The state of Pakistan's macroeconomic situation and its present growth prospects are widely known. There is clearly big trouble in little Pakistan, and we are running from pillar to post to raise money, nationally and internationally, to keep ourselves afloat.
If the macroeconomic situation does not improve, and this can only really happen if we move to a higher growth path, it would be hard to manage Pakistan and its large, poor, ill-educated and under-skilled population. Managing the huge number of youth entering the work force, their 'productive' years, the increasing fragmentation of society, and the rapidly rising income and wealth inequalities across the country are equally formidable tasks.
But managing the macroeconomic imbalances and getting to a high growth path, though both are necessary, seem to require opposing kind of policies. Macroeconomic balance requires a stabilisation programme that cuts expenditures and raises domestic resources to achieve lower budget deficits and stability on the balance-of-payments side. Though some international loans have been raised - for instance, through the IMF programme - these loans are to cover fiscal and financial gaps between revenue and expenditures and not for growth purposes.
But when it comes to the slashing of expenditures, it is usually development expenditure that takes the biggest hit, which directly hurts growth. Even if current expenditures are cut, say from health, education and other areas, it is going to impact growth and restrict growth prospects eventually. So, how should the two be put together?
A lot of the above dichotomy has to do with how traditionally growth has been thought about and achieved in Pakistan. From the late fifties, the growth paradigm in Pakistan has been that growth comes from a) public investments, and b) selective incentives and subsidies given to the private sector in selected sectors. This approach was not only tied to the dominant paradigm of growth in the sixties and seventies, it also gelled well with the elite dominated political economy of the country.
Public sector investments, largely in infrastructure, but sometimes in other areas as well, raised growth directly. Most of the time the elite benefited from these projects more than the public at large, but they did result in a growth impetus for the country.
While selective incentivising allowed the elite to maintain control over productive resources, it also allowed the government to keep the 'commanding heights' of the economy with itself. Although the changes in thinking about growth, especially over the 1980s, forced large holes to be poked into the traditional thinking about growth in Pakistan, the mindset of policymakers and the overall structure of our political economy have not changed.
Our Public Sector Development Programme (PSDP) is still conceptualised in project mode; it is put together in that way and is executed in that manner as well. On the incentives side, the budget as well as the policies that FBR or the ministries of industries, commerce, and textiles come up with are also products of interest group interaction and working out selective incentives for the powerful.
Growth experiences of other countries and developments in economic theory, over the last three decades, has shown quite unequivocally that our growth paradigm is outmoded and cannot deliver. The political economy of the country and the way the elites are deeply entrenched in Pakistan makes it hard for any dialogue on reform to progress without corrupting it in their favour.
We know that sustained growth comes from allowing entrepreneurship to come through private sector initiative. We know that governments have to invest heavily in effective governance and in education, skills of the populace and infrastructure of the country.
The debate is not about big or small government, it is about effective and efficient government and the effective role of the government in areas where there are substantial public good elements (human development, infrastructure development, regulation).
But this requires a very basic and fundamental reorganisation of our government as well as the mindset of the Pakistani elite and policymakers. And this is exactly what has been proved too hard to change; throughout Pakistan's history, this change has been and is still being resisted today.
It is not as if we have not tried to reform. In fact, in light of the lessons from international experiences, we have. We have been attempting 'structural adjustment' for the last 25 odd years now. But the main issue has always been that our attempts at reform have never gone deep enough; they have been piecemeal, and have continued to be dominated by elite interests.
Still, some reforms have yielded benefits too.
The deregulation of the some sectors, such as banking and telecommunication, can be termed a relative success. Major regulation issues in these areas exist still, but over the years we have seen rapid expansion of services, declining prices for consumers, increased quality of services and more effective competitive environment. Clearly a lot of clients have benefited from these changes.
But in the same vein we have had spectacular failures too. The privatisation of cement industry, deregulation attempts in agriculture and the privatisation of KESC are good examples of failures. What was the difference in these successes and failures? Though this will require a separate paper to make this case, here I will just state it as a hypothesis: the main difference was the influence of elite interest groups, with the key factor being which side of the debate these interest groups exerted their pressure.
In both banking and telecommunication international companies and some of the larger local groups stood to gain a lot more from more effective deregulation. In the cement and KESC case, it was local groups trying to create monopoly rents for themselves in cahoots with the political and bureaucratic set up. Hence we had poor deregulation in the latter case.
Another example, from a different realm will strengthen the hypothesis a little. Look at the relative differences in the 'reforms' that have taken place at the State Bank of Pakistan (SBP) and the Federal Bureau of Revenue (FBR). While it is not perfect, fact remains that SBP has been given more autonomy, it has been able to reform itself substantially, and it has, as a result, also been able to get a significant reputation for itself as a relatively more effective regulator, a more objective commentator on the health of the economy, and a more credible critic of the political government. Again, while it could do a lot better, it has achieved important milestones nonetheless.
Contrast that with the state of 'reforms' at the FBR. After twenty years of efforts and hundreds of millions of dollars spent, it remains one of the most corrupt and ineffective institutions we have.
And the reputation it has in the country reflects that as well. Is it any wonder we have not been able to improve out tax-to-GDP ratio? But this reflects the power of the elites in Pakistan. Where they have needed a more effective SBP to look after the banking industry and give some predictability and certainty in that area, they helped ensure reforms, while at the same time, they have benefited immensely from a weak FBR that has been unable to levy direct taxes on the rich and the powerful.
So, clearly, we need very basic and foundational changes in how policies are made and implemented in Pakistan if we are going to have 'real' reforms and move beyond protection of narrow/sectional interests. It is interesting that the new growth framework put forward by the Planning Commission, does talk of moving beyond the traditional growth paradigm in the direction that has been pointed above. It also talks of making the government more effective and it talks of moving beyond selective incentive provision to providing broader space for entrepreneurship and private initiative.
But where the framework is weak is in suggesting how this change is to be effected; it does not explicitly make the argument about elite control in the sense that it does not recognise the negative role that various elite groups have played in Pakistan and the significant power these elite groups still wield.
The new growth framework proposes bureaucratic reforms, regulatory reforms, reforms in how policies are made and implemented and major reforms in state-owned enterprises (SOEs) as a way forward. It recognises the investments that are needed in human resource development and infrastructure development, and though it does not give explicit plans for how these are to be made, it does acknowledge that the state has a role to play in these.
And, most refreshingly, as it is coming from the Planning Commission of Pakistan, it explicitly recognises the need for policies to move beyond the selective incentive/subsidy giving mechanisms to more sector-wide and 'level playing field' kind of policies. These are definitely positive steps. Where the breaks come are a) the growth framework does not identify how the change in policies, policymaking frameworks and most importantly, the mindset of the politicians, bureaucrats and elites are going to be affected, b) what is the buy-in for the policy even from the government currently in power and c) what does the framework imply for the PSDP that the government is proposing/ has proposed for the next year.
In fact, it seems that the proposed growth framework stands in isolation from other documents of the government. The budget did not seem to take the growth framework into account and did not signal any breaks from the past. And neither did the proposed PSDP and the way it has been put together. So, how is the change going to come about?
Pakistan is in a tight spot and significant policy changes are needed. But more importantly, we need to change the way we think about policies also and we need to move to more inclusive and more democratic ways of making and implementing policies. Otherwise it is hard to see how we can stabilise the economy and achieve a higher growth path.
The new growth framework put forward by the Planning Commission does recognise that, but it does not propose any way forward in terms of how the changes are going to be achieved. In fact, given its lack of discernible connections with the budget that the government just proposed as well as the PSDP, it is unlikely that the new growth paradigm would be anything more than another document.
If the Planning Commission could come up with a realistic implementation plan, and if the political government could signal strong buy-in - which it might not as it is too close to the general elections - we could be in for interesting times. Maybe we will have to wait for the next government for this. A move in the proposed direction seems inevitable, but it might take a few years before the elite too will have to acknowledge the writing on the wall and mend their ways. Faisal Bari, on leave from the economics department at LUMS, is currently working with an international NGO. His work is focused on economic/social development, especially with reference to education. He can be reached at [email protected]
Comments
Comments are closed.