Civil service a constraint to growth
KHALEEQ KIANI

When the planning commission’s former Deputy Chairman Dr Nadeem-ul-Haque presented an ambitious housing monetisation plan for civil servants last year, with a potential of Rs14 trillion income in 10 years with an initial investment of Rs140 billion, even his team leader and then-Finance Minister Abdul Hafeez Shaikh did not take the political risk.

The plan was designed for better utilising Islamabad’s 548 acre land currently in use of civil servants.

Former central bank governor Dr Ishrat Hussain and Dr Haque have been critical of the declining state of affairs at the federal bureaucracy. They have been articulating better remuneration for civil servants, along with tighter accountability, as part of larger civil service reforms to attain better governance for an improved delivery system.

In its latest report, the World Bank has identified poor civil service, resultant bad governance, and excessive business regulations as ‘binding constraints’ for growth in Pakistan.

“Weak civil service performance is a major binding constraint to economic growth. By international standards, the public sector in Pakistan is small: 3.3 per million people, less than two per cent of the population, against 2.3 per cent average for low income countries,” the World Bank noted.

According to the Global Competitiveness Report 2011-12, Pakistan ranked near the bottom of the quality of public institutions — at 107 of 147 countries.

The Bank added that labour productivity in Pakistan’s public sector, at about $9,509 in 2005, was roughly estimated at less than half of the worldwide average of $20,251, and there was no reason to believe that this ratio has improved; instead, it could have declined.

But public sector remuneration is not correspondingly low. While the wage bill is about four per cent of GDP — average by international standards, and similar to that in Bangladesh, China and India — numerous perks and extra cash payments greatly increase the base pay, which reduces productivity and increases the bureaucracy to manage them, thus encouraging rent-seeking and corruption. The average ratio of total salary to cash payments has more than doubled since 2001, from 1.8 to 3.7.

The WB report said that most government and market failures were related to corruption, poor government management, and other civil service related issues. It said that at the provincial level, the civil service’s excessive size and rapid growth was the most pressing issue, as provinces hired more than 56 per cent of public employees, and their numbers are growing.

Most additional resources shifted to provinces have been diverted to public salaries rather than for investment in basic infrastructure or social needs. More than 95 per cent of public employment is in the low skilled, lower grades of less than BPS-16.

Meanwhile, official estimates put the total sanctioned strength of grade 17-22 officers at about 28,000. Of this, the working strength currently stands at about 21,300 officers — about 16,000 of whom are currently posted in the federal capital. Interestingly, only 14 per cent of Islamabad-based officers occupy government accommodation in or around the three-kilometre radius of the federal secretariat.

This has created a wide disparity, and creates room for political patronage and manipulation. To end this, Dr Haque’s plan proposed that an estimated 550 acres of land be vacated, and estimated and allocated for a ‘High Density Zone,’ with high-rise (mostly 20-stories), mixed-use buildings for economic activities and general housing, on the pattern of the Madinatul-Jumairah or the Burj Dubai.

The overarching objective of the housing monetisation, according to Dr Haque, was to remove discrimination not only in the housing provision, but also in effective government decision-making, and earning income in the process by vacating high value state land for multi-purpose high-rise buildings.

Dr Nadeem-ul-Haque also argues that the planning commission’s Framework for Economic Growth (FEG) has established that the footprint of the government in the economy is very large. He says that while people generally note that government expenditure as a percentage of GDP is only 22 per cent, and therefore the size of the government in the economy is not large, this line of argument is used by the bureaucracy for increased taxation.

He says that the percentage of government expenditure in GDP is not the correct measure of the influence of the government in the economy, where it still controls a large number of public sector enterprises — in fact, the largest companies listed on the stock exchange are largely owned and managed by the government.

The government is still engaged in many market transactions, often as a dominant player, in the case of energy, construction and commodities etc. An aggressive tax subsidy policy as well as tax expenditures (SROs) direct market activities, at the cost of excessive barriers to entry. And the regulatory framework often inhibits investment and market opportunities, with the most egregious example being the serious hurdles in the development of the construction industry and city development.

With this in mind, Dr Haque says that the planning commission calculated the footprint of the government on the basis of its contribution in all sectors of the economy, which is measured by government spending, earning of government institutions, price support and subsidies, and based on market share in these sectors.

In this calculation, the share of the government was estimated at 44.17 per cent in the total GDP. This is what the government directly controls in the economy.

In addition to directly influencing the economy, governments also use regulations to control the direction of the economy. These can be in the form of wage control, tariff and non tariff barriers, as well as regulations for starting new businesses, and legal framework as an obstacle to competitiveness etc.

According to Dr Haque, calculating the regulatory burden is a complex exercise, but it could be assumed on the basis of Worldwide Governance Indicators (Regulatory Quality Index) that Pakistan’s regulatory burden is at least three times as much as the US.

Considering Pakistan’s regulatory burden to be only twice that of the US, the cost of this regulation to the economy would be about eight per cent of GDP, compared with the current 16 per cent.

In other words, trade barriers, obstacles to investment etc. are costing the Pakistani economy 16 per cent of GDP, and hence the Framework for Economic Growth concluded that city development, the services sector, and the construction industry are held up by binding regulations, and hence it could be stated that the size of the government footprint on the economy is over 60 per cent of GDP.

Dawn.