Friday, 18 September 2009

On Zubair's Reply--Rethinking Pakistan's economy

Thank you Zubair for a nice comment!

On the Tyranny of Macroeconomics

I have often lamented that we Pakistanis do not engage in civilized debate and too quickly get into the mode of “argument and personal attacks.” Zubair’s comment is heartening and welcome as an offer to expand a debate so that all of us can learn.

Zubair argues that “There is little doubt in the argument that unless macroeconomic conditions are right and sustainable, economic development cannot be maintained.” Frankly on the surface this statement looks like “motherhood and apple pie” but dig a little deeper and you begin to worry.

Think about it! Zubair’s statement can be rephrased in medical terms as There is little doubt in the argument that unless vital signs (body temperature and blood pressure) are right and sustainable, “life” cannot be maintained.” Does that mean that treatment should focus only on maintaining those vital signs without treating the underlying cause! Most of us know that if a patient has cancer or some serious underlying disease, the symptoms may show up in body temperature and other macro indicators but for a complete cure, the fundamental problem has to be addressed.

My point is that the fundamental problem is political economy and governance and without reform in those areas gains to macroeconomics may be temporary. So let me assure Zubair it is not that I wish for macro-profligacy, but that we should learn from the failed Fund strategy of the last 30 years where macro policy was the only objective. In fact the preoccupation with getting the macro numbers right, has hurt domestic governance and institutions. Case in point is the over-centralization of the economy and the excessive power to the ministry of finance. Macro-policy cannot be fixed without fixing policymaking, political economy and governance. This is the reason that I think that our continuous discussion on macro without looking at the micro determinants may be a mistake.

On increased taxation

Zubair goes on to say that “In this context, I fail to understand the merit of your criticism of improving revenue generation. Simply because the Shaukat Aziz administration squandered the increase in revenues does not make the proposed policy "wrong".” Again no one disagrees that the state should collect more revenues and our revenue GDP ratio must be in line with comparator countries. But with the current state of the civil service, the nature of the state and the elite, I find it difficult to hope for any success to this policy!

Moreover as I have argued frequently, modern fiscal theory regards taxation to be based on some form of a social contract. Governments tax in return for some service that they provide. And there is an expectation that government expenditures will be for the good of the people. My view is very simple that given the extensive misuse of expenditures for VIP pleasures (houses, cars, foreign trips), elite subsidies (gifts to the rich, elite Clubs, prime land, Polo, golf etc), false titles (meaningless cabinet positions, dead agencies), it is hard to justify revenue increases without a proper expenditure review and reform. I point out several areas such as government perks (repeat housing, cars foreign trips etc), elite subsidies (elite Clubs, prime land, Polo, golf etc), false titles (meaningless cabinet positions, dead agencies) where savings can be made and efficiencies achieved.

I also challenge the notion that Pakistanis are under-taxed! There are too many hidden forms of taxation that this ‘9 percent of GDP’ figure does not include. This is also an area we should debate. But I will not take that up here.

On attacks on economics

On whether the criticism was “flippant”, like any other subject economics learns from fresh data and the recent crisis has brought a lot of fresh data. Similarly the continual failure of fund program and donor programs should also teach us something.

It is not surprising that a lot of earlier wisdom has been called into question. Not only Krugman but Volker, De Long, and many other luminaries are questioning our state of knowledge. Yet economists carry the additional burden that the body public seems to feel adequately qualified to talk most authoritatively on economics. Indeed with the aid of a few well known World Bank/IMF statistics amateur economists love to tell economists off and offer big policy announcements.

Physicists have been quarreling over quantum mechanics and are now talking of strings with no real evidence to back them. Dawkins and Gould have argued on evolutionary biology in the harshest of terms. No one accuses them of ideological bias and no one suspects their motives. Yet if economics argue about monetarism or the role of government; it is time for all and sundry to pick on economists (nayyar ali).

Like any other subject economics is evolving science learning from observation and experimentation responding to evidence and anomalies with paradigm shifts and fresh theory. This “evolution’ and “paradigm shift” should not be seen as “ideology” and provoke accusations of “narrow focus”, ‘neo-liberal” and other such epithets. Debates occur in every subject and the best of them occur among the giants of the subject. Einstien and Neils Bohr had their differences, Wittgenstein and Popper did not talk to each other. I can quote many more.

Debates are never flippant and certainly Nobel prize winners like Krugman are not “flippant.” He has a serious point to make and we should be humble enough to be mindful of it even if it challenges our comfortable precepts based on many years of received wisdom!

On Conditionality

Zubair says that “"Conditionality" has been given a bad name by countries like Pakistan which have been able to break it and still continue to obtain financing.” This interpretation assumes that the donors are benign and also know what good conditionality is. There is much literature to suggest that conditionality itself if flawed. Even ex Fund members like Musa and Morris Goldstein have criticized conditionality. People like Conway, Killick, Easterly and Collier have conducted ample research on conditionality to even make the Fund change its mind.

Despite silly assumptions on economics, economic research has shown that for a country to change course deeper changes in behavior and institutions are required. Neither the design nor the method of implementation of those changes is immediately obvious. Should we assume that the donor has all the information and the capacity to make such deep changes in complex societies? Is it something that visiting teams can do in a short span of time? Are donor agencies totally altruistic and competent to make such reform? Will their own agendas and biases as well as career concerns not come in the way? Will such imposed reform be “locally owned?” Does change not have to made locally? If so why does it need to me envisaged globally?

Can you imagine doing the US health care reform through conditionality? Would the World Bank or the IMF be able to do it? There are a number of design issues involved which without local debate and research cannot be solved. There are political economy issues without which the reform will not be “locally owned”. So if it will not work for the US, why should it for Pakistan?

As I said conditionality is a complex subject and a lot has been written on it and many serious thinkers are now very shy of pushing it too hard!

On Solutions

Zubair then issues a challenge to me “I would encourage you to propose an alternative approach to addressing the economic problems that we are currently facing.” And of course we Pakistanis cannot miss an opportunity for making sarcastic personal remarks “ I am sure, after having spent almost thirty years advocating the IMF-supported adjustment programs, you have acquired the wisdom and experience to propound an alternative.”

I am sorry I have to disappoint you by admitting that I have no silver bullet no neat prescription that will make Pakistan rich country. My view is that any serious policy analyst or thinker will have to take this viewpoint. Countries are complex and changing the direction of their societies and economies should not be considered a cavalier proposition. Donor reports do not have complete solutions as well. If they did we would be a high income country by now.

I will be immodest enough to say that I have developed certain lines of thinking which if we begin to seriously develop may lead to better outcomes but that after a lot more work at both research and implementation. These are:

1. Governance related issues.

a. One important issue is civil service reform which I argue is central governance. Within civil ervice reform we have to get the strategy right and focus on perks. See PIDE Website has more material on this. (and this is certainly more than increasing salaries

b. You might also wish to look at issues of judicial reform that I have written about. Can send you a copy if you like.

c. One important forgotten area is the need for organizing religion. http://www.opendemocracy.net/article/how-to-solve-pakistan-s-problem

2. I have argued extensively that our growth strategy is deeply flawed as it remains steeped in yesterday’s thinking.. Growth strategy and Pakistan’s Economic Planning is being conducted on the ideas from thinking of the sixties and may be responsible for many of our problems. http://www.opendemocracy.net/article/how-to-solve-pakistan-s-problem

3. The stifling of our “domestic commerce” sector may be at the heart of many of our problems including slow growth and fundamentalism. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=986881

http://www.pide.org.pk/pdf/PolicyViewPoint/PolicyViewpointNo.1.pdf

4. Lack of knowledge of economic geography in our economic policy debate may be another reason why our cities lack the dynamism that could launch growth. http://www.pide.org.pk/pideweb/pdf/policyviewpoint/PIDE%20Policy%20Viewpoint%20(Urdu%20Version).pdf

5. I have also argued that is a fallacy to focus on sectors and “private sector development” without worrying about entrepreneurship. And what Pakistan lacks is entrepreneurship. http://ideas.repec.org/p/pid/wpaper/200729.html

Let me stop here. While I will not ever claim that I have anywhere near a solution, I have developed some thinking in a number of areas where further work may help develop policy ideas. That is all a researcher can do. A complete solution is not possible and we should not even look for it. We should look for directions of movement and along the path develop further solutions and hope development will emerge eventually (Easterly also argues for this approach).

However, I do think that we must also share a vision for Pakistan for debate and understanding or possible goals for us. For that reason I have written a vision for Pakistan. http://www.pide.org.pk/pdf/Highlights/vision2030.pdf

On engagement

So I hope Zubair that you will now not accuse me of not working on any solution or be sarcastic about my 30 years experience. It would be nice to engage on these issues meaningfully. In societies that developed, there was full and diverse intellectual engagement. Why is it that our society lacks engagement? Why is it that we wish to huddle in small select groups not on the basis of ideas but on personalities? Why is it that we do not cite each other or review each other’s work? On this issue, please see http://www.pide.org.pk/pdf/Sad_Plight.pdf