Evolving strategies for a new phase of capitalism
By Shahid Javed Burki
Monday, April 20, 2009
SOME crises produce hysteria which leads to inappropriate public responses. Some clear the mind and result in fundamental changes in thinking about critical issues. The Great Depression of the 1930s produced both responses.
The same is true of the financial crisis that began in the United States last summer and has affected all countries of the world, including Pakistan. It is leading to some serious rethinking about the meaning of capitalism, globalisation and the role of the state.
The new ideas and concepts being developed will have enormous consequences for all nations, including emerging economies. It is especially true for a country such as Pakistan which, because of the inability to generate domestic resources to invest in the economy, continues to rely on external finance.
A few days ago after a meeting with the United States’ Senator John Kerry, Prime Minister Raza Shah Gilani said that Pakistan did not want conditions attached to the provision of aid. His reference presumably was to political but not to economic conditions that may accompany the flow of capital to his country.
The community of potential donors that have offered to aid Pakistan would want to see that the money they provide is handled properly; that it gets used within a policy framework that can and should contribute to economic stability and progress. It is in this context that the rethinking on the meaning of capitalism gets to be relevant for Pakistan.
The last occasion when Pakistan had to factor in external views about appropriate domestic economic management and the role of the state was in the early 2000s. At that time – as is the case now – Pakistan had gone to the IMF to save it from a severe economic downturn, even the possibility of default on external obligations. The Fund came to the help of Pakistan but attached a number of conditions to the use of its money.
At that time the policy framework general ly referred to as The Washington Consensus was all the rage in development circles. It called for opening the economy, curtailing the role of state and putting the private sector on the commanding heights of the economy. Pakistan accepted the offered advice and brought about a major change in the way it looked at these aspects of economic management.
The impact of these changes in public policy was to initially slow down the rate of economic growth and allow almost unconstrained role to the private sector in the sphere of economics. Later when the country came out of the Fund’s programme and fiscal and monetary policies were eased, the private sector allocated the savings available to it from the banking sector or from abroad, into the sectors that produced the highest rates of return for it. Real estate, especially luxury housing and shopping malls; telecommunications, in particular mobile phones; and automobiles, both passenger cars and motorcycles, became the favoured sectors.
All three grew at very high rates and helped the economy to pick up the rate of increase in GDP. But the sectors did not generate a significant amount of employment. Consequently, while the GDP increased at an impressive rate in 2003-07, the impact on the incidence of poverty and narrowing of income disparities was insignificant.
Given the way the thinking on economic management is evolving since the financial crisis slowed the global economy, Pakistan will undoubtedly be asked to follow a different approach. What is this change in thinking following the burial of The Washington Consensus announced by Gordon Brown at the conclusion of the meeting of G20? How will this new thinking affect the way the Pakistani policy makers manage the domestic economy?
In answering these two questions, I will also reflect on what I heard from the representatives of the private sector during my most recent visit to Pakistan.
In late February and early April I chaired two sessions of the Planning Commission’s Task Force on Private Sector Development. This was established in December last year with me as its chairman. Its mandate is to advise the government and have it factor in the thinking of the private sector in the making of public policy with reference to reviving economic growth and modernising the economy.
The current economic and financial crisis has led to rethinking covering at least three areas. First, there is a consensus that the neo-liberalism of the Reagan-Thatcher era was not an appropriate policy to be pushed. People don’t always behave rationally, especially if they are using borrowed funds. This can lead to excessive speculation since prices don’t always reflect the risks that are being taken to producing goods and services and doing transactions in them.
Second, unchecked there is a tendency towards monopolistic behaviour as the firms with good contacts with the policy makers or with built-in efficiencies that cannot be matched by rivals, rapidly grow in size. These firms capture a very large share of the market. For instance, in Britain only four grocery chains control 70 per cent of the market, leaving very little space to thousands of small operators.The government should be extremely wary of the strains that can be put the economy if a large firm is considered to have become too large to fail.
Third, globalisation of finance means that domestic regulators cannot always control the operations of firms working in the market place. Domestic regulation has to be supported by an international regulatory mechanism.
The major public policy consequence of this new thinking is to allow a much larger role to the state in managing and guiding the economy than was envisaged by The Washington Consensus. The state must properly regulate the economy by ensuring that there is no excessive risk taking, by preventing the development of monopolies, easing the entry and exit of firms, and protecting the citizenry from the predatory behaviour of enterprises.
The Washington Consensus advocated a minimal role for the state; the new consensus lifts the state’s role towards a much higher profile. The challenge before Islamabad is to redefine the role of the government and make it more effective as well as prominent. How should this be done? This is where the work of the Planning Commission’s Task Force on Private Sector Development enters the picture.
In the discussions we have had thus far, the private sector representatives have made a number of suggestions about the supportive role of the state. Of these the following three are particularly important.
One, those representing large enterprises feel that they confront an exceptionally uneven playing field in the domestic market place. Small operators are able to keep themselves out of the tax net, can avoid labour and health regulations and don’t have to deal with repeated visits by various regulators. As such small businesses can keep their costs low.
Second, they are of the view that their work is inhibited by the absence of appropriate skills in the labour market. Skill development is an important matter but since the government does not have the resources to meet business men’s needs, what is required is a public-private sector partnership. However, for the private sector to invest in skill development, it needs tax incentives.
Third, they are of the view that Pakistan’s unique geographic situation has provided the businesses with opportunities but has also posed problems for them. Economic relations with Afghanistan, China and India are particularly important but need to be carefully an alysed by the government working with the private sector.
Afghan transit trade dumps a lot of dutyfree consumer goods in the Pakistani economy; cheap imports from China are hurting the domestic industry and slow Indian response to Pakistan’s initiatives are not opening up that country’s large market to Pakistan’s producers.
In sum, looking at Pakistan’s economic situation in the context of redefined capitalism and the country’s own somewhat unique circumstances is now a matter of urgent government attention. We will provide an input into these by taking up these matters in the deliberations of Task Force on the Private Sector Development.