Economic advice for the PM

The prime minister made a very timely and passionate speech recently at the signing ceremony of performance agreements, which basically will evaluate the performance of ministries. He indicated that it was important for ministries to improve their performance, and that after being in office for almost half of the overall tenure, there was no more room for ‘learning on the job’ for the incumbent government.

While ‘evaluation’ of ministries is important – and as the PM said lagging ministries will be penalized, with greater squeeze/surveillance focus on those dealing with ‘A-listed’ economic concerns of utmost importance, and the PM included among such concerns as a) those dealing with power and agriculture sectors, b) that helped target subsidies and rationalize pensions, and overall, c) those that led to export enhancement – yet what is even more important is to ‘reform ministries’. Without this, it will be very difficult to reach economic targets, including the ones indicated above, especially on a sustained basis.

Reforming ministries is not enough though. In fact, it is important to understand that ministries for all practical purposes are the ‘institutions’. So reforming ministries is basically ‘institutional reform’. According to institutional economics, institutions are the ‘rules of the game’, that provide the ‘environment’ for the organizations, which are the ‘players of the game’ to perform ‘economic exchange’ both within the hierarchical structure of the organization, and the market. To elaborate further, institutions are both ‘formal’ and ‘informal’, where formal institutions are the laws, rules, regulations, and procedures that are embodied as a ministry for all practical purposes. On the other hand, informal institutions are the beliefs, customs, and culture within a society and overall influencing it. Here, at all these three levels of institutions, organizations, and markets, elements of the ‘environment’ will basically constitute ‘incentive’ – both ‘positive’ and ‘negative’, in the shape of subsidies and tax/regulation, respectively – and ‘governance structures’.

Hence, it is important for the PM to understand that economic policy for both meeting ‘A-listed’ economic objectives, and broadly as well, to simultaneously undertake reforms in institutions or ministries, organizations or government departments/state-owned enterprises/private sector, and markets. Evaluation of ministries is not enough to enhance the capacity of ministries, which requires reforming institutions, and by which as indicated above means, introducing a set of incentives and governance structures that enables ministries to perform more efficiently, and in turn be more productive towards underlying organizations and markets.

The first thing for government to understand is that the neoliberal philosophy of ‘least government’ has not worked, especially in developing countries where institutional, organizational, and market fundamentals are not sound enough to produce or allow optimal economic outcomes to manifest themselves. In fact, as quite evident from the rising income inequality in the country over the years, if anything, collusive practices by politico-economic elites have distorted economic benefits to unjustifiably reach the pockets of a small segment of society. Once understood, government will see that it has a much greater role to play in providing a level playing and incentivized basis for economic agents to interact, with least amount of ‘transaction costs’ involved.

Secondly, and as a consequence of government realizing the above and enhancing its role in economic management, it will have to see itself as the ‘entrepreneurial state’. Understanding it is important for the government to visualize the extent of role of ministries, and in shaping an appropriate level of institutional reform for creating needed capacity to carry out such a role; especially if it wishes to be innovative enough to capture greater export markets, and incentivize economic agents to consume, and produce more efficiently.

An idea made prominent by world renowned economist, Marian Mazzucato, and which she aptly brings out in her book ‘The entrepreneurial state: debunking public vs. private sector myths’: “This conventional view of a boring, lethargic State versus a dynamic private sector is wrong as it is widespread… in countries that owe their growth to innovation – and in regions within those countries, like Silicon Valley – the State has historically served not just as an administrator and regulator of the wealth creation process, but a key actor in it, and often a more daring one, willing to take risks that businesses won’t. This has been true not only in the narrow areas that economists call ‘public goods’ but across the entire innovation chain…” Hence, for meaningful working of ministries, and underlying organizations and markets, would therefore require the right understanding of the role of government.

Thirdly, once understood, the government will have to rigorously work towards enhancing immensely the capacity of data management in the country. In the same speech, the PM highlighted the difficulty in reaching correct economic data, for instance in the power sector. It is highly likely that that the government would have to go through a similar experience, if it wished to know losses of state-owned enterprises (SOEs). Sadly, previous government did not properly reform the Pakistan Bureau of Statistics, or built-up its capacity adequately, or provided it enough powers to collect data in an effective and timely manner.

It is important to note that data authority’s capacity to disseminate data has also remained weak traditionally. Perhaps, as one of the tools to perpetuate elite capture, data-related authorities have been kept weak by design. That it is still weak after two-and-a-half years of current government’s tenure in office, is quite shocking, given the fact that it wished to bring transparency in economy, for which high reliability of data is an essential pre-requisite. A full-fledged, appropriately capacitated ‘ministry of data’ is the need of the hour, and is an important component of enhancing the capacity of ministries, and overall, all economic decision-making in the country.

Fourthly, ministries, organizations, and government regulation/incentivization of markets require better quality of labour force. For this, civil service reforms are a must, and it needs to be done on an urgent basis. Frankly speaking, no innovative ideas have really come to the fore from the committee reviewing this. Broadly speaking, civil service should be replaced with an overall ‘public service’, covering all fields of the economy, and in turn, operating in two streams of ‘fast’ and ‘routine’ streams, where selection takes place on the capacity of officers, and finally officers working in two areas of ‘administrative’ and ‘technocratic’ service.

Fifthly, labour sector reform is essential as it provides the underlying incentive structure to enable public- and private sector employees to function in an optimal manner. This should be part of a greater reform focus of government to reach rational prices in not just the services – to which the labour market belongs – but also the goods market. Reaching true price signals will allow government to reach not only efficient competitiveness levels in the realm of exports, but it will also be able to control inflation in a better way, including being able to reach rationalized levels of pensions.

This framework and its philosophical underpinning are the heart of economic policy approach, which has strangely alluded the attention of PM and its economic team, and is indeed essential for meeting the economic objectives, and overcoming economic issues. The overall policy needs to stand on these fundamentals. Otherwise, it will be more a case of being stuck in vicious cycles of rising poverty and income inequality, greater perpetuation of elite capture and debt accumulation, and falling into current account crises time and again.

(The writer holds PhD in Economics from the University of Barcelona, and previously worked at International Monetary Fund. He tweets@omerjaved7)

Copyright Business Recorder, 2020