Saturday, 25 January 2014

Make Way for Cars: No Room for Khokhas

When I grew up there were small kiosks (khokhas) all over Lahore. Vendors on bicycles and on foot used to hang around our houses and schools. As kids they offered us many delights from spicy concoctions (chooran, Chaat) to wore puzzles and other toys such as tops. Craftsmanship was on offer. A spirit of entrepreneurship was displayed.

This was when the city was compact and most of us walked or biked and as a result were somewhat lean. Roads and sidewalk were lined with khokhas. The sidewalk indeed was a public space where community interaction happened. People walked, haggled and interacted.

Then came our romance with garden city suburbia. Bureaucrats, both civilian and military learnt that plotting was profitable and began a horizontal expansion of the city. To them distance did not matter since their car expense was picked up by the public sector. Besides, downtown development was theirs to stifle so that suburban values would go up. And they got those suburban plots for a song. So they could pocket huge capital gains. And tax free too!

Suburban expansion and stifled downtown development eventually fueled the demand for cars. A rent-seeking domestic industry developed to provide cars with yesterday's technology. But the people were forced to buy them as policy gave them no choice.

But cars are such a necessity in this suburban model of development that any one who can afford one has to keep one no matter how old or beat up. Or at least u need a motorbike.

As cars grew in number and suburbs spread, more and more money was spent on making roads and broadening them.

This resulted in 3 negatives for Pakistan.
  1. Valuable agricultural land developed though harnessing rivers at a huge price is being converted to housing colonies.
  2. The spread of the city has increased our car-dependence. In turn our car dependence has increased our oil bill and is rapidly increasing our environmental cost.
  3. Most importantly the car has displaced the sidewalk and the khokha.

In addition since all policymakers have free cars with chauffeurs, they have absolutely no incentive to develop public transport. Only a political leader like Shahbaz Sharif forced the issue and developed Pakistan's first post-indepcdnce public transport system in Lahore. (we used to have public transport in colonial days.

Through 3 governments, I have tried to put together a policy for khokhas and sidewalks but with little success. The bureaucrats are totally opposed to this. Unless perk/plot/protocol culture is removed they will remain wedded to cars and plots. After all they benefit directly from these.

Whenever, I go overseas, I am amazed at the opportunities that khokhas offer. Constitution avenue, the heart of Washington DC has khokhas some of them operated by Pakistanis. Right next to white house there are khokhas. Manhattan is full of them and Wall Streeters frequent some of these for a quick lunch on a nice sunny day.

The far eastern cities are littered with khokhas everywhere and shopping and eating there is a tourist attraction. They even have dedicated building with khokhas in them small stalls where poor entrepreneurs work hard to climb up the social ladder.

None of these khokhas are unattractive or filthy. The government has a regulatory and licensing framework that ensures certain quality standards. This makes visiting khokhas attractive and offers the poor opportunities for entrepreneurship.

All governments give us the usual youth and poor incentive schemes based on handouts or loans. Microcredit has mushroomed. But no one has given thought to opportunities for poor entrepreneurship. Without space to invest, what with do with an incentive or a loan.

Cities become inclusive and humane when policies like this are adopted. This is why the Framework of Economic Growth (FEG) of the Planning commission of 2011 highlighted city development.

However, this reform is quite unlikely to happen unless our city planning paradigm based on plots/perks/protocol is changed. Following the FEG, we must discontinue our suburban garden city approach to city development. But unless the system of rewarding through plots is discontinued, this will not happen. This is one of the reasons that the FEG linked civil service reform with city development.

Politicians see the vision because they know that this is a vote-getter. However, they are unable to push this bureaucracy into making the change. Now do you see why change must begin with the elimination of perks/plots/protocol.

Tuesday, 21 January 2014

Civil Service Reform—Some Principles

Let us begin by recognizing that civil service comprises the bulk of the executive and affects all aspects of society. The configuration of the civil service for a new society in a new century should be of serious interest to all. Consequently this reform should not be done in back rooms by the patient that needs healing—the bureaucracy. Nor should it be left to donors who have had opportunity in the past and failed.
Reform should be developed through a process such as an independent commission comprised of (or backed up by) serious technical skills, intellectual firepower and certainly some fresh faces. The commission must do open consultation with civil society and many segments of society. Donor input if any should be subjected to local public scrutiny and not just implemented.
The Key principles of reform must be clearly understood and debated in Parliament and passed into law. CSR is too important to be left to administrative change in rules alone.
What then are the principles that such a reform should seek?
First, civil service independence must be guaranteed by law. This can only be done if all law ensures that all key decisions about the running of the service (recruitment, promotions, transfers, pay and pensions) are protected from any interference. Of course all these things happen under legal guidelines but that is all. MNAs and ministers should not be able to control civil service appointments at any level.
Second, UPS should be abolished. Civil service should not be viewed as a monolith comprising of all government employees. Currently Unified Pay Scales (UPS) which are a hangover of the socialist, planning days seek to place all services on an artificial relative scale so that doctors and professors are considered inferior to administrators. This seriously impedes professional development and should be discontinued.  Professions and government agencies (or professions) should be allowed to establish their own pay scales within their budgets!
Third, lifetime predetermined careers where promotions are guaranteed at known intervals have to be discontinued. Current entitlement mentality of civil servants has to end. Merit rather than entitlement should be initiated so that performance is rewarded.
Fourth, all civil service jobs should not be protected from external competition. The preferred scenario would be to open out recruitment to external competition! If that is not acceptable, all senior appointments (Secretary and Additional Secretary) should be based on worldwide competition. Public sector senior appointments affect so much; the best people should be sought for them.
Fifth, the current system of the federal government controlling provincial and local civil services is not conducive to good governance, federal development and economic growth. As in the rest of the world, each level of government must be independent. The provinces and cities should have their own employees and there is no reason that they should be paid less or regarded as inferior to the federal government. This is also the need of devolution.
In the current system much is centralized at the secretary level with entire divisions and attached departments placed at the beck and call of a secretary confusing responsibility and extending the chain of command. The Rules of business make the Secretary of a division the Principal Accounting Officer of not only that division but of all attached departments. The result is an excessive centralization that impedes productivity.
Sixth, transfers should be recognized as a control device and should be discontinued. Frequent transfers are not helping productivity and should be questioned in Parliament. Like the rest of the world, appointments should be given tenure with new appointments being obtained through a competitive not a command process. Of course mobility rules will be put in place not just within the civil service but also to facilitate a flow between the public and private sector for required cross fertilization.
Seventh, perks which are now so connected with power, corruption and payment should be monetized. The current payment method is dysfunctional, induces corruption and adversely affects productivity. All perks should be monetized taking the government out of the business of providing houses and cars and paying utility bills. Salaries should be all in cash based on market comparators and indexed. Benefits should include no more than indexed, fair valued pensions and health care.
Eighth, the established practice of “public service should not be paid well” needs serious review. Public service positions are too important to be shortchanged. Public servants should be paid well in keeping with the heavy responsibilities they carry. All serious reforming countries have done that. Market based salaries should be given while appointments and promotions should be on merit and external competition.
Ninth, processes and rules of business should be reviewed to ensure that government becomes a learning, investigating and thinking government using technology, developing data, information and analysis and innovative in policy determination and public service delivery. Such a bureaucracy would be continuously reform itself adapting to a rapidly changing world.
Tenth the training program of government should be reviewed to facilitate a modern professional bureaucracy and move beyond the current approach to develop a generalist, league of gentlemen.
Without a process for reform-- a serious commission led by thought and intellect and a public consultation—and the adoption of these principles, there will be no serious civil service reform!

Wednesday, 15 January 2014

How Important is Trade with India?

There is a lot of noise on how the only thing that will save Pakistan is trade with India. On bended knees we should beg. The donors have spent over 10 million dollars to buy out all our leading intellectuals on worthless studies that state the obvious conclusion that they want that trade with India will be good for us. They have another 10 million+ to spend on this subject. So whatever you read by people know that it is not freely written.

But do not get me wrong! I am all for trade with not only India but with everyone. Have been for it forever. As an economist, how can I disagree with openness? That is the fundamental tenet of economics that has been established since Adam Smith and David Ricardo in the late 18th century. But openness means trade with all. Indeed Pakistan should be open to trade with all including India.

But the rhetoric is that it will be a panacea for Pakistan. Fantastic numbers are quoted with no basis because there can be no basis of a situation that has not happened. Besides we have possibilities of trading with everyone else. Why is our trade/GDP ratio not growing even though we have openness with many other countries, like Iran, Afghanistan Central Asia, and the Gulf? So there are some structural impediments that are not letting trade work. And they will be there even if we do trade with India.

Yet large number of conferences, opeds and media headlines are yelling all manner of grandiose claims on trade with India. 10 million dollars will buy you a lot of claims on the subject.

Interestingly enough, while we are spending 10 million dollars on this subject (and it is our money since it comes from aid committed to us), we have no money to study, energy, governance, pricing, deregulation and many other such subjects. All our bets are on one issue trade with India which I find very surprising as a policy analyst. Like in life, policy also must seek a multipronged approach for building an economy and society.

Let us look at the issue a little more closely. India is a large country with many states some larger than even our Punjab. There are no trade barriers there. So one would expect that all states will benefit from the union of India. All states will be growing at the same rate and converging to the same level of welfare. Over 60 years equalization would have taken place.

In a recent paper, Cherodian and Thirlwall look closely at the data and after much econometrics found that “regional differences in gross State domestic product per head in India have continued to widen” through the last 6 decades. Even if they control for various policy and other state controlled variable as well as resource endowments, they find that disparities are widening. They find that without state reform and development efforts Indian integration or trade within India is not enough to get the poor regions to catch up with the richer regions.
If trade has not helped the poor Indian states to catch up with the rich, why is there such grand expectation of it? Why are we willing to postpone domestic reform and wait for trade with India? Perhaps the donors will use some of their dollars to tell us why this is so?
Economics 101 affirms that openness is important. It opens up a highway. But the highway is only useful to someone with a nice car, with a smooth powerful engine, a good driver, and gasoline in the tank and passengers ready to travel. If we have a poor quality car (poor governance), amateur driver (nonprofessional, non-research government), no energy, and all the passengers living of SROs, who do we expect the car to move well on the highway. We can continue to ask for more openness but let us not forget domestic reform.
In fact domestic reform must be our priority number 1!
Indian disparities are also shown in this Financial times map. It confirms that a lot depends on the states abilities to capture the gains from trade that openness provides. In other words the way a state is run--its governance and policies-- is important for development indicators.
These results for India have been substantiated in many papers.

Tuesday, 14 January 2014

No social or intellectual capital

It was like being in twilight zone.

I was at at local conference which is become and institution as it annually gathers a fine grouping of Pakistani social scientists to create a fine debate in policy and thought. Generally it is interesting and participating in it is fun.

As I keep saying conferences are for learning. But our intellectual for many reasons has never achieved relevance and is self consciously seeking attention but not through academic work. Combine this with ignorant and arrogant public policy which has no demand for research and provides no research funding. The result is that we have starving intellectuals whose product has no market.

Our conferences are anything but places for learning. There is no real debate. People are not even listening to each other seeking and testing hypotheses, developing models and analyses, accepting results, and keeping memory of past themes. There are no real paradigms and the approach is anything but scientific.

I cannot understand, how everyone in an academic conference begins by saying that we have all solutions and don't need to learn anything. All we need is implementation and political will. So there is no need to create knowledge. No wonder our intellectuals are irrelevant. If they do not produce knowledge and have no questions why should anybody--ministers or secretaries or civil society--pay attention to them.

Most conferences explore themes from a paradigm. They seek factors that explain some phenomenon seeking to find patterns, exploring associations in those patterns, and developing associations into models. Through presentations and debates they seek to deepen the understand of the patterns and models to seek simplification and indent iffy causal relationships.

For example, the question why is Pakistan not reaching self-sustaining growth, the refrain is we know the answer. Why is there no implementation? Ok what is it that should be implemented? Government must invest in infrastructure, education, health and other good things. Well earlier government investments in these areas have not panned out well. The answer is do more do it better. Ok what education and what infrastructure, can we sharpen at least that? The conference is not interested.

All they are interested in is tautologies. Growth does not happen because we do not invest. Investment does not happen because there is no political will. We say invest, they implement. Sparkling thought.

Then there is inclusive growth. Everyone says we want inclusive growth. Can we define what we mean by it. That is too boring!

Each speaker, each session is independent in content and in thought. There is no need to listen to questions or ideas posed by any one. There is no memory of research done in the past, of easier paradigms or earlier writings. But even when the previous speaker may have presented something that challenges what the current speaker is saying no worries who is noticing.

Conference organizers are not looking to sum up knowledge, culling hypotheses and models safeguarding results, initiating and preserving debates. Instead they are worried about VIPs. In academic conferences around the world VIPs are academic stars who parade their theses to spark debates.

Here conference organizers are running after ministers, secretaries and donors. Ministers are paraded in to make absurd claims, treated with kid gloves.they come and go learning nothing only for ceremonial purposes. But our academics feel good and heard.

Donor consultants fly in from the US and UK using our aid money, flying business class, claiming USD 2000 to offer platitudes with no meaning. They are the stars, placed prominently, next to the VIPs, with the label handle with care.

They did not know where to place me. They are good people and my friends. But they were uncomfortable. Here is a former State Minister of Planning. He has also written a lot of academic papers and has seminal pieces originating themes of domestic commerce, cities as engines of growth, pushed original thinking on perks/plots and the civil service reform.

But the current minister for Planning is making a claim that there was no strategic thought after the last Nawaz government and has initiated a vision 2025.this is despite Vision 2030, medium Term Development Framework and the Framework for Economic Growth, My academic friends are out to please him.

My academic friends participated in the conferences for the Framework for Economic Growth. Large conferences small conferences many of them. Some of them made numerous presentations at these forums. Some of them had also participated in the events for vision 2030. Yet to my bitter amusement, none of them wanted to recall those conferences. It was as if nothing happened before vision 2025.

By denying history, credit for intellectual work and the power of analysis, we will never be able to lay an intellectual foundation.

No intellectual capital!

At that session, I was invisible. My friends could not see me. Because they were busy pandering to the new minister. They did not want to draw on my experience and my academic background.

No social capital!

These are investments we must make. Conferences are for that. How can we understand this?

Monday, 13 January 2014

Architecture of Economic Policymaking

Architecture of economic policymaking
    We are a developing country. Our topmost priority needs to be economic growth and development. Yet we have no agency looking after growth and development.

    We leave all facets of economic policy in the hands of one ministry—the Ministry of Finance (MOF). Conflicted with many objectives, they naturally do a poor job.

    MOF must be held to some performance standard. For the last 30 years it has been unable to hold the line on expenditures and has never been able to put in a tax reform. A poor quality budget is passed with little planning for the needs of the economy. Soon after passage of the budget, MOF succumbs to demands for reallocation and overspending for unplanned incentive schemes, subsidies, and purchases of commodities as well as providing for losses of PSEs. Hardly a proposal from on high is refused. Reallocation and over spending is all too easy.

    On the other side MOF also is too weak (or….) at resist issuing SROs. Despite adverse revenue implications, MOF continues to issue SROs. Issuing SROs is also too easy.

    Both the tax and expenditure power lies with Parliament. These powers cannot and should not be delegated to MOF.

    Currently, budget management is only hurting growth and development! Runaway fiscal deficits require exceptional financing from both commercial banks and SBP. SBP prints since it is controlled directly by the MOF, Finance Secretary and all his nominees are on the board of the SBP. The result is creeping inflation and credit for the private sector being crowded out. Growth, investment and development suffers in both cases.

    Poor budget management and runaway fiscal deficits also require some expenditure pruning. As is well known this is done through several anti-growth measures.

    On occasion development expenditures are slashed. In 2010 these were cut by 50%. Such cuts disrupt major infrastructure, education projects setting back their time to completion, leading to cost overruns and often upsetting the feasibility of the project. Sometimes they resort to slow down of releases. Once again this disrupts project management, cost and completion.

    On other occasions MOF arbitrarily imposes taxes such as income tax surcharge and surcharge on imports stirring up legal battles and confusing investment decisions. Expecting such vagaries in policy, the private sector is likely to be wary of investment.

    On occasion they cut expenditures everywhere on what they term “austerity”. Not being able to resist ill-thought out “packages” that had not been anticipated in the budget, MOF at times cuts non-wage expenditures. The result is cuts in maintenance and “dispensable” activities such as training, research, conferences etc. As a result, systems, equipment and human capital depreciate. Obvious long- run consequences ensue.

    EAD is a MOF wing that seeks foreign funding full time. Hungry for money, they do not worry about the impact on the economy. Donors freely retail their own whims of policy and use their contractors and consultants as they like. Donor projects such as TARP, SAP, 

    Capacity building, Access to justice and several others which are viewed as unsuccessful by their own evaluations, leave a loan that will have to be paid back by our children.

    Often the search for foreign loans means compromising our development agenda. Sometimes it means following poor quality advice. In both cases it marginalizes our own growth and development thinking. In the long run that is a huge loss to the economy.

    This situation must change. Here is how!

    There are 3 main objectives of economic policy—growth, external and internal balance and inflation management. The current practice of all 3 being managed by 1 ministry may be the biggest folly of our poor governance.

    50 years ago the first economics Nobel Laureate Jan Tinbergen had argued that each policy instrument should not try to affect more than one goal. This means that each government agency should be a custodian of one goal. Hence central bank independence!
    Right now MOF is floundering on all three objectives and making a mess of it.

    Like the rest of the world we should develop an independent central bank that manages inflation and an MOF that manages the budget and through it the internal and external balance.

    Growth and development needs an independent champion. Like the SBP it should be independent, staffed by competent professionals.
    I call it the Economic Development and Growth Commission (EDRC). PC could and should be re-engineered to develop into this. (I tried but MOF as usual blocks reform). It is important that EDRC be independent and able to speak on behalf of growth. EAD should be a small part of EDRC. Better policy would be developed through the creative tension between three independent agencies—SBP for inflation, MOF for budget and EDRC for growth and development. 

Saturday, 11 January 2014

Should we only blame the Politicians?

Who do we blame?

We spend all together too much time blaming politicians and our incumbent leaders for their failure to deliver. Is that fair?

I have seen even when politicians want to make reform, the system stymies them. Technocrats have been invited by all governments to make reform but all of them have been chewed out by the system and made totally ineffective.

Mahbub ul Haq came here with many ideas but the civil servant group led by GIK obstructed him in every way and finally sent him out of the country. They ganged up on him to preserve the status quo!

Many have come and gone like Dr. Haq to see if they can help develop the country. They come with new ideas. They work hard to give this country something. Even some politicians try to develop new ideas and wait around for some good results. Unfortunately all their ideas too are implemented in such slipshod fashion, that be it an education program, or a youth scheme, or a social protection program, the result is the same, no real progress or a programs that we can be proud of.

At the beginning you see plush offices, big cars and a smartly dressed DMG official running the show, giving slick presentations even arranging big conferences with lots of foreign delegates. But this is while the donor funding lasts. After the funding dries up, the DMG official moves on, the office becomes decrepit and all the good people leave. And all we have is another derelict outfit waiting to be killed.

Meanwhile, government remains beset with old familiar issues: buying commodities, managing crises that arise out of long unaddressed problems, chasing donors for funding to preserve the status-quo! Any thing to keep reform at bay.

Even when a reform like monetization of cars is approved by our leaders, it is left for the beneficiaries to develop and implement for themselves. It is implemented badly and then used as an example of why this country is not ready for reform. The people who implemented the reform move away like ghosts and no opprobrium visits them. Instead they become the loudest voice in the room where change is being discussed arguing against change.

Occasionally leaders will call a meeting for change. There will be one hapless technocrat and many secretaries. One after the other they will all speak about how we must be careful to change a system where they have all power as well as many perks and opportunities to get perks and plots. Typical refrains are “sir, we must be careful and go slow”. Why because we implemented previous reforms badly. The implication is that all change is bad. Not that the implementers have a problem with change since they are so heavily invested in status quo of perks/plots/protocol.

They are also quick to point out how “local conditions”, which of course they know best will not allow the best ideas to work here. I am always amused to see these people sitting their in their western finery with their kids in American universities, arguing that Pakistanis are not ready to change. In a society that is now deeply globalized through migration, these people are still arguing for how people want to remain local.

The rules of business make all our leaders beholden to secretaries. But this control by people who will do all that is in their power to maintain the status quo from which they benefit is holding the country back.

Politicians have to face the electorate and can be sent home and lose their perks and privileges. Bureaucrats have royal perks and privileges and are permanent serving all governments with their usual refrains for the status quo! Without their perks and privileges they will be human and want change that benefits as they will be a part of the general good.

We would all do well by ensuring that our bureaucrats are in the same boat as us. Right now they live in a different world living in gated enclaves, have private clubs, utilities are constant and well paid for. Every thing is too convenient and exclusive. Whether the rest are experiencing difficulties does not concern these people.

Humanize the people with the power and break the status quo. At least place the blame where it is due! At least the politicians try! There is a group that merely wants to preserve privilege.

Sunday, 5 January 2014

Economics in Pakistan

The tragedy with economics is that everyone is an economist. At gatherings there are several people who are pontificating on how the economy would pick up if only we would make sure that everything works well. Economics to these people is just wishing—just say all that you wish should happen and expect it will. So fix the economy and all will be well is the usual prescription I hear. Our education system has not taught them tautologies!

Such speakers will say in one breath, build Bhasha, Kalabagh and several other dams and several coal based plants and then import LNG, educate all, export more, expand industry and agriculture especially horticulture, develop more infrastructure. These speakers will not stop for a minute to think that most of these are objectives or wishes of things to happen. To make these happen, we must think of processes on how to make them happen, the instruments that we have at hand if any to make them happen, financing if required, and most important of all the human skills and incentives that will make them happen. But unlike economists, speakers and columnists of this variety will assume that instruments, capacity and financing for their wish lists exist.

There is another group of economic pontificators who only think fiscal deficit and stabilization. For them, every speech/column is lamenting the fiscal situation and presenting a single item remedy—increase taxes. They seem to have confused economics with accounting. Expenditure minus taxes is the fiscal deficit. Since the deficit has gone up and they feel that expenditure should not be cut down, let us collect more taxes. Simple arithmetic.

Column after column, speech after speech this arithmetic is repeated. If you ask a few questions like fundamentalists they turn on you to shout out a defense of their arithmetic. Why not cut expenditures? Can you not see that social sector spending is so low, public investment is so low, debt servicing is high! More arithmetic!
Of course the slightly more erudite will very cleverly argue, “How will you finance your deficit?” Print more and you will increase your inflation rate and we do not want inflation. More debt is not possible since we are already way beyond our self-imposed debt limit. Still in arithmetic mode.
And of course there is the constant reminder of our reserves and declining BOP situation. More arithmetic.

Then of course there are those who will vociferously argue for subsidies to industry and exports after all there can be no growth without this. Is that not what East Asia did? This is the model of the sixties that these people are clinging on to without realizing that the world has changed. Nor do they know that each country’s path to development is unique and mimicry wins nothing.

There is another tiresome refrain, “we know all the solutions and all we need is implementation.” When you ask them what is it that you know they will hand you there wish list and ask for its implementation. It is like wishing to be a Wimbledon champion and asking someone to implement your wish.

Economics is not mere accounting or arithmetic. Nor is it wishes. Nor is it static, stuck in the sixties. Nor is all known. Anyone who is following the global crisis will be stuck with the complexity of the problem. The best minds of the world are involved and solutions are far from obvious. So a little humility is in order. But not our know-it-alls!

Without research, thought and reading to claim that we know all is very dangerous and should be shunned.

What these people need to understand is that economics is most importantly concerned with understanding human behavior at the individual and group level. People individually or in some collective develop responses to their environment to maximize their own, their family’s or their groups welfare. The environment is largely the manmade frameworks of laws, regulations, systems of governance, market organizations that humans operate in every day. The varieties of these responses make up what we know as GDP in the economy.

If GDP grows it lifts up not only welfare in general it also gives the government more operating room allowing space for more debt and deficits while also inducing more tax revenue. Most economies think of ways to increase growth for good things to happen. But our accountant/economists are focused merely on stabilization, accounting and arithmetic.

Those who want growth cannot have growth through wishing for all good things. If only we could trade regionally from China to Kazakhstan to Sri Lanka. If only we could build a solar station on mars and give all manner of subsidy to industry and exporters. Growth does not happen like that.

We know now that growth happens when the institutional/incentive framework is conducive to people’s efforts to innovate and engage in entrepreneurship in open competitive markets. This is clear. However, operationalizing this statement is a huge research agenda. No one can claim to know what is it that needs to be done. 

We can now all start researching and learning and see how we can create the winning institutional/incentive system. It will have to be a slow learning process and one that we will have to continually research and tweak for this system is high maintenance and needs constant attention.

This is why I have been writing for over 2 decades on why and where our economic system needs change. Which is why serious economists argue, the government should stop chasing money, wish lists, false targets and yesterday’s models. Instead it should focus on economic reform to make a system of incentives and property rights that is conducive to economic growth. But this cannot be done while thinking that we know all and that we can be mere monkeys mimicking some distant country.

Instead this will mean serious research, serious debate, serious humility at every level—bureaucracy, politicians and thinkers—an acceptance of our ignorance.
Serious economists in their speeches and columns should discard the outmoded method and start developing ideas on understanding our economic system and educate the rest of society on how to think afresh on the economy.

The Framework of Economic Growth (2011) of the Planning commission could be one such point to departure. It deliberately talked of only a small number of linchpin reforms that underpins the rent-seeking system and has the potential of disrupting it. It should be understood and discussed more widely.

Wednesday, 1 January 2014

Interview with Pakistan Today

Pakistan needs Imagination and Reform

We Need to Move to a New System that Promotes Competition and merit
  1. You have long advocated better management of cities to lead growth. Why? And why did the government not heed your advice?
Answer: We must recognize that the government is seriously depleted of talent to make a development agenda. Such an agenda requires serious research, thinking and debate. When we had such an agenda, there were people like Mahbub ul Haq, Burki and Parvez Hasan charged with this responsibility and they had the ear of the leadership. Today the system has no room for such people. And the leadership is distracted from development.
All our think tanks universities work for donors on their consulting agendas which are always following some fads. Today it is trade with India where donors are spending millions of dollars and everyone is focused on that issue. Planning Commission needs to put up some funding for research to allow a domestic policy agenda to emerge and liberate our intellectuals from being mere research assistants to donors.
On cities, my view is the real powerhouse of growth is deregulation of cities. Powerful well organized cities naturally reach out to their supply lines even if they are across borders. But such cities create entrepreneurs, innovation and creativity. They will lead to high inclusive growth and transform Pakistan.
  1. Why is it that military governments seem to achieve better production and growth than our more democratic setups?
Answer: Military dictatorships have been lucky that a neighborhood crisis sends money into their laps and therefore growth picks up. But let us also review their performance. The increase supply of aid gives them an opportunity which they waste on populist ideas like giving their MNAs development funds, building without clear thought, and pursuing agendas that are anti-development. Sadly our military has never had a vision for reform and restructuring society for development.
Both military and democratic governments suffer from a common problem that they lack the imagination and capacity to think through the reform that is needed. Both rely on an outmoded and a rentseeking civil service. They pick up “hearsay” agendas and do not have the attention span to make serious considered policy.
Protocol, perks and foreign trips take up all their time. This method of governance is such that there is not time of process for serious thought.
Does heavy feudal representation in democratic parties, eventually, make for policies that are not working-class friendly?
It is surprising how many cabinet members, parliamentarians and senior officials (both army and civilian) claim to have connections with agriculture and argue for higher support prices and subsidies. This is at odds with the situation where the majority of Pakistan now lives in urban areas. The lack of a census and proper redistricting seems long overdue.
It is also surprising how many are beneficiaries of the perk/plot system. The incentive system at decision-making seems to perpetuate rural subsidies and the plot/perk culture. And this is a drag on development.
  1. Do we have a way out of repeated structural adjustment programs of the Fund?
Answer: Fund programs are not to blame. Our policy is. I certainly do not share the common perception that policy should worry only about tax/GDP ratio or only about exports. Policy is about getting a right mix of interventions towards a clear goal. We have a confused and outdated agenda. We are continually chasing aid and trying to please people with ill-thought out populist schemes.
My view which I put in the Framework for Economic growth (FEG), (which was approved by The National Economic Council in 2011 and 12, was that we have to be clear that we are going to be growth driven and that growth is going to come from deep structural reform. We pointed to several areas where reform could be made to generate quick wins and achieve sustained economic growth. Urban reform and openness would boost our growth and investment very quickly by a few percentage points. If we develop a serious government through civil service reform many of our governance problems will begin to be addressed. If we follow the FEG approach, we can unlock a virtuous cycle of growth investment and reform.
  1. You have been a champion of civil service reform. Can you explain why and what kind of reform do you have in mind?
Answer: The human enterprise, from the pyramids to the modern day capitalism has always been maintained and developed by a bureaucracy. I argue for a civil service reform not to rid us of bureaucracy but to develop a strong and modern bureaucracy that we need.
Building a bureaucracy for the 21st century will require a continuous process of reengineering. The principles, however are clear. 1. More decentralization; 2. Increased competitive recruiting especially at senior levels; 3. Merit as opposed to seniority; 4. Monetization for transparent compensation and to end “enclave mentality” 5. Modern technology based work processes.
As argued in the FEG we need to move to a results based system of management rather than the current input based system. Movement to that system will allow a much more open and decentralized system to emerge. Currently the economy and all decision-making is being destroyed by the secretaries in Islamabad controlling everything from the power sector to railways to PIA through what is known as the Principal Accounting Officer. Their grip on government must be loosened. The current mess has been made by this over-centralized system. It creates large incentives for corruption rentseeking and maladministration.
  1. Why do you think your Framework for Economic Growth (FEG) has been, discarded even though it had been appreciated in several circles?
Answer: Let us not fool ourselves into thinking that our government is based on sustained hard work or sound considered policymaking. We would not be in this mess if that were the case. Everything is now done on a whim. Work is considered to be ill-prepared meetings where hasty decisions are taken by pointing to an impending crisis or the urgency to deliver to people. No one Islamabad reads or has time to read a complex document like the FEG.
Ministries like to operate in silos and arbitrarily. No one wants the discipline of a plan. Collaboration and teamwork requires effort and seriousness. It happens in an atmosphere of professionalism and not in a plot/perk/protocol culture.
We arranged many meetings conferences and other activities for the FEG. Sadly none of the ministers, MNAs and secretaries had the time to come to them. Sadly they go to no learning events or seek knowledge. We have to rid ourselves of the arrogance of all knowledge residing in powerful people. That is not a modern concept. It harks back to feudalism.
Aid supplied consultants have made government lazy. Policy is handed to ministers like fast food to ministers in donor conferences where announcements are made and loans signed without adequate thought or ownership.
  1. Remembering the good times of the dictatorship era, people question the ability of democracy to arrest our economic slide?
Answer: I have already told you I am no fan of dictatorships and I do not think they have performed better. They frittered away opportunity through arrogance, lack of knowledge or sheer adventurism.
I can make a case for better decision-making by democratic governments by pointing to financial sector reform, accepting openness, moving to decentralization etc. But I do not want to make it a dictatorship v democracy debate.
Remember both dictators and democrats have maintained colonial institutions without much updating. And those institutions have atrophied over time and are impeding development. Lots of international data—cost of doing business, governance indicators—point to this. This is the major failing of our system.
However, this is not to say that our democratic system cannot be improved through reform. We should be thinking and evolving ideas for framing better democracy. But unfortunately all types of government, our bureaucracy and our society has not thought along those lines. And we have starved the thinking sector so that they are incapable of giving us ideas. But as I said earlier the thinking sector needs funds and support by the government to liberate it from being totally beholden to donors.
  1. Why are we still confused about merits, or otherwise, of privatization? Can you please explain the economic rationale of hanging onto Public Sector Enterprises that hemorrhage hundreds of billions every year?
Answer: I think privatization is no longer opposed anywhere in Pakistan. People are suspicions of the process expecting some form of cronyism. Without reform the most common term I hear about the government is “trust deficit”. This is why I think we should make reform a central process of governance for many years to come.
PSEs are very lucrative to those who control them. They are slush funds with no accountability. Board members, mostly civil servants and friends of incumbent governments get large perks and payments. Those who have influence can get comfortable and lucrative lifetime jobs. All these people will fight tooth and nail to preserve this system. It is up to the rest of us to break this nexus.
But for good privatization we need good government and regulation.
  1. How can entrepreneurship be encouraged when the government is crowding out the private secor form credit?
Answer: FEG argued for entrepreneurship as one important engine of growth. But please remember that there is a difference between and entrepreneur, an investor and a businessman. An entrepreneur is and passionate innovator with ideas and is willing to take his risks without resort to subsidy or government support. They seldom use credit. Venture capital markets support them.
Governments cannot create entrepreneurs. They can only create a framework in which entrepreneurs can flourish and then let things happen. FEG was based on developing such a framework. It consists of vibrant markets backed by an efficient regulatory and legal system and a strong state providing security of life and property. Entrepreneurship happens in dense people centered cities. Such cities put commerce before privilege of peks/plots and kothis. In short such cities allow for density, high rise, mixed use and walkability.
  1. Considering the trajectory of the last 10 years, what is the most optimistic expectation for the decade down the road?
Answer: Without reform and a change of mindset, we will muddle along. We have a youthful population, large and rich diaspora and there is a large informal economy beyond the pale of government. I think these things will keep us afloat. There will be no major crisis. However we will not break out like India China and Korea. For that reform has to accelerate. And that reform must build institutions of the 21st century.
The current SRO/perk/plot culture promotes rent-seeking and discourages entrepreneurship. We need to move to a new system that promotes competition and merit.
I spelt it out in the FEG. That course will be followed. It takes time for complex ideas to be understood. I knew it will not be immediately implemented or understood. My desire was to change the narrative of growth. It will take time but the seed has been planted and the narrative will change. They can deny me a citation or credit for my ideas, which are based on years of research, but they cannot rid themselves of the idea.