Public policy, private sector and economic crisis
By Shahid Javed Burki
Monday, 13 Dec, 2010
HISTORICAL experiences of a number of countries such as India, Mexico, Argentina, suggest that economies in crises can rebound quickly if right public policies are put in place.
Central to producing such a policy framework requires a close collaboration between the government, private sector, and other societal stakeholders. It was for this reason that the government established a Task Force on Private Sector Development in December 2008. It submitted its report to the government a couple of weeks ago after discussing its findings with President Asif Ali Zardari on October 29.
One of the major conclusions reached by the Task Force was that the private sector can-- and should – play an important role in getting the country out of the mess in which it finds itself today and in setting it on the path of sustained and high level of growth. Properly managed, the country has the resources and the capability to match the rates of growth of other large South Asian countries. What is needed is intelligent public policy and the grant of space within which the private sector can play its part.
In this context, the Task Force placed particular emphasis on developing an institutional and analytical framework to guide the process of decentralisation of economic decision-making. The process has begun as a result of the passage of the 18th amendment and needs to be fully supported by the governments at the federal and provincial levels. Once completed, it will bring policymakers closer to the firms and other economic actors in the system.
The Task Force recognised that the private sector has gone through periods of ups and downs. From the private-led growth model pursued between 1947, the economy in 1972 shifted to a state-led growth model as a result of the nationalisations of 1972 and 1974. Even though the process of privatisation started in 1991 and the early 2000s that reduced the role of the state in business, much remains to be done as a number of important enterprises in the utilities sector are still in the hands of the public sector.
Most of them are incurring severe losses. They are doing poorly, needing the support of the government to keep them solvent. This places additional stress on the government’s already strained budgetary situation.
Although 90 per cent of the economy today is controlled by the private sector, the culture of government subsidies to certain sectors and firms persists which has created a large budgetary burden. The private sector is dominated by very small enterprises that remain inward oriented, technologically backward, employing low-skilled labour and producing products with low levels of sophistication.
These enterprises remain small primarily because of the regulatory system in place which allows those who employ less than ten workers to avoid a number of requirements larger firms must meet. The regulatory system is also poorly enforced, focusing their attention on large firms. This creates an incentive for enterprises not to grow in size and to remain small.
There are a number of ways of encouraging the private sector to play a larger role in the economy. The private sector members of the Task Force agreed that obtaining macroeconomic stability must be a high priority for Islamabad. This will require great effort on the fiscal front. To begin with it is important to rationalise and expand the fiscal base with the goal to increase tax to GDP ratio from the current nine to 17 per cent over a period of five years.
This goal was adopted by the Task Force. Some of the sectors that are currently excluded from the tax system need to be brought in and those – individuals as well enterprises – who are able to avoid paying taxes need to face harsh penalties.
Owners of large firms complain that they are operating in an uneven playing field, unable to compete with small enterprises that avoid both regulation and the tax man. However improving the tax collection system is not the only way of improving government finance. The other is to ensure that the government spends wisely it’s albeit limited resources.
One way of ensuring this is to periodically conduct “public expenditure reviews” at the federal as well as provincial levels and share the results with the public by presenting them in the national and provincial legislatures. This will create confidence that the people’s tax money is being well spent and not wasted on frivolous activities.
I have been struck for many years – especially when I began writing on Pakistan’s economic history – as to the number of antiquated laws that have accumulated on the books. One example of this is the Agricultural Marketing Acts that were enacted by the British in the 1930s to provide protection to the Muslim peasantry against the predatory practices of Hindu moneylenders and marketing middlemen.
The Hindus are long gone but the laws remain on the books since they have developed strong vested interests that would not like to see them repealed. It is laws such as these that inhibit the development of domestic commerce. We discussed this issue in the Task Force and there was lot of support for reviewing all laws pertaining to economic activities with a view to rationalising them. This review would be a major undertaking but rationalising the legal framework would encourage private investment as well as development.
Laws that need to be consolidated and rationalised include those pertaining to labour and conditions of employment; business laws constraining Companies Ordinance of 1984; laws concerning insolvency, conglomerates and secured transactions; and those pertaining to urban land use.
In a study of the enterprise sector a few years ago – a study the government has yet to release for public consumption – the World Bank provided a picture of the current situation. Both industrial and commercial sectors are dominated by small enterprises that prefer to remain small for the reasons discussed above. Any talk of using the private sector to aid the process of development will remain abstract unless there is a full understanding of the nature of the Pakistani firm and how it can be developed.
Some of what needs to be done is in the fiscal sector and some in the legal structure. But of equal importance is the need to improve the levels of skills available to the firms. This requires a nationwide action plan based on a strategy that provides roles for both the public and the private sectors.
Trade, both external and domestic, is one other area that received a great deal of attention by the Task Force. Emphasis on a “trade oriented growth strategy” does not make much sense as an end itself. Trade should be the outcome of a whole lot of other things that need to be done and not the end point to be reached in a growth strategy. What are these things that should be highlighted in a review of trade policy that should encompass all aspects of commerce, in particular what economists call “trade facilitation.” The review of the legal system discussed above will be critical in encouraging domestic and international commerce. Improving the flow of commerce needs improvements in infrastructure but the development of a national infrastructure policy requires better understanding of what is available and what is needed. This could be done by conducting an Infrastructure Expenditure Review with a full appraisal of the available infrastructure and needed export and import supply chains covering railways, roads, airlines, ports, inland waterways, trucking etc.
The main point I would like to emphasise, basing it on the work of the Task Force, is that the use of the private sector to promote development requires review of the current interface between the public and private parts of the economy and making it more efficient and effective.This can only be done if careful thought is given by the government as well enterprise owners to the way they can support one another.