Pak Economy: An alternative to the IMF programme

by Shahrukh Rafi Khan

In my last two essays I argued Pakistan has an adequate resource base and does not need to go to the IMF, and established that there is an alternative and superior economic program to the one advocated by the IMF. This leads us to the question of whether Pakistan’s economic bureaucracy has the capacity to implement such a programme if the legislature approves it.

The neo-liberals have successfully created the impression that mismanagement and rent-seeking (corruption) is rife in most low-income economic bureaucracies. Based on this, they have asserted two untested propositions: First, that “government failure” is much worse that market failure; Second, that the alternative programme of industrial and support policies is much more “good-government”-intensive than the neo-liberal package of structural adjustment. It follows from these propositions, that because there is a lack of good government, the domain of the government in economic programme implementation should be pared back. Heterodox development economists have pointed to the lack of empirical support for the first proposition. They also point to a logical flaw in the second proposition and argue that complex structural adjustment policies, including inter-financial, fiscal, monetary and wide ranging sector policies, are no less good-government-intensive than the proposed alternative. Finally, they have accumulated empirical evidence, based on numerous case studies, of successful implementation of industrial and support policies in a wide range of circumstances.

Of course, refuting neo-liberal propositions does not mean that Pakistan’s economic bureaucracy has an adequate implementation capacity. One needs to supply evidence to establish that they do. Systematically marshalling this evidence is not possible in an op-ed piece, but the interested reader need only peruse back copies of the Economic Surveys to ascertain how much more successful the economic bureaucracy used to be in fiscal and monetary management, compared to what happened after the structural adjustment period. Conservative fiscal and monetary policies had successfully maintained low fiscal deficits and inflation rates. It was the straitjacket of structural adjustment that blew this discipline.

IMF insistence that interest rates should be liberalised to promote saving and that the government should borrow from liberalised capital markets, started the era of high deficits and ballooning debts. Instead of borrowing at 3 or 4 percent the government borrowed from the capital markets at over 20 percent. Since generally the prosperous saved and evaded taxes, low interest on borrowing was in most cases a justifiable form of implicit taxation. Further, theory and empirical evidence refuted the association of higher saving with higher interest rates.

The de-industrialisation caused by high interest rates and import liberalisation indirectly reduced the tax base. The heavy IMF pressure to liberalise imports (way more than that required even by the WTO) also directly reduced the tax base. The deficit financing that became inevitable led to inflationary pressures. The insistence on capital market liberalisation created just the kind of capital flight, currency depreciation and inflationary pressure that heterodox economists had been warning about. It is convenient to brand poor economic outcomes to bad economic management rather that to bad underlying economic policies.

Historically, the Planning Commission has demonstrated excellence. So much so that most young graduates in economics, myself included, aspired to a career in it. But that was the 1960s and the early 1970s. In its present form the Planning Commission is a dinosaur and will need to be radically reformed for it to effectively deliver on industrial and support policies. However, there is adequate human talent to be able to recreate excellence. The Highway Police is a good example of Pakistan’s ability to create excellence, with the right incentives, even within an institution that had been viewed as among the most corrupt in the country.

Just as effective police are needed to monitor the implementation of highway laws, an effective agency is needed for the effective implementation of industrial and support policies. For the sake of argument, let us say that this is a reformed Planning Commission. To begin with, it would need an influx of talent, for which a good salary structure and prestige would be needed to draw from the best youthful talent in the country. The resources exist and the evidence is just how much is being earned by consultants or others pulling MP scales. If transparency and checks can be created in the police force, it certainly can be created within the economic bureaucracy.

There is also a need for structural reform to simplify the agenda. The Highway Police partly succeeded in its mission because of a very clear and comprehensible mandate. The agenda of the Planning Commission needs to be radically simplified if it is to effectively implement industrial and support policies. I would suggest a name change, since traditional “Planning” and Five-Year Plans are an anachronism and the latter is repetitive and irrelevant and has evolved into an end rather than a means. Perhaps Economic Activity Bureau (EAB) would be more appropriate since facilitating economic activity should be the agency mandate. Sections not performing this function should be phased out or moved to relevant provincial or federal ministries, depending on constitutional mandates.

Pakistan has no dearth of entrepreneurial talent and the mandate of the EAB would be to facilitate that. It would have to do that by having open channels of communication with the private sector, learning what is succeeding despite the lack of support, and removing constraints, so that incipient success becomes dramatic success; like the ready-made garments sector in Bangladesh. The spectacular success export of sports goods and surgical instruments from Sialkot or bed linens from Faisalabad happened despite infrastructural and other constraints and could go much further in a supportive and facilitative environment. A review of secondary government production and trade statistics can also provide important evidence of what to support and when. With experience and the right talent, an EAB may in time be able to create supportive policies for industries not already on the economic landscape that should be there. An effective use of performance criteria (local content, quality, exports, and regular reporting) as conditionality, and sanctions, if needed, would have to be central in nurturing success.

Each country evolved its own path to an effective industrial policy and drew on different kinds of talent. Korea’s industrialisation drive was led by engineers and Taiwan’s by lawyers. However, the experience of these countries demonstrates incentives to get the right talent would have to be accompanied by authority to be able to effectively coordinate. The EAB would need to be able to interface with other ministries to coordinate the needed support for economic activities. Reporting directly to the prime minister so that it is not trumped by any other ministry would facilitate this process.

There is wisdom and experience in Pakistan, currently in high office, that far exceeds mine. It should not be difficult for them to craft appropriate institutional reforms drawing on the experience of other countries that effectively implemented industrial and support policies. The greatest and most critical challenge in such institutional reform would be ensuring social and environment safeguards so that industrial growth is inequality and poverty reducing, and not environmentally destructive.

Two obstacles stand in the way of effective reform of the kind I have suggested above. First, there is a culture of cynicism that inhibits meaningful reform by casting doubt on hope. For this group of cynics, nothing seems workable in the country, despite much evidence to the contrary. Then, there are the concerns of scholars who think that the global policy environment has changed fundamentally and that the dramatic industrial successes of East and South East Asian economies are no longer possible. This is a more serious concern and the one to which I will turn in my concluding essay.

The author is a visiting associate professor at Mount Holyoke College. Email: shahrukh.2006@gmail.com

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