The impact of Government Regulations on Economic Growth

Introduction

Governments across the world have used regulations to protect their markets from collapse. Laws and regulations are government tools that are used to support societal well-being and economic growth. As they affect citizens, businesses, and the environment, their design and implementation are instrumental in achieving perceived benefits. On the pretext of protecting markets from external threats and maximising social welfare, Pakistan, having a mixed economic system,  also regulates key areas of its economy. However, ill-planned government interventions have often caused more problems than they have solved. Although many sectors of the economy see government regulations as barriers to profit-making and a tool for efficiency, if designed properly, regulations can meet public policy objectives and help achieve socio-economic growth. Moreover, regulations are critical for improving transparency and creating an enabling environment for investment, innovation, and economic growth. It is, therefore,  important to examine the impact of government regulations on the economic growth of Pakistan.

 

What is the Need for Government Regulations?

As the world grows in inter-connectedness, the role of regulations has become increasingly important. The COVID-19 pandemic sent shocks around the world, and various governments used laws, subordinate rules, and administrative regulations  to protect their citizens and economies from harm. Sensible, evidence-based regulations can provide significant public benefits such as protecting the environment, public health and safety, civil rights, consumers, and investors. However, regulations can also disrupt the marketplace and stifle innovation, growth, job creation, and waste limited resources. Governments use economic, social, and administrative regulations to better align public and private interests. If economies of scale are achieved in a single activity, a single firm would be able to meet the entire demand at the lowest cost, leading to monopolistic structures in society. This can lead to exploitation of the society at large and, subsequently, market failure. Regulations also impact pricing, competition, and market entry or exit. Lastly, regulations are also effective in building investor trust and confidence. Therefore, in order to balance out public and private interest, regulations are required at the government level (Beales, 2017).

 

Pakistan and Past Regulations

The private sector has always played a dominant role in Pakistan’s economic growth. Regulations have been imposed to ensure private sector objectives remain aligned with national priorities. However, the goal of such regulations have rarely been materialized and have often led to increased red-tapism and corruption. Mismanagement of resources, overstaffing, inappropriate and costly investments, poor quality of services, and heavy losses of public enterprises have remained some of the reasons why an effective regulatory framework has not been achieved in Pakistan. Economic regulations require information on key structures of industry and regulators rarely have access to such information. Secondly, the regulated party often finds it difficult and complex to comply with all the different stipulations which are technical. Regulations have also been used to influence private gains rather than correct market failure. Therefore, regulations in Pakistan have been characterised by poor planning and design, weak implementation, and lack of support from the private sector (Kemal, 2002).

 

Can Regulations Have a Positive Impact on Economic Growth

The relationship between economic growth and regulations is complex at its best. Regulations can have positive impacts on the market by removing certain market failures and improving economic efficiencies. They can also lead to greater transparency in the processes of price setting, market-entry, and resource mobilisation. Not only does this make the market more secure for the common public, but it also limits the powers of corporations that attain monopolistic structures. Moreover, unchecked businesses can pose significant threats to the environment as maximisation of profits remains the ultimate goal. Furthermore,  regulations prevent consumer exploitation by forming standards that ensure that safe and sustainable products are provided to the public at all times. Countries who championed the rationale of a free market also regulate their economies to some extent to achieve public welfare and socio-economic growth. Singapore and New Zealand, two of the world’s most economically free countries, have put in place minimal regulations on businesses with strong property and consumer rights. Therefore, regulations are important for protecting both public and private interests for the ultimate betterment of society at large.

 

Conclusion

A country’s economic growth is dependent on multiple factors. Regulations are an important source of protecting markets from external forces, market failures, and economic inefficiencies. Although there are some negative impacts of regulations on markets, they can best be described as by-products of positive change. Therefore, even if regulations do stall the economy in the short run, properly planned and well-thought regulations ultimately lead to greater transparency, enhanced investor confidence and economic growth.

 

Key Takeaways

Laws and regulations are government tools that are used to support societal well-being and economic growth. They affect multiple groups in society and are designed to protect markets and provide maximum social welfare.

Practical and evidence-based regulations can provide significant public benefits such as protecting the environment, public health and safety, civil rights, consumers, and investors.

Mismanagement of resources, overstaffing, inappropriate and costly investments, poor quality of services, and heavy losses of public enterprises have remained some of the reasons why an effective regulatory framework has not been achieved in Pakistan.

The relationship between economic growth and regulations is complex at its best. Regulations can have positive impacts on the market by removing certain market failures and improving economic efficiencies.

Countries that championed the rationale of a free market economy also regulate their economies to some extent to achieve public welfare and socio-economic growth.