Washington consensus and its important points with respect to pakistan

Washington consensus and its important points with respect to Pakistan

1. Washington consensus By Dr. Arifa Saeed

2. Neo liberalism Neoliberalism is a policy model that encompasses both politics and economics. It is a set of economic policies that have become widespread during the last 40 years. Neoliberalism is a policy model that encompasses both politics and economics. It favors private enterprise and seeks to transfer the control of economic factors from the government to the private sector. A general characteristic of neoliberalism is the desire to intensify and expand the market, by increasing the number, frequency, repeatability, and formalization of transactions. The ultimate goal of neoliberalism is a universe where every action of every being is a market transaction, conducted in competition with every other being and influencing every other transaction , with transactions occurring in an infinitely short time , and repeated at an infinitely fast rate

3. Neo liberalisation vs Capitalism Neo-liberalism is not an economic structure, it is an ideology followed by a set of people called capitalists. Capitalism is an economic system which follows neo-liberalism as its policy. Capitalism is often thought as an economic system in which private actors own and control property in accord with their interest, demand and supply determines prices in markets in a way that can serve the best interests of society.

4. Who advocated Neo-liberalism? The Washington Consensus is a set of 10 economic policy prescriptions considered to constitute the "standard" reform package promoted for crisis wracked developing countries by Washington, D.C.–based institutions such as the International Monetary Fund (IMF), World Bank, and the US Treasury Department. The term was first used in 1989 by English economist John Williamson. Neoliberalism is often associated with the leadership of Margaret Thatcher, the prime minister of the U.K. from 1979 to 1990 (and leader of the Conservative Party from 1975 to 1990) and Ronald Reagan, the 40th president of the U.S. from 1981 to 1989

5. Why Neo liberalisation It often refers to a dogmatic belief that developing countries should adopt market-led development strategies that will result in economic growth that will “trickle down” to the benefit of all.

6. Characteristics Free enterprise, competition, deregulation, and the importance of individual responsibility Opposition to the expansion of government power, state welfare, inflation Minimizing government control of industry and boosting private sector ownership of business and property Free market capitalism and the efficient allocation of resources Globalization rather than heavily regulated markets and protectionism A reduction in government spending and lower taxes Less government control over economic activity to enhance the efficient functioning of the economy An increase in the impact by the private sector on the economy Government intervention when it's needed to help implement, sustain, and protect free market activities

7. Washington Consensus The Washington Consensus is a set of 10 economic policy prescriptions by Washington, D.C.-based institutions such as the International Monetary Fund (IMF), World Bank and United States Department of the Treasury. It was drawn from the advice of John Williamson. It constitutes the “standard” reform package promoted for crisis-stricken developing countries. The prescriptions encompassed policies in such areas as macroeconomic stabilization, economic opening with respect to both trade and investment, and expansion of market forces within the domestic economy. It minimized the state’s role in the economy and pushed an aggressive free market agenda of deregulation, privatization, and trade liberalization It paved the way for the domination of the Western-style capitalism. It was aggressively promoted by the IMF and the World Bank. Aim : To advocate free trade, floating exchange rates, free markets and macroeconomic stability. Importance : To determine policy towards economic development in Latin America, South East Asia and other countries

8. Ten principles of Washington Consensus Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP. Redirection of public spending from subsidies (especially indiscriminate subsidies) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment. Tax reform, broadening the tax base and adopting moderate marginal tax rates. Interest rates that are market determined and positive (but moderate) in real terms. Competitive exchange rates. Trade liberalization: Liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs. Liberalization of inward foreign direct investment. Privatization of state enterprises. Deregulation : Abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions. Legal security for property rights

9. Fiscal policy discipline in Pakistan in Sap The Debt crisis of the early 1980s prompted several analyses that emphasized the negative role of fiscal deficits of economic development . This negative view of fiscal deficit swas consolidated in the “Washington Consensus” agenda . The first and foremost principle of Washington consensus is to lower the government borrowing to avoid the large fiscal deficits with respect to GDP . A fiscal deficit occurs when a government's total expenditures exceed the revenue that it generates, excluding money from borrowings . Fiscal Deficit = (Revenue Expenditure - Revenue Receipts) + Capital Expenditure - (Recoveries of loans +other receipts).

10. Fiscal deficit Pakistan has been facing significant fiscal challenges, including a high fiscal deficit. The fiscal deficit is the difference between the government's total revenue and its total expenditure, excluding borrowing. Several factors contribute to Pakistan's fiscal deficit, including high levels of public debt, low tax revenues, inefficient public spending, and economic challenges such as inflation and unemployment. To address these issues, the Pakistani government has implemented various measures, including tax reforms, austerity measures, and efforts to increase revenue collection. However, sustaining fiscal discipline remains a key challenge for the country.

11. Redirection of Subsidies to Primary health care and primary education For socio- economic transformation , high priority was assigned to education , building of new institutions and investment by Research and Development by the state. Without education ,ability to absorb technology for sustainable development and structural change would be limited. Special administrative structure was built to carry out community development as part of the efforts at transforming and developing the rural area .

12. Increasing Tax Base: Third Principle Increasing the tax base in Pakistan is a crucial step towards improving the country's fiscal situation and reducing its fiscal deficit. Pakistan faces challenges in tax collection due to a large informal economy, widespread tax evasion, and limited tax compliance. To increase the tax base, Pakistan can consider several strategies: Broadening the Tax Net: Efforts should be made to bring more individuals and businesses into the tax net, especially those currently operating in the informal sector. Improving Tax Administration: Strengthening tax administration to reduce corruption, improve efficiency, and enhance tax compliance is essential. This can include using technology for better tax monitoring and enforcement. Tax Reforms: Implementing tax reforms to simplify the tax system, reduce tax rates, and remove exemptions can help in increasing compliance and broadening the tax base. Public Awareness and Education: Educating the public about the importance of paying taxes and the benefits of a strong tax system can improve compliance. Addressing Informality: Policies that encourage formalization of the economy, such as providing incentives to businesses to register and operate legally, can help expand the tax base. International Cooperation: Collaborating with international organizations and other countries to combat tax evasion and improve information sharing can also be beneficial. Implementing these strategies requires a concerted effort from the government, businesses, and the public to create a fair and efficient tax system that supports economic growth and development in Pakistan.

13. Determination of Interest rate in Pakistan In Pakistan, the determination of interest rates is influenced by various factors, including: Monetary Policy of the State Bank of Pakistan (SBP ): The SBP, Pakistan's central bank, sets the policy interest rate, known as the SBP Policy Rate. This rate is used to influence other interest rates in the economy. Changes in the policy rate can affect lending and deposit rates offered by banks. Inflation: Inflation is a key factor influencing interest rates. Higher inflation typically leads to higher interest rates to maintain the real return on investments. Economic Growth: The level of economic activity and growth prospects can also impact interest rates. Higher economic growth may lead to higher interest rates to prevent overheating of the economy. External Factors: Global economic conditions, including interest rates in major economies and international market trends, can influence interest rates in Pakistan, especially for foreign currency-denominated loans. Government Borrowing: The level of government borrowing can also affect interest rates. Higher government borrowing may lead to increased demand for funds, putting upward pressure on interest rates. Exchange Rate Stability: Exchange rate stability is important for determining interest rates, especially for loans denominated in foreign currencies. Risk Premiums: Lenders may also factor in risk premiums based on the creditworthiness of borrowers and the overall risk environment. The SBP regularly assesses these factors to determine the appropriate stance on interest rates, aiming to achieve its objectives of price stability and sustainable economic growth.

14. Competitive exchange rate A competitive exchange rate in Pakistan is one that reflects the country's economic fundamentals and promotes a balanced trade environment. Here are some key aspects of a competitive exchange rate: Reflecting Economic Fundamentals: The exchange rate should reflect factors such as inflation, interest rates, economic growth, and external balances. A competitive exchange rate ensures that the currency's value aligns with these fundamentals. Balancing Trade: A competitive exchange rate helps balance trade by making exports more attractive and imports relatively more expensive. This can help improve the country's current account balance. Attracting Foreign Investment: A competitive exchange rate can attract foreign investment by making domestic assets more affordable for foreign investors. This can help boost economic growth and create jobs. Price Stability: While a competitive exchange rate is important, excessive volatility can lead to price instability. Therefore, stability in the exchange rate is also crucial for economic predictability and planning. Central Bank Intervention: The central bank plays a key role in maintaining a competitive exchange rate by intervening in the foreign exchange market to smooth out excessive fluctuations and ensure stability. Fiscal and Monetary Policy Coordination: Coordination between fiscal and monetary policies is essential to support a competitive exchange rate. Sound fiscal policies and prudent monetary policies can help maintain exchange rate stability. In Pakistan, the State Bank of Pakistan (SBP) plays a central role in determining the exchange rate through its intervention in the foreign exchange market and by setting monetary policy to achieve its objectives, including exchange rate stability and promoting economic growth.

15. Trade Liberalism in terms of Import Trade liberalism in terms of imports in Pakistan refers to the policy of reducing barriers to trade, such as tariffs and quotas, to promote the free flow of goods into the country. This approach is aimed at increasing efficiency, promoting competition, and enhancing consumer choice. Here are some key aspects of trade liberalism in terms of imports in Pakistan: Tariff Reduction: One of the main components of trade liberalism is the reduction of import tariffs. Lower tariffs make imported goods cheaper for consumers and businesses, stimulating demand and increasing competition. Quota Elimination: Trade liberalism also involves the elimination of import quotas, which restrict the quantity of certain goods that can be imported. Removing quotas allows for a greater variety of goods to enter the market. Trade Agreements: Pakistan has entered into various trade agreements, such as the South Asian Free Trade Area (SAFTA) and the Preferential Trade Agreement (PTA) with several countries, to liberalize trade and reduce barriers to imports. Customs Procedures: Simplifying customs procedures and reducing bureaucratic hurdles can also promote trade liberalism by making it easier and more cost-effective to import goods. Import Licensing: Trade liberalism often involves reducing or eliminating import licensing requirements, which can help streamline the import process and reduce administrative burdens. Consumer Benefits: Import liberalization can lead to lower prices for consumers, as competition from foreign goods can help drive down prices in the domestic market. Overall, trade liberalism in terms of imports in Pakistan is aimed at promoting economic growth, efficiency, and consumer welfare by opening up the economy to international trade and competition. However, it is important to carefully manage the process to ensure that domestic industries are not unduly harmed by increased foreign competition.

16. Foreign Direct Investment in Pakistan Foreign Direct Investment (FDI) in Pakistan has been a key driver of economic growth and development. FDI refers to investment made by foreign companies or individuals in productive assets in Pakistan, such as factories, land, or equipment, with the goal of establishing a lasting interest in the country. Here are some key points regarding FDI in Pakistan: Sectoral Distribution: Historically, sectors such as telecommunications, energy, financial services, and manufacturing have attracted significant FDI in Pakistan. Government Policies: The Pakistani government has implemented various policies to attract FDI, including liberalizing investment regulations, offering incentives such as tax breaks and subsidies, and establishing special economic zones. Challenges: Despite efforts to attract FDI, Pakistan faces challenges such as political instability, security concerns, infrastructure deficiencies, and bureaucratic hurdles, which can deter foreign investors. China-Pakistan Economic Corridor (CPEC ): The CPEC is a major infrastructure and economic development project that has attracted substantial Chinese investment in Pakistan, particularly in energy and transportation infrastructure. Potential Sectors: There is potential for increased FDI in sectors such as agriculture, renewable energy, information technology, and tourism, which could help diversify the economy and create employment opportunities. Economic Impact: FDI can have a positive impact on the Pakistani economy by creating jobs, transferring technology and skills, stimulating economic growth, and enhancing competitiveness. Overall, attracting and retaining FDI is crucial for Pakistan's economic development, and continued efforts to improve the investment climate and address key challenges can help attract more foreign investment in the future.