R U S S I A

KAZAKHSTAN TURKEY UZBEKISTAN AZERBAIJAN TURKMENISTAN IRAQ IRAN AFGHANISTAN KYRGYZ REP. TAJIKISTAN

MONGOLIA

NORTH KOREA

JAPAN

C H I N A

SOUTH KOREA

NEPAL BHUTAN SAUDI ARABIA INDIA BANGLADESH BURMA

PACIFIC OCEAN

LAOS VIETNAM

THAILAND

PHILIPPINES

PAKISTAN
Rank: 110 Score: 3.33 Category: Mostly Unfree
(Best) 1

BRUNEI SRI LANKA MALAYSIA SINGAPORE I N D O N E S I A

Present & Past Scores

2 3.33 3.26 3.29 3.31 3.50 3.50 3.50 3.49 3.44 3.35 3.73 3 3.34 4 (Worst) 5 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06

AUSTRALIA
I N D I A N O C E A N

Q U I C K STUDY
SCORES Trade Policy 4.5 Fiscal Burden 4.3 Government Intervention 2.5 Monetary Policy 2 Foreign Investment 3 Banking and Finance 3 Wages and Prices 3 Property Rights 4 Regulation 3 Informal Market 4 Population: 148,438,000 Total area: 803,940 sq. km GDP: $81.1 billion GDP growth rate: 5.1% GDP per capita: $546 Major exports: textiles, cotton (fabrics and yarn), rice, chemicals, manufactures Exports of goods and services: $15.7 billion Major export trading partners: US 23.1%, United Arab Emirates 9.4%, UK 7.1%, Germany 5.1%, Hong Kong 4.6% Major imports: machinery, chemicals, minerals, fuels Imports of goods and services: $12.7 billion Major import trading partners: United Arab Emirates 11.2%, Saudi Arabia 10.9%, China 7.3%, Japan 6.6%, US 6.0% Foreign direct investment (net): $1.3 billion

akistan gained its independence from Great Britain in 1947 and has fought three major wars against India, including the 1971 war in which Bangladesh seceded. The Pakistani economy has been hampered by heavy state involvement, widespread corruption, political instability, and chronic tensions with India. President Pervez Musharraf has committed his government to cautious political and economic reform. After 2001, Musharrafs swift abandonment of Pakistans Taliban allies and cooperation in the war against al-Qaeda paid large economic dividends in the form of a major U.S. aid package, the dropping of U.S. economic sanctions imposed because of Pakistans nuclear program, the rescheduling of Pakistans large foreign debt, and increased economic aid from international organizations. The Musharraf governments substantial economic reforms have helped to spur growth, particularly in industrial production, and have left the economy less dependent on agriculture. The privatization program, announced in 2003, picked up momentum in 2005 with the privatization of some of the countrys most prominent public-sector companies, including Pak Arab Fertilizer and portions of Pakistan Telecom, the state communications monopoly. Pakistans trade policy and government intervention scores are 0.5 point better this year, and its capital flows and foreign investment score, banking and finance score, and wages and prices score are 1 point better. As a result, Pakistans overall score is 0.4 point better this year.

TRADE POLICY Score: 4.5Better (very high level of protectionism)

The World Bank reports that Pakistans weighted average tariff rate in 2004 was 13 percent, down from the 15.2 percent for 2002 reported in the 2005 Index, based on World Bank data. According to the U.S. Trade Representative, Pakistan continued to ban the import of 30 items, mostly on religious, environmental, security, and health grounds. The USTR also reports local content requirements. Based on the lower tariff rate, as well as a revision of the trade factor methodology, Pakistans trade policy score is 0.5 point better this year.

FISCAL BURDEN OF GOVERNMENT

Final Score: 4.3Stable (high cost of government)

ScoreIncome Taxation: 3.5Stable (high tax rates) ScoreCorporate Taxation: 5Stable (very high tax rates) ScoreChange in Government Expenditures: 3.5Stable (low increase)

According to Deloitte, Pakistans top income tax rate is 35 percent. The top corporate tax rate is 39 percent, down from 41 percent. In 2003, according to the Asian Development Bank, government expenditures as a share of GDP increased 0.2 percentage point to 18.7 percent, compared to the 0.9 percentage point increase in 2002.

GOVERNMENT INTERVENTION IN THE ECONOMY Score: 2.5Better (moderate level)

The World Bank reports that the government consumed 11.7 percent of GDP in 2003. In fiscal year July 2003June 2004, according to the Ministry of Finance, Pakistan received 9.4 percent of its total revenues from state-owned enterprises and government ownership of property, down from the 11.78 percent reported in the 2005 Index. As a result, Pakistans government intervention score is 0.5 point better this year.

2003 Data (in constant 2000 US dollars)

311

MONETARY POLICY Score: 2Stable (low level of inflation)

From 1995 to 2004, Pakistans weighted average annual rate of inflation was 5.85 percent.

ance sectors. Based on evidence of a decreasing state role in the financial sector, Pakistans banking and finance score is 1 point better this year.

CAPITAL FLOWS AND FOREIGN INVESTMENT Score: 3Better (moderate barriers)

Foreign investors are permitted to own 100 percent of most businesses. According to the U.S. Trade Representative, the only formal restrictions on foreign investment involve arms and munitions, high explosives, currency/mint operations, radioactive substances, and new nonindustrial alcohol plants. The USTR also reports that Pakistan requires a minimum initial investment in agriculture, infrastructure, and social services; maintains local content requirements for 16 items in the auto and motorcycle industries; and caps foreign ownership in agricultural investments at 60 percent. In addition, Corruption and a weak judicial system remain recurrent and substantial disincentives to investment, and the enforcement [of contracts] is difficult. The International Monetary Fund reports that foreign exchange accounts are subject to restrictions, including government approval in some cases. Payments and transfers are subject to approval, quantitative limits, and other restrictions. Most capital transactions are not permitted or require government approval. Based on evidence of greater openness to foreign investment, Pakistans capital flows and foreign investment score is 1 point better this year.

WAGES AND PRICES Score: 3Better (moderate level of intervention)

According to the Economist Intelligence Unit, Provincial and local authorities occasionally set the price of commodities perceived to be in short supply, and the government effectively fixes prices on locally manufactured goods granted tariff protection. The government fixes prices, mostly at the ex-factory stage, for certain products of state-owned firms, including cars, petroleum and public utilities. The government extends price support to farmers for certain crops (such as rice, cotton, sugarcane and wheat), and it increases imports to keep prices stable. In addition, The government sets fuel prices, power rates and gas rates, some through government-appointed regulators. Formal price controls for the private sector are in place only for the pharmaceutical industry. Based on a reassessment of the available data, Pakistans wages and prices score is 1 point better this year.

PROPERTY RIGHTS Score: 4Stable (low level of protection)

The Economist Intelligence Unit reports that Pakistans Judiciary was completely separated from the executive in mid2001, [but] the legal system still functions poorly, hampered by ineffective implementation of laws, poor security for judges and witnesses, delays in sentencing and a huge backlog of cases. According to the U.S. Department of State, the judiciary suffers from corruption.

BANKING AND FINANCE Score: 3Better (moderate level of restrictions)

About 75 percent of the banking sector is now privately owned, reports First Initiative. As of December 2003, the banking system was composed of 40 banks, six development financial institutions and two micro-finance banks. The majority of banking sector assets are held by the five largest banks, all of which were previously publicly owned. At the end of 2003, three of the largest banks had been fully privatized, one was in the process of being privatized, and one had been partially sold. There are three government-run or owned insurance companies in the country, including the State Life Insurance Company, which controlled approximately 90% of the market in 2001. In addition, there is one state-owned reinsurer. According to the Pakistani embassy, there were seven public-sector banks in 2004one less than in 2003 following the privatization of Habib Bank. The tax applied to banks has fallen from 47 percent in 2003 to 41 percent in 2005 and is scheduled to be reduced to 35 percent by 2007. The embassy also reports that the state no longer has a policy of directed lending. According to the U.S. Trade Representative, the government recognizes the right to establish new banks, as well as grandfathering acquired rights of established foreign banks and foreign securities firms[and] recently clarified that foreign investors are allowed to hold a 51 percent equity share of companies operating in the life and general insur-

REGULATION Score: 3Stable (moderate level)

The government has made some effort to improve Pakistans business environment in recent years. The president has set up a commission to deregulate the economy and attract investment. The Economist Intelligence Unit reports that investors often cite the laws on water and power, labour, food, agriculture and social security as particularly obstructive to private and foreign investment. The government is considering reforming the labor laws. According to the U.S. Department of Commerce, Policy inconsistency, weak implementation and corruption have dampened investor interest and economic growth in Pakistan.

INFORMAL MARKET Score: 4Stable (high level of activity)

Transparency Internationals 2004 score for Pakistan is 2.1. Therefore, Pakistans informal market score is 4 this year.

312

2006 Index of Economic Freedom