Economic challenges
By Shahid Javed Burki
Tuesday, 30 Mar, 2010
Pakistan has a new finance adviser, a man of exceptional background and many qualities. Included in his background is service with the World Bank and one of his assignments has been giving advice to Saudi Arabia.
He also had very successful tenures as the finance minister of Sindh and minister in charge of privatisation. It was only palace intrigue that prevented him from becoming minister of finance in the second administration assembled by then President Pervez Musharraf.
In other words, Abdul Hafiz Shaikh who has assumed his new job is well versed in Pakistan’s economic problems and its prospects. That said, it would not hurt if he received some advice from such long-time students of the Pakistani economy as myself.
I would suggest to Mr Shaikh to study the country’s past, get to know its present and plan for its future. In each of these areas he needs to focus on those issues that will help him better manage the economy. By my reckoning there are four of these in terms of lessons from history, and three each to be dealt with by understanding the present and planning for the future. In other words my advice touches on 10 subjects.
Let me begin with the past. We must study our troubled economic history in order to draw lessons for the future. There are many lessons to be learnt but four are particularly important. For a variety of reasons, Pakistan has neglected the development and modernisation of agriculture, its most important endowment at the time the country gained independence. It encouraged industrialisation by providing liberal incentives to private entrepreneurs. It neglected to develop its human resource by educating and training the large population. And it paid little attention to orienting the economy towards the production of exports.
One way of correcting these mistakes is to focus the government’s attention on these four areas. There is an urgent need to improve the technological base of both agriculture and industry. The sector of agriculture should be prepared to provide the economy with an export base. Industry must learn to stand on its own feet and not remain dependent on government largess.
In devising a strategy to improve the quality of human resource, the government needs to ensure not only the achievement of the Millennium Development Goals with respect to primary education and female literacy. It also must pay attention to developing higher level skills. A large population offers us the opportunity to develop the services needed by labour-short economies in the West. This will only happen if the skill level of the people is improved.
In so far as the present is concerned there are three things that will need the attention of the new finance adviser. He must recognise that the government in Islamabad overspends, under-collects taxes, and is not planning for the future. I will take up each of these three things in turn briefly.
In taking a close look at government spending it would be useful to carry out a detailed public expenditure review. It will show a number of areas of great waste some of which can be reduced by redesigning the way the government compensates its employees. By monetising a number of ‘perks’ given to those who occupy relatively senior positions the government will not only save itself a lot of money. It will also increase savings by the employee who will be less willing to spend on items like transport and telecommunications when the resources have to be deployed from cash compensation provided by the state. Devolving more functions to the provinces — and for the provinces to do the same to local governments — will help to reduce the amount of duplication that now occurs.
A concerted effort is needed to reverse the recent trend towards a declining share of taxes in GDP. By now Pakistan has reached the level at which it cannot spend any amount on development unless money is available from abroad. This is clearly not a sustainable situation if the managers of the economy wish to set the country on a trajectory of a high rate of growth that can be sustained over time. Dozens of studies have been conducted by many development agencies on what needs to be done in order to improve the tax base. The only way to get more people into the tax base is to make it very expensive for them to escape it. Also, some of the areas not taxed have to be brought into the tax net. These include agriculture, trade and many services.
Turning to the future, our policymakers must recognise three things: the country’s large economic potential will not be achieved unless the economy is fashioned in a way to take advantage of the enormous changes taking place in the international system of production and trade, unless Islamabad concludes peace with New Delhi to benefit from one of the world’s largest and most rapidly growing economies located just across the border, and unless the country’s politicians realise that the economy would be better managed by delegating a number of policymaking functions to the provinces.
A strategy that covers these 10 areas would serve Pakistan well. The country needs to develop agriculture, reduce the dependence of industry on the state, intensify efforts to provide education and skill development to the large and expanding workforce, and develop a viable programme aimed at expanding exports and thus increasing the trade-to-GDP ratio. It needs to reduce wasteful government expenditure while increasing the tax-to-GDP ratio. It needs to make trade the driver of growth by focusing in particular on trade with India. And it needs to develop the capacity to do serious analytical and strategic work to plan for the future.
The last can only be done by a revitalised Planning Commission working closely with a number of think tanks in the private sector. Perhaps the best way to begin will be to organise a brainstorming session involving some of those who have a deep knowledge of the economy.