Imperatives For Economic Development Of Pakistan

Ladies & Gentlemen! Assallam-u-Alaikum

My talk - Imperatives for Economic Development of Pakistan - is divided into three parts:

1. The domestic politics of economics.

2. The international politics of economics.

3. Urgently needed economic reforms and their execution.

1. The Domestic Politics of Economics:

Succinctly put, it means that before any sustained economic development can take place in a country there has to be a general consensus about it. The consensus has to be around the proposition that economic development or raising of standard of living of the people is a highly important and a worthwhile objective to strive for. When stated the way I have, the proposition seems perfectly obvious. But when we look at the reality on the ground, we see that absence of such a consensus is what makes conducting a sound economic policy most difficult. This consensus can either be enforced from the top as in China or as was the case in Chile or more democratically as achieved in some East European countries or as will have to be the case in Pakistan. As we scan the landscape in Pakistan, we see that our energies seem far more devoted to ideological or ethnic or class politics. We may pay lip service to the proposition of general economic development but in reality we are far more narrowly focused. So how can we hammer out a consensus around the proposition that we have to rapidly raise the standard of living of the people in Pakistan?. The answer is easier said than done. And the answer is that reform minded forces in the country have to strive to get the power brokers in our country on board. This cannot be done in a day but requires a sustained effort over a period of time. Fortunately, evolutionary trends and "conditions on the ground" are favorable to developing such a consensus. The "conditions on the ground" are that a sea change in the communication landscape in Pakistan is taking place. This change involves the hundreds of thousands of our labor force that is abroad and is witnessing the culture of economics with its own eyes and can see that their "condition" is not a result of fate but of their own making. It involves their communicating this to their families and friends back home. It is also related to the power of the satellite television which shows the people the realities beyond their village. Again this means that information so long monopolized by the power brokers is now available to them in their homes uncensored or almost uncensored. Finally, workers' remittances have had a profound effect on domestic consumption and in generally raising the demand for economic goods. All of this helps a great deal in creating the "right conditions" for developing the consensus about economic development that I've talked about. In its pure and idealistic form this consensus means that the landlords, for instance, can see that the education of the Haris and their tribesmen are not only good for them and the economic productivity of Pakistan but in their own long term interest It means that religious leaders can see that a prosperous people can actually do far more for creating a caring society than poor one. It means that the military leaders can see that security is not only in armaments and number of men in uniform (as any Soviet General will tell them) but in a well educated people who have an entrenched economic stake in the country. It means that the ethnic leaders can see that the best way to ensure that the share of the pie for their constituents grows is for the total size of the pie to grow. In Pakistan's 50 years, the ten years of Ayub Khan can stand out when economic development was pursued with some sustained focus. The reason it could not be institutionalized was precisely because consensus on economic development broke down. The Ayub administration was unable or unprepared to pursue an inclusive policy. This policy would have led to concessions to or sharing of power with the growing political forces outside the government in exchange for their continued support of the economic agenda.

In any case, building of consensus around the economic proposition is two pronged: the reform minded forces push the power brokers on one side while the evolutionary forces as manifested by "conditions on the ground" push them from the other. It takes both these two forces to hammer out such a consensus.

Hence the first imperative for economic development is a continuous and sustained effort by the reform minded forces to co-opt and keep the power brokers on board. This usually requires a policy of persuasion that relies on both a stick and a carrot! This then is the Domestic Politics of Economics!.

2. The International Politics of Economics:

This has two interconnected facets: (1) the globalisation of markets and (2) aligning one's foreign policy to the market forces unleashed by such globalisation. The fundamental fact to grasp, as far as global capital markets are concerned, is its enormous size as compared to "bilateral or multilateral aid and IMF money". Most of Pakistan's focus on economic planning in the last 50 years has been on concessional aid from Donor Countries and World Bank project aid. And in times of economic distress, we have turned to IMF for helping us out. What we have to understand is that (a) the level of this aid is falling in real terms and we can not rely on it to the same extent as we did in the past and (b) the amounts that we can potentially attract in foreign investment from the global markets if we got our house in order is several times more per year than any aid money we have ever received

While $1billion per annum that we may get in concessional aid or $1.5billion of IMF facility currently under negotiation may be critical in immediately averting economic disaster, it is still peanuts compared to the amounts that are flowing from international capital markets into emerging markets. It is estimated that approximately $100 to $125 billion came into the Emerging Markets. Of this, about $6 billion came into Malaysia, a country which has roughly 6 times smaller population than Pakistan.

In other words, there is a whole new brave world out there. Amounts flowing into Emerging Market countries with sound economic and political policies are in tens of billions of dollars. The double digit growth rates of some of these economies are largely due to such capital flows. While this mobile capital knows no boundaries, it is an exacting task master, as we recently witnessed in some Asian countries. It demands above all a safe haven - political and economic safe haven. Competition for this capital has changed the rules of the game globally. Added to the already difficult task of managing one's domestic economic situation, is now also the necessity to make oneself attractive to the foreign capital relative to other emerging market countries. In other words, we have to continuously know what the other countries are doing and to either emulate them or, if we are up to it, remain a step ahead of them.

This changed landscape has huge ramifications on what choices to make in deciding one's foreign policy. With the end of the cold war, the focus has shifted to the bread and butter issues and we have been a witness to how some intractable and long standing regional conflicts have been settled. All of a sudden non-settlement of Kashmir issue, for instance, has a real cost to both Pakistan and India that now people can relate to in terms of foregone prosperity not just for today's but future generations too. This does not mean that we should compromise on principles. Far from it. But that in playing the game of diplomacy we now have to contend with the realities of the market place also.

Settling Regional conflicts in a manner that is largely acceptable to domestic populations has exponential effect on the peace dividend: first, it can lead to dramatic reductions in the defense expenditure thus freeing up resources for investment in education and infrastructure and second, by removing uncertainty about the external security situation it sends a powerful signal to the international capital markets that the country is now open for business. This then is the international politics of economics! I now come to the last of my Imperatives for Pakistan's economic development - the urgently needed economic reforms and their execution.

3. Urgently Needed Reforms And Their Execution:

The first two imperatives, critical as they are, belong to the big-picture category. The third and the last imperative that I am about to discuss is about the nuts and bolts of the overall approach. It will be fitting at this time for me to quote the English Weekly, The Economist which, in one of its recent issues, said the following about the Nation-State. It said that the Nation-State is "too small for the big problems and too big for the small ones." Thus a successful Nation-State appears to be one that never loses sight of the big-picture (i.e. it is mindful of the imperative, for instance, to create larger national groupings like the Common Market) while governing itself fundamentally at the grass roots level. Therefore, it is no surprise that I have chosen devolution of power at the local bodies level at the top of my list of economic reforms.

(a) Revival and Empowerment of Local Bodies: Some people will debate whether local bodies belong in the category of economic reforms. However, if you have been with me up to now you will agree that I am being consistent with my fundamental thesis that all politics has an economic dimension and all economics has a political dimension. Holding local bodies election and making constitutional amendments to empower them is the need of the hour. This measure will help the economic situation and the investment climate in three ways: First, by improving the overall law and order situation. Second, by a more efficient use of resources since the elected representatives at the local level will be more accountable to the people and third, by accelerating grass roots solutions for the local problems as the people will now feel much greater stake in and responsibility for governing themselves. A successful devolution of power at the local level allows the National Government to devote its energies to improving the structural bottlenecks and tackling the macro problems. Empowerment of local bodies does not, however, mean that the National Government's key role in national security, integration and leveling the playing field should in any way be diminished

(b) Privatization: There are three things about privatization: the process should be transparent; it should be managed such that the Government receives a fair price and lastly, the process should be completed with a sense of urgency but clearly avoiding fire sales.

(c) Reducing Government Waste: No where is their a greater test of a government's political will and savvy than in cutting public sector expenditure, reducing the size of the government and deregulating the economy . The new administration has done a commendable job in the first phase of economic reforms by cutting taxes. The harder part is now. The government has to create a climate which will make the task of selling austerity measures to the electorate somewhat easy. Of course, political timing here is crucial but risks have to be taken. The government can also reduce the short-term pain of its measures by creating a safety net for the people who will be effected. This simply means a greater up front expenditure with the aim of saving a much higher amount later on. As those of us who have lived through the "white collar" recession in America can testify that there is light at the end of the tunnel. Undoubtedly, the challenge is great but so are the rewards.

(d) Massive Investment in Primary Education: A study of some of the faster growing Emerging Markets, shows that investment in primary education has a very high pay out ratio. To get the biggest bang for your buck, this is the golden key to dramatic improvement in productivity. Of course, full results take 5 to 10 years to be material and visible but we have to start now, urgently. The biggest investment will not be possible as long as we have heavy defense needs, but the favorable effect of privatization receipts and cutting of government waste should be invested in primary education. Please note I am talking about "primary" not "higher" education. The latter should largely be left to the private sector.

(e) Execution of Reforms: Good policies do not translate into desired results without paying meticulous attention to their execution. To execute successfully one has to create a team. A single individual, howsoever competent, can not do it alone. As they say: figure out what you have to do, find the best people who can do it and then empower them by getting out of their way. This private sector philosophy needs to be implanted in government thinking and public sector. As Mr. Shaukat Aziz of my institution and who is keynote speaker tonight has suggested, we need "an infusion of 50-100 private sector executives in the government and public sector corporations that will provide a turbo charge to the change management efforts so crucially needed by the country". In conclusion, I want to say that the Government has to pick its priorities carefully. The priorities I have identified are:

1. Building Consensus Around Rapid And Sustained Economic Development Domestically.

2. Aligning Foreign Policy Such That We Will Be In A Position To Take Advantage Of The Global Markets.

3. Reviving And Empowering Local Bodies.

4. Privatizing.

5. Cutting Government Waste, Reducing Size of Government And Deregulating The Economy.

6. Beginning Large Investments In Primary Education And

7. Giving the Government and the Public Sector Corporations A Turbo Dose of 50-100 Private Sector Executives Who Along With The Top Flight Public Servants Will Form The Nucleus For Executing The Key Reforms Outlined Above.

When the situation is dire, the priorities particularly have to be few. This is the only way to accomplish the most important things in a short period of time. Few priorities allow the focus on them to be laser-like. And their execution meticulous. The rest should be left to God.