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Old Monday, September 07, 2009
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Expanding government


By Shahid Javed Burki
Monday, Sep 07, 2009


IN many ways, some of them much too subtle to be grasped easily, the role of the government is likely to change quite significantly in the years – perhaps even decades – to come.
It is known from experience that ideas about economic governance readily flow across national borders. This happened in the 1980s when what came to be called Reaganism or Thatcherism, depending on which side of the Atlantic you happened to be, relegated the state to the sidelines.

This economic philosophy had tremendous consequences for policymaking in countries such as Pakistan that had to take advice from Washington and London in order to access the foreign capital that was desperately needed. Under this approach, Pakistan during the period of President Pervez Musharraf, adopted an approach that gave a great deal of space to the private sector and pushed the state to the background. But foreign influence was not the only reason why that happened. Economic policymaking at that time was led by an individual whose own background was in commercial banking with very little knowledge of economics and even less interest in strategic thinking.

Under his stewardship, the private sector ascended the commanding heights of the economy while the institutions of the state were allowed to weaken. Two sets of institutions were affected adversely in particular. The Planning Commission was virtually taken out of the business of strategic work and regulatory institutions that could oversee the working of the private sector were not given the autonomy they needed to work effectively.

The thinking on the economic role of the state has changed quite dramatically over the last several months. This creates an opportunity for Pakistan to redefine the state’s role since it will not be forced to go in a different direction by institutions such as the IMF on which the country is once again dependent for access to external capital.

There are at least four reasons why the thinking has changed. The first, of course, is the deep economic recession across the globe. This started in the United States where the private sector, left more or less to its own devices, showed that the assumption that it could self-regulate was totally misplaced.

Alan Greenspan’s belief that the state should keep itself at a long distance turned out to be totally misplaced. With the private financial sector having gotten itself into a series of tight situations, it had to rely on the state to get it out and to have it functioning again.This was done with a great deal of public money doled out to the banks and to the automobile sector. Without formally nationalising parts of the private sector, the US government now owns large chunks of the assets in a number of vital sectors.The second reason for the disillusionment with this philosophy was the growth in income disparities in a number of countries that had followed it aggressively. In the United States the gap between the incomes of the well placed executives and owners of assets and their workers increased to the point that it became a political issue. President Barack Obama owes his impressive victory in last year’s presidential election to the growing public discomfort with growing income and wealth disparities. He promised “change” from the past and won handsomely against a candidate who wanted the continuation of the status quo.

The third issue with the philosophy that granted the private sector so much space was the way a number of corporations and wealthy individuals acted and swindled the state as well as those who were relatively less affluent. Enron Corporation and Worldcom were two companies in which their owners and managers built huge fortunes at the expense of the government – by avoiding to pay taxes – and at the cost of the middle class who owned shares in these companies and relied on the pension funds the companies managed. The fact that a number of these managers went to jail was small comfort for those who has lost a great deal of money and the promise of good life after retirement. They wanted the system to be changed. The fourth reason why the private sector system of economic governance is being replaced by the one in which the state will play a much more important role is that the latter was shown to be demonstrably better than the former. European capitalism that cared more for the poor and the disadvantaged placed less burden on the society than did Reaganism and Thatcherism.

The Asian countries also demonstrated that their system of the state being more prominent was also producing better results. The most recent example of this is the crushing defeat of the Liberal Democratic Party (the LDP), at the hands of the newly formed Democratic Party.

The LDP, in spite of its name, was as conservative in its approach towards economic management as the Republicans in the United States and the Conservatives in the UK. Yukio Hatoyama, the presumptive Japanese prime minister, rallied campaign crowds with his pledge to shift away from what he said were “excessive reforms” in the economic system.

“The recent economic crisis resulted from a way of thinking that was based on the idea that American-style free-market economics represents a universal and ideal economic order”, he wrote in an article first published in a Japanese monthly magazine and reproduced by The New York Times.The American system, he went on to say, was “void of morals or moderation”.

These developments in economic and political thinking need careful reflection in Pakistan as the country struggles to revive its faltering economy and put in place a new political structure. Having relegated the state to the background during the period of Pervez Musharraf, the country needs to bring the government back into play.

How should that be done; what should be the respective roles of the government at various levels, not just the centre but also in the provinces and at the local level; how should the state be provided the skills and the talent it needs to run an effective system of governance; what is the best way of holding those who hold public positions accountable for their deeds; and how should economic strategies be formulated and what kind of political involvement should be included in this process? These are vital questions and they need to be studied. Some good work was done by the commission headed by Dr Ishrat Husain.The report he prepared appears to have been shelved. Perhaps one way of moving forward in this area is to release the report to the public and to begin a dialogue.
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