Makani Marketing, a leading real estate agency, delves into the recent report by the World Bank highlighting the impact of low real estate taxes and cascading import duties on Pakistan’s economy. The findings shed light on critical distortions that hinder growth and resource allocation, affecting various sectors including real estate, trade, and gender participation in the workforce.

According to the World Bank’s “Pakistan’s Country Economic Memorandum,” the country faces repeated external crises due to distortions such as under-taxed real estate, import duties at every stage, and support prices for crops. These distortions create barriers to growth and contribute to a cycle of economic challenges.

Real Estate and Taxes One of the key distortions identified is the under-taxation of the real estate sector. Low taxes in real estate lead to a misallocation of resources, with productive investments diverted towards non-tradable sectors. The difference in tax rates between real estate and other sectors makes it more lucrative to invest in real estate, resulting in a decline in the productive capacity of the economy. This imbalance also contributes to increased imports and reduces the growth potential of the tradable sector.

Import Duties Another significant distortion highlighted in the report is the cascading import duties, particularly affecting the tradable sector. The complex tariff structure leads to higher costs for importing essential components, discouraging firms from exporting and limiting their exposure to competitive international markets. This imbalance not only exacerbates the trade deficit but also hampers the growth of dynamic and outward-oriented businesses, leading to a less diverse and competitive economy.

Gender Participation The report also addresses gender norms as a distortion impacting talent allocation. Limited female participation in the labor market due to societal norms restricts the pool of talent available for productive endeavors. This constraint on talent allocation hinders allocative efficiency and reduces the potential for economic growth, especially considering the rising levels of formal education among women.

Agriculture Subsidies In the agricultural sector, distortions in the form of subsidies and support prices for specific crops have led to limited diversification and inefficient resource allocation. Subsidies favoring certain crops over others, coupled with underpriced water usage, have hindered technological advancements, prevented diversification towards higher-value crops, and benefited a select group of land-owning elites.

Recommendations for Alleviating Distortions The World Bank’s report proposes several measures to address these distortions and promote sustainable economic growth:

1. Tax Policy Reforms: Widen the tax net, harmonize tax rates across sectors, and encourage investment in productive sectors rather than non-tradable sectors like real estate.
2. Trade Policy Reforms: Gradually reduce import duties to promote exports and facilitate resource allocation towards outward-oriented activities.
3. Export Schemes: Expand eligibility for export subsidies to encourage export growth and diversification.
4. Gender Inclusion: Implement unbiased hiring policies, enforce workplace legislation, and provide incentives for female employment to enhance talent allocation.
5. Agriculture Subsidies: Phase out regressive subsidies and support prices to promote market-based allocation of resources in agriculture.

Moving Forward Makani Marketing acknowledges the importance of addressing these distortions to foster a more competitive and sustainable economy in Pakistan. By implementing the recommended reforms and promoting a conducive business environment, Pakistan can unlock its full potential and attract investment across diverse sectors, including real estate.