Pakistan's best hope today comes from the same building that housed economists and policymakers credited with the 'decade of development' back in the 1960s and early 1970s. But if the commission must relive its glory days, then sooner than later it must learn how to deal with the four major problems that it faces today.
The increased globalisation and privatisation of Pakistan's economy have vastly reduced space for planning by former methods, whereby the government sets targets and could use licensing and other direct controls to help realise them. Increasing globalisation means that the private sector's view of economic prospects will depend not only on the vision of the plan and the impact of its forecasts, but also on factors that are extrinsic to the plan.
Thus, a credit crisis in the US, a slowdown in the Japanese economy, a spike in oil prices by Opec, a decision by China to move aggressively into the manufacture of textiles, or other external events could condition businessmen's investment intentions far more than the picture painted by the government's plan.
Privatisation raises another set of problems. The government's ability to influence the private sector suffers from a basic asymmetry. The government can 'stop' the private sector from doing something, but it cannot 'make' the private sector do something. Increasing privatisation, therefore, means that the government's control over that ever-enlarging part of the national economy is becoming progressively more diluted.
Second, the passage of the 18th Constitutional Amendment has delegated the responsibility of several important economic sectors to the provinces. This poses special problems of co-ordination of ends and means between the Centre and the provinces, which are made more difficult if the federal and provincial governments are formed by different political parties.
Third, the Planning Commission does not possess sufficient staff with the qualifications and experience required by the new economic environment. An economy dominated by the private sector and freed from most direct controls can only be guided by the application of carefully crafted policies that offer incentives and apply disincentives.
To steer the economy using these tools requires a substantial number of well-trained economists, experienced in policy formulation and aware of "best practices" in countries that have dealt successfully with the issues confronting Pakistan.
Fourth, the Planning Commission has lost substantial parts of its role to other ministries, especially the Ministry of Finance. Even the strategy for poverty reduction, which one would have thought fell unquestioningly within the remit of the Planning Commission was entrusted with the Ministry of Finance. After all, what good are development plans to a poor country if their primary aim is not to reduce poverty?
Taken together, these developments mean that if the Planning Commission does not quickly adapt itself to the requirements of the new economic environment, it will be relegated to acting merely as custodian of the public sector development program, whose share in national investment is set to decline continuously.
Compared with the 1960s and the 1970s, Pakistan's economy is subject to much fewer government controls. For instance, the incidence of licensing, quotas, price-fixing, and subsidies has been considerably reduced. The role of public sector enterprises in the economy is also coming under increasing pressure.
Thus, while the "footprint" of the government in the economy remains large, the tools available to the government to direct the economy have substantially changed and are arguably becoming weaker. Moreover, not only is the action moving increasingly towards the private sector, large parts of it (after the passage of the 18th Amendment) now fall under the remit of the provinces.
In the circumstances, it is clear that planning by the former methods is no longer feasible. Pakistan's planners are not unique in facing this problem. The same issues have arisen in virtually all countries that have a mixed economy - ie, one in which both the public and the private sectors play substantial roles - and that are increasingly integrated into the world economy.
These issues resonate just as much in developed economies that have embraced planning - for example, France (which instituted its first plan as far back as 1947), the Netherlands, Sweden, Japan - as they do in developing countries, including South Korea, India, Egypt, Vietnam and the Philippines.
In these circumstances, what should the Planning Commission do in order to revitalise itself? By and large, the strategy adopted, implicitly or explicitly, by most successful countries has rested on two prongs, and Pakistan's Planning Commission should follow some variant of this approach.
First, it must engage with the private sector through a form of "indicative planning." An "indicative" plan for the private sector does not attempt to define binding commitments, but rather reflects expectations and intentions of both the private sector and of the government. An indicative plan establishes targets in discussion with the private sector, but does not impose them.
The theory behind indicative planning has been articulated by several economists, including Nobel laureate James Meade. The basic argument is that since forward markets do not exist for many commodities and services, economic agents are forced to make decisions based on incomplete or incorrect information.
This lack of co-ordination is likely to produce a suboptimal allocation of resources, which will impact saving, investment and future growth adversely. On the other hand, if credible forecasts of future production, exports, imports, labour market trends, and so on were available, they would provide much the same information as would prices generated by a complete system of forward markets.
The provision of missing information about the future by means of indicative plans would enable economic actors to share a coherent view of the future. This should lead to more efficient decisions and a more optimal allocation of resources. The government would reinforce the informational and exhortative effects by measures such as taxes, subsidies, and interest rates, to encourage private decisions to move in directions that were judged to be socially optimal.
Some form of indicative planning (under the same or any other nomenclature) has been practiced by several countries. Thus, much of the post-World War II economic miracle of France was attributed to this type of planning (in fact, the country originated the term), as was the recovery of the Netherlands after that war.
Similarly, most of the sectoral and export targets in Japan and Korea were set in discussions between the government and industry. Japan instituted these targets largely through the powerful Ministry of International Trade and Industry (MITI) while South Korea did that through the Ministry of Planning, the Minister of which held the rank of Deputy Prime Minister in charge of all economic matters.
The second major prong is to make the planning organisation the repository of the economic expertise of the government. In a way, this element is connected with the first, because as the system of direct controls withers and undergoes atrophy, the planning organisation has to rely increasingly on policies, incentives, and disincentives to achieve its aims. In order to do this, it must build up a strong cadre of economic experts.
In fact, in its glory days (the 1960s and 1970s) the Planning Commission did, to a significant degree, perform this function. Thus, for example, the Planning Commission did the technical work and was responsible for much of the negotiations that led to the separation of the external debt of Pakistan and Bangladesh, after the latter country became independent.
This was an extremely complicated and tense matter because political feelings were inflamed owing to the circumstances in which Bangladesh had been created, and because Pakistan's financial resources were at rock bottom and it could not continue to service the Bangladesh portion of the debt which, as the successor state to the former united Pakistan, it was legally liable to do.
The new growth strategy that was approved by the National Economic Council at the end of May concentrates more on strengthening institutions and providing incentives to increase productivity than on setting targets for investment. It therefore implicitly recognises the difficulty of setting credible investment and production targets in an economy increasingly dominated by the private sector and tries to boost investment by dissolving the impediments that confront the private investor. What does this imply for the structure and functioning of the Planning Commission?
First, it means that the Planning Commission is starting to recognise the difficulties of setting inflexible targets in an increasingly private-sector dominated economy, particularly when the tools of control (such as the Industrial Investment Schedule), that were formerly available, no longer exist.
Second, it implies that the organisation will have to undergo at least a partial restructuring so as to create new units that would deal with innovative subjects, such as institutional development. Third, it will have to hire staff with very different skills from those it presently has. It will not be easy to fill the slots. The main problem with the Planning Commission in dealing with the issues it now faces is not so much its structure, but the capacity of its incumbents.
As a result of abandoning the training programs of the past and losing the regular connection with external experts, the quality of the Planning Commission staff has noticeably weakened. Moreover, the very substantial and seemingly irreversible brain drain trend, largely because of the security situation in the country, has made it difficult to recruit qualified replacements even when attractive salaries are offered.
Fourth, in order to formulate concrete plans that incorporate the new development strategy, the Planning Commission will have to conduct research in the areas from which it has been absent, including some for which data and clear-cut, universally agreed methods of estimation might not exist.
Thus, for example, it would be desirable to have estimates of the extent to which improvements in the working of the commercial judicial system affect investment incentives, or the effects on economic growth of a particular subset of civil service reforms, or changes in zoning laws to permit greater commercialisation of urban areas. In the absence of such studies, working out the requisite estimates would be likely, at least in the initial Plans in which this new strategy was incorporated, to require the making of rather heroic assumptions.
Fifth, after the passage of the 18th Amendment, several key sectors - such as agriculture, education, and health - have become the responsibility of the provinces. To deal with these responsibilities, the provincial shares in the total tax revenues collected by the federal government have been increased. Some key parts of the economy, therefore, are no longer under the direct control of the federal government - the planning and implementation of projects and policies in these key sectors fall under the purview of the provincial governments.
This creates another set of challenges for the Planning Commission The Planning Commission will have to interact much more intensively with the provincial planning departments on economic and sectoral plans and policies. The present interaction appears to be especially weak regarding economic policies. The commission will also have to work with the Federal Bureau of Statistics to help the provincial statistical departments develop the data - such as provincial GDP, investment (both public and private), savings, and so on - that are necessary for planning.
Moreover, if overall plans are to be realistic, provincial plans will also have to be realistic. The staff weaknesses in the Planning Commission are multiplied many times in the provincial planning departments. This makes it difficult to formulate good plans in the provinces and to interact productively with the Planning Commission.
And yet, if the country's plans are to be successful, the provincial plans must be improved. Thus the challenge for the Planning Commission is to help the provinces strengthen their planning departments at the same time as it must strengthen itself, in a situation where both sets of governments are trying to recruit similar expertise in several areas from a rather limited talent pool.
For the country's plans to be successful, the Planning Commission must ensure a meaningful interaction not only between itself and the provincial planning departments, but it must also ensure a substantial degree of co-ordination between the planning departments of the different provinces.
The interaction and co-ordination could be made more difficult if the federal and political governments are formed by different political parties. The goals of these parties as well as the methods of attaining these ends could diverge substantially, and the Planning Commission may have to play a major role in helping broker politico-economic compromises if a coherent and consistent national Plan is to be successfully prepared.
None of these challenges is impossible or insurmountable. However, nearly all of it will be demanding, because these will be largely new tasks, and because the quality of staff resources both at the federal and provincial levels is restricted.
At the same time, the difficulty of recruiting qualified staff from outside the organisation (at least until the security situation in the country improves), could also seriously slow down the movement from the articulation of an innovative strategy to the formulation of an actionable plan.
The writer is a former Director of the World Bank who worked at the Planning Commission of Pakistan for several years. This article is based on a much more extensive paper - titled 'Revitalising the Planning Commission: some recommendations' -- prepared in January 2011 for the International Growth Center, London. He can be reached at [email protected]
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