By Shahid Javed Burki
IT might seem excessively optimistic – perhaps irresponsibly so – to put out the thought that the Pakistani economy, troubled as it is, could bounce back quickly provided the country can somehow devise a set of policies to address the problems that have led to the present crisis.
We should remember that when the conditions constraining an economy are removed a bounce-back can occur. It has occurred before in the country’s difficult economic history and could happen again if the environment in which the economy is functioning is improved. In this context it is important to ask the following question: what are the areas that should receive the attention of our policymakers?
There is now a new economic team in place that has been given the responsibility of managing the country’s battered finances, to strategise the future by energising sectors that can provide quick dividends and by managing monetary policy that will reduce the pressure on prices and support the revival of growth. Finance, planning and monetary policy are the traditional concerns of all economic managers and it is in these areas where the government is being advised – in fact pressured – to act quickly.
For instance, the International Monetary Fund has held back the release of the next tranche of its large loan to Pakistan since Islamabad has not made clear how it plans to raise the tax to GDP ratio. The IMF wants action by December this year. At about 8.8 per cent of GDP, Pakistan has the lowest ratio of all the major economies in the world. But before a credible tax policy can be put in place the government has to address the broader issue of improving the quality of good governance.
Attempts have been made in the past to improve the government’s mobilisation of resources through taxation. It is well known why the government collects so little: the tax base is narrow, several sources of income are exempt from taxation, the rich and the powerful can bribe their way out of the obligations they have to the state and so forth. But good governance is needed to address these and other issues.
Good governance has several elements. Four have particular importance in the context.
The first is the capacity and willingness of those in power to give attention to policymaking that would help the economy. The second is a civil bureaucracy that has the capacity to implement the policies of the government. The third concerns the establishment of an institutional structure and legal system that can ensure that all government functionaries act responsibly and within the legal framework. The fourth relates to decentralisation to ensure that policymaking as well as policy implementation takes place as close to the level of the people as possible.
Pakistan needs to move in all three areas. To indicate where the focus of policymaking should be it might be useful to compare Pakistan’s situation with that of India. Let me begin with India.
Before the near-fiasco of the Commonwealth Games, India had earned the reputation of an economy on the way to becoming one of the world’s most dynamic economies. The great difference between India and Pakistan is that the former is deeply set in its ways while the latter is in a state of extreme flux. A state of flux means that change becomes possible; the attempt to bring it about meets with less resistance than is the case when traditions are strong and the urge to retain the status quo overpowering. It is possible for Pakistan to more thoroughly restructure its system of governance than seems possible in India.
As has been demonstrated vividly by the Commonwealth Games, even in a country that has seen its economic performance applauded all across the globe economic dynamism is the result of private initiative rather than government enterprise.
It is the private sector that has led the way. Montek Ahluwalia, currently the head of the Indian Planning Commission and once my colleague at the World Bank, said to me: “If the Indian government had discovered in advance what the IT sector was about to do for the Indian economy, what it accomplished would not have happened – never.”
In the contest of the Commonwealth Games, it is the private sector that delivered while the government totally failed. As Raja Lakshmi wrote for The Washington Post one day before the opening of the Commonwealth Games, the event exposed “the gap that has emerged between a government rooted in a slower-moving socialist era and a entrepreneurial class that is busy building global IT companies, the world’s largest oil refineries and spectacular structures such as the $2.8bn airport terminal”.
Vir Sanghvi, Hindustan Times editorial director, put it more bluntly: “We can brag as much as we like about the new India. But when it comes to delivering on an international commitment, we are no China. We are still corrupt, slothful India.”
What distinguishes Pakistan from India is the important fact that the hold of the bureaucracy was loosened over the economy in Pakistan as a result of some of the measures adopted by the administration of Prime Minister Zulfikar Ali Bhutto. He disbanded and cast adrift the powerful Civil Service of Pakistan that had partnered with the military during the period dominated by President Ayub Khan. By dissolving the CSP, Bhutto shifted the focus of policymaking from the bureaucracy to the people’s representatives.
However, he and those who followed him failed to take the further step of creating a bureaucratic structure that would effectively implement the decisions taken by those in charge of policymaking. This is where Pakistan is today. It is my firm belief that with an appropriate structure of governance the Pakistani economy would quickly bounce back.
There is a consensus among economists that India could add as much two per cent to the already high rate of growth if it could somehow improve the working of the government. In fact Pakistan is in a better situation to do this. It can generate a greater bounce in its economy than India by creating better governance.