency. People are leaving en masse or hoping to leave en masse if they get any opportunity whatsoever. And so to tell me a little bit about how, for example, what Uruguay did back in that day and and what was going on that Uruguay was forced to, take those measures? And, also, in the context of do you think Pakistan can realistically take serious measures, during this time or maybe sometime in a future crisis that could give us a potential simmer of hope. And are there examples of such elsewhere in other economies when countries were going through tough time, and that was when they really fixed their direction and and they're not star?

Look, the the there's a phrase that has been attributed to many, including Winston Churchill, in including, the the the chief of staff of the Obama administration. I don't know exactly who who said it, but these days, many people are saying it. That is, never waste a good crisis. Whether, this is going this crisis and the reason why it has been repeated so much, if you if you do I did a a a Google search of the the hits of that phrase. You know how many searches they have been, and they have been increasing over the past over the past months. And in part is because, the world economy, not just Pakistan. The world economy has been subject to, repeated crisis. Right? So we had we had first COVID with all that it implied. And then we had The the Russian Inflation. We have inflation in The US. Inflation everywhere. New thing for, you know, not new, but, you know, it hasn't happened in the last thirty four years that we had rates of inflation. And so the the Fed went all in to increase interest rates. And when interest rates in The US increase, well, everybody else pays more. Right? It reminds us of the nineteen eighty debt crisis in Latin America. You increase interest rates in The US, and that means that interest payments on on foreign liabilities that countries have accumulated go up. And then on top of that, we had the Russia Ukraine Conflict. And the Russia Ukraine Conflict introduced, you know, a lot of pressure on commodity markets and commodity prices going up. So for countries like Pakistan that are, reliant on on on on imported food, that are reliant on on fuels, plus the interest rate effects, plus the the overhangs, then then that's, that's that that meant a crisis. So, you know, you you see that phrase everywhere. Whether there is any truth to that phrase, whether, you know, crises do or do not get get wasted, that's, I think that's up to to policymakers. But I think there are there are some opportunities. I mean, if, you know, the time to act, we'll say the time to act is now. And what what are the areas in which you you want to act? So in in our report, in that from swimming in sand to to high unsustainable growth, we we, present a a road map for reforms to move from the stagnation that we've seen in the past years to, a a path of of of high dynamic, growth and and job creation. And you you you asked about the the Uruguay comparison. And let me give you one example that I think is pertinent. It's part of what the recommendation of the recommendations that we have in that report. And I think it's one of the recommendations that we have in that report that is particularly relevant these days, right? That is doable. That is because there are other recommendations that right now, you know, with constraints on the fiscal side, constraints on the current account side, there are some reforms that perhaps we will need to wait a little bit. There are others that the time to act maybe now. One thing that Uruguay did after so in in 02/2012, we had a big recession, a big recession that was driven, by contagion from, first, a Brazilian crisis in 1999 that led to a large depreciation of the, of their currency, and that made Brazil more competitive. And Uruguay, Brazil was the main trading partner of Uruguay, became uncompetitive because the the Brazilian currency depreciated. And then Argentina also depreciated. That was the second largest trading partner of Uruguay. So Uruguay was, caught. You know, there were a number of of crisis, but one of them was related with with balance of payments and and and also, with the with fiscal, deficits that were high, you know, twin deficit type of of problems. And a key drag on the fiscal side were state owned enterprises. Uruguayans love state owned enterprises. You know, you there have been a number of efforts to reform state owned enterprises to privatize. And Uruguayan people went and voted against privatization initiatives through referendums. Sort of like the Swiss do that they vote. Uruguayans also vote through referendums through, you know, to to oppose to specific laws that governments, introduce. And they voted against the the state owned enterprise privatization. But what happened in 2001 is that, you know, some of these SOEs became, completely infeasible. They were making huge losses, but more importantly, because they were inefficient... So they were loss making, and so that created a fiscal drag. But they were inefficient, and because typically state owned enterprises operate in upstream sectors, you know, telecom, banking. So all other sectors require their services. That means that if they are inefficient, everybody else becomes inefficient. So the inefficiency sort of, you know, transmits over the supply chain, as we would say. And so what happened was that they said, you know, we need to do something with these state owned enterprises. And and there was governance reform, serious governance reforms. Some of the of the state owned enterprises got privatized, even, with, you know, perhaps without a lot of popular support. And some got seriously reformed. So the governance structure got seriously reformed, they became much more Independent. Independent, much more agile, and much more, private firm looking, right, in the sense of profit maximizing. If, you know, if if if labor laws that applied to state owned enterprises were different than labor laws that applied to to private owned companies, etcetera. So some changes were introduced, and and there were some efforts in terms of privatization of those that were feasible or those that were directly not in the areas in which the state should have stakes. And the the reason I bring this this state owned enterprises is because in Pakistan, state enterprises also are, there are many of them. They incur big losses that have implications on the fiscal. And, also, they they are, in many cases, operating at at inefficient levels with, again, effects on everybody else, right, on the ecosystem that requires those services. And when you start looking at the type of so the sectors in which these SOEs operate, you you'd be surprised. There are SOEs in fisheries, for example. So why is the state of Pakistan evolved in, in the fishery sector? So perhaps, you know, let's let's go through this, and let's try to, divest in those activities in which, a, we are running losses, when we have been systematically running losses. We call those zombie firms in the report. And, b, those that are not in the domain of what states should be operating on. So I think that SOE reform is a crucial reform, these days. And a second thing that is quite important, that it wasn't done by Uruguay at the time, but I think it's still very important for Pakistan to act now, is to make it as easy as possible for exporters to export. At the end of the day, to pay for the accumulation of foreign liabilities that Pakistan has incurred over the years with current account deficits, what you need is exports. That's the genuine source of foreign exchange. Right. Yeah? So FDI will be good for you if it helps you finance your current account deficits. Exports are good because they're a genuine source of foreign exchange that you're going to get. And there are many things that we can do now to improve the conditions under which exporters operate, and I will mention one. If you're an exporter, say you produce this pen, you want to sell this pen. It happens that this pen takes this metal, so it uses this metal here. And you then import the metal. So you import this metal, you put it in the pen, you produce the pen and export the pen. The duties that you pay on the metal, in principle, you're entitled to get a duty drawback. Right? What happens in practice is that to get a duty drawback, you need an organization that is called the input output coefficient organization to say that the amount of metal you're using is valid, that the input output coefficient, the coefficient, the ratio of metal to the pen value is acceptable. So that's a bureaucrat that decides how much metal you should put in your pen. Mhmm. Of course, firms may want to innovate and put a lot of metal or put no metal or, you know? So it's difficult to understand why you would get a bureaucrat to decide sitting in the inputoutput coefficient organization Mhmm. To say, okay, this is how much, know, how much metal you can put in, and therefore I'm going to only give you back taxes on that inputoutput ratio. That process needs to be automated. Yeah. It's fine that there is an imp some sort of input output ratio there to look at so that, you know, this exporter doesn't get a lot of metal duty free and then sells it in domestic market. We don't want that. We want to reward the exporter only for the metal using the export product. There are so many ways we can do this without having an inputoutput coefficient organization with people that go, audit, increase the cost of doing business for exporters. I mentioned two two examples. One can be use fixed input output coefficients as many countries in the world do, across sectors. And then if a firm comes with an input output coefficient that is extremely different from that average, then perhaps send an audit. But if it's within the range, let it go. Right. Another way is we are in the world of big data. FBR sits on a lot of data that could be used to use through sales tax declarations, calculate what are the input output coefficients in those sectors, move them over time. Perhaps these things because these things change over time. Firms innovate, firms do things differently. And so input inputs required to produce something change, and update this frequently, with data, evidence based, and automate it. This is something that increases cost for exporters, and Pakistan is still doing. If you get rid of that, you don't lose revenues. You don't get more imports. What you get is more exports. So that should be, you know, small action in the right direction. So, yeah, the crisis shouldn't be wasted. There are many things that can be done. We talked at the beginning of the conversation on tax reform. That is an important one. But there are many things that can be done on the business environment, let's call it that way, that will help exporters become better, become more efficient, reduce their costs. And that is is win win. It's not it's not gonna be costly for the government at this point, in which, you know, costly interventions are sort of difficult to implement. Makes sense.

There's a lot being said on the free float dollar. I think that's one of the major conditions from the IMF right now as well. We've spoken about that before as well, how it incentivizes your exporters. And I don't I don't think there is any country that has had current account deficits that has pegged their dollars, pegged their currency to, let's say, a dollar or whatever, that has successfully come out of it. But if I were to ask you because, still, that that understanding isn't there for most people, How do you see the conversation around the free floor dollar? Why is it so important for the market to decide the correct value of the dollar? And, currently, within the context of what's happening right now, we're we're seeing where there is a huge difference between what's available in the market, what's right now in the banks. And because of that, there is a gray market that's sort of sprung up. I'm going to Dubai. I I'm unable to source their homes anywhere, to be very honest. And so that that that control of of currency, do you think in the modern economic environment, does that even exist anymore? Or do you think we've sort of gone out gone, away from it? Because I was speaking to a professor from Lums, and and and he, attributes the free float dollar to a neoliberal, economic practice, and he he he is very against the idea of letting your dollar just or or letting your currency just be defined by the market. You know, they they they say it has to be controlled by the government, and the government has to control where that foreign exchange is being used. And through that, if done properly, you can get good results. So what are your thoughts on that?

The exchange rate is a key price in the economy. Right? The the price of foreign currency is a key price of the economy. It's it's very important it's a very important conversation how it gets determined. It's very important because it's consequential. It it it has consequences of many things. It has consequences on the export import, area, but it also has consequences on inflation. When the the currency gets depreciated, imported products get more expensive, Tradable goods in general get more expensive. They don't need to be imported. They as long as they are tradable, they're also increasing price, and that increases inflation. That is good for the purchasing power of people. And the changes in the exchange rate also affect, they may affect the the the the, you know, solvency or, you know, the debt burden that, governments face if some of their debt is denominated in foreign currency. So all of these things matter in the conversation. And and and this is why this is a this is a complex conversation to be had. There are, you know, when when you hear a very, sort of there there are some some positions there that are very, facilist, let's call them. You know? They are, like, a little bit simplistic, I would say. So it's it's it's a it's a complex conversation. Yeah? But what are the options that that Pakistan has? I mean, that that is, you know, is it is it about free floating and fixed? So you mentioned, should be the market determine determining the price? Well, if not the market, then who? Should it be the government? And does the government have information to know at what price, you know, how should it be priced? But and more important question is, can the government fix the price? Because fixing the price has implications. If you fix the price of the dollar too low, then you need to have a lot of dollars, to be able to support that. If you fix it too high, then you need to be willing to accumulate a lot of dollars in reserves. Accumulating a lot of dollars in reserve, you know, now, right now doesn't seem to be a problem, but we are not thinking of fixing it too high. I think that the issue is that we are fixing It too low. The the price of the dollar relatively lower than the market would tell us. And so to do that, normally, what we would need is a central bank that has so many dollars that if if you think that the price of the dollar at 220 is low, you're gonna buy a lot of them, and the central bank should give you these dollars or should channel through the banking system these dollars so that you have them. So if you have an infinite amount of dollars in reserves, then fixed exchange rate if you think that is the way to go. And then we can discuss if that's the way to go. But if you think that's the way to go, you know? But can you do it? Can Pakistan do that now? Does it have a large amount of dollars? No, it doesn't. So the issue then gets more complicated because then there is a decision that needs to be to be made on who gets the dollars and who doesn't get the dollars. Yeah? And so there's there's exchange rate rationing. And there is no good experience across the world in which there has been exchange rate rationing and then, you know, the economy booms. What you see when there is exchange rate rationing is a lot of rent seeking behavior, because agents are going to be putting a lot of effort in trying to get those scarce dollars that are underpriced so that they can benefit when the price of dollar increases. And so you so the the government or the central bank gets in a very tough position of having to decide how are the dollars allocated. So which letters of credit are we letting, firms open? Right? Are we letting are we letting firms open letters of credit to import cars or to import medicines or to import, I don't know, tea or... And so that that arbitrariness around who gets the dollars and who doesn't, that is intrinsic to the rationing of exchange rates, is is problematic. It's problematic for economic activity, it's problematic for productivity.

It's maybe unfair, Right? There there there are issues I mean, it's going to when when it's unfair, then it begins to give rise to potential corruption as well because at the end of the day, you know, you have you're again letting human intervention decide which where a lot of this goes. Whereas when you let the market decide it, it's it's a lot more transparent, and then it's more based on productivity rather than anything else.

So so the the the the question there is not I mean, I think the question should should you have a floating or a fixed exchange rate? I think that's a valid question. The question is can you have it? Mhmm. And what are the implications of having it at this at this moment? And I think it's a challenging situation. Makes Let me add one thing. And I think a lot is said in Pakistan. So the debate when it comes to the link between exchange rates and exports, a lot is said. And the typical thing that we hear is there's no export surplus in Pakistan, and so a depreciation exchange rate won't do anything because there's nothing to be exported. And what we find when we look at data is a different story. So the export surplus, whether there is something to export or not, is what economies call endogenous to the exchange rate depreciation. If the exchange rate has been, overvalued for a long time. So if the Pakistani rupee has been overvalued for a long time, what happens is that the export capacity of the economy shrinks. And so with the export capacity of the economy shrinks, it's difficult, even if conditions improve, say, the the exchange rate depreciates a bit, for exporters to expand. But if you give them enough time, they will expand because exporters, like anyone else, respond to incentives. And a real depreciation of currency increases the relative profits. Okay. So I'm gonna move to the report.

I know that there are three major areas that you guys focus on, in terms of identifying where some of those challenges exist, and then you give policy actions to it as well. Tell me about those areas and why you think they're the most important or or the biggest challenge that the economy is facing right now. Right. So the the underlying premise of the report is that, and I mentioned this at the beginning, Pakistan's growth has been stunted

by its inability to allocate not only its resources, but also its talent to the best possible uses. And so under that premise, we looked at three things that we think are crucial into this issue of allocation of talent and of resources. The first element is the element of productivity. So how has productivity been evolving in Pakistan, in different sectors of the economy, and what can we do about it? The second issue we look is at how investment has been doing. Investment is another challenge for Pakistan. Investment rates at a macro level are very low. And when you look at an indicator that we call capital deepening, that is the ratio at which firms increase machinery per worker at firms that is crucial for innovation, technology adoption, etcetera, that's also a challenge. So we look at investment challenges in Pakistan. We look at how firms grow or don't and why. And then the third thing that we look is at another crucial element associated with allocation of resources and talent. That is female force participation, another big challenge for Pakistan. Female labor force participation in Pakistan is around 21%. It's among the lowest, in the in the world. And and that means that a lot of very talented people, women, actually do not get to contribute to their full potential for the economy. And that clearly has productivity, and growth implications. So that's those these are the three areas. And as as you can see, there's a there's a conducting line that that links these these three chapters. Right? So to grow, you need more and better workers. Female labor force participation is a first order condition there. You need more investment. You need firms growing, but you need firms also becoming more productive and farms becoming more productive, also in agriculture.

It makes sense. Well, I'll start with the female, workforce participation. It's now beginning to gain traction. Lot of people are saying, you know, 50% of our population is not producing anything. And so, obviously, your productivity comparatively is going to be lower, unfortunately, because there are social norms attached to it. And so, therefore, it is a contentious topic for most part. I want to have an understanding whether you were able to compare the Pakistani situation to other countries in the region with more contextualized culture similar to Pakistan. Because when we look at, I mean, if we, it's it's very different when we sit here and compare, let's say, oh, you know, The US is like this. And so if we had a better participation of women like in The US, people are looking less at the economic part of it and more at the cultural part of it. And then they suddenly get really, really scared. But we if we look at some someplace closer in the region, I think there's a lot more connect there. So tell me a little bit about that. Why do you think that is such an important aspect? And if if I were to ask you to compare it to a to a country in the region, would Have you done that in the report? Right.

So let me first start. Why is this so important? To get into that answer, let me say... You mentioned, you know, the people out there say 50% of the population don't work. And I will, I will nuance that statement. Actually, women that do not participate in the labor force work a lot. They work at home. They do a lot of work. It's unpaid work. It's not only unpaid work, it's work that they, didn't really choose. Some of them may have, but it's sort of a norm. They need to do that. That's what they need to do. So, the issue is not so much that they don't work because they do. The issue is that their talent is misallocated. What do I mean by this? And I'm going to give you an analogy to see if I can make it as clear as possible. So imagine that by an accident of history, you have a situation in which Baba Rasam - you know Baba Rasam - was, made to do weightlifting. So he was put into the weightlifting, group. And Talha Talib, that is Pakistan weight... Weightlifting champion at category sixty two kilos, I think, was made to bat in the cricket field. So they would be stuck in these roles. Talha, batting, pavar, lifting. Would they be good at it? Probably not. Perhaps we can help them do things better, but there's a limit to which they're going to be able to do things better. The best thing possible is to give the choice to Talha and to Babar. Say, what do you want to do? And perhaps Babar says, I'm better off batting in the cricket field. And Talha says, I'm better off lifting. And that move, right, that reallocation of that talent is going to be better for them because they're going to make much more money. But it's going to be better for society because, you know, the social welfare will increase. We will see much better cricket and much better weight lifting. Productivity will increase. Right. A similar situation happens when you have a large portion of your population. So, out of, you know, women are about 50% of the population in Pakistan. Female labor force participation is 21%. So you have, you know, you have eight out of 10 women that are not in the labor force that are stuck in a role. But they may have talent to do something else, and they certainly have the talent to do something else. So you have a lot of highly skilled females that are not in paid employment. And you have a lot of females that perhaps they didn't accumulate education, but they are highly entrepreneurial because they may have talent innate that are also, we're not tapping into that potential. So what we did was we looked at, and you asked about a regional comparison. And so we did a regional comparison with Bangladesh. Bangladesh is a country that shares a lot of features from a cultural perspective with Pakistan. At some point, we're the same country. But it's a country that has, in that respect, in the respect of female participation, has done much better. So female labor labor force participation in Bangladesh is about 38%. It's almost double what we see in Pakistan. And so the exercise we did was, say, what would happen with GDP if female labor force participation in Pakistan were to match the level of Bangladesh. And if we had labor, you know, labor policies that would encourage this or facilitate these women getting jobs. And then what we find is that GDP of Pakistan would increase up to 23%. So, you know, it's a It's large a huge difference, yeah. Almost a quarter. Yeah. Right? Increase through more, females in the labor force. And this is a static, exercise. So, the long run, so from a dynamic point of view, if you think It's compound. It compounds too. It compounds because talent gets better allocated, because the the story I was telling at the beginning. And women will find what is their talent, what is their strength, and where is it that they're going to maximize the gains from using that strength. And that is going to, you know, increase female empowerment and increase, locality efficiency,

of the economy. So that's a big thing. Right. And and in terms of I know that you guys recommended some policy interventions there as well. What were some of those policy interventions that that could potentially help, integrate some of these women? And I'm not necessarily talking I I I want you to give me an insight on across the spectrum. Right? So so a lot of times we say, you know, create better universities for women and x, z. But in a lot of ways, that is targeting a very particular segment, whereas your general masses or who would probably end up in factories and in manufacturing sectors and in call centers, for example, we don't necessarily look at them even though they're the major chunk of the population.

So, look, the if if you look at female labor force participation in Pakistan along the, the level of education of females, or the level of income of females, that in a way, you know, the two variables are correlated. What you see is a u shaped relationship. At low levels of education or low levels of income, what you see is that females participate much more in the labor market. In a way, poverty trumps norms. Right? Also, a lot of these women at low levels of educational income are in the agricultural sector in which, female work is is is, more acceptable from a from a gender norm perspective. And then you have, at the other end of the distribution, highly educated, high income, females, also relatively high rates of female level first participation. What we have a gap is in the middle. Right. And the middle, you can think of it as associated with those that could be working in manufacturing sectors, right? Those that have middle levels of education could be working in manufacturing sectors. When you look at female employment in manufacturing, it's at 4%, extremely low. And so why is that the case, and what can we do to change that? And when you start looking at, the drivers of women employment in manufacturing, what you see is what economists call a coordination problem. What is this coordination problem? You can say it's a chicken and egg problem. On the one hand, you have that females, to go and decide to work, they need to ensure that where they're going to work, there are washrooms that are dedicated for them. There are dedicated spaces. There is safe transport to get to the job. So because firms don't offer this in general, they don't, offer their labor force. On the other side of the coin, you have firm managers, and firm managers would want to hire women, but the issue is that there are Two, four. Not many women offering the job, offering their, their, their labor force. And because there are not many women offering to work, they don't invest in having dedicated space for women or, or washrooms, etcetera. It doesn't make sense to have dedicated space for women if you're going to get one or two females working in your factory. So, it's very expensive to hire the first woman, right? And this creates a circular problem. Firms don't invest in these dedicated facilities because there's not enough supply of women, and women don't supply the labor force because there are no dedicated facilities. So, how does economics react to coordination failures of this type is, okay, let's public policy do something about it. And something about it could be, say, okay, firms above a certain level, a certain size will, have to have mandatory, dedicated spaces. That could be a way going forward. Another way of going forward is experimenting and saying, okay. Can we help firms pay for a portion of these investments that are needed? And, you know, because they will underinvest otherwise because they don't know how many females are there. So if we help them pay for these investments, in public infrastructure in terms of transport is a crucial element. Right? If you get public transfer that is safe for women, that's also going to be helping your coordination problem, but also support to those firms that are willing to, willing to to to do the necessary investments to accommodate females. And and what is it that Bangladesh did different? So one of the things that Bangladesh, or one of the things in which Bangladesh differs is not public policy too, but also the way they integrate into the global economy. So Bangladesh is much better integrated in global value chains than Pakistanis. And this has implications on female labor force participation. Why? Because global buyers want to source inputs or source products for fact from factors that do employ women and do give women good working conditions. Ultimately, because clients value this in Western countries, so they're willing to pay more for these products. And so firms make sure that they source for these type of firms. And if you go to even even in and and so, because Bangladesh is very integrated, it has more global buyers as clients, so you have more factories in Bangladesh that are linked to these global buyers, and so that creates an incentive for firms to employ more women. But also, you see that in Pakistan. If you visit firms in Pakistan, you will see that those that are well integrated into global value chains, those that export to large, well known retailers, are going to be those that also have more females in the workforce. But but in a nutshell, what I would say is it is expensive for a firm that has zero female employment to hire one. Right? So there's there's something that we need to do to push that firm to hire. Perhaps that is help in making that investment in in in in in the the premises so that they accommodate females. Makes sense. Do you think public transport is important

for increasing productivity? And I'm not necessarily focused just on women in this case. Definitely, it's important because mobility is very, very important to get them to the workplace. But overall, do you think? Because Pakistan has generally lacked in the provision of public transport. There's this sort of private sector sporadic random public transport, but not, proper. We've just recently begun to experiment with these sort of metro lines and buses.

But how important do you think that is? So public transport is crucial for female labor force participation, for sure. Safe public transport. In general, for the purposes of productivity upgrading, one could say, again, this is an area we don't specifically look at in the report, but the both public transport and, a good system of logistics for cargo is crucial for the allocation of resources to improve. If you don't have public transport, you're going to get, people locked in, their communities, to, to work there. Right. Unless you're rich and you can't afford a car. Of course. But if you can't afford a car, then transport will become a conditioning factor to where you can go and work somewhere else. So that creates a lot of misallocation talent. Right? You have workers that could be very good at working, in a distant location, but actually they can't because they can't get there. And so they work in a nearby location at lower levels of productivity. So from a pure allocative, you know, perspective, you'd say, yes, public transport matters. Not just public transport for, you know, for women, but also, in general, a transport system that is efficient, that also includes cargo and links to logistics. That's also very crucial. Makes sense. There's

an entire part about the growth of enterprises and companies in the report. And I know for a fact that Pakistan historically has been unable to. And we've seen that not just with large enterprises. We've we've seen the same with even for a lot of people what they would understand. For example, there are a bunch of these restaurants in Pakistan that everybody loves, but we haven't seen any McDonald's style success story where a restaurant, for example, if they they crack the code and created a fan base at Karachi, you know, they were raising capital and were able to create 15 other branches across Pakistan, which they very easily could have. And that's the easiest example I could come up with. But, obviously, firms by and large across Pakistan have been unable to scale themselves up. And a large major reason for that, in my opinion, has been because of the lack of access to capital. Obviously, if if they go for getting these sort of, loans, we have such high inflationary environments consistently that that becomes very, very complicated. And there is a social and and and cultural, problem there as well where a lot of people want to stay, remain outside of the credit system. And so, theoretically, the alternate would be raise that capital to through the, you know, through the stock market and otherwise. But even that hasn't been very, very... We haven't seen a lot of that happening. What are some of the areas that you guys looked at and what are some of the policy interventions that you discuss within that?

So, yeah, that's a crucial element of report. That's a central, piece of the report, whether firms grow, and if not, why not. And one of the things that we have to motivate the analysis is there's a chart that is quite telling that shows what happens with firms, as they grow old with their size. And what happens in Pakistan with these firms, and what happens with firms from Mexico or firms from The United States. We have these two comparisons because that's where the data is from. The data was available. And what we see is that in Pakistan, the line is flat. As firms grow old, they don't grow large. Whereas in Mexico, it's a little bit, steep, and in The US it's definitely very steep. So the firms that grow old, they also grow large. There's, in the literature they say up or out. Right? You either grow or you exit the market. Yeah? And that's why in The US you see that these firms, as they grow, they, they, they grow large also because those that don't grow large exit the market. So they don't live up too many, many years. Right? This is not what we see in Pakistan. So what we see in Pakistan is firms remain very small, and this up or out dynamic is not there. So firms, even unprofitable, remain for a long, long, long time, in business. We call those zombie firms, firms that for a long period of time, they they incur losses. Many of these are SOEs, but also there are family owned firms that that operate, in in those conditions, you know, as zombie firms. For exporters, you also see something similar. Exporters, it's very difficult to see. We do what I call transition matrices. So we follow a firm over time and see, do you move up in size classes? So if we divide the sample into small firms, medium, small, medium, medium, large, and large, do these firms that started, say, twenty years ago a small move to be large? We have no single case that moves from small to large. We have some cases that move, you know, in between the categories. But when you do the international comparison with Turkey, with Bangladesh, with Mexico, with Ethiopia even, and Egypt, what you see is that Pakistan struggles in that respect. Firms do not grow. And part of this, as you mentioned, may be related to credit, and credit is a big issue. And one of the things that we under, underline in the report is the fact that in the banking sector, a dominant player is the government as a borrower, is the state as a borrower. And when the state absorbs a lot of the borrowing from the banking sector, what happens is that it crowds out credit that could go for the private sector. So the fact that you have this dominant player, is crowding out credit that could go to the private sector. That's one element. It's not, the whole story is not that. Part of the story is that. There's also the fact that the private sector is a risky undertaking four banks. And here, there are issues that are related with how insolvency is dealt with in in Pakistan. And, of course, banks, they're going to lend for a productive investment if they're going to be able to get their money back. And if you are not able to pay, they're going to get your collateral and be able to, realize that collateral. If insolvency loss, the way courts operate, is detrimental to that, or if, you know, the process for them to get hold of the collateral and regain the value of the loan they gave in the first place is very long or very cumbersome, then firms are banks are going to be less prone to lend to the private sector. So you have these these two problems. The crowding out because of high lending to the government. And on the other hand, you have that whatever remains, you know, there are relatively little incentives because you have issues to fix insolvency. Now, there are other elements that have to do with other things and not credit. And that has to do with what we call in the literature managerial capabilities. So if your firm is small, you know, you founded the firm, and if your firm is small, you may be good at managing it. Now, as your firm grows, then managing the firm, say, you may be a great podcaster, and you have people working with you. As you grow, you need to be a good podcaster, but also a good manager. And these are two different Growths. Skills. Yeah. Yeah? And so you may not have the skill to manage. In private firms, typically, as firms grow, management gets, you know, moved to professional roles. You have owners and managers as separate. I have profession, professionally managed firms. Now, because in Pakistan there's a high prevalence of family owned firms, family owned firms, sort of, you know, march to a different drummer in a way. What happens is that it's very difficult to see professional management there. I mean, you may have some, you know, family owned firms that operate very well, but in general, from a productivity point of view, and that is very much associated with firms, the capacity of firms to grow, family owned firms perform a little bit worse than, non family owned private firms. And there's, there's there's what is called a Carnegie effect. That is, you know, if your family owns the firm, perhaps you don't need to invest so much in human capital to get that job because you're going to get the job because it's part of your family, right? So there are fewer incentives to accumulate human capital. So upgrading managerial capacities is something very important. A few years back, there was a survey done by a number of researchers, some of them from the Lahore School of Economics, in which they measure, they have a systematic way of measuring how well a firm is managed, right? So it's a, it's a managerial practices survey that is conducted across, the world, and it was conducted also among firms in Punjab. And one of the things that we saw, that we see, I wasn't part of the survey, but I read the paper, is that, managerial practices are on average, are below average in Pakistan, you know, compared to countries at a similar level of development. And in particular, they are lower in those firms that are now integrated into the global marketplace. So even integrated into the global marketplace, being an exporter or being foreign owned, that gives incentives of their own to professionalize management. When you're inward looking, perhaps receiving subsidies, being protected by high levels of import duties, incentives to upgrade your managerial capacities, are lower, and that limits your ability to grow. So you have a system of incentives out there, So things that are external to the firm that are limiting the growth. And you can think about credit related both to the fact that you have a large big borrower that is the government that sort of crowds out credit to the private sector. You have insolvency laws that are not helping credit flow. And then you have things that are internal to the firm that are hurting Pakistan's, chances of getting these firms larger and larger. And that has to do with this managerial capacity challenge. Interventions there, well, what you do? Insolvency laws need to be brought to, international good practices. Courts need to work better. There need to be dedicated courts to deal with insolvency issues. You need a gradual reduction of fiscal deficit so that the government doesn't continue being the key borrower or at least reduces

how much it extracts from the banking sector. So either lower the costs or increase the taxes or tax collection, to be able to essentially fund its own, budgets.

Right. Yes. Increasing the the the improving the fiscal, conditions, for Yes. Yes, for the central government. And then at the firm level, one can think of a number of interventions to upgrade capabilities. So if one is, again, you know, there are many people that don't like, interventions, and so they say, well, the solution here is give them incentives to upgrade on their own, expose them to competition, help them to export or, you know, open up sectors so that you have more ex orientation. That would be more a free market approach to getting these firms upgrade their managerial capacities. But increasingly, there are interventions, that are partly subsidized by government agencies, across the world with some promising results in which firms get, so some firms that are identified as high potential get trainings on how is it that you want to organize your production line, how is it that you manage, your your your workforce, etcetera. And there's some learning associated with that, and there are some long lasting productivity effects, from from those interventions. So those things are experimental. One would need to see what happens when you scale up these interventions, whether they they have the same positive effects on firms' growth and firms' productivity. But I think it's something worth exploring. Again, experimenting implies that you need to try, and if it works, scale up. And if it doesn't, learn from the mistake and stop doing it. Change it. Right? And and I think that's, that would be a virtuous cycle for policy. Try, experiment with things that may work, may help firms grow. See what the results are, and internalize these results. Learn from your own mistakes, and things that don't work, stop doing them. And that holds for these interventions and managerial capacities, but it holds for many other policies, that are in place, that perhaps we should be learning from successes and from failures also, and acting upon that learning

experience. Makes a lot of sense, Gonzalo. I know that you do have, another meeting and you do have to leave. I'm going to wrap this up. There is a very detailed section on agriculture as well. I think very, very important for Pakistan. There's a section on foreign direct investment. The report has been out for a couple of months now. It's available online. I'm going to link it down below. It's really, really good. I would urge the the viewers and the listeners to to go through it. There's a lot of learning there. Gonzalo, thank you so much for coming in and sharing all that insight. You know, I'm excited to to, to hear what comes out of this report. I'm glad that you guys were able to, you know, go through this so comprehensively, and I hope that certain people can learn from it and create the right policies, that can take Pakistan out of this mess. Thank you so much for coming in. Thank you for the invitation. It was great. Thank you. And for all of you guys, thank you so much for watching. If you like this video, please do subscribe to our channel, and people on YouTube can, like the video. It'll help reach to more audiences. For people on Facebook, there's a link down below where you can join the TBD community where we take different feedback, take guest recommendations, and share different articles, so you can be part of that as well. For people on audio platforms, you can, subscribe to our channel and be notified for all future episodes as well. Around here, you'll see easy peasar jazz, casual sadha, pay, number popping up. You can support the channel. We accept anything from 1 rupee to as much as you'd like. It's the thought that counts. But, anyways, this was Sayed Muzamelas and Sedi. You are watching thought behind things. Thank you so much for watching, and I'll see you in the next one.