Estimating the Footprint of the Government on the Economy
Estimating
the Footprint
of the Government on
the Economy
The
Planning Commission Framework for Economic Growth (FEG) established
that the footprint of the government in the Pakistan economy was very
large. Often people note that government expenditures as a percentage
of GDP are only 22% and therefore the size of the government in the
economy is not large. This line of argument is again used to
establish a basis for arguing for increased taxation.
The
FEG noted that the percentage of government expenditure in GDP was
not the correct measure of the influence of government in the economy
where the government is
- Still controls a large number of Public sector enterprises (in fact the largest companies listed on the stock exchange are largely owned and managed by the government).
- The government still engages in many market transactions often as a dominant player (eg. energy, construction commodities etc).
- An aggressive tax subsidy policy as well as tax expenditures (SROs) direct market activities even at the cost of excessive barriers to entry.
- A regulatory framework that often inhibits investment and market opportunities (the most egregious example of this is the serious hurdles in the development of the construction industry and city development).
With
this in mind we calculated the footprint of the government on
the basis of contribution of government in all sectors of the
economy, which is measured by government spending, earning of
government institutions, price support subsidies and based on
market share in these sectors. The final results of the calculation
are given below.
Table
1: Size of the government Foot Print
Govt.
share in sector
|
Sector
share in the economy
|
Govt.
Share in the economy
|
|||||
Agriculture
|
43.06
|
20.91
|
9.00
|
||||
Manufacturing
|
11.90
|
18.70
|
2.23
|
||||
Transport
and Communication
|
73.38
|
9.99
|
7.33
|
||||
Electricity
and Gas
|
77.63
|
2.20
|
1.71
|
||||
Wholesale
and Retail
|
7.90
|
17.20
|
1.62
|
||||
Health
and Education
|
49.26
|
12.29
|
7.17
|
||||
Public
Admin and Defense
|
100.00
|
6.60
|
6.60
|
||||
Finance
and Insurance
|
45.5
|
4.50
|
2.03
|
||||
Construction
|
75
|
2.51
|
1.88
|
||||
Ownership
of Dwellings
|
100
|
2.70
|
2.7
|
||||
Mining
& Quarrying
|
79.6
|
2.40
|
1.91
|
||||
Total
|
100.00
|
44.17
|
In
this calculation the share
of government is 44.17%,
out of total GDP. This is what the government directly controls in
the economy. The decision in these areas are dependent on the
government.
In
addition to directly influencing the economy, governments also use
regulations to control the direction of the economy. These
regulations can be in the form of wage control, tariff and non tariff
barriers, regulations for starting new businesses and legal framework
as an obstacle to competitiveness etc.
Calculating
regulatory burden is a complex exercise. For US, regulatory burden
accounts for 8% of the national economy. Kaufmann, Kraayand and
Mastruzzi (2010) have come up with Worldwide Governance Indicators
which also looks at the effectiveness of all the regulations in every
country (Regulatory Quality index). The index includes all the
variables needed to calculate regulatory burden. US gets a score of
89.5 out of 100 (higher is better) whereas Pakistan gets a score of
33.3 out of 100 ie., Pakistan's regulatory burden is at least 3 times
as much as the US (assuming and unrealistic linearity).
Here
we will consider to Pakistan's regulatory burden to be only twice
that of the US to make our point. Crain and Crain (2010) have
estimated this cost of regulation to the economy to be about 8% of
GDP. By this reasoning we can expect Pakistan's regulatory burden
to be about 16% of GDP. In other words, trade barriers, obstacles to
investment etc. are costing
Pakistan’s economy 16% of its GDP.
I may also add given the reasoning that we have presented in the FEG
on the manner in which city development, the services sector and the
construction industry are held up through bind regulation, this is
likely to be significant underestimate.
However,
for discussion purposes let is add the two together we can find an
estimate of the
size of the government footprint on the economy to be over 60% of
GDP.
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