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Everything’s almost free in Spain’s parallel barter economy

It can be argued that extra-judicial interventions first by Ghulam Mohammad as Governor General in 1951 and later by military regimes and disregard of the Constitution – facilitated by either pliant or weak high judiciary- have been a root cause of problem. It needs to be noted, however, that in some respects Pakistan’s military regimes were less arbitrary than some democratically elected leaders starting with Z. A. Bhutto.

The democratic governments of Benazir Bhutto and Nawaz Sharif that followed the end of Zia rule in 1988 did not play by the democratic norms and often proceeded to persecute opposition leaders. For instance, the well-conceived step of the establishment of a high-level Public Accountability Bureau was undermined by using it as a political tool. Meanwhile, the core competency and authority of bureaucracy – central to effective administration and delivery of public services – has declined steadily because both of falling real compensation and the very frequent political interventions in violation of rules and regulations.

The early Musharraf years did see a significant improvement in economic management with greater reliance on technocrats and greater stress on merit in recruitment and promotion. But ultimately political compromises after the 2002 elections limited progress on some fundamental issues such as improving tax administration and reforming civil service.

The last five years represent somewhat of a paradox. On the one hand, governance has declined further, corruption has been on the rise and effective decision making has suffered as merit has not been the key criteria for high appointments. Militancy and terrorism have been on the rise and there has been foot dragging actions on accountability of high public servants for abuse of power. On the other hand, the higher Judiciary especially the very independent minded Supreme Court has become very pro- active in governance issues and the free media especially electronic media is playing an important role in highlighting public policy issues and exposing wrong doing.

Furthermore, there are basic constitutional changes that augur well for the future of democracy in a meaningful federal setting. The 18th Amendment to the Constitution passed in April 2010 has restored in letter and spirit the parliamentary democracy and the relationship between the Federation and the Provinces as envisaged in 1973 Constitution. This amendment does more than repeal the 17th Amendment introduced General Ziaul Haq which had given enormous authority to the President. It transfers major economic powers to the provinces by abolishing the concurrent list in the 1973 constitution. The amendment also laid down the procedures for nominating judges to the higher judiciary and made the office of Chief Election Commissioner autonomous of both the executive and the parliament and prescribed the procedure for appointing the head of the Accountability Bureau. Through the subsequent 19th and 20th Amendments, procedures for appointments of High Court and Supreme Court have been clarified and the arrangements for caretaker government to oversee interim administration during elections have been laid out with the final authority on the caretaker prime minister being given to the Chief Election Commissioner in case the outgoing Prime Minister and the Leader of the Opposition cannot agree on a nominee.

The substantial devolution of power to the provinces has been underpinned by the 2009 National Finance Commission (NFC) award which substantially increased the share of provinces and within the provincial allocation share of the two poorer provinces, Balochistan and Khyber Pakhtunkhwa. However, it has been rightly pointed out that ideally the transfer of additional resources to provinces under the NFC award should have followed the transfer of increased executive responsibilities to avoid wrangling on additional resource transfers and a significantly weakened federal revenue position.

The impact of significant new structural changes would depend, among other things, on how effective the provinces are in improving the efficiency of expenditure and mobilising additional taxation for greatly enhanced responsibilities for the social sectors. One big question is whether provinces would take steps in turn to devolve greater authority to the local government as broadly envisaged by the Musharraf government. (See discussion below) The results of the next elections would also be important in indicating whether the hold of traditional parties remains strong or whether new leadership can emerge.

But regardless of whoever wins the elections, governance would not improve significantly unless several conditions are met (1) The security situation improves and the militancy is brought under control, (2) There is a firewall between executive authority and accountability mechanisms. It would be fair to say that Pakistan has one of worst records in punishing wrongdoers, whether, politicians, bureaucrats, businessmen, or military leaders. Unless the threat of jail time becomes real, behavioural changes cannot be expected, (3) Higher judiciary is strengthened further and allowed to play its proper role, (4) A deliberate effort is made to reform the civil service and restore the independence of public institutions through autonomy, proper selection of top management and professional staff, and adequate pay, (5) and last but not least, effective steps are taken to decentralise authority to the local government level.

TRANSLATING LESSONS TO FUTURE ACTIONS The above discussion clearly suggests that, first and foremost, good governance, in the broadest sense, and realistic national agendas focused on equitable economic development are critical to ‘Moving the Pakistan’s Economy Forward’. Unfortunately, these are areas least susceptible to advice from a group of economists, development experts and economic policy officials. What Pakistan needs is an enlightened leadership that can take a long term view, inspires national confidence and cohesion, and does not concern itself unduly about perpetuation of its own rule. This, however, cannot be ordained. But a democratic set up with decentralised authority, guarantees for open and fair elections at all levels, and strong deterrents for abuse of power and breaking of the law applied to all citizens, seem like a pre-requisite. As noted above, some progress has been made in this regard during the last few years. But unless the tussle between judiciary and the executive is resolved and the accountability bureau successfully prosecutes public officials who have committed crimes and is able to send at least some of them to jail for long terms, the signals for answerability would not be clear.

On the incentives side, one hopes that both politicians and the military have learnt their lessons from their less than glorious record and will collaborate rather than confront each other in efforts to move Pakistan towards a better future. They need to remember that none of leaders after Jinnah so far in the 65-year history of Pakistan has become a national icon, somewhat of a shame and of course a considerable cost to the country.

Among the specific steps mentioned above to strengthen governance, de-centralising governance to local government level deserves special mention. In an important study on decentralisation, Cheema, Khwaja and Qadir make two important points. First, historically decentralisation to local governments has been undertaken by military governments seeking political legitimacy while centralising political power in their own hands. Secondly, the control over the local governments was sought to be exercised through the bureaucracy.

Under Musharraf, however, there was a genuine, albeit very ambitious, devolution plan introduced in 2000. The lynchpin of the plan was to create the elected office of District Nazim (head) with substantial authority and responsibilities for economic and social development functions.

It is not clear, however, whether the local government system devised by President Musharraf will survive. The provincial government in general and members of national and provincial assemblies in particular regard elected local district heads as competitors for influence in their respective domains.

The recent amendments to the Local Government Law by the Government of Sindh have abolished the position of elected Nazims and the administration and of districts has reverted to bureaucrats appointed by the provincial government. This is a retrograde step. Governance must move closer to the people. The province is just too large a unit to be governed centrally.

The danger of elite capture and further increase in corruption are often cited as arguments against devolving too much authority to local governments. These dangers are real but can be mitigated by instituting the office of independent provincial prosecutors for all districts who will be responsible only to the Federal or Provincial Ombudsman depending on the nature of crimes being investigated.

On the positive side, healthy competition among districts could improve performance as Nazims attempt to burnish their reputations and attempt to showcase their administrative skills. Is too much emphasis being placed on improved governance and more enlightened leadership? I do not think so. First of all, there is a crisis of confidence in the country’s leadership which is hampering control of militancy, encouraging capital flight and discouraging both domestic and foreign investors. Second, some of the deep problems that Pakistan faces such as inadequate tax collection, poor quality of public education, a persistent and prospective energy crisis are also linked in a fairly direct fashion to the failure of public sector and the leadership to develop adequate responses to issues that have long troubled the country.

Take the case of education. It is correct that public expenditure on education at 2 percent of GDP is woefully inadequate. However, some political promises to treble or quadruple this level of expenditure are unrealistic because of the financial constraint the country faces. The fact is that public schools are steadily losing ground to private schools even in the rural areas where private schools do not charge very high fees. The quality of public sector education remains a critical concern – there are too many stories about ghost schools and phantom teachers that require structural solutions such as transfer of authority to local bodies, public: private partnerships, and even school vouchers that can be used in private schools.

The public sector can and should play leadership and catalytic roles. Shahbaz Sharif’s initiative and idea for Danish schools is an excellent one. But why should Danish schools be all in the public sector that is so short of funds. Civil society in the districts could be encouraged through promotion, land grants, and selective subsidies to establish such schools countrywide on a scale and speed that is not likely to be possible otherwise.

NEED FOR A NATIONAL ECONOMIC STRATEGY Agreed governance agenda should be a part of a long-term economic strategy on which agreement of major political parties should be sought something like the Charter of Democracy which has led to many constitutional changes aimed at strengthening democracy. The Framework of Growth formulated by the Planning Commission during the last year already stresses a number of important points, need for urban development, public transport, and strengthening of internal markets. It is thus an important start. But there remains a need for a comprehensive national strategy for an accelerated economic and social advance which recognises squarely the faults and shortcomings of the past and attempts to develop a national consensus on at least six broad areas:

—- Better political and economic relations with India especially the opening of trade, travel and investment

—- A better balance between defence and development

—- Recognising the major role that private sector has to play in economic development but not a private sector that actively seeks economic rents and government patronage but indeed is open to fair completion from both inside and outside:

—- A strong revival of investment in both human and physical capital

—- Strong export orientation and

—- Greater attention to population control

Many of these subjects are being discussed in other essays in this book. So I will confine myself only to few points where policies need either more thrust or better definition.

POPULATION As discussed earlier population pressures have hampered growth in incomes and employment. Population control issues deserve more attention than they are receiving. Fortunately, population transition has begun: the growth rate of population has come down to 1.8 percent per annum. However, fertility rate is still high 3.6 compared to Bangladesh (2.4) and India (2.6) which thus have much lower growth rate of population than Pakistan. In terms of policy action, focus should be on the high fertility rate of 4.5 in rural areas through continued acceleration of women’s education and availability of family planning services. In general and especially in rural areas, continued policy efforts to encourage reduction in birth rates will help increase savings, reduce poverty and make it easier to improve social indicators.

EXPORTS Another area in which I believe the Pakistan policymakers need to make a resolute commitment and the biggest push – beyond the crippling energy crisis – is increasing the export orientation of the economy. As discussed earlier and as Table 1 illustrates, Pakistan has not made much use of the opportunities offered by almost explosive growth in global trade especially in manufactured goods and fallen far behind other major developing countries. However, it is not too late to change course and focus. Some will argue that the boom in world exports is over and in any case Pakistan has now a very steep hill to climb in terms of competitiveness. But the pessimism about further globalisation is not justified. Despite the serious international financial crisis of 2008 and the setback in 2009 world manufactured exports have fully recovered and were already in 2011 more than 10 percent above the previous peak in 2008. More to the point for Pakistan, international comparative advantage continues to shift. Like Japan earlier, the share of many East Asian countries in labour-intensive manufactured goods has been declining. Recently the rate of exports from China has also slowed down reflecting cost pressures emanating from higher wages. Pakistan has the further advantage that its share in manufactured goods other than textiles and clothing is minuscule. So even with somewhat slowing international trade Pakistan can hope to gain market share provided it follows policies that strengthen competitiveness, diversify the product-mix, and move up the value chain. Initially, achieving a moderate goal of 8-10 percent annual export growth in nominal terms over the next five years might be quite feasible provided there is a comprehensive export policy and even more important co-ordinated actions across public and private sector institutions.


—- An exchange rate which fully reflects the differential between the movements in Pakistan prices and the international price level

—- Strong incentives for new investments and skill upgrading in textiles that increase scale and update technology and encouragement exit of mills with low productivity and profitability

—- A determined push aimed at small and medium industries for expansion and export diversification in areas outside textiles

—- Strengthening monitoring mechanisms including quarterly meeting of the high level Export Board

—- A special focus on expanding exports to regional partners especially China and India, the two fastest growing economies in the world. The large negative trade balance with these countries can provide some leverage.

—- A special and speedy implementation review of the free trade agreement and establishment of free trade zone with China and assessment of their likely impact on exports in the near term.

—- A similar review of key constraints and principal opportunities for expanding trade with India

—- Focus on the development of export supply chains using the work being done in the context of the National Trade Corridor Improvement Project, the NTCIP.

—- Joint public and private sector efforts to promote foreign investment in textiles, clothing and other promising export sectors from countries like Korea, Hong Kong, Malaysia, Taiwan, which are losing ground in labour intensive industries due to high and rising wage costs. The focus of these efforts should be to upgrade skills and technology and to make use of established export channels.

—- Implement recommendation in the Strategic Trade Policy Framework 2009-12 to reduce anti-export bias by withdrawal of protection from inefficient industries, minimisation of taxation at investment stage, and elimination or zero rating of customs duty on important inputs to textiles and clothing exports.

—- Closer co-ordination of commerce ministry policies and activities not only with textile ministry but all other production related ministries appears to be sorely needed.

INVESTMENT Gross fixed capital formation fell to 11 percent of GDP in FY12, the lowest level in half a century. The comparative figures for China, India, and Bangladesh are 45 percent, 30 percent and 24 percent respectively. The present rate of investment cannot sustain a growth of more than 4 percent per annum.

Security issues, political uncertainty, and energy crisis are all contributing to the depressed investment climate. The interesting point is that the decline in real fixed investment of more than 20 percent over FYs2009-12 was in sharp contrast to a rise of over 12 percent in GNP over the period. The deepening imbalance between investment and consumption was reflected in an increase in consumption over the three years of nearly 20 percent triggered in part by higher defence outlays, large increase in public sector salaries and sizeable public enterprise losses and resulting high fiscal deficits as tax revenues lagged.

The control of fiscal deficits which have probably averaged close to 7 percent of GDP annually in recent years should be a top priority and would require improvement in tax revenues, sharp cutback in wasteful administrative expenditures, restraint on military purchases, and a solution for loss making enterprises. This may appear to be a very tall order. But the fact is that in the above mentioned areas there have been significant slippages as resolute government actions have been lacking. There has not been much attempt to introduce austerity in spending, public or private. Real private consumption in 2011-12 was 28 percent higher than in 2007-08 suggesting that there is certainly room for belt tightening especially because of substantial income inequalities. Thus with strong governance and committed political leadership public finance problems can be brought under control.

In the somewhat longer run resources need not be a major constraint on reviving growth and investment. Provided the security situation gets better, governance improves, and economic relations with India expand, the confidence of investors, both domestic and foreign, in Pakistan would be revived. The capital flight would slow down and in time be reversed. There is a large amount of Pakistani capital sitting on the side hesitant to invest because of non-economic factors. Similarly foreign private investment from both the middle- east and more successful exporting countries in East Asia including China who are feeling the pressure of rising real wages is a strong potential source of financing development, improving technology, upgrading labour skills and finding export markets. It is worth recalling that under improved investment climate conditions foreign private investment totalled more than $12 billion or 2-2.5 percent of GDP in the three years FYs 2005-08 though it was unfortunately not focused on exports and main productive sectors.

HUMAN CAPITAL Strengthening substantial but neglected human capital resources is as important as reviving physical capital formation. But this is not just a matter of increasing public resources for education which are admittedly at a very low level. As the growing buoyancy in private education sector suggests families are willing to save and invest in their children’s education provided there is a reasonable confidence in the quality of education being imparted. The public sector is failing this test. Deep structural reforms are needed that would aim at increasing the effectiveness of spending, the quality of the curricula and much greater accountability of teachers. Increasing transfer of authority to local bodies, public-private partnerships, and even school vouchers that can be used in private schools are some of the critical steps that should be seriously considered and implemented.

MECHANICS OF CHANGE None of these changes can occur or be successfully implemented until there is a strong political commitment. But even robust political will would need to be backed up by empowered and informed institutions and workable instruments of change that improve governance.

During the last few years, legislators in the National Assembly and the Supreme Court have, by and large, shown enlightened leadership. The independent media is vigorous in its critiques though perhaps not always well informed. Some independent policy institutes are doing a heroic job. Nevertheless, there appears to be an intellectual vacuum which hurts informed public debate and limits the impact of what would more balanced and less biased media reach.

The level of academic research and economic literacy is low. This is partly because Pakistan has relied for long periods on analysis done by international financial institutions notably the World Bank and the IMF. Many of the domestic policy institutes remain dependent on foreign funding.

Major organs of the state require more intellectual backup and analysis. For instance, the Council of Common Interest has become critically important for resolving disputes among provinces and between the provinces and centre but as yet there is not much thought to giving it an independent secretariat. Similarly the important National Finance Commission could, like in India, benefit from a professional group assisting it. Finally, the Parliament could give consideration to the establishment an independent budget office that could inform and educate politicians and clarify policy choices.

The governments, both at the federal and provincial-level, need to deepen their involvement with private sector bodies but especially independent institutions like the important Pakistan Business Council.

Among the existing institutions, the role of the Planning Commission needs to be redefined and its function of liaison and co-ordination with provincial planning authorities needs to be considerably strengthened in light of new distribution of powers. At the same time the Planning Commission needs to become a leaner outfit discarding some of the functions not central to planning processes.

The Debt Policy Co-ordination Office (DPCO) that I helped establish more than a decade ago needs to be invigorated with strong leadership. Its performance so far either as a source of reliable debt statistics or regular analysis of Pakistan’s debt situation has been greatly disappointing.

In terms of instrumentalities an independent, well-paid and honest civil service remains crucial for improving governance. One focus should be on the remuneration and quality of the top tiers, ie, grades 19 to 22. A quote from the World Bank 2003 Public Expenditure Report on Pakistan deserves attention;

‘There is a prima facie strong case for significantly adjusting upwards the compensation for higher managerial and professional grades, say grades 19 to 22. The numbers involved are small. For instance, Federal employees in the grades 19 to 22 are only about 3,200, less than 1 percent of total Federal employment. The share is somewhat higher in the provinces. But overall these grades account for less than 3 percent of the government wage bill. So financial costs of say a 100 percent real pay increase – would be only 0.1 percent of GDP. A substantial part of this increase could be financed from natural attrition of lower grade staff focused on areas where employment is excessive and services are no longer needed. Restraints on recruitment coupled with attrition might be easier politically than retrenchment as a method for creating fiscal space, but it is recognised that the de-compression in compensation that is being recommended here is nevertheless politically challenging. It is however urgently needed if high-level managerial and professional skills are to be attracted to the public sector.’

CONCLUSION Looking forward, nothing seems quite as important as restoring confidence of the public in the government and the country. While a number of important constitutional steps have been taken in the last two years to strengthen the basis of a democratic set-up based on a working Federation, it is yet be seen that the elections next year would result in strong leadership committed to better governance and sounder economic management.

This is a very challenging agenda. However, there are some good signs. The military leadership has renewed its efforts to combat militancy though military solution alone will not be enough. The relations with India are improving and prospects for increased trade, investment, and tourism between the two countries appear good. None of these changes can occur or be successfully implemented until there is a strong political commitment. But even robust political will would need to be backed up by empowered and informed institutions and workable instruments of change that improve governance.


(The writer is a former Chief Economist of the World Bank and author of several books on Pakistan and East Asia)

Parvez Hasan, "Everything’s almost free in Spain’s parallel barter economy," Business recorder. 2013-03-10.