Friday, 16 August 2013

Fix Governance Before It is Too Late

At a time when the country is fighting for survival, our leaders are begging for aid.

The crying need of the hour is governance reform. The country is gasping for breath because of poor governance. Some symptoms:

  • There is a huge law and order problem. Not only is terrorism on the rise, kidnapping and violence has increased.
  • Qabza groups prey on property rights in collusion with the regulators and lawmakers
  • Resources continue to be misallocated in development projects because of corruption and mismanagement.
  • Public service delivery is wasteful and inefficient.
  • Energy is in short supply because of problems in power sector governance
  • Water is running out because the water sector continues to be poorly managed
  • Government policies are capricious and poorly thought out, lacking coherence and continuity.

At the heart of all these issues (and I am sure readers and can add more) lies public sector management. All Pakistanis will denounce public sector management and wish for it to change. For years we have blamed the politicians for these problems. But even with Martial law there has never been any improvement in governance. At the heart of the governance issue is the issue of incentives of the managers of the Civil Service.

Currently our civil service system has 4 major flaws

  • It is a closed non-meritocratic system ie., recruitment is only open to young people at junior grades and promotions are guaranteed and according to age and not performance
  • The National payscales attempt to put the entire government on one uniform scale with the federal government and the District Management Group on top vitiating an form of decentralization and autonomy of institutions.
  • Civil servant salaries especially at upper levels are largely in terms of non-transparent perks which are easy to abuse. This form of payment corrodes ethical standards and nurtures corruption.
  • The current pay system is also complicated by all manner of allowances. It is not inflation adjusted on a regular basis. Instead a series of allowances are used to adjust for inflation. 
  • Every few years a Pay Commission is put in place to deal with the allowances. The Pay Commission does the usual of consolidating a few allowances and giving a few increases leaving the system intact.

The system is antiquated and needs a complete overhaul if we are to meet the challenges we face today.

I wish we could have a serious national conversation on this.

Return to Magistracy

Return to Magistracy

A Distracted Bureaucracy

In our adventures to find a viable political system, we have politicized the bureaucracy moving it away from its primary function—magistracy.

Politically weak governments attempt to buy legitimacy through the delivery of projects and giveaways. Almost as a bribe — repeated governments claim “I cannot give you freedom and liberty but I will build dams, roads and railways!” And “I cannot give you security but I will build education.” And even there the dictates of the system lead to more building not more public service.

Such agendas are supported by donors who too are in hurry to write those reports claiming “literacy has improved in my tenure”, “in my 3 years here, I have done three projects on clean water”, and “I financed a project for building a dam worth 20 billion.” Donors are dumping money on development projects to achieve these ephemeral goals for better economic development.

Donor project are a godsend for the civil service. It gives them access to large funds that can easily be used for personal aggrandizement. Such funds come with nice cars (Land Cruisers), plush offices, nice allowances, liberal foreign travel and access to substantial consulting funds. Consulting funds can easily be used to benefit friends and family. Why would you want to do magistracy when the benefits are all in development?

It is no wonder that law and order has been on the decline here. No property rights exist; life and liberty are in serious jeopardy. Even your rights have to be obtained through powerbrokers. If you are not networked into the powerbrokers, even your life may not be safe. In such an environment, long term investment is very risky.

While society is falling apart because of the lack of magistracy, our old civil service the custodian of democracy has its attention divided. The premium is in development the drudge in law and order.

Magistracy first!

Recall that historically, the prime function of the government and civil service has been “magistracy” — the administration of law.

The primary role of the state as envisaged by many philosophers and as developed through history is to provide the framework to society for “individual personal and economic security”. This involves two separate processes — one for making fair and responsible laws (a parliamentary legislative process) and the other a system of fair administration of laws (a bureaucracy and judicial system).

The term “individual personal security” involves judicious and efficient police and emergency systems that administer the rule of law regardless of stature and hierarchy.

The term “economic security” is also very clear. It is the provision of secure property rights, secure system of contract enforcement and market facilitation. All this is to be provided with a minimal involvement of government.

The government must be like an umpire at a cricket game — to be seen and not felt, stopping the game only momentarily if required. The umpire does not get involved in the game nor is the umpire the star of the game.

No Development Without Magistracy

Growth without magistracy is ephemeral. Much evidence now exists to show that the rule of law--strong and fair magistracy--is an important prerequisite for growth. Development projects and assistance have not led to the development of strong foundations of growth, often leading only to temporary improvements in welfare. In cases where the state has really lost control of magistracy and rule of law, civil war has sometimes ensued. Examples from Africa are well known.

For the development of country and society, we must develop serious magistracy. The first step is to recognize that long term development requires the development of the magisterial good — individual and economic freedom — by the government. Moreover, the foundations of society and state lie in the development of the magisterial good and magistracy. Consequently, rather than relegating the magisterial good to second place after development, now we must give it priority.

If we accept this line of argument, then the current rhetoric of “development first” has to be accepted as wrong.

Government of the day must accept magistracy as a its primary function and development as secondary. The push for development cannot be an excuse to put off magistracy.

The development and the magisterial functions of the civil service should be separated. There must be a bureaucracy that is totally dedicated to magisterial work and no donor project should interfere with it. True development is the development of the magisterial good first.

What about infrastructure development and social sector development? When we have the magisterial good developed, the public sector can get the private sector to get increasingly involved in developing these objectives.

Without magistracy, the line between development projects and organized corruption seems to be very thin indeed.

Sunday, 11 August 2013

Estimating the Footprint of the Government on the Economy

Estimating the Footprint of the Government on the Economy

The Planning Commission Framework for Economic Growth (FEG) established that the footprint of the government in the Pakistan economy was very large. Often people note that government expenditures as a percentage of GDP are only 22% and therefore the size of the government in the economy is not large. This line of argument is again used to establish a basis for arguing for increased taxation.

The FEG noted that the percentage of government expenditure in GDP was not the correct measure of the influence of government in the economy where the government is
  1. Still controls a large number of Public sector enterprises (in fact the largest companies listed on the stock exchange are largely owned and managed by the government).
  2. The government still engages in many market transactions often as a dominant player (eg. energy, construction commodities etc).
  3. An aggressive tax subsidy policy as well as tax expenditures (SROs) direct market activities even at the cost of excessive barriers to entry.
  4. A regulatory framework that often inhibits investment and market opportunities (the most egregious example of this is the serious hurdles in the development of the construction industry and city development).

With this in mind we calculated the footprint of the government on the basis of contribution of government in all sectors of the economy, which is measured by government spending, earning of government institutions, price support subsidies and based on market share in these sectors. The final results of the calculation are given below.

Table 1: Size of the government Foot Print

Govt. share in sector
Sector share in the economy
Govt. Share in the economy

Transport and Communication
Electricity and Gas
Wholesale and Retail
Health and Education
Public Admin and Defense
Finance and Insurance
Ownership of Dwellings
Mining & Quarrying
In this calculation the share of government is 44.17%, out of total GDP. This is what the government directly controls in the economy. The decision in these areas are dependent on the government.
In addition to directly influencing the economy, governments also use regulations to control the direction of the economy. These regulations can be in the form of wage control, tariff and non tariff barriers, regulations for starting new businesses and legal framework as an obstacle to competitiveness etc.
Calculating regulatory burden is a complex exercise. For US, regulatory burden accounts for 8% of the national economy. Kaufmann, Kraayand and Mastruzzi (2010) have come up with Worldwide Governance Indicators which also looks at the effectiveness of all the regulations in every country (Regulatory Quality index). The index includes all the variables needed to calculate regulatory burden. US gets a score of 89.5 out of 100 (higher is better) whereas Pakistan gets a score of 33.3 out of 100 ie., Pakistan's regulatory burden is at least 3 times as much as the US (assuming and unrealistic linearity).
Here we will consider to Pakistan's regulatory burden to be only twice that of the US to make our point. Crain and Crain (2010) have estimated this cost of regulation to the economy to be about 8% of GDP. By this reasoning we can expect Pakistan's regulatory burden to be about 16% of GDP. In other words, trade barriers, obstacles to investment etc. are costing Pakistan’s economy 16% of its GDP. I may also add given the reasoning that we have presented in the FEG on the manner in which city development, the services sector and the construction industry are held up through bind regulation, this is likely to be significant underestimate.
However, for discussion purposes let is add the two together we can find an estimate of the size of the government footprint on the economy to be over 60% of GDP.

Sunday, 4 August 2013

Radio Interview on Pakistan Economy