PIDE on institutional change, growth and poverty

Cerebral conceptualisations and proficient experiences when syndicated, unleash invigorating manifestations that not only widen the canvass of thought and solidify convictions but also trigger an inculcation characterised with a spirit and alacrity to act.
Pakistan Institute of Development Economics (PIDE), Islamabad, in collaboration with the Pakistan Society of Development Economists accomplished a syndicate by staging its 19th annual general meeting and conference between January 13-15 2004.
In his presidential address director PIDE Dr A.R. Kemal enlightened the audience on the theme of the conference: institutional change, growth and poverty in Pakistan.
In his scholarly speech he not only rendered masterly elaborations on the theme, certainly blended with its applied dimensions, but also furnished practicable solutions so as to meet predicaments.
In fact, his speech served as a comprehensive outline and abstract of the whole debate to follow during the conference.
To start with, the need for well-functioning institutions can hardly be overemphasised. Here we ought to recognise that these institutions in development economics carry altogether different theme as highlighted in World Development Report 2002, 'the rules, enforcement mechanisms and the organisations'.
These institutions classified by varying degrees of formality, levels of hierarchy and area of analysis, interact with policies for the ultimate fruition of the optimal outcome.
Formal institutions (as written rules based on unwritten codes of conduct, laws regarding property rights, charters, bylaws, statutes, common laws, regulations) are laden with enforcement characteristics.
Informal institutions are the ones with informal elaborations, they are simply extensions and modifications of formal rules, socially sanctioned norms of behaviour (customs, taboos, sagas, myths and traditions) and internally enforced standards of conduct.
Institutions may be economic markets as well, that determine production, allocation and distribution of goods and services; the political institutions, responsible for holding of elections, devising electoral rules, type of political system (as regards opposition and the government), measures of checks and balances and political stability.
The legal institutions refer to the type of legal system, definition and enforcement of property rights and legal origin.
Social ones govern the social sectors such as health, education, social security arrangements and gender balance.
Then comes the issue of costs that have to incur in the course of economic transactions taking place among these institutions viz., buyers and sellers, creditors and debtors (or simply among competitors) rulers and constituents, representatives and voters and also between the competing political groups.
These costs tend to rise due to inadequate information, incomplete definition, banal enforcement of property rights and the barriers to entry.
As far as institutions for economic transactions are concerned, they evolve in two phases.
Phase one, intracommunity transactions that rely on personal ties and the intercommunity transactions that take place with inadequate inter-community institutions.
Phase two; there are efficient institutions for impersonal inter-community and inter-community economic transactions.
Certainly, legal and other rules with third party enforcement also govern inter-group and intra-group political transactions.
Clearly, low cost transaction system ensures specialisation and efficient production. Yet, these institutions being country specific, the desirable institutional arrangements have a large component of context specificity, certainly arising from differences in historical trajectories, geography and nature of political economy or other initial conditions.
In Pakistan's case, the institutional framework is extremely faulty. The setbacks are numerous and known to everyone. In fact each one of us is being 'sinned' by this institutional structure.
Think of any government office, and you feel irritated, annoyed and disgusted. However, these setbacks are being tried to be done away with.
A silver lining is the devolution of power from the federal and province level to districts, whereby, the district administration and police are answerable to elected chief executives of the district.
A system of checks and balances together with citizen monitoring by elected representatives is in place.
Arrangements to access to justice, police reforms and civil services reforms are under consideration in order to ensure good governance and better servitude.
Especially, the civil services reforms bear pivotal significance, for civil servants tend to deserve civilians.
They can be mended if we follow factors that Good Governance Report 2010 enumerates as animating the crises in civil services: 1. Perception that government is to provide jobs in the public sector, 2. existence of poor salary structure, 3. protecting status quo, 4. resistance to sharing the information, 5. centralisation of decision-making, 6. lack of discipline, 7. lack of professionalism and performance orientation, 8. corruption, 9. archaic operating procedures and regulatory mechanism, 10. public aversion to public servants.
The reform strategy in this regard may include, flatter structure of civil service, merit-based recruitment and promotion, performance-based compensation, incentives to improve and innovate and increase demand for professional skills.
On the whole, the reforming of the institutions calls for understanding of the differentiation between the development of exogenous and endogenous institutions, existence of difference of levels of institutions with different time horizons of change and importance of the local settings.
As a matter of fact, over last the three decades, especially in 1990s (the lost decade), public institutions have degenerated.
Given that well-functioning government institutions lead to high investment level, better policies, increased social capital stock and better management of ethnic diversity; contrarily, the decay leads to poor governance and disservice.
Thus, we need transparent, participatory and efficient working of institutions to ensure right priorities, formulation of appropriate policies, and efficient implementation thereof. But first comes the establishment of sound institutions.
Now how to develop effective institutions, for this purpose World Development Report 2002 suggests four-pronged approach:
1. Design them to complement what exists in terms of other supporting institutions, human capabilities and available technologies;
2. innovate to design institutions that work and drop initiatives that do not;
3. connect communities of market players through open information flows and open trade; and
4. Promote competition among jurisdictions, firms and individuals.
Let us now address the other two components of the theme of the conference viz., growth and poverty (alleviation).
They are interrelated per se for, pro-poor growth is distinct from mere growth taken as generality.
In this context, the institutional capacity and governance need special attention. Take governance, where good governance bears many of positive ramifications; the poor governance fosters instability and unpredictability, which tend to discourage long-term investment and engender lobbying, corruption and misuse of power.
This spawns frustration and dysfunctional behaviour on the part of economic agents.
Poor governance manifested in inefficiency, ineffectiveness, inaccessibility, intractability and lack of motivational incentives contributes substantially to slow growth, low economic activity and abject poverty.
According to Nanak kakwani, DCs need poverty equivalent growth rate (pro-poor growth), since proportional reduction in poverty is monotonically related to the poverty equivalent growth.
Luckily, our plight and fortune are not as they used to be in the recent past; the fact was brought to light by the federal finance minister Shaukat Aziz.
In his superb inaugural address, he discussed salient achievements of his government, even without shying away the challenges faced by the country.
According to him, now by dint of healthy, consistent, transparent and predictable economic policies the investor confidence has risen which is reflected by sharp pick up in bank credit to private sector from Rs 65 billion in corresponding period last year to Rs 157 billion this year. Foreign capital inflow is also on the rise.
This all has materialised 14 percent growth in industrial production. The capital inflow indebted to good governance and better infrastructure, has led to a buoyant stock market. Again, exports and imports are growing by double digit, a better credit rating is all heartening.
Nevertheless, on the issue of debt, we hope to be able to prepay high cost external debt worth $ 1 billion shortly.
The external balance of payments at the moment is the best ever; current account is also in surplus, forex standing at over 12 billion (equalling 17.4 percent of GDP) are sufficient to support 12 months imports.
With inflation at 3 percent, economic growth over 5 percent, interest rate environment being conducive, fiscal deficit coming down from 7 % to 4.5 percent, public debt from 110 percent of GDP to 90 percent in the last two years we can see for ourselves the signs of good governance and macroeconomic stability.
Regarding debt problem he emphasised the fact that colossal debt servicing resulted in revenue shortfall. According to him, debt consumed two third of government revenue in 1990s.
Thus the need of the hour is to have sustained macroeconomic stability, financial discipline and consistent and transparent policies.
In recent years, the twin deficits (fiscal and current account) have been reduced to help improve macroeconomic environment, bring balance of payments to a viable position and pile up foreign exchange reserves to strengthen shock-absorbing capacity of the economy.
A wide-ranging structural reforms strategy to boost the supply side response through removing impediments to private sector development, have definitely removed many of irritants; that marred investment climate previously.