Tuesday, 10 December 2013

Getting the Archotecture of economic policy RIght



Ministry of Finance (MOF) has always found the discipline of the medium term too difficult to live with. When the budget was in difficulty it relied on either or both a) Cutting development and/or social sector spending and b) Introducing arbitrary and distortionary tax or tariff measures. In the short term to please various special interests, MOF developed the SRO regime which impeded market competition and openness and hence impacted growth. All three of these MOF initiatives- cutting development expenditures, distortionary taxation, and the SRO regimes--challenge the planning process while also severely impeding growth and development efforts.
Consequently, since 1973, MOF has continuously struggled to take over the PC. PC was envisioned to be a technocratic ministry under the PM. The Chairman of the PC was the PM. Most FMs since 1973 have fought to become Planning Ministers a position that should not exist.
Almost continuous IMF Programs since 1988 have contributed to eroding the planning process further. As is well known IMF programs are not designed for growth. In the case of Pakistan the programs remained focused on increasing revenues and holding the rein on expenditures often either through a cut in development expenditures or through arbitrary cuts on overall expenditures. As the programs went off track when difficult revenue measures were not achieved, further arbitrary cuts were imposed often at the cost of maintenance or efficiency. In all case growth suffered further. With the PC and the planning process weakened there was no challenge to the programming approach of the IMF and the MOF. Growth and development suffered severely in this period.
MOF expanded as part of Fund programs to take over functions of the PC as well as other divisions. While the medium term, reform and development functions were the PCs, MOF through donor support managed to develop projects develop sections for economic reform, poverty management and making the Poverty Reduction Strategy Paper, a substitute for a Plan.
Donor agendas are facilitated in a weakened planning system but lead to a fragmented development effort. Without a planning process to coordinate disparate agendas individual donors find it easier to deal with ministries that are not coordinated to accept studies, programs, policies, capacity building, PMUs and even new agencies. For example, we have several heavily funded projects running for years that no one has reviewed, e.g. PIFRA, TARP, PMDC etc. EAD wants to coordinate donors without the discipline of the Planning process even though the role of EAD is to purely manage donor relations without getting into economic policy. It should be noted EAD has no economic, technical or planning skills. 
Without the Planning process, fundamental reform is slowed down. The PSE problems arise because no one is pushing for, facilitating or coordinating reform. Despite many Fund programs,
1) The tariff structure is riddled with SROs against the open economy that Pakistan has committed to;
2) Commodity operations continue to choke domestic credit and impose a claim on the budget;
3) Generalized subsidies continue unabated despite a well-conceived social safety net;
4) The pricing structure still has too many administered prices e.g. gas, electricity, wheat etc.;
5) Overall regulatory structure remains unfriendly to investment and promotes anticompetitive practices.
6) The gains from productivity increases as outlined in the PC FEG remain unexploited while all the government’s time remains committed to projects that are riddled with inefficiency.
The Architecture of economic policy making must be balanced to include growth and development as an equal player to fiscal and inflation management. In the current architecture MOF places everything under the control of short term fiscal constraints. SBP and the banking system are forced to finance the deficit while long term growth is sacrificed unthinkingly through expenditure cuts and distortions as described above. While the IMF is arguing for SBP independence and there have been laws to that effect. Surprisingly in a poor country like Pakistan, little attention is paid to PC independence so that needs of growth and jobs are not forgotten. 
Our failure to make reform happen should alert us to a poor reform process. Yet the way forward for many years is to mainstream and fast track reform. Our outmoded system of governance and public sector management, our regulatory, our public service delivery, our work processes and several other areas are in urgent need of modernization.
It should be clear by now that few in government understand the reform process. Reform mostly happens at the behest of the donor. There is little domestic research or thinking on reform. Donor reports drive reform and are often full of mistakes eg TARP, Access to Justice, Civil Service reform. Too often reform is command driven.
Reform is left to civil service officials who have limited experience in change management. Change management which is a major part of reform must be driven, monitored and incentivized externally.  
There is little reform communication.  Cabinet must mainstream change-management and reform through its agent the PC. To achieve growth and productivity, we must fast track reform. Without a reform process, we will continue to muddle along. The PC through its mandate of long term growth and development must be the cabinet’s change agent.