Way out of the conundrum
Public policy will need to be oriented towards ensuring that the economy does not face the same kind of crisis again.
By Shahid Javed Burki
Tuesday, 05 May, 2009
IN the article last week, I suggested why it was critical for Pakistan to win the hearts and minds of the people marginalised by the way the economy has developed over the last several decades.
It is these people who have been attracted to extremist causes since they have lost hope in the state’s ability to come to their help.
They have been promised nirvana by the extremists. Those who live in great economic and social stress and see little hope in the future if the state does not change its ways, will go for any alternative, even one that does not have a record of providing people with what they want over the medium and long term.
To get out of this conundrum, the Pakistani state will have to reform and restructure itself. Will it be able to do this? Will it be able to leave behind past behaviour and choose an entirely different approach?
The country is seemingly getting out of the woods. Macroeconomic indicators have improved, foreign exchange reserves have been built up, the fiscal deficit has been reduced, compression in imports has improved the balance of payments, the rise in consumer prices have begun to moderate. Will these trends continue? Will the improvements in the economic situation begin to address the problems, the frustrations of the marginalised people who are seething? These questions could have positive answers if two things begin to happen.
Public policy will need to be oriented towards ensuring that the economy does not face the same kind of crisis again. Foreign resources continue to keep flowing in to help the country tide over the severe financial problems it has had to deal with in the last couple of years. In fact these two contributions to economic survival and sustained and inclusive growth are linked. The donors will continue to provide support if there is comfort that the money being provided is being put to good use.
‘Does aid work?’ is a repeatedly asked question in the corridors and conference rooms of development agencies. It is being asked in the case of Pakistan with a sense of urgency. That is for two reasons that go be yond the normal concerns of development institutions. The first, of course, is the rise of extremism and the threat it poses not only to Pakistan but to the rest of the world. There is now a widespread belief in Washington and other western capitals that the Taliban are only 60 miles from Islamabad. If Pakistan falls it will generate a gigantic tsunami that the world is not equipped to deal with.
The second concern about the use of aid in Pakistan can be understood by the use of a term popular in finance. Called ‘moral hazard’, it refers to the behaviour of the firms that believe that they are too big or important to fail. This pushes them towards taking risks that are hard to justify in terms of conventional cost-benefit analysis. If the risks materialise and push the firm towards bankruptcy, someone will come along and launch a rescue mission. In fact, this is precisely what happened in the case of several large financial firms in the United States that were saved by the state with the injection of large sums of money.
Pakistan has been in that position on sev eral occasions. Each time the country came close to bankruptcy and default it was saved by some foreign provider of finance, more often than not the IMF but on occasion also the US, Saudi Arabia and China. This has happened again with the IMF and the Friends of Pakistan coming to the country’s rescue. However, will the post-crisis period now be any different from those in the past?
The answer depends in part on how the funds provided by the donor community are deployed. There is the traditional way and then there is a new way, the latter based on Pakistan’s own experience with the use of donor assistance as well as the nature of the problems the country faces. The conventional way would be to put a significant amount of money directly into the budget in order for the country to bring its fiscal situation close to a sustainable level.
This is estimated by economists to be four to 4.5 per cent of GDP. To get there from the present seven per cent would need a significant amount of fiscal retrenchment that will hurt the public-sector development programme. The country cannot afford to go on that path. It urgently needs economic growth without which it will not be able to provide support to the marginalised segments of the population.
In addition the donors would like to put their money into social development plans since Pakistan has fallen way behind the countries at its level of development in terms of human development. This calculation led the World Bank a decade and a half ago to develop and finance a Social Action Programme, the SAP, which provided billion of dollars of donor money for primary education, basic healthcare and improvement in the social circumstances of women. These were all worthy causes but almost nothing was achieved by SAP. The bank persevered for more than a decade. It even moved its supervision function to Islamabad. But the results were pitiful. The donors are about to commit the same mistake again.
Why did SAP fail and will a similar initiative succeed? Pakistan has yet to create the institutional infrastructure that can efficiently implement SAP type programmes. What is required is a functioning system of local government that is accountable to the people it serves and represents. Pakistan has tried five different systems of local government in the past 60 years. Each one of these was abandoned for the reason that the political system was not prepared to countenance devolution of power to lower levels of government. Devolution is seen in a zero-sum context; if those who have power at the centre or in the provinces transfer some of it to local governments, the latter’s gain will mean the former’s loss. This is wrong, of course, since bringing the government closer to the people improves overall governance and everyone benefits.
The other reason why a SAP type of initiative will always fail is that the social, economic and political structures in which the poor find themselves trapped don’t allow them to benefit from social development programmes. They need to be in better command of their lives in order for such programmes to work. ¦