‘SBP should provide critical reform assessments to politicians’

Interview with Professor Sir Paul Collier

Earlier this month, the State Bank of Pakistan invited Professor Sir Paul Collier to deliver a lecture on “The Role of a Central Bank in National Economic Development” as a part of the SBP’s annual commemoration to its first Founding Governor Zahid Husain.

Collier is a professor of Economics and Public Policy at the Blavatnik School of Government and a Professorial Fellow of St Antony’s College. He is currently a Professeur Invité at Sciences Po and a Director of the International Growth Centre.

In his lecture, Collier, emphasised on the need to inculcate a sense of shared belonging, a sense of fairness and a sense of purposive action. Without these complementary beliefs all shared by main stakeholders of the society and economy, sustained economic development would be hard to achieve, he said. He also praised the national consensus on CPEC as a powerful symbol of national unity.

Over a quick tea with BR Research, Collier dwells on those three senses as well as his thoughts on the role of the central bank, and how SBP’s recent emphasis on SME finance, low-cost housing finance and agriculture could be weaved into a meta-narrative for development. Below are the edited excerpts from that meet.

BR Research: Pakistan’s government does not have the fiscal space to provide education, health etc. Individuals and businesses, on the other hand, don’t want to pay taxes, saying they do not trust the government. How can Pakistan resolve this problem? 

Paul Collier: There are two aspects to trust. One is that people don’t trust each other to pay taxes. Second, people don’t trust the government to use tax to build a better future. These are the two aspects of this trust. How do we get out of that? What is vital to get out of it?

The root to real prosperity depends upon sustaining a phase of major public investment towards building key economic infrastructure and institutions. Both these investments are important. An investment means you’re going to be using resources to invest, not to consume. It’s a phase of collective sacrifice to build a better future.

In order to make that collective sacrifice, you put in an individual sacrifice. Why should I give up my consumption now, if others won’t or if the government is going to misuse it? That’s the nature of the problem. How do we get out of it? By cracking those two levels of mistrust.

We have got to believe that other people will also sacrifice their consumption, and we have got to believe that the government will use the resources well. For that, we have got to build the three interrelated beliefs I talked about. We have got to get a sense of ‘we’. Until we believe that we are a ‘we’, some sort of shared belonging, there is no way we can invoke things like loyalty to each other.

BRR: Are you referring to having a sense of commune?

PC: Yes! A sense of community. When I say this or that will help all of us, you have got to understand that the ‘us’ includes you. How does a society do that? That’s where leaders come. But their words without actions will not get very far.

Leaders can’t just appoint people from narrow sections of society; they have got to spread power around. That’s why I say that your central bank’s quota system is a very good way of ensuring that; it is a very powerful signal that it sees itself as a national institution. We need more signals like that.

BRR: Can a savings culture be inculcated as well using the shared belief?

PC: Yes! If we all invest now, we will all be better off in the future. We’ve got to generate a reasonable shared belief that collective savings will yield a big payoff. The nice thing about the China-Pakistan Economic Corridor is investment – a good reason to believe that iconic plan can payoff. It is also a symbol of binding the regions of Pakistan together.

BRR: This idea of having a shared belief has been experimented in Pakistan. A host of Lahore-based economists have suggested re-imagining Pakistan’s identity as a trade conduit, separating it from hard-line Islamists’ identity that was carved after military dictator General Zia took money from the American CIA and indoctrinated militant identities. But this re-imagination of identity has not taken off in this country.

PC: You need to have a unifying identity for narrative purpose. One such unifying narrative is that you want future Pakistan to be strong. Think what the unifying narrative in China was. It wasn’t communism, or capitalism. It was ‘we are sick of being humiliated; we want a strong China’. Then, the obvious point is that we can’t build a strong China in two years. It’s not a matter of how much we spend on the military now; it’s a matter of ‘can we grow the economy to the point where we can then spend on a lot of things?’

BRR: Given your readings in political economy, have there been cases where political/civilian leadership, and the military leadership, both of whom have been historically at odds with each other in Pakistan, have carved out a shared narrative or a shared future?

PC: Absolutely. Botswana is one example. One of the first things that they spent a lot of money on when they became prosperous was a military airport. They spent a billion dollars on it. But the narrative to the military was ‘we’re not going to build that unless we first build the economy’.

The only way a country is going to be able to survive in a region with some big bullying neighbouring country is if you’re richer. It is perfectly feasible to say we unite on the idea of a strong Pakistan. If you cast it as a trade-off between ‘a vision of Pakistan as a trade conduit’ versus ‘a vision of Pakistan as an Islamic fort’, then you’re creating an unnecessary division.

Regardless of where you want the country to be, you have to first develop the economy. That was the Korean narrative. They said ‘okay, we all want unification’. But first, we have got to develop the economy.

If your civilian and military leadership can unify on the priority of what we are going to do first, that can give you the sense of purpose and continuity, regardless of which system you run. The common purpose gives you this continuity.

BRR: A lot of what you say hinges on the elite. Why would the elite change the rules of the game? What pressures force the elite to do that?

PC: It could perhaps be done through pressure, but the best way is for the elite itself to recognise the importance of catching-up. Think how things spread around East Asia; it was basically catch-up. Things become obvious once your neighbours do it and it works. Why did India change policies? Because China was developing fast!

Elite will reform if it realises that it is in its own self-interest. The root of self-interest is to get this over-arching objective that everybody shares. ‘We have got to have a strong Pakistan in 20 years; otherwise we are really in a mess. A strong Pakistan in 20 years needs a strong economy’.

BRR: Well, development in both India and China has failed to push Pakistani elite into the ‘catch-up’ mode. But let’s go back to the kind of a role you are advocating for the central bank to have using what you said in the lecture: ‘a sense of shared belonging, a sense of fairness and a sense of purposive action.’

PC: The central bank can change beliefs through its words and actions. For instance, it can create a sense of purpose, by focusing on housing, which leads people to having a stake in the future. House financing is an important domain of the central bank. But my own hunch is that it’s not going to be done by banks but by new classes of simple institutions with a much lower cost base.

For example, when housing became a problem in the early 19th century in Britain, a new financial institution by the name of ‘building societies’ was developed, to solve the house financing problem. When banks think housing, they think elite housing, whereas building societies think housing is for ordinary people.

BRR: Unless there is trust in the society, the central bank’s role itself becomes limited. For instance, Pakistan’s central bank wants to focus on SME finance. But in an undocumented economy, there are structural limits to growth in SME finance.

PC: You are quite right. To really ignite finance in SMEs you need greater compliance in tax, which superficially might seem to be a different problem. The central bank can’t do what it isn’t responsible for. But it can try and influence at a higher level. And the central bank is in that position where it can inform other parts of the government about its views on the economy. The central bank is licensed to talk. It is not licensed to decide on every economic or public policy, but it is licensed to give its own independent views.

BRR: But tomorrow if Pakistan’s central bank governor goes about making public statements or releases detailed public reports on problems related to taxation, the governor would soon have to look for another job. 

PC: He can give advice to political leaders quietly. As a central banker, you have two windows. You have got the public, and you have got the political leaders. The central bank is an apex economic authority for advising the government. Its role is more important in a society that doesn’t have a deep independent economic community of opinion. So the central bank does have a role of quietly building understanding amongst political leaders of their own larger interests.

BRR: If, therefore, Pakistan’s central bank writes a chapter in its periodic reports assessing and commenting on the quality of the government’s tax reform, do you think that would be overstepping the line or would it be within the lines of what you are talking about?

PC: It depends on what you do with that report. If it’s shared discreetly with political leaders, then they are certainly within their mandate. If they release it publicly, then it’s not.

BRR: In Pakistan, banks have been busy parking their money in government papers instead of lending to the SMEs. How can they be part of the trust and shared narrative you are talking about?

PC: It is a problem when banks become retail outlets for government debt rather than banks. Basically, if it’s too easy for banks to make money like that, they will never become banks. What banks should be doing is becoming information gatherers on SMEs to learn which business will be good to finance. So they need to become information gatherers and information users. That’s what a good bank assistant does. Instead, if they have retreated into just being a payment system and a retail outlet, then life needs to be made harder for them.

BRR: When we talk about building a ‘stronger nation’ narrative, what should enjoy logical priority: social sector development – health, education, police reforms, etc. – or hard infrastructure such as motorways and power projects?

PC: I think the ‘stronger nation’ narrative should focus on the economy. A strong economy needs good economic infrastructure that provides connectivity and energy. It also needs the vital sinews of the state: reliable contract enforcement; honest tax administration; sensible regulation. And finally, it needs to help households invest in their children through schooling that gets children to global standards of ability. But that list is still highly focused: growing the economy is not a license for the state to try to do everything.