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Old Tuesday, May 29, 2007
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Reforming the government PART III

By Ishrat Husain
The writer is a former governor of the State Bank of Pakistan. He is currently the chairman of the National Commission for Government Reforms.

In order to lay down the direction in which the reforms will be undertaken it is essential that the broad principles that will underpin these reforms are clearly defined. The following broad principles are outlined under each area of the reforms.

Civil services: (i) Open, transparent and merit – based recruitment to all levels and grades of public services with regional representation as laid down in the constitution, (ii) Performance – based promotions and career progression for all public sector employees with compulsory training at post-induction, mid-career and senior management levels, (iii) Equality of opportunities for career advancement to all employees without preferences or reservations for any particular class, (iv) Replacement of the concept of superior services with equality among all cadres and non-cadres of public servants, (v) Grant of a living wage and compensation package including decent retirement benefits to all civil servants, (vi) Strict observance of security of tenure of office for a specified period of time, (vii) Separate cadre of regular civil services at all Pakistan, federal, provincial and district levels co-existing with contractual appointments, (viii) Creation of an all Pakistan national executive service (NES) for senior management positions drawn through a competitive process from the federal, provincial and district level civil servants and outside professionals, (ix) Introduction of three specialised cadres under the NES for economic management, social sector management and general management.

Structure of federal, provincial and district governments: (a) Devolution of powers, responsibilities and resources from the federal to the provincial governments.

(b) Establishing inter-governmental structures with adequate authority and powers to formulate and monitor policy formulation.

(c) Clear separation of policy making, regulatory and operational responsibilities of the ministries/ provincial departments.

(d) Making each ministry/ provincial department fully empowered, adequately resourced to take decisions and accountable for results.

(e) Streamlining, rationalising and transforming the attached departments/ autonomous bodies/ subordinate offices/ field offices etc. into fully functional arms of the ministries for performing operational and executive functions from six to three.

(f) Reduce the number of layers in the hierarchy of each ministry/ provincial department.

(g) Cabinet secretary to perform the main coordinating role among the federal secretaries.

(h) Revival and strengthening of the secretaries committee at the federal/ provincial governments to become the main vehicle for inter-ministerial coordination and dispute resolution among various ministries.

(i) District level officers interacting with the general public in day-to-day affairs should enjoy adequate powers, authority, status and privileges to be able to resolve the problems and redress the grievances of the citizens.

(j) Police, revenue, education, water supply, and health are the departments which are highly relevant for the day-to-day lives of the ordinary citizen of this country. The internal governance structures of these departments, public grievance redressal systems against these departments and checks and balances on the discretionary powers of the officials have to be introduced.

Business process re-engineering: i) All laws, rules, regulations, circulars, guidelines issued by any government ministry/ department/ agency should be available in its most up dated version to the general public free of charge in a user-friendly manner on web page and in electronic and print forms at public places.

ii) Service standards with timelines for each type of service rendered at the district, Thana and union level should be developed, widely disseminated and posted at public places in each department.

iii) Rules of business at the federal, provincial and district governments should be revised to make them simple, comprehensible empowering the secretaries/ heads of departments/ district coordination officers to take decisions without multiple references, clearances and back and forth movement of files. Post-audit of the decisions taken should be used to ensure accountability rather than prior clearances.

iv) Delegation of financial, administrative, procurement, human resource management powers should be revisited and adequate powers commensurate with the authority should be delegated at each tier of the hierarchy.

v) Estacode, financial rules, accounting and audit rules, fundamental rules and all other rules in force should be reviewed systematically and revised to bring them in line with modern management practices.

vi) E-government should be gradually introduced in a phased manner. Technological solutions, hardware and software applications are easy part of the process but the most difficult aspect is the training and a change in culture, attitude and practices. E-government should be driven by business needs rather than crafted as an elegant technical solution.

Proposed approach: There are several ways to approach the task assigned to this commission. One option is to spend several years in preparing a comprehensive blueprint and plan for bringing about the desired changes covering all aspects of the structure, processes and human resource policies of government. This option has the disadvantage that by the time the report is ready ground realities might have changed. Political support for reforms under this approach is most likely to wane as high costs are incurred upfront in pushing through complex, unpopular and difficult decisions but the benefits of the reforms do not become visible in the lifecycle of the political regime in power. The advantage of this option is that all deficiencies and weaknesses are addressed simultaneously in a comprehensive manner.

The second option is to prepare a long term vision and direction in which reforms should aim and move but combine this with an opportunistic approach whereby easy to implement changes are taken up first and the more difficult reforms are taken up later. The disadvantage of this option is that the changes introduced may be imperceptible and the time taken for the whole process to complete may be too long. But the advantage is that incremental changes that create a win-win situation for all the stakeholders including politicians have a much better chance of getting accepted and implemented. It is suggested that the commission may propose the second option as the modus operandi for its working.

The sequencing, phasing and timing of the various reforms and their implementation will be guided by the speed at which consensus is built among the stakeholders and the decisions are made by the top policy makers but it is important to lay down the overall direction in which these reforms will move

While the comprehensive reforms will be implemented incrementally a second track will also be followed in which some quick win reforms will be implemented from time to time as an opportunity presents itself. For this purpose, the commission will follow a more flexible route. For example, it has decided to focus on four major areas where the interaction between the ordinary citizen and administrative machinery of the government is most intense. These four areas are police and enforcement of laws, land revenue administration, education and health.

The commission has formed four sub-committees to review and examine the efforts being made by the government, private sector and civil society in each of these areas and come up with solutions that will make the existing system more efficient and responsive to the needs of the public in the immediate or short run. The commission has also formed another sub-committee to recommend revision in the rules of business for removing impediments in the functioning of the government departments/ ministries/ agencies and empowering the heads of the departments to deliver results.

The preliminary recommendations of the sub-committees will be presented to focus groups of stakeholders drawn from diverse segments of society -- secretaries committee, political leaders, businessmen, NGOs, academic refined civil servants etc. -- for soliciting their feedback and views. Once this feedback is incorporated the sub-committees will finalise their recommendations which will then be discussed by the commission and then presented for consideration and decisions by the steering committee. The high-powered steering committee is co-chaired by the president and prime minister and consists of the four chief ministers. The committee has decided to provide a legal cover to the commission so that the recommendations approved by the steering committee are implemented by the federal and provincial governments without further reviews. The commission will also act as a facilitator and conduit for the reforms formulated by the federal ministries/ provincial governments and table them, after its own analysis for the decisions by the steering committee.

To conclude, those who agree that there is a need for these reforms have serious reservations about their implementation. They contend that these reforms cannot be implemented in real sense unless we insulate bureaucratic actions from political interference. According to this school of thought the problem of maladministration and poor governance stems from this interference. It must be recognised that in democratic forms of governance, elected leaders will have to respond to their political constituents and the associated vested interests. The accountability for results rests largely on these politicians and not on the civil servants.

If the interference of the politicians is aimed at serving the narrow parochial interests of a few individuals or groups rather than the broader collective interests of their constituencies, they may end up paying a heavy price at the time of the next elections. Their opponents, the opposition parties and the media scrutiny will keep a watch on their actions and expose them before their constituents. The alignment of the civil servants with their political bosses in violating a circumventing laid down laws, rules, regulations and procedure would prove to be myopic as these civil servants will also become tainted and suffer in their career advancement.

If the successive civil servants appointed to a key position refuse to carry out illegal, unlawful or irregular orders how many times a minister can get them transferred or how many of them could be appointed as OSDs. The strong temptation to indulge in immediate gratification by keeping the political bosses happy and either ignore or go along with them is indeed the crux of the problem. The long term consequences for succumbing to such temptations should always be kept in mind by this category of civil servants. There is no substitute for personal integrity and character in public service.

However to expect that we will be able to induct angels in civil services is also unrealistic. The thrust of the proposed reforms is to limit the discretionary powers of the decision-makers, simplify the cumbersome procedures and processes and make them transparent and realign the incentives of the individual civil servants with those of the organisation. It is proposed, therefore, that the commission should remain as a permanent body responsible for change management in the government but limit the term of the office of chairman and members to two years only.


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Old Wednesday, June 20, 2007
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Reforming the government in Pakistan: rationale, principles and proposed approach-I


ARTICLE (June 20 2007): A legitimate question that is often raised by those working for the Government in Pakistan but not the outsiders is: Why reform the Government? Most of them believe that things are going well and the costs of bringing about these reforms will prove to be disruptive for the economy, as well as for administration.

We had inherited a strong, robust system from the British that has been tried and tested over time and there is hardly any compelling reason to bring about any major structural changes. In order to address this question we have to provide the rationale for bringing about reforms in the government. Having established the business case for reforms, the next step is to lay down the principles that would underpin these reforms. Finally, the proposed approach to design the reforms will be discussed.

RATIONALE FOR REFORMS: It must be conceded at the outset, that the time-horizon for the consummation and impact of the proposed reforms is long term - next 10 to 20 years, and not immediate or short term. The rationale for this plan should therefore be viewed in the context of the long-term vision of Pakistan, the external environment in which Pakistan will be operating as a country, the lessons learnt from other successful developing countries, the diagnostic studies including public opinion polls about the government performance in Pakistan and the growing expectations of the public at large.

(A) LONG TERM VISION AND EXTERNAL ENVIRONMENT: Vision 2030 prepared by the Planning Commission in consultation with the private sector, academia, civil society organisations etc envisages Pakistan to be a developed, industrialised, just and prosperous nation at the end of the next 20-25 years.

This vision is to be achieved through rapid and sustainable development in a resource constrained economy by deploying knowledge inputs. The transition for achieving this objective is proposed to be managed by an intelligent and efficient exploitation of globalisation through competitiveness. Pakistan is therefore opting to become an active participant in the globalise economy for goods, labour, capital, technology and services and this option has serious consequences for the future governance of the country.

The imperative of integrating Pakistan in the larger global economy places certain essential demands and one of these demands is that the structures of state and instruments of government have to be redesigned to use knowledge and technology inputs to create opportunities for increased productivity and competitiveness within the constraints imposed by depleting resources.

Among the 180 nations of the world who are Pakistan's competitors for capturing a market share in the ever-expanding global economy, only those will survive that remain agile and adapt themselves to the changing demand patterns, supply value chain and technological up-gradation. The main actors in a country that will together impinge upon its competitiveness and productivity are the state, market and civil society. The respective roles of these main actors and their interrelationships have therefore to be redefined and re-calibrated.

Structural economic reforms to improve Pakistan's prospects for competing in the globalise economy require stable, functioning, competent and responsive institutions for implementation. But unfortunately, we are at present caught in a difficult logjam.

While the economic reform themselves create dislocation and displacement in the transition period, strong working institutions provide the wherewithal and armoury to withstand these shocks, thus minimising the costs of adjustment and maximising the benefits to the poor and neglected. The urgency to build up strong institutions to implement these structural reforms is therefore quite obvious.

Following this logical sequence, the various organs of the State - Executive, judiciary and legislature - have to be assessed and evaluated to determine whether they are capable of meeting this new challenge, or do they need to be revamped to develop new capabilities and build up new response capacity. The task assigned to the National Commission for Government Reforms (NCGR) is limited to a review and examination of one of the organs of the State, ie the Executive branch. The Commission has been asked to assess whether the Government, its structures, processes and human resource can keep up with these new demands or need modification or alteration.

(B) LESSONS FROM OTHER DEVELOPING COUNTRIES: The role and limitations of governments in various types of developing countries have been analysed at great length. The majority view is that governments should do what they are capable of doing better than in the past. A strong and effective government is needed, rather than weak and expansive government.

The all-wide encompassing government has become too cumbersome and centralised with overlapping and competing interests, inefficient and unresponsive to the emerging needs of the public. Civil servants are poorly trained, sub-optimally utilised, badly motivated and ingrained with attitudes of indifference and inertia. It has been argued by development economists that an effective government in developing countries was not only necessary due to abundant market failures, but possibly even sufficient to achieve economic development.

A number of developing countries have successfully reformed their governments and tackled the market failures, as well as achieved rapid economic development. How have they been able to transform the expansive government into a well-focused, well-functioning and result-oriented effective government? The interpretation of the success of East Asian countries, such as Newly Industrialising Countries (NICs), Asean countries and China is a matter of serious debate among development economists.

Neo-classical economists attribute the success to market-friendly, private-led growth and openness to trade with the governments providing macroeconomic stability, security of person and property, infrastructure services, promoting research and development, investing in education, health, science and technical training. Others such as Wade and Amsden have argued that an interventionist state, which guided and steered a proactive industrial policy and picked the winners was largely responsible for their success.

By now, there is some consensus that if the labels and ideologies are set aside, the evidence suggests that countries that have tended to promote competition and avoided monopolies or oligopolies, ensured a level playing field and entry for new comers in the market, made privatised firms face competition, exercised regulatory vigilance (but eliminated inefficient and outdated regulations), opened up the economy to international trade, provided the way for judicial independence, provided dispute resolution mechanisms and enforced contracts, promoted transparency, observed rules of law, have been relatively successful.

In short, the government provided an enabling environment for private businesses to carry out production, distribution, trade of goods and services, but did not itself indulge in these activities directly.

The other piece of empirical evidence that is beginning to gain wide acceptance is that decentralisation and greater devolution of power, authority and resources to lower tiers of government also makes a difference, through better allocation and more efficient utilisation of resources. Devolution also helps in moving towards a more relatively egalitarian outcome in the provision of basic public goods services.

(To be continued)
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Old Thursday, June 21, 2007
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Reforming the government in Pakistan: rationale, principles and proposed approach-II


ARTICLE (June 21 2007): Another way to promote human development and deliver social services to the poor segments of the population, that has worked, is through the wider participation of the private sector, communities and civil society organisations.

Participation, besides being considered a means to further human capabilities a la Sen, is also a way of choosing the right kind of projects and ensuring that development funds are used more judiciously. Private - public partnerships and public - NGO or Civil Society Organisation partnerships are being successfully used in many countries for provision of infrastructure, education, health and other social services.

These partnerships not only supplement the limited public resources and counter the governance issues, through monitoring, evaluation and corrective actions but also enable local communities to participate in decision making through their organisations. The reduced efficiency of public sector expenditure can also be corrected through these partnerships.


We now turn to the diagnostic studies and the changes that have taken place in the landscape in Pakistan in the past several years and are likely to affect the functioning of the government in the future too. A number of Commissions, Committees, Task Forces, and Working Groups have examined and made recommendations about the changes in our administrative system. These recommendations and studies have been scanned and sifted and the proposals that are still relevant and useful and will form a part of the NCGR's recommendations. But in addition to the historical reasons there have been at least seven new developments in the last few years that clearly point to the need for reforms in the structure, processes and human resource management policies and practices.

First, it is becoming increasingly apparent that the benefits of economic growth have not been distributed equitably among the lower income groups, backward districts, rural areas and women. Although the government has used the channels of devolution and poverty targeted interventions to spread these benefits, the results have been less than satisfactory.

Almost all studies point out that the institutions of governance, ie the governmental machinery at the Federal, Provincial and Local Governments, have become largely dysfunctional due to the protracted neglect of our institutions. Almost all comparative country rankings, whether originating from the World Bank* or Global Competitiveness Report of the World Economic Forum or other think tanks and institutions, consistently rate Pakistan quite low in Public Sector Management, Institutions and Governance.

Along with the low Human Development Indicators, this weak institutional dimension makes the task of poverty reduction, income distribution and delivery of public services quite difficult. The impact of good economic policies upon the lower strata of our society, particularly those who are illiterate and are not well connected, thus gets muted. The widespread hue and cry about the absence of a trickle-down effect of good economic policies is a manifestation of the dysfunctional nature of our public sector governance. Government institutions have to be strengthened to meet this challenge.

Second, the responsibilities of the government in the field of owning, managing and operating public enterprises and corporations have a undergone significant change, both in the thinking as well as action during the last sixteen years. A large number of government owned corporations, businesses, industrial units, banks and financial institutions and service providers have either been privatised, or are in the process of privatisation.

This will reduce the burden on the administrative apparatus at all levels of the government. The shedding of these activities by the government has serious repercussions for the oversight function of the Ministries/ Departments in the post privatisation period.

Third, the devolution of administrative, operational and financial powers to local governments, since 2001, has introduced a completely new element in the governance structure that will require suitable modifications in other tiers of the government.

The Federal Government is seriously considering the transfer of some functions, listed in the concurrent list of the constitution to the Provincial Government's projected increase award of financial resources to the provinces, under the national finance commission, should provide some fiscal space to them for carrying out essential public services directly, or through the District Governments. This implies a reallocation of administrative resources and strengthening of capacity at the local government level.

Fourth, the unbundling of the policy, regulatory and operational responsibilities of the Federal Ministries has shifted the focus on the policy-making, monitoring and evaluation functions. But this transition has been incomplete, uneven and mixed across the ministries and needs to be firmly rooted.

The lack of adequate competence and knowledge of regulatory functions would demand development of expertise in this field, as well as in policy formulation, implementation and evaluation.

Fifth, some limited success has been achieved by fostering private - public partnerships in the fields of Infrastructure, Education and Health. But these partnerships can only be nurtured if the government departments and ministries have the adequate skills to design concession agreements, B.O.T or contractual arrangements, monitoring and evaluation tools and legal recourse to enforce the obligations and stipulations agreed by the private sector partners. Similarly, the NGOs and community organisations such as Rural Support programmes have been actively engaged in the delivery of public services in the fields of education, health, water supply etc.

The government departments and ministries have to be reconfigured for developing the capacity to design and operate these partnerships. Sixth, there is a great deal of uncertainty and anxiety among the members of the civil services of the country about their future career prospects.

Those specialists serving in ex-cadre jobs, such as scientists, engineers, medical doctors, accountants etc, are demoralised because they have limited opportunities for career progression. They also feel that they are not treated at par with the cadre service officers in matters of promotion and advancement.

Seventh, the switch-over from manual to automated processes and the government's commitment to move towards E-Government would require a look at the skill mix and training requirements of the existing and future civil servants, throughout the entire hierarchy.

E-Government will itself flatten the hierarchical texture and throw up the redundancies in the system. At the same time, it will involve basic computer literacy at all levels and grades digital archiving, storage and retrieval of all files and documents. Consequently, only few of the clerical and subordinate staff positions can be utilised in the future government organisation.

(To be continued)
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Default Education, employment and economic development in pakistan


Ishrat Husain

Governor, State Bank of Pakistan

Reasons of Economic Backwardness

The ‘new growth theory’ has been highly influential in explaining the differences in the economic performance of developing countries. Economic backwardness is highly linked to low labor efficiency and training, deficient supplies of entrepreneurship and slow growth in knowledge. The countries that have surged ahead, on the other hand, are characterized by high level of human capital accumulation where the educated labour force has raised the level of output and the rate of growth over a sustained period of time. Stern (2001) argues that Education takes center stage in any discussion of development strategy for two reasons. First, the quantity and quality of education influences strongly the labor force, governance and the workings of most institutions. Thus it is a key determinant of the investment climate. Firms, both domestic and foreign, are more eager to invest when they know that they will be able to draw on a skilled workforce to make that investment productive. Second, universal access to basic education is essential for ensuring that all segments of society will benefit from macroeconomic growth.
Studies confirm that the productivity benefits of education are large-just one additional year of education can increase productivity in wage employment by 10 percent even after controlling for other factors. Skill development through education has been identified as a key determinant of comparative advantage and manufacturing export performance. In Pakistan, it has been shown that districts with a higher literacy level have a higher level of development (SPDC 2003).

Role of Education in Poverty Reduction

For poor people, education can serve as a bulwark against volatility: even the fundamental skills learned in primary school can make a critical difference for the survival of families when government services fall short or during times of economic crisis. The widening of educational access thus can help to eradicate poverty even before it begins to yield returns in the labor market. (Stern 2001).

Poor Economic Scenario of Pakistan

Pakistan presents a paradoxical situation. The country was able to record 5 percent annual growth rate over a fairly long period of three decades: between 1960-90, bringing down the incidence of poverty to 18 percent. This happened when Pakistan’s social indicators were dismally low in absolute, as well as, in relative terms. In 1990, after such impressive growth performance almost two-thirds of the country’s population was illiterate, enrolment ratios were dismally low, the drop out rates were quite high, gender disparities in access to education were rampant and the quality of higher education was on a declining path. By most indicators, basic schooling investments in Pakistan were low and growing less rapidly than on the average for low income countries.

Pakistan's Educational System is Fragmented

The reasons for Pakistan’s low educational status are varied but one important factor is that Pakistan’s educational system is highly fragmented and segmented. It has, therefore, created some intractable problems in the optimal utilization of human resources under the given labor market conditions.
Box I depicts graphically the three parallel streams that start right from the primary level. The parents have the choice to send their children either to a madrassah or to an English Medium primary school or Urdu medium primary school. The English medium schools are further divided into ‘elite’ schools and ‘non-elite’ schools. Most English medium schools are in the private and not-for-profit sector while the majority of the Urdu medium schools are run by the Government. The latter provide education to about 73 percent of the total primary school enrolment. (Table-I). This fragmentation does not end at the primary level but persists throughout the education cycle and spills over into the labor market as well. A more detailed analysis of this segmentation and its consequences for economic development is presented elsewhere (Husain 1999)

Pakistan has suffered immensely as a result of this fragmented educational system coupled with issues of access, quality and governance. Pakistan’s primary and secondary enrolment ratios in 1991 were 46 and 21 percent of the relevant age groups – only one-half the average for all low income countries. Only about half of those who enrolled in school stayed on until the fourth grade in comparison with an average of about two thirds for all low income countries Within the South Asia region, Pakistan lags well behind its neighbors in enrolment; net primary enrolment rates are 50% in Pakistan, 75% in Bangladesh, 77% in India and 100% in Sri Lanka. By all criteria, Pakistan’s educational system was at the bottom of the international ladder.
A number of empirical studies show that the returns to expanding years of education in Pakistan are still considerable, i.e. 20 percent (Behrman 1995). The implication is that Pakistan has lost considerable earnings due to under investment in education. A social rate of return of 13 percent for primary school, with reinvestment, would lead to a doubling of assets within six years (Shabbir 1994). In one influential work, an attempt was made to characterize the cost to Pakistan of having low schooling and a relatively large gender gap by a series of simulations based on pooled estimates of the dependence of growth on initial schooling investments. The authors found that Pakistan’s 1985 income would have been 25 percent higher if Pakistan had had Indonesia’s 1960 primary enrolment rate and about 16 percent higher if female enrolment rates had been at the same level as for boys (Bridsall, Ross and Sabot 1993). Extending these projections to 2005 it would be safer to conclude that Pakistan’s per capita income today would have been almost double than what it actually is and the record on poverty much better.
The gender gap in education in Pakistan suggests that the country has foregone a great opportunity by not capitalizing on the large rates of return of female schooling on economic productivity. In a study of estimates of wage relations for males and females separately over several time periods using Household Income and Expenditure Surveys, it was found that females had higher rates of return than their male counterparts (Ashraf and Ashraf 1993). Some estimates suggest that the return on getting more girls into schooling may be over 20 percent. Another study estimated that annual growth in income per capita could have been nearly a percentage point faster if Pakistan had closed the gender gap as fast as East Asia between 1960 and 1992. (Klasen 1999).

Pakistan thus missed economic opportunities that have been exploited by many developing countries by increasing educational levels for the bulk of its labour force and, thus, enhancing their household incomes and reducing poverty. What is more disturbing is that the low net enrolment ratios will make the achievement of 100 percent literacy levels even more difficult in the future. This has serious implications for Pakistan’s competitiveness and rapid poverty reduction.

Poor Enrolment Ratios in Primary Schools

The enrolment rate in primary education is 40 percent among the poorest 10 percent of the population, while the children of the richest 10 percent have reached 100 percent enrolment. Moreover, nearly 40 percent of children belonging to the poorest quintile drop out of school by grade 4. The comparable figure for children belonging to the richest quintile is only 12 percent. It can thus be seen that a majority of the children belonging to the poor families are not acquiring the basic skills that would equip them to participate in the country’s economic development while the children of the rich families are better off.

Low Share of Females in Economic Productivity

Social Action Program, a multi-donor programme of assistance to Pakistan implemented during the 1990s has had a mixed record of success. The number of girls enrolled in primary school in Balochistan doubled as a result of subsidized recruitment of female teachers and the drive to increase girls’ education led to higher enrolment of boys (Kim, Alderman and Orazem 1999).
Adult Literacy rate in Pakistan had risen to 47 percent by 1999 while female literacy rate to 32 percent. Net enrolment ratios, however, remained unchanged. It is estimated that there are 13 million out-of-school children of about 50 million children in the 5-9 years age group over half of whom are girls (SPDC 2003). In Balochistan and North West Frontier Province (NWFP) – the two conservative provinces of the country – the female literacy rate more than doubled in the decade of the 1990s much more rapidly than the national average bridging the gap somewhat. But the fact remains that both Sind and Punjab have still twice as many literate females as a proportion of the population compared to Balochistan and the NWFP.

Role of Private Sector Organizations

The other noteworthy development in the 1990s was the emergence of non-governmental schools sponsored by the private sector (for profit), communities, and not-for-profit organizations. Between 1983 and 2000, the number of private primary and secondary schools in the country increased ten fold from 3,300 to 32,000 – much faster than the population of school-aged children (Andrabi et al 2002). Table 2 shows that in 2002, the private schools had a share of 27 percent in primary school enrolment. The expansion of private schools has also played an important role in bridging the gender gap in primary schooling in Pakistan. Andrabi et al (2002) provide evidence that private primary, middle and secondary schools have a lower ratio of enrolled boys to girls than comparable public schools. Private schools have achieved a more balanced male/female ratio than public schools despite the fact that a larger proportion of them are co-educational schools. This finding challenges the conventional wisdom that the parents in rural areas in Pakistan are not willing to send their daughters to co-educational schools. Even private schools for low income households are emerging. According to a survey, two thirds of all primary school students in low-income neighborhood in Lahore attend private schools. The record of these institutions in expanding access is impressive but in imparting quality education it has been mixed. In the higher education a number of institutions of international standards were established in the country during this period. There are no firm estimates of the enrolment in private and non-governmental institutions in the tertiary sector, but the number is expanding fast.

The remittances sent by the Pakistani workers employed in the North America and the Middle East are also reported to have a positive influence on the education of their own children’s and the children of their extended families education. As most of the migrant workers originate from poor families this investment in their children’s education is likely to have some intergenerational mobility out of poverty.

In the period since October 1999 several major initiatives have been taken to bring about structural reforms in the education sector. The thrust of these reforms is achieving universal primary education and adult literacy, improving the quality of education, a focus on technical and vocational education and reform of Madarsah education.

In Punjab and Sindh provinces, education up to matric levels has been made compulsory and free. The Punjab Education Sector Reform Program (PERSP) implemented with the support of the World Bank has set up a workable model of expanding access, and improving governance and quality of education. Provision of free text books to primary school students, monthly stipends to girls enrolled at the middle schools, appointment of better qualified teachers and improvement in physical infrastructure have led to an overall 13% increase in enrollments in primary schools and 20% increase in enrollments of girls at middle level in fifteen low literacy districts of Punjab. The model has proved successful because of the wider participation of civil society organizations, district and local level department staff, parents and the teachers. An overarching objective of this program is to reduce gender inequalities in the province. If successfully replicated to other provinces it is quite likely that the unsatisfactory performance of the past several decades could be reversed and the slippages in meeting the MDG goals could be contained.

Higher education has received a big boost in the allocation of financial resources and improvement in the quality of education. The enrolment ratio which is only 2.6 percent compared to 10 percent in India is projected to double in the next five years while the Universities are being upgraded through a vigorous programme of faculty development, scholarships and stipends to the poor, curriculum revision, equipping laboratories and libraries, connectivity to pooled and shared resources and emphasis on research. Annual Budget allocation has been raised ten times from a paltry sum of $15 million to $150 million while that for Science and Technology increased from $3 million to $100 million.

Andrabi et al (2004) analyzing the district wise data from the 1998 census, have found that the Pashto speaking belt along the Western Border with Afghanistan is the only region in the country that has a high proportion of madrassah enrolment. But even this accounts for just over 2 percent of total enrolled children in the 10 districts of Pashtun belt. The media reports of claims about enrolment and existence of madrassah education have been very carefully analyzed in this study and found to be highly exaggerated.
Despite the positive movements on macroeconomic front the unemployment situation in Pakistan has not yet improved. The linkage between higher employment and poverty reduction is strong both through direct and indirect channels. But in the last several years Pakistan has shown high economic growth but the improvement in the employment front is by no means, satisfactory. Unemployment rate has declined from 8.3 percent to 7.7 percent in the last two years but the trend is still not widespread either geographically or sectorally and has occurred mainly due to an increase in the jobs for the category of unpaid family workers in the rural Punjab.

Causes of Unemployment in Pakistan

There are at least five different factors that I would like to put forward to explain this phenomenon of higher incidence of unemployment coexisting with rapid growth rate in Pakistan.

First, there is a serious mismatch between the jobs demanded by the emerging needs of the economy and the supply of skills and trained manpower in the country. While the economy is moving towards sophisticated sectors such as telecommunications, information technology, oil and gas, financial services, engineering goods the universities and colleges are turning out hundreds of thousands of graduates in Arts, Humanities and languages. This mismatch has created waste and misallocation of resources on one hand and the shortages of essential skills required to keep the wheels of the economy moving. On the basis of anecdotal evidence I have put together Box-I that summarizes the emerging employment scenario in Pakistan – the sub sectors and companies where the jobs are being created or are likely to emerge in significant numbers in the next few years. It also shows that public sector and government is losing jobs or there is at least stagnation. Technical and vocational training has failed to keep pace with the emerging skill gaps that have further been widened by the migration of experienced technicians and professionals to the Middle East and elsewhere.

Second, there is a crisis of expectation among the families and the youth belonging to certain areas of the country which have enjoyed quota reservations in the government jobs for last several decades. As the economy is relying more on the private sector and the public sector enterprises are being privatized the opportunities for new jobs in the government ministries, attached departments, public sector corporations, state owned enterprises and nationalized commercial banks are fast disappearing. Those who used to get into the public sector on the basis of quota entitlements therefore feel themselves at a disadvantage in the job market. The security of the tenure, the perks and power which they were expecting are no longer available and this has led to a lot of frustration among a section of the population. The private sector employers are highly competitive in their choice of recruitment and totally indifferent to the considerations of regional balances.

Third, the aggregate elasticity of employment with respect to GDP was historically high because of the relative weight of agriculture. But as the share of agriculture in GDP is declining the contribution of agriculture sectoral elasticity to the aggregate elasticity has also dwindled. Higher total factor productivity in the economy and technological innovations are also reducing the demand for unskilled and semi – skilled labor force in almost all the sectors of the economy. The inefficient utilization of factors of production that was a characteristic of public sector dominated economy has been minimized as a result of structural reforms in tariffs, taxation, financial markets and privatization. The demand for labor inputs per unit of output has consequently been reduced due to this compositional shift from the public to private sector employment. At the same time labor force participation rate is on an upward incline because of the entry of large number of females. High unemployment rates under these conditions of productivity and efficiency gains are therefore not surprising.

Fourth, factor mobility across the provincial boundaries is highly limited with the exception of Karachi which absorbs people from all parts of the country. Labor market segmentation based on ethnic and province of origin and domicile is quite pervasive and allows simultaneous existence of labor shortages in one part of the country with excess availability in other. The high costs of relocation for the job seekers and high search costs perceived by the employers further attenuate a state of disequilibrium in the nation wide labor market. The regional labor markets may be relatively more efficient but the same is not true of the national labor market.

Fifth, the archaic and outdated labor laws, levies and benefit payments imposed upon the formal sector of the economy create a wedge between the unit costs borne by the employer and the actual wage received by the employees. There is little incentive for the employer to hire people on permanent basis and invest in their training, skill up gradation and productivity enhancement. They have therefore developed a short sighted view of extracting as much value as possible by engaging part time or contractual employees. In a competitive environment, this behavior is not tenable over a long period of time. The businesses have to close down or substitute capital for labor reducing the level of labor absorption in the economy.

The future agenda for productive employment generation and education are closely interlinked. We will therefore have to address (a) the issue of greater focus on technical, vocational and professional education (b) expanding enrolment in higher education to at least 10 percent of the relevant age group (c) improving access, quality and governance in primary and secondary schooling (d) providing incentives to encourage enrolment of girls in schools (e) reforming madrassah education and making them relevant to the labor market requirements (f) restructuring labor laws and regulations that discourage employment in the formal sector.
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Default Challenges to Pakistan's Economy



A paper presented at the Seminar on “Pakistan – China Relations in the 21st Century” held at Beijing on March 18, 2010.

It is indeed great honour and pleasure for me to be addressing this august gathering in China. As a student of the Chinese economy for the least 30 years I am a great admirer of the people and leadership of this country for the unparalleled success they have achieved. Very few countries in history have been able to transform their economies on a scale and at a speed that has been exhibited by China. I wish my own country Pakistan could learn a few lessons from this great country and apply some of those for its own development. The topic that has been assigned to me today focuses on the challenges and opportunities facing Pakistan’s economic prospects.

Brief Overview of Pakistan's Economy since 1947

Let me begin by giving you a brief overview as to how the structure of this economy has evolved since its independence. In 1947, Pakistan had 30 million people with per capita income of $100. Agriculture accounted for almost 50 percent of economic output with hardly any manufacturing, as all industries were located in India. Therefore, it was unable to feed 30 million people and was dependent on PL-480 imports from the U.S.A. From thereon, Pakistan has come a long way. Today with 170 million people, our per capita income in 2008 was $1000 which was ten times more than the 1947 level. Pakistan is the third largest exporter of rice in the world and produces enough food grains to feed its people. Pakistan is one of the leading cotton producers and one of the five major textile producing countries in the world. Agriculture now accounts for 20% of our national income, and 40 percent of the country’s labor force is engaged in agriculture as compared to 70-75 percent sixty years ago. This implies that productivity per acre of land has increased in this period. Within agriculture there has been a significant change. Livestock, dairy, mutton, beef, poultry and similar other products form almost one half of total agriculture output. Pakistan produces third largest quantity of milk in the world. So this shift within the sector has resulted in the reduced importance of major crops which only account for 36 percent of agriculture value added and minor crops, fisheries, orchards, fruits and vegetables another 14 percent. Manufacturing and industry now account for 25 percent of the income. Please recall that there was not even a single industrial unit worth its name at the time of independence. Services sector has been the most dynamic sector that generates 50 percent of national income and employs about the same proportion of the labor force. But where we have failed is that we have not lived up to our potential. In 1969, Pakistan exports of manufactured goods were higher than the combined exports of Indonesia, Malaysia, Philippines and Thailand. In 1960’s Korea emulated Pakistan in its five years planning process. The tragedy is that even a country such as Vietnam which was completely devastated by the war has now overtaken Pakistan. Ten years ago, India which was way behind Pakistan (till 1990’s) is now way ahead.

Pakistan has achieved 5 percent average annual growth rate during the last 60 years of its existence, with much higher growth in the 1960s, 1980s and early 2000s. During 2002-07 Pakistan’s economy grew at 7 percent annually; poverty and unemployment were reduced, external indebtedness was lowered, international financial markets were accessed and Pakistan attracted sizeable foreign direct investment. But the last three years have been quite difficult for the economy. It all started with the oil and commodity price shocks of 2007 that were not managed prudently. The transition to the democratically elected government was also not easy and the economy got off the track.

For the last 16 months Pakistan has successfully pursued a macro-economic stabilization program with the assistance of the IMF. The results that were envisaged – a reduction in current and fiscal deficits, decline in government borrowing from the Central Bank, bringing inflation down, accumulating foreign exchange reserves, stopping flight of capital and maintaining a realistic exchange rate – have more or less been achieved. The Government has taken some tough decisions such as curtailing many of the untargeted subsidies and introduced social safety net for the poor in form of a Cash transfer scheme. However, in this process the country has incurred external debt that has raised the Public Debt - GDP ratio, sacrificed public sector investment for infrastructure and human development and raised overall interest rate structure. The dependence on external bilateral and multilateral agencies has increased sharply and the degrees of freedom available to economic managers have been curtailed significantly. Going ahead Pakistan’s main imperative today is how to resume the journey to high growth trajectory that was disrupted three years ago. We face at least eight challenges that have to be overcome in order to resume this journey.


a. Low Domestic Savings

Out of every hundred rupees of our national income, 85 rupees are consumed and only 15 rupees are saved, which means that the amount of money which is available to invest for economic growth and development is too inadequate in relation to the country’s needs. In order to grow by 6 percent annually at least 24-25 percent investment rate is required. Consequently, the desired saving rate should be 25 percent. India’s saving rate has jumped from 15-20 percent to 35 percent. China’s saving rate is 50 percent and household consumption accounts for only 36 percent of national income. Pakistan will have to at least double the national savings rate otherwise either the dependence on external sources will intensify or growth rates will remain low.

b. Low Export Growth

Pakistan’s exports of merchandise goods are stuck at US $20 billion for past several years. This is equivalent to less than five days of exports of China. Services exports are even more insignificant. Pakistan has a free trade agreement with China but does not yet figure in the global supply chain of Chinese imports. Other Asian countries have integrated themselves in this chain and are benefiting from the dynamic demand for goods by the world’s largest exporting nation. Pakistan should strive to capture at least 1 percent of Chinese market. The lower is the gap between the export earnings and expenditure on imports – and that can be achieved only by expanding the exports ---the reliance on external sources would be reduced.

c. Fiscal Deficits Are High

Pakistan’s government captures only 15 percent of national income leaving 85 percent in the hands of the private sector. This meager amount is to be spent on defence, debt servicing, internal security, development on education, health, general administration, etc. Out of every rupee of income received by a Pakistani on average, tax paid is only 9 paisas and 91 paisas remain with the individual. In 2007-08, Pakistan’s fiscal deficit was more than 7 percent which means its income or revenues were only 13 percent of GDP whereas, expenditures were 20 percent. Therefore, fiscal deficits have to be financed either by borrowing from external sources for from the State Bank of Pakistan. The financing provided by the State Bank of Pakistan is perilous because it creates high inflation in the economy, which is injurious to the middle class, those earning fixed wages and salaries, and the poor. The double digit inflation rates in Pakistan have historically been rare and the tolerance threshold for inflation beyond 7 to 8 percent is low. Debt / GDP ratio was reduced gradually between 1999/2000 and 2007/08 and brought down from 100 percent to 50 percent, --average for emerging economies. However, during the last two years, it has moved up to 58 percent and may reach 60 percent.

d. Lagging Social Indicators

A country such as Pakistan that should have had social indicators i.e. literacy, infant mortality, fertility rates, access to water supply, primary enrolment ratios comparable to the Asian countries is lagging way behind. Even Tajikistan, which is a very poor country, has better literacy rate and primary enrolment ratios than Pakistan. Gender disparities are quite significant and low female participation in the labor force is preventing the country from reaching its peak capacity. If we had literacy rate of 100 percent instead of 55 percent then in 2009-10 our per capita income would have been $2000 rather than $1000. Instead of 30 million middle class in Pakistan we would have had 60-70 million middle class people; and poverty would have been reduced to 15-20 percent. The link between high social indicators and economic development is now very well established and documented.

e. Energy and Water Shortages

A more recent problem that is slowing down the economy is persistence of energy and water shortages. It is not only that the generaion capacity of existing power plants is not enough or that we do not have enough water. The inefficiencies of public utility companies, the exceptionally high Transmission and Distribution losses, the non-payment of electricity dues and the circular debt problem have exacerbated the situation. Government of Pakistan out of its own limited resources is paying 200 billion rupees ($2.5 billion) every year as subsidies to power companies. We have silting of our dams, but not a single new large storage reservoir has been constructed since Tarbela in 1974. Water course losses of about 20-25 percent are depleting the water availability at farm level. Even after these losses, the water is inequitably distributed. As a result the productivity of the poor farmer is only one third of that of the large holders. If water was equitably distributed and the small farmer got his due share, the productivity gains will translate into additional income for the poor ( in turn reducing the incidence of rural poverty) and generating surplus food grains, cotton and fruits and vegetables that can add to export earnings of Pakistan. The impact of rising purchasing power in the rural areas would also be beneficial for domestic manufacturing industry which is facing deficiency in demand.

f. Governance and Implementation Weaknesses

Pakistan inherited a strong Civil Service system built on merit, performance and result orientation. But with the passage of time the Civil Service has lost its direction. Consequentially, poor governance and weak implementation capacity have diluted the effectiveness of the state. Civil Service reforms that aim to strengthen the capacity and effectiveness of the governments at all levels have to be undertaken whereby the human resource policies, processes and accountability are aligned with tangible results. The delivery of basic services such as Education, Health Care, Water Supply, Security and Administration of justice will not reach the ordinary citizens unless these governance reforms are implemented.

g. Political Stability, Law and Order / Security

A robust and well functioning economy requires political stability, law and order and security. The Armed Forces of Pakistan deserve gratitude for what they have done in Malakand Division and South Waziristan in bringing about restoration of law and order in those areas and reestablishing the writ of the State. Pakistan, unfortunately has acquired an image of political instability, poor law and order situation and insecurity, whereby investors from all over the world hesitate in coming to Pakistan and invest. Until 2007, Pakistan was one of the favorite destinations among the international community despite the ongoing war against terrorism. A thirty year bond was over subscribed four times at a price which was only 300 basis points above the US treasury. Very few countries without investment grade rating can claim to have that kind of credibility with international fund managers. However, in the last two years time, foreign investors have not been that forthcoming because of the negative image and the growing concern for security. I must however, acknowledge that the only exception is our Chinese friends who have continued to visit, live and carry out projects.


How can we overcome these challenges and problems and improve our economy? A lot has been written and talked about, but I will focus on only a few action points.

1. Increase Domestic Resource Mobilization

The reason the fiscal deficit is widening is low revenue collection. Tax-GDP ratio is only 9 percent and therefore there is a scope to widen the tax net, improve tax collection and remove various exemptions and concessions. Along with plugging the holes in State owned corporations and making them efficient the public dis-savings can thus be reduced raising the national savings rate. Agriculture incomes are exempt, professionals, retailers, wholesales, transport owners and many other services providers evade taxes by paying not at all or a small fraction of what is due. Studies indicate that with the same tax rates the tax authorities should be able to raise as much as S8 billion of additional revenues ( compared to $16 billion actual collection) by tightening enforcement and compliance, carrying out robust post assessment audits, better supervision of tax administration and plugging the loopholes .

2. Expand the Share in the World Trade

In 1990, Pakistan’s share was 0.2 percent of the world trade. After 20 years it has come down to 0.12 percent in a very buoyant world economy. World trade has been growing much faster as compared to the world output. Asian countries have captured a larger chunk of world exports and the best example is that of China that has increased its share to an impressive 8 percent. Pakistan has failed to take advantage of these opportunities and is stuck with only a few commodities – textiles, leather, rice, sports, goods and the surgical goods. We have not entered the markets for more dynamic products. All our exports are to a few markets – the U.S.A., EU and the Middle East. So this narrow export base and very limited geographical spread are not allowing us to expand our share. By improving the quality of our products, fitting in the global supply chain, investing in research and development, and diversifying towards Asian markets the prospects can improve.

3. Building of Human Capital

It is now well documented that for the countries to prosper and progress on a sustained basis there is no substitute other than building up human capital. Private Sector, Public Sector, NGOs, local communities, philanthropists, etc., all here to put their hands on deck and participate in making sure that every child goes to school, every high school graduate has some technical and vocational skill and every eligible person goes for higher or professional education. We need to invest massively in human capital to catch up with the rest of the world because the world economy is going to be a knowledge based economy. One has to acquire and assimilate the knowledge and apply in order to solve problems. Under the new paradigm of development human capital formation is more important than machinery and equipment. Pakistan can leap frog by building up the institutions, infrastructure and incentives for human capital formation that other countries have successfully demonstrated.

4. Use of Technology

Technology is spreading like a wild fire. It was impossible to imagine even five years ago that more than half of the inhabitants of small towns and villages of Pakistan, would have access to mobile telephones or internet. 95 million Pakistanis out of 170 million have mobile phones today and are using them for banking services, information on climate/weather, agriculture extension, health, education, etc. It is a powerful tool which can improve the lot of those who have remained disadvantaged due to geographical distance and lack of physical access to services and information. Use of information / communication technology for the betterment of social and economic problems of Pakistan provides a huge untapped potential that can be exploited. A more holistic and comprehensive approach that deploys technology for poverty reduction can to be put in place.

4. Young Labor Force

Pakistan is one of the few countries which has a young labor force which can be harnessed for its own and global economy. Japan, Europe, U.S.A. and after 2050 China are going to have aging population where the ratio of old to young people is going to increase. India and Pakistan are two countries where the ratio of younger people to the older ones is going to rise. If these young men and women are tooled and equipped properly, the female labor force participation is increased, skills and knowledge are imparted to the youth, they can become the labor force for the rest of the world. This will give a big boost to Pakistan’s own economy. In 2001, worker remittances were less than a billion dollars; today they have reached almost 7-8 billion dollars. Now this can be multiplied by three or four times if more of the workers going for overseas employment are educated and skilled. If the domestic economy is unable to create adequate number of employment opportunities for those young men and women there could be social upheaval. Therefore, it is imperative to create such educational opportunities and avenues for them that train them in the kind of skills which are needed not only by the national economy but also by the international economy.

6. Devolution and Decentralization

As the population is increasing, one cannot govern Pakistan from Islamabad, Karachi, Lahore, Peshawar or Quetta. One has to devolve powers, decentralize and delegate authority, provide resources to the local / district governments so that they can take decisions at their own. Those decisions would be very much in accordance with the requirements and the needs of those communities. Decision making powers, financial resources and administrative authority should therefore be devolved to the people at the grassroots level as it would lead to much efficient allocation and utilization of resources. There must, however, be accountability of the Local Governments by the Provincial Governments and of Provincial Governments by the Federal Government but not interference or usurpation of powers. Under this scenario the same amount of resources can yield much higher growth rate. For example, if under the present centralized structure, investment rate of 24-25 percent generates 6-7 percent GDP growth under the devolution model the growth rate can rise to 8-9 percent with the same resources.

7. Income Distribution

Pakistan has income inequalities across households, rural / urban divide, gender and regions. Two of the provinces – Balochistan and NWFP – along with the Federally Administered Tribal Areas FATA (where most of the insurgency is taking place) have lagged behind Punjab – the most populated province and urban Sindh. The recent successful award of the National Finance Commission (NFC) has tilted the distribution of divisible pool towards the poorer provinces. The Parliament is debating some significant constitutional amendments that will transfer power to the Provincial and local government and give greater autonomy to them. These measures provide an excellent opportunity to invest resources in these backward areas and improve income distribution in the country. The impact on social cohesion and national integration from these measures is likely to be favorable and the trust deficit between the Federal and the Provincial Governments would be overcome.


The basic thrust of this paper is that Pakistani economy has made a substantial progress during the last sixty years but it has lagged behind other Asian countries in realizing its full potential. The current economic difficulties starting from 2007 have arisen due to a variety of internal factors and policy and management lapses. The stabilization program introduced in November 2008 with the assistance of the IMF is on track. But the main challenge facing the country is how to resume the high growth trajectory that Pakistan had achieved between 2002-2007. The constraints are formidable but the opportunities do exist both domestically as well as externally whereby this goal can be attained .But this would require some tough political decisions, better governance, peace and security in the country, and shift from dependence on foreign aid to external trade and investment. Pakistan has to shift its orientation from the West to the East in its foreign economic relations to align and benefit from the changes in the global economic balance of Power.
" Remember that if Allah gave you more, more He would expect from you. Higher position is a TEST. Taking a test is not an achievement rather PASSING it is."
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