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Raising a smart public sector

A new world is emerging as the era of Washington consensus has ended on the back of Covid-19. The pandemic did not cause the demise of the consensus, it only accelerated the process. The cut-off point was the 2008 financial crisis. It was about this time, jolted out of their comfort zone, that the developed countries realized that the consensus had started impacting too negatively on their core economic interests.

For decades, the rich countries thrived at the cost of poor countries like Pakistan as the free movement of goods, services, and capital, in other words the laissez-faire policies dictated by the Washington consensus, were enforced globally by multilateral institutions such as the International Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO).

Wary of the serious side-effects of laissez-faire policies today both the developed as well as the smart developing countries are trying to rescue their economies from the devastations of the Washington consensus by increasingly deploying and expanding their respective public sectors initially with the immediately needed government interventions.

It is time, therefore, for Pakistan as well to give up its faith in the Washington consensus which was sold to poor countries on the promise that the trickle-down theory embedded within the workings of the consensus would help fuel growth in these countries and as a consequence the have-nots in these countries would automatically be lifted out of their poverty trap. It was an invalid theory. And Pakistan is one of the most glaring examples of the failure of the consensus to deliver on its promised premise as even after having signed more than two scores of IMF programmes over the last 40 years this country has continued to remain trapped in a hand-to-mouth existence.

According to Shannon K. O’Neil (Protection Without Protectionism-Getting Industrial Policy Right, published in the January/February 2021 edition of Foreign Affairs magazine) the Washington consensus grew out of the volatility of the 1970s and 1980s. Trade agreements brought down tariffs, eliminated quotas and government licenses for imported goods, and protected intellectual and other property rights. International money flows surged as capital markets opened up. Governments deregulated industries and privatized state-owned enterprises. At the same time, multilateral institutions enforced the rules; the WTO, for example, adjudicated disputes and punished rule breakers. The IMF encouraged countries to open up to foreign investment and prescribed spending cuts and other austerity measures to get debtor countries back on track.

But opening up to global capital proved not to be the blessing that was promised. Money came in, but it also flowed out quickly, intensifying boom-and-bust cycles. In Asia, many countries blamed the IMF and its austerity measures for deepening and extending the economic and social losses from the 1997 financial crisis.

Economists tried to save the model by supplementing its basic menu with reforms such as anti-corruption regulations (therefore, the current craze in Pakistan) and targeted anti-poverty measures, for example, conditional cash transfers to the needy (as we are doing today). But it was too late. Starting in 2015, the WTO relinquished its role as a promoter of freer trade when, after years of stalemate, negotiators finally gave up on the Doha Round of international trade negotiations, which would have further lowered trade barriers on agricultural goods and other products.

“Meanwhile, the IMF has done an about-face: after years of preaching austerity, the fund has determined that fiscal restraint is out and spending is in. This past fall, IMF economists officially blessed more government largess, designating it a necessary catalyst in spurring private-sector investment,” discovered O’Neil.

Of course, even in the heyday of the consensus phase governments in many rich countries had continued to intervene in markets (which was strictly discouraged by the IMF in the developing countries seeking the help of the lender of last resort), using a mix of trade rules, tax incentives, interest rates, and public contracts to protect domestic businesses, create jobs, and attract and direct investment. States built critical infrastructure, funded research labs, trained workers.

Asian countries like China, Vietnam and to an extent South Korea, in particular, took this more hands-on approach. Although China professed a belief in market-based reforms at crucial moments, such as when it was applying for WTO membership, it never played by the laissez-faire rules. Instead, Beijing expanded public financing and subsidies, strengthened protections for domestic industries, and forced foreign companies that wanted to do business in China to share their proprietary technology with Chinese partners. Japan also protected and supported certain sectors, keeping out rice imports through quotas and tariffs and barring foreign-made autos through strict environmental and safety standards.

In Europe, the European Economic Community and its successor, the European Union, played an important role in national economies, as well, most notably by stitching together over two dozen countries into one market. It provided public funding for research and development and temporary loans to many companies. More recently, the EU has stepped up subsidies for local industries and allowed national governments to intervene in order to keep major European firms from coming under the control of foreign investors.

In the US, a number of states already routinely offered tax breaks, worker training, and cheap electricity, to attract new plants or corporate headquarters. The federal government also mandates that US highways and airports be built with steel and iron made in the United States, that publicly funded school lunch programmes use only American-grown foods, and that many defense contracts include “Buy American” clauses. Most foreign assistance was attached so as to promote locally produced goods, equipment, services and even local shipping industry.

Federal funding in the US spurred the science behind the Internet, global positioning systems, touch screens, solar panels, LED lights, fracking, artificial intelligence, quantum computing, and the sequencing of the human genome.

Meanwhile, international supply chains were weaponized for geopolitical gain—for example the United States using its central role in global finance forced European companies to divest from Iran and Indian refiners to turn away Venezuelan oil. The United States has also banned semiconductor companies that use US equipment or software, no matter where they are based, from selling their products in China. In 2019, Japan stopped exporting essential chemicals for semiconductor manufacturing to South Korea because of ongoing tensions between the two countries over reparations for war crimes committed during the World War II.

History, however, provides many examples of industrial policy based on overwhelmingly public sector endeavour going wrong. Supposedly, temporary protections for infant industries or struggling economic sectors often become permanent, encouraging the development of monopolies or oligopolies. Over time, such measures impeded national competitiveness, as protected corporations and sectors are less inclined to innovate.

So, while totally discarding the Washington consensus under which the engine of growth is in the exclusive hands of the private sector, developing countries like Pakistan cannot let this engine be driven wholly by the public sector instead in view of its above mentioned side effects. It has, therefore, to be a smart amalgam of public and private sector strictly monitored by efficient and completely autonomous statutory regulatory bodies.

Educational curricula also immediately needed to shift in order to better prepare Pakistani youth for the kinds of work the future is likely to offer in a digital world. This means more science, technology, engineering, and mathematics programmes. Indeed, tomorrow’s workforce will also have to move beyond such fields as intelligent machines increasingly take over calculations and coding. In the future, the most valuable and highly compensated workers will be those who can think creatively, solve problems, communicate across cultural divides, and define new ethical frameworks. That means that the federal and local governments need to not only expand education in the sciences but also invest in the liberal arts.

Considering the lack of local availability of the expensive fossil fuel resources it would be advisable for Pakistan to adopt a smart industrial policy by offering the solar energy industry the same no- questions- asked investment concessions that we are offering to the construction industry and at the same time, let the Ministry of Science and Technology set up smart training centers in public sector offering crash programs in tech skills such as (Designed by World Economic Forum for the next two decades): analytical thinking and innovation; active learning and learning strategies; complex problem solving; critical thinking and analysis; creativity, originality and initiative; leadership and social influence; technology use, monitoring and control; technology design and programing; resilience, stress tolerance and flexibility and; reasoning, problem solving and ideation.

And also let the CPEC lead the engine of growth by focusing smartly on the economies of Gilgit-Baltistan and Balochistan but of course, without ignoring the development needs of the other three provinces.

M Ziauddin, "Raising a smart public sector," Business Recorder. 2021-01-06.
Keywords: Economics , Financial crisis , Economic interests , World Bank , IMF programme , Foreign affairs , IMF , WTO

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