Saturday, 12 September 2009

Comments on Zubair Iqbal’s “PAKISTAN’S CURRENT ECONOMIC CRISIS—AN IMPERFECT STORM"

Nice piece by Zubair! It is typical of most economic writing (other examples are Ashfaq and Meekal) in Pakistan which has now been conditioned to think “macro-first” ignoring the underlying micro and institutional problems.

Written in typical IMF fashion giving primacy to macroeconomics assuming that it is independent o political economy, institutions and governance. For example

“It has become fashionable to trace the current economic malady to “wrong” growth strategy of the past 60 years. This is neither meaningful nor helpful in understanding the current policy imperatives. Yes, there has been a secular weakening of institutions but that is not an excuse for inappropriate policies. ???”

This is what Krugman calls the dark age of macroeconomics.

Failure of underlying institutions and lack of policymaking capacity can only manifest itself through poor policy choices. Add to that the deliberate attempt by the powers that be to destroy policymaking capacity (case in point Tariq Hasan at HEC in the earlier regime and K Mirza at CCP now), policy has to be inappropriate. So statements like “weakening of institutions ….(are) not an excuse for inappropriate policies” are difficult to understand. Later Zubair accepts this in a throwaway sentence (which we always use in bureaucracies to cover our back side).

“Finally, the deteriorating official capacity to formulate and implement effective policies has become a major impediment.”

I would argue that this is central to the issue and not a final footnote.

There is also a presumption that course correction in macroeconomics policy can be made in real time.

“Problems were compounded by a total disregard of economic crisis by the new government in the initial period; valuable time, during which the crisis could have been staved off, was lost.”

As if in a few months the mistakes of the last 5 years could have been corrected. With the tax base eroded, an ongoing civil war, a judicial crisis and power shortages and global crisis, I think it is unfair to blame the new democratic government.

He is too kind to the earlier government when he says that the crisis began to show itself in 2006. Indeed the inappropriate policies were evident by 2004 when interest rate and exchange rate policies of the central bank were totally misguided and windfall of a rescheduling was wasted. These misguided policies were directly the result of the lack of capacity in the government. They genuinely did not understand! Some senior officials used to argue that we need expansionary monetary policy for growing the economy. They were also given the comfort by the “usual advisors” that short term macroeconomic stability backed by capital inflows will lead to long term gains. There was no need for fundamental reform because capital inflows will lead to growth. Recall our Banker PM used to shun learning and analysis publicly saying that he knew it all through his practical banking. He was also fond of telling stories on how full hotels were and was always publicly counting the megaprojects were coming in.

Most of the solutions proposed have been tried for many years without success. Surely that should tell us that something is wrong in our solution. Yes the donors and the “usual economists” want an increase in the tax/GDP ratio. And they have wanted that for the last 30 years. But this has not happened?

We are told that

“Without fundamental reforms of the fiscal sector aimed at raising domestic revenues and increasing room for outlays to improve the abysmally poor infrastructure—energy, education, water resources, R&D in agriculture, and transportation-- any sustained improvement in growth outlook is unrealistic.”

This assumes that when the government has additional resources, like it did in the 2000s when aid was increased, that it did use the expenditures wisely. People like Furrukh Salim and Shahid Kardar have documented the waste in government. Our leaders –both current and past—jet around the world as if they were on a frequent flier program costing the exchequer 4 billion rupees if he media is to be believed. VIP cavalcades expensive housing and many other government pleasures is what our expenditures are used for. Public sector perks account for 14% of expenditures larger than our outlays on education and health. Should we not look at these? Perhaps political economy requires that these should be addressed at the same time as a tax increase.

Finally Zubair acknowledges governance. Now he comes close to accepting the primacy of governance in determining economic outcomes.

“None of the proposed reforms will make any headway without a dramatic and sustained improvement in governance—not simply in terms of formulation of policies and strengthening of institutions to implement them.”

So where are the efforts to improve governance and policy capacity in governance? And what does he suggest other than an improvement in the tax/GDP ratio.

What should we do? He has a simple solution! More conditionality!

“It is critical that donor financing must be conditional in order to ensure that Pakistan takes painful, but necessary, steps that are needed for it to durably ensure growth and thus eliminate the need for global handouts every so many years. One way would be for such assistance to be tied to reform programs agreed with multilateral lending agencies.

Is that not what we have been doing for the last 60 years! We have had a fund program based on conditionality for 20 of the last 30 years. World Bank ADB even DFID conditionality has been riding us forever. Remember IPPs social action. If conditionality were the answer, we should have arrived!

We need a separate discussion on conditionality which many of my economist friends who are advising the government from overseas now seem to be asking for. But certainly the onus should be on them to explain why we need more conditionality, why it did not work in the past (in both military and political governments) and why it will work now.