'Ministry of Economy'

The Advisor on Finance reportedly indicated that the economic team would be formulating a holistic roadmap for the economy, in which goals for all economy-related ministries/departments will be set and performance will be monitored, and will be shared with the prime minister on a regular basis for obtaining further guidance.
This kind of harmonization is welcome, but there needs to be an institutional framework to do this in a systematic and sustainable manner. The current framework lacks proper role emphasis, institutional and organizational alignment, and enhancing capacity of supporting systems and human resource.
First of all, the government needs to understand the difference between institutions and organizations. Institutions are the rules of the game, while organizations are the players of the game; where the former are divided into formal - laws, procedures, regulation - and informal - customs, conventions, culture - institutions.
In the practical sense, institutions are ministries at the federal level, and departments that are solely responsible for purely provincial matters at the provincial level; while organizations are the departments/other entities, for example state-owned enterprises, operating in turn within the overall institutional environment, providing incentive and governance structures to the organizations and the underlying markets.
Here, institutions and organizations interact over time, and evolve in the process. The three elements - institutions, organizations, and markets - combined are what define the overall 'institutional framework'.
Secondly, the government needs to decide which economic philosophy it wishes to associate itself with: neoliberal or social democratic. This will in turn influence the way it evolves the role of institutions, organizations, and markets on one hand, and the extent of role of government intervention and regulation. Broadly speaking, among differences between the two approaches, the role of institutions is seen as endogenous to the performance of economic growth and related equity concerns, in the philosophy of social democracy; which takes a political economy and related heterodox view of economy and economic agents. In this regard, the understanding on institutions and its framework indicated above is an outcome of this political economy and related heterodox thinking; while in the neoliberal sense the concept of institutions - and in turn, the role of government/regulation - is taken as limited.
On the other hand, social democracy sees a greater role of government/regulation, since, unlike the neoliberal thought process, it identifies the existence and significance of transaction costs - which included costs related with gathering and inspecting information, along with pertaining to enforcement, among others - in the economy as an important determinant of economic growth and underlying institutional quality; which is why in one important way, the role of institutions is emphasized here to reduce such costs to boost economic growth and macroeconomic stability.
Currently, there is a lack of clarity in the way the government has approached economic policy planning, since the manifesto of PTI and speeches of PM show a strong philosophical tilt towards the policies of Scandinavian countries, which are in turn social democratic in nature, while the programme negotiated with International Monetary Fund is basically neoliberal in nature. This confusion will need to be addressed and clarified in policy formulation under the drive of this reported economic roadmap.
Thirdly, the Ministry of Finance should not lead macroeconomic management; rather focus on its main role of focusing on fiscal - budgetary and revenue - matters. At the same time, the Ministry of Planning and Development should be made a part of every economy related ministry as a dedicated department on one hand, while on the other a part of its role is made larger and more potent in the shape of an overall 'Ministry of Economy' (MoE); which should lead the matters on overall economic management, together with the central bank leading on matters falling solely under its purview.
The central bank must retain its independent entity, yet there should be made a 'Board of Economy' where the Minister of Economy and the Governor of State (or central) Bank of Pakistan (SBP), along with the finance ministers of provinces should be the members, and would report directly to the PM. At the same time, the current formulation of Economic Coordination Committee (ECC) of the cabinet should continue.
This would mean that while the Board will present their unified or dissenting opinion on economic issues, the buck of decision-making- with application of appeal in courts retained, as is currently the case- in a democracy would stop with the PM on matters, which are not the sole responsibility of the provinces. In matters otherwise, the PM can suggest to the Chief Ministers of provinces accordingly. In most governments, the PM may still have significant say in provincial matters, because generally a political party in government at the federal level also has government in at least one of the provinces, if not more; not to mention the coalitions in other provinces.
Here, to understand the role of the Ministry of Economy, it is important first to indicate the composition of an economy. An economy primarily consists of four sectors: a) real sector; b) fiscal sector; c) monetary/financial sector; and d) external sector. Primary ministries in the real sector pertain to agriculture and industry, in the fiscal sector, Ministry of Finance primarily, Ministry of Economic Affairs in the external sector mainly, and SBP in the monetary/financial sector primarily. Hence, the MoE will provide the overall planning on all these four sectors; where SBP will provide the policy direction and regulation in particular matters of monetary/financial sector that fall within its domain.
The MoE needs to evolve a department in every ministry/department related with the economy, which identifies the transaction costs involved in the sphere of their work.
The MoE also needs to set up a department in every economy-related ministry/department that identifies the extent of information asymmetry - a situation where economic agents/entities unjustifiably do not have equal access, quantity and quality of information - and the way(s) in which it exists in the realm of activities of that department.
This will be an important step to take, since in Pakistan, research indicates the presence of large extent of information asymmetry that is an important source of inequality of opportunities, and with it inequality of income/wealth and overall poverty levels; including being an important source of market failures. This situation also compromises the quality of democracy. In effect, it is an important determinant of economic, political and social injustice in the country.
The MoE also needs to evolve an 'Office of Independent Evaluation (OIE)' within every ministry/department that evaluated the performance of department in terms of programmes launched. The recruitment for this Office may be done through setting up a separate stream in the federal and provincial public service commissions, respectively.
Last but not the least, the MoE should also evolve a ministry, and departments at the provincial level after consultation (and clearance in matters where provincial permission is needed) with the provinces, which deals with informal institutional aspects of economy.
The roadmap for the economy that is based on consensus, and has a sustainable sense of harmonization and direction, needs to be evolved through the framework indicated above. This is also important, since even the most well-intentioned and best thought-out economic plans need a wholesome institutional emphasis, with strong and clear underlying philosophical thought process.
(The writer holds PhD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund. He tweets @omerjaved7)