Policy reforms: 'Don't throw out the baby with the bath water,' says Dr Ishrat Husain

"A study of the private sector's response to policy initiatives introduced by the Government of India provides some piercing insights for the policy makers," says Dr Ishrat Husain. In a recent interview with BR Research, the Dean of the Institute of Business Administration and former Governor State Bank of Pakistan offered informative comparisons between Pakistan and India. The following transcript comprises selected excerpts from this interaction.
"Due to the lack of consistency in economic policies in Pakistan, businesses in the country have not had a clear path ahead of them in terms of the intended goals of the government," said former Governor State Bank of Pakistan. He attributes this uncertainty as the major cause behind subdued investment and cautious expansion of businesses in the country.
Citing the example of India, Dr Ishrat Husain explained that the private sector in that country was also not immediately on board with the government of Narsimha Rao, when reforms to open up the economy and do away with the prevalent license raj were introduced under his leadership in the early 1990s.
"It was only after the following government was formed and it continued with the same economic policies that the private sector mustered the courage to respond according to the changing regulatory structures and market dynamics," he pointed out. In other words, the private sector really fell in line with the program when they were confident that the Government of India would remain committed to reforms that included opening trade and investment with the rest of the world.
Across the political spectrum India has given up its old licensing raj and integrated itself with the world economy and has become an open economy with private sector and deregulation. "It was this shift that has really propelled that country in the international arena," asserted the former SBP Governor. He added, "that is how they have been able to grow to a point where they reap the benefits of economies of scale. Then when the market forces were unleashed they were able to penetrate both the domestic markets as well the international markets because economies of scale had actually led them to a competitive position".
Shifting his attention to Pakistan, Dr Husain stressed that there has been "no validation of reforms by successive governments in Pakistan". He recalled that governments, whether democratically elected or dictatorial, have remained at odds with other political forces and as a result have repeatedly failed to follow up on each other's sound economic policies. "Effectively, they threw out the baby with the bath water" he said.
The veteran economist considers this lack of consistency in economic policies to have mounted uncertainty for the private sector even when governments were stable and unchallenged. "The politicking which has ensued left little space for economics to be prioritised in the national agenda" he summed up..
THE TIMES THEY ARE A' CHANGING According to Dr Ishrat Husain, there are four transitions that are currently taking place in Pakistan, over the past four years. He considers these transitions to entail significant costs to the economy and stressed the need to comprehend each in order to generate the right policy responses to tackle each.
The first transition is the shift from the previous authoritarian, quasi-dictatorial regime towards a fully democratic government. This transition has been disrupted many times before in the history of this country. One of the major distresses caused by this changeover is the desire of the current government to distance itself from the perceptions of the people regarding the previous government. As a result of this distancing the present government has undone some of the accomplishments like Higher Education Commission and the Local Government system.
The second change is from military to civil supremacy. Until now, decision making has been ultimately under the control of the army. Dr Husain opined that the role of the military will diminish going forward and there shall be a steady decline in its ascendency.
The third transition is that the federal government which was highly centralised and had concentrated all the powers in itself is now forced to give the powers to the provinces. But this change shall remain incomplete until the empowerment of district and local governments. Once that happens, the lives of ordinary citizens will improve considerably.
The fourth transition is due to the fallout from the Afghan war which is taking Pakistan from being a peaceful state to one that is war torn and afflicted by extremism, militancy and fundamentalism.
"These phenomena lie at the core of the decline in economic growth, per capita incomes, living standards and other economic and social indicators" said the IBA head honcho. He stressed that the economic condictions in the country can only improve once these non-economic factors are addressed.
"Most of the discourse in Pakistan is focused on economic management and though it cannot be denied that better quality of economic management is highly desirable, the non-economic factors also have to be addressed" he said adding that "until this done, the country and countrymen will continue to face the music."
LOCAL GOVERNMENT MEANS BETTER REPRESENTATION Many political parties drawing major support from the rural areas have staunchly opposed the Local Government system terming it the inheritance from dictatorship and a needless layer of government. But Dr Ishrat Husain dispelled these assertions with examples from his practical experience. "Empowering the local governments brings accountability into the system of governance because instead of having to chase after just 500 ministers, the public can reach out to 62,000 representatives, with representation of each locale among them," he said.
"The job of the members of provincial assemblies or members of the National Assembly is not to handle the daily affairs of local administration; their job is legislation," he stressed. The economist said that MPAs and MNAs are opposed to the empowerment of local governments because they are unwilling to see their own hegemonies in their respective electorates get challenged by new contenders.
The former State Bank Governor claimed that by empowering the local nazims and focusing the job of MNAs and MPAs on legislation. "Only those people will eventually enter the fray in provincial and national level politics that are genuinely interested in and equipped for legislation.
"Besides, the locals of any area are best positioned to allocate scarce resources in the most efficient manner," he asserted. Citing an experience from the early days of his career in public administration, Dr Ishrat Husain recalled a meeting with the people of a village outside Shikarpur.
Though the provincial government had planned to construct a new school for girls in that area, the locals pointed out that a good school already existed in a neighbouring village just one kilometer away. They convinced the administration to lay a one-kilometer road between the two villages so that the existing school would be more accessible for others in the vicinity.
Dr Ishrat Husain also stressed on the need for the establishment of an adequate forum to ensure that the provinces contain themselves to their stated budgetary targets so that the Federal Government is not faced with mounting fiscal imbalances at the end of each fiscal. He contended that the size of government is needlessly large and called for the government to be limited to the provision of healthcare, education, security, etc.
"The government has no business running Pakistan International Airlines or Pakistan Steel Mills," he said. The veteran economist drew attention to India's aviation industry which has witnessed a boom after that government allowed private competitors to compete against the national carrier.
He prophesised that if the Ministry of Defence gives up the portfolio over the aviation industry and a separate ministry is formed with a view to boosting competition in this sector, the country's aviation industry will take off soon. Similarly, he also called for the government to curtail its size and concentrate on the role of facilitating and regulating the various sectors of the economy.