State and the crisis
By Shahid Javed Burki
Monday, 30 Aug, 2010
THIS may be a good time to begin to think about giving the economy gravely damaged by the floods a different focus.
There is a consensus building up among economists who are watching the unfolding economic situation and social disaster in Pakistan that it will take a long time for the economy to recover. Such is the extent and depth of the damage caused that the economy may not return to the path of growth for as long as five years.
In the meantime, the country will have to live on foreign aid which, given the reputation for corruption and inefficiency of the government, will be provided only grudgingly.
The international community is also looking for signals that those who govern from Islamabad are prepared to develop a strategy that, over time, will provide a firmer footing for the Pakistani economy. In order to do this Islamabad needs to think big and begin to place the economy on a different track that will provide it with dynamism.
Economists who have studied the economies that were successful in catching up with the leaders concluded that the state has a critical role to play and that that role will be different in different country situations. Alexander Gershchenkron, a Harvard University economic historian, was the pioneer of this line of thinking. He studied how France caught up with Britain as the latter took off with the help of the Industrial Revolution. Paris let the state take the lead in creating conditions that would help France to close the gap between its economy and that of Britain across the English Channel.
Germany, initially left behind by both Britain and France, developed a model in which the state encouraged close collaboration between the industrial and financial sectors. The Russians also turned to the state and allowed it to climb the commanding heights of the economy while suppressing private initiative. France and Germany succeeded in their catch-up efforts; Russia failed totally.
In the 1990s, the World Bank studied the catch up efforts of the various miracle economies of East Asia and concluded that the state, once again, was heavily involved in this effort. It invested in human development; selected the “winners” for encouragement and support; and forced the financial sector to invest in the winners while allowing banks and other financial institutions to obtain cheap resources from depositors.
Unlike the Soviet Union, the East Asian state did not create monopolies in the public sector. It encouraged the favoured private sector industries to compete with one another; letting the weaker companies to fail and exit. This is the way the Koreans encouraged the development of world class firms such as Samsung and Hyundai and let weaker companies such as Daewoo to leave the scene.
Initially the South Asian state also sought to place itself on the commanding heights of the economy. India did it under Jawaharlal Nehru, the country’s first prime minister who governed for uninterrupted 17 years. His efforts only succeeded in producing what the Indian economists themselves have called the “Hindu rate of growth” that was only marginally better than the rate of increase in population. Pakistan adopted the Indian model in the early 1970s when Zulfikar Ali Bhutto came to power.
While Nehru had not nationalised industries and financial institutions, Bhutto brought the enterprises in these sectors under the control of the government. The unintended result of this move to enormously increase the presence of the state in the economy was that it discouraged the private sector from investing. The economy slowed down appreciably. Also the expanded state increased the opportunities for corruption by both politicians and bureaucrats.
The purpose behind recalling this history is to alert the policymakers not to make some of the mistakes that disfigured the structure of the economy as they begin to reshape it to place it on a stronger footing. The present crisis has provided some opportunities that must not be wasted. Pakistan needs to catch up with other economies of Asia. It has been left behind by India by a wide margin; even Bangladesh, once the poorer part of Pakistan, is fast catching up with what is now Pakistan.
The new economy needs to be built on a number of pillars with the state playing an important role along with the private sector. What should the state do while attempting to restructure the economy and what kind of help should it secure from the international community?
The world has been fully alerted to the problems Pakistan now faces. It is preparing to help. That help could be directed into not only repairing the damage that has been done by the floods. It can go beyond that. I will take up next week the question of what kind of help Pakistan should aim to solicit from the world. Today the focus will be on defining the role of state.
In defining its role, the state should do what cannot be done by the private sector. This means getting involved in at least three activities. The first of these is improving the quality of governance. This, as most observers of the scene recognise, has declined perceptibly over the last several years. Democracies have a built-in mechanism for correcting errant behaviour by throwing out the offending elected officials. But elections are spaced at intervals during which much damage can be done.
Besides, in political and social systems such as Pakistan, the opportunity for making change is considerably limited. Economic dependence of much of the electorate on the elite and the continued prevalence of the “baradari” system means that it is not easy to, as the saying goes, “throw the rascals out” during elections. What is required is a built-in system of accountability that has the ability to ensure that all those who hold and exercise power are answerable to an incorruptible authority.
Since the early 1990s Pakistan has experimented with different accountability systems. Unfortunately the systems put in place themselves came under the influence of political masters and became corrupt. Given this history it may be prudent to establish a commission of persons chosen by the parliament that has full authority over an institution such as the current National Accountability Bureau. This will subject the NAB itself to the same kind of accountability that is envisaged for senior judiciary in the 18th amendment.
The second activity for the state is to select the “winners” – sectors as well as enterprises within the sectors – that will be supported in order to move the economy towards greater export orientation. Agriculture including livestock is the sector that has the greatest potential in this context. It is also the one that has been hurt the most by the floods.
But helping the sector to acquire dynamism will need a combination of state-supported initiatives. These include provision of subsidised credit, research and extensions, and identification of external markets. Automobiles is one other sub-sector that could be helped with emphasis on supplying to such rapidly developing industries as those in China and India.
The third area of attention by the state is the one that has been talked about a great deal – development of the country’s large human resource. Here again the state and the private sector need to work together.While the emphasis should be on improving the quality and accessibility of basic education, development of skills for a modern economy must also receive considerable attention.
There are other things the state must do to help the economy out of the deep crisis in which it has plunged as result of the floods. This is a good time for the state to develop a strategy for the future.