Monday, 13 January 2014

Architecture of Economic Policymaking

http://magazine.thenews.com.pk/mag/moneymatter_detail.asp?id=7020&magId=10&catId=30

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.