Dr Ishrat Hussain
 

[B]
Time to look to the East[/B]


By Dr Ishrat Husain
ONE of the most dynamic regions of the world today and likely to remain so in the next several decades is East Asia (including Japan, China, Korea, Taiwan, Hong Kong, Australia and New Zealand). The East Asia summit that was held at Kuala Lumpur recently was a path-breaking event in which 10 Asian countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Viet Nam), along with China, Japan, Korea, Australia, New Zealand and India participated. This summit could become a precursor for a long drawn process for an emerging East Asian Community.

The critical importance of East Asian countries can be realized from the fact that this group contains one half of the world population, one-fourth of world GDP, is the fastest growing region in the world and provides hundreds of billions of dollars of its net savings to finance the current account deficit of the United States. Intra-regional trade among the Asian countries accounts for 54 per cent of the total trade and the links in the global supply chain led by Japan and China are quite strong in the region; a substantial part of foreign direct investment to developing world is channelled to these countries. China has become the world’s manufacturing factory while India is the largest beneficiary of outsourcing of services.

At the Emerging Markets Forum held at Oxford on December 9-11, co-chaired by former President Fidel Ramos of the Philippines and former managing director of the IMF, Michel Camdessus, which I had the privilege of attending, there was almost a consensus that the Asian region is going to continue as a growth engine for the world economy in the near term. President Haruhiko Kuroda of the Asian Development Bank (ADB) outlined at the forum his vision of Asia’s future.

The four pillars through which the integration and cooperation will be strengthened among the Asian countries are: (a) development of regional infrastructure such as ports, roads, airports, shipping and trade facilitation through which goods and people can cross borders easily; (b) harmonization of taxation, regulations, laws, etc., so that the transaction costs of doing business within the region can be minimized; (c) pooling of financial resources and utilizing them within the region for development, crisis prevention and crisis management; and (d) increased trade of goods and services to capture global market shares. The ADB under the dynamic and visionary leadership of President Karoda has committed to assist the member countries to fulfil this agenda and we in Pakistan should take full advantage of this initiative. How can we go about this ?

Pakistan’s public policy makers and businessmen have, for historical reasons, remained too much attached to the United States and Europe and have paid scanty attention to this dynamic region. Simple arithmetic demonstrates the superiority of an approach tilted towards the East. The US economy is expected to grow at an average of three per cent and European economy would be lucky to reach an average two per cent growth. There is already a hollowing out of manufacturing in the US and Europe as they remain confined to high-tech industries such as aviation, aerospace, etc., while the rest of manufacturing is shifting to East Asia, particularly to China.

The share of manufacturing in the US GDP has dwindled to 15 per cent while jobs created in manufacturing are even fewer. Demographics is also not going to help the US and Europe as the proportion of old-age population rises relative to working-age population, creating a shift in the demand pattern away from goods and services typically produced in countries such as Pakistan. East Asian economy, despite the slow growth of Japan, is projected to grow at an annual rate of seven per cent.

Per capita incomes in this region having one-third of world population will therefore double every 12-14 years and the emerging middle classes of these countries, equivalent to the entire population of the US and Europe, will absorb increasing volumes of commodities, goods and services. All these goods and services cannot be found within their own borders. They will source them from the least-cost producers but the dynamics of sourcing has changed and is likely to change even more dramatically in the future. Instead of the final product originating from one single country, reliance will be placed on a global supply chain — exactly the way China is operating at present.

China orders and imports inputs, parts, raw materials, components from different countries of the world, processes, assembles and integrates them in the form of finished manufactured goods and re-exports them to the rest of the world, including the countries from where parts of the supply chain are procured.

Pakistan’s manufacturing establishment has not yet taken to this new mode of specialization of production and international trade and is therefore not part of the global supply chain. It continues to combine all the activities vertically — from raw materials, designing, processing, manufacturing and shipping under one umbrella. This approach has resulted in a lot of missed opportunities for Pakistani exporters. They have to unbundle their activities, specialize in a particular component of the global supply chain, in which they have a comparative advantage, produce that in bulk either in-house or through outsourcing and subcontracting and arrange delivery of these components in the fastest turnaround time at a low-cost maintaining of high standards of quality.

The emphasis has to shift from doing everything yourself to managing quality standards, logistics arrangements, delivery on time and cost controls but producing in bulk — literally in millions because of the economies of scale. The managerial, human and technical skills required for this new way of doing business have to be reoriented, retained and retooled.

In terms of financial integration, Pakistan has to actively participate in the Chiang Mai initiative of Asian central banks and also in the Asian bond market initiative. These initiatives will enable Pakistan to deepen its links with the financial markets in Asia and also with the region’s Central Banks. Pakistan should also encourage the quality commercial banks from Eat Asia region to establish their branches or set up joint venture banks here. Pakistani banks operating in Hong Kong and Singapore have to play a more vital role in promoting trade between East Asia and Pakistan.

The Pakistan government’s initiatives in developing Gwadar port as the hub for the Central Asian and Western China transit trade and the energy pipeline corridors are extremely timely. But to get them implemented in the fastest possible time and produce end results, they have to be saved from the routine inter-ministerial and inter-governmental bickering and rivalries that characterize public administration.

High-powered autonomous operational bodies headed by highly competent chief executives accountable to their Boards and ultimately to the parliament should handle all the affairs pertaining to these infrastructure projects to save ourselves from the embarrassment of delayed completion and huge cost overruns. The world around us is not going to stand still and if we fail to deliver on time and within the expected cost structure we will be heavily penalized as the business will slip away from our hands to some other smart country and we will keep on blaming each other and finding scapegoats.

The eastward looking strategy can be successful only if we have a change in the mindset — from a negative, obstructive, can’t-be-done way of thinking and doing to a more agile, proactive and can do type of attitude. Until that happens, the chances of Pakistan benefiting from the vast potential of East Asian region will remain subdued.

To sum up, the vast economic potential of East Asian economies has not yet been fully tapped by Pakistan. This requires a change in the organization of production and distribution by our manufacturers as well as a change in the composition and organization of public sector bodies created to develop the cross-border and transit infrastructure projects and last but not least a change in the mindset of policy-makers and private entrepreneurs.

[I]The writer is the former governor, State Bank of Pakistan.[/I]

[I]Assalam Alaikum,[/I]

[I]This space is exclusively reserved for Dr. Ishrat Hussain. Members are requested to post his articles here.[/I]

[I][B]Note: Any irrelevant posts under this thread will be deleted.[/B][/I]

[I]Thanks.[/I]

Financing Human Development
 

[FONT=TimesNewRomanPSMT]
[/FONT]
[B][FONT=Tahoma]FINANCING HUMAN DEVELOPMENT IN PAKISTAN[/FONT][/B]
[B]ISHRAT HUSAIN[/B]
[B]1[/B]
[LEFT]Pakistan has committed to achieve its MDGs by 2015 through a variety
of interventions e.g. Real per capita income growth, expansion of schooling
particularly for the female population, increasing pupil-teacher ratio,
improving sanitation access, increased immunization coverage, improving
nutritional status of the children, providing electricity to the villages. Empirical
studies assessing the progress made so far indicate that growth of real
consumption expenditure per capita and large targeted intervention in child
survival, malnutrition and schooling over and above the more general
intervention could take Pakistan closer to achieving these goals. Failing this, it
will be quite difficult to attain any of the MDGs. Financial assistance to poor
families conditional on their making investment in their children’s human
capital can bring about the desired results in improving child schooling, health
and nutritional out comes.
Conceptually, the economists think in terms of production function i.e.
a set of inputs are deployed to produce one Unit of output. In case of MDGs
the inputs such as teachers, doctors and para medical staff, generation
transmission and distribution of water and collection of waste and garbage,
supply of immunization shots etc. produce expansion of school, improved
access to health, nutrition, water supply and sanitation, immunization
coverage etc. Some of these inputs are additive while other interact with
each other in a positive way making the output greater than the sum of all
the inputs e.g. provision of inputs for potable water supply and sanitation
interact with inputs for heath in a way that the outcomes of improved access
to health, water and sanitation are positively correlated. Therefore instead of
thinking independently of financing for education, financing for health,
financing for water supply and sanitation we should think in terms of
financing MDGs and include all expenditures on inputs that are deployed for
achieving the outputs or outcomes embedded in the MDGs.
Institutionally, federal government ministries, provincial departments,
district government departments are all organized vertically and do not
conform to the conceptual issue that I have outlined. Thus there is a
disconnect between optimally efficient utilization of financing and the actual
delivery of these programs. The other issue is that we have to design the
correct measure to capture expenditures on human development. So far we
have focused on a partial measure i.e. public expenditures - the amounts
allocated out of the budgets of Federal or Provincial Governments. As a
matter of fact there are three types of expenditures that are incurred. First is
the public expenditure, second is the expenditures by private and nongovernmental sectors who provide schooling or health services and finally is the expenditures incurred by the households themselves in form of tuition
fees, text books, purchase of medicines, vaccines etc. When all three types
of expenditures are taken together we get a complete picture of the
expenditures on inputs used for achieving MDGs.
In addition to MDGs Pakistan has developed the Poverty Reduction
Strategy (PRSP) and more recently an ambitious medium term development
framework (MTDF) to catch up in the other areas of human development
such as secondary, vocational and technical training, higher education,
science and technology teacher training, curative health services etc. Too
much preoccupation and the swing of pendulum towards an exclusive focus
on primary education and basic health services create its own distortions and
disequilibria. Teachers at the primary level exhibit poor quality and
performance despite many attempts at teacher’s training because their
graduate and postgraduate education has been sub-optimal. Universities are
producing hundreds of thousands of graduates every year who are not all
suited for ready absorption in labor market while economy is starving from a
lack of technical skills. We have aspirations to become an active player in the
globalized economy but capacity has to be developed in our science and
technology institutions to generate the products, innovations and processes
that will improve the productivity. The linkage between industry and
universities is almost non-existent at present and has to be nurtured.
The main argument of this paper is that while the donor emphasis and Pakistan’s commitment to achieve MDGs are well placed and
should be fully implemented a more holistic approach towards human
resource development that caters both to the economic and social objectives
of the country has to be adopted. The internalization of externalities,
spillovers and linkages within the whole human development initiative would
create efficiency and result in cost savings and thus reduced overall financing
needs.
Second, “All hands on the deck” covering the Federal, Provincial
and local governments, private sector, external donors, communities, not-forprofit institutions, civil society organizations, philanthropies and charities
should be assigned roles in a more cohesive and integrated manner. The
waste, duplication, overlapping can be avoided and optimal use of physical
facilities and infrastructure by multiple players and pooling of resources across
institutions rather than maintaining separate silos encouraged under the
current arrangements of program delivery.
Third, the excessive focus on public budgetary allocations on education
and health has neglected the tremendous expenditures, being made by the
households themselves in spending on schooling, health care, water and
sanitation and also the efforts being made by other providers of these
services in non-governmental sector. Attention should be shifted from the
level of public expenditures or its share in GDP to the productivity of these
expenditures. These stereotype and meaningless indicators with which the
countries are flogged for lack of their commitment are not very helpful.
Fourth, it is my contention that we should distinguish between
financing and provisioning. While the Government should be responsible for
financing primary and to a large extent secondary education and basic health
services particularly preventive it should have, however, no exclusivity or
monopoly in providing these services. For the poor quintiles the access to
quality services can be improved if the Government provides scholarships,
stipends, per capita grants and financial assistance to the non-governmental
or quasi-governmental institutions in a transparent and targeted manner. The
Government is already providing several incentives to these providers in the
context of its Public-Private partnership program which needs further
strengthening in operational terms.
To illustrate this point education and health in Pakistan has been
blessed recently with the entry or private sector, not-for-profit organizations,
semi or quasi-governmental bodies (Annex I for a tentative list). The National
Commission on Human Development, the National or Provincial Educational
Foundations, Rural Support Programs, Fauji Foundation, Private foundations,
charitable hospitals and clinics are taking an increasing burden of provisioning
every day. There is no reason that the Government cannot use some of
these quality institutions for financing the services targeted at the poor. So a
competitive business model in which all service providers irrespective of their
affiliation meeting the set criteria can provide the education, health or other
services to the poor households needs to be implemented.
If the above holistic framework encompassing the concept,
measurement, financing, provisioning of Human Development is agreed upon
and a consensus is reached then the issue of financing human resource
development becomes less pressing.
[FONT=Tahoma][/FONT] [/LEFT]
[B]TABLE-I[/B]
[B]Financing Human Development[/B]
[B]2005-2010[/B]
Public Private Total
Basic and College education 103 50 153
Health, Nutrition and Populate 107 300 407
Water and Sanitation 150 1050 1200
Skilled based literary,
technology education 70 37 107
Higher education, S&T 223 70 293
Total 653 1507 2160
Annual 130 300 430
The total financing requirements for human development as identified
in the MTDF and estimated on the basis of household expenditures amount to Rs.2160 billion over 2005-2010 period or Rs.430 billion annually. Of this,
public expenditure is Rs.130 billion or slightly over or US$2 billion annually or
less than one third of the total expenditure on human development, while
private expenditure is Rs.300 billion or $ 5 billion annually. Private
expenditure is dominated by household expenditure on water and sanitation,
and health and to a lesser degree education. Non-household private
expenditure would be about Rs.30-60 billion annually mainly provided by
philanthropic, charitable institutions, individual and corporate donations and
endowments.
In the last year 2003-04 the total public expenditure on education and
health alone was Rs.112 billion. Thus the proposed target of Rs.130 billion is
not unrealistic and can be easily achieved if the domestic and donor
assistance are available.
[B]Conclusion:[/B]
Pakistan’s public expenditures on human development are low by
international standards and are approximately 4 percent of GDP. But total
public and private expenditures amount to more than 8 percent of GDP i.e.
twice what the public sector spends. But this number is hardly recognized or
mentioned in the popular discourse. Households themselves spend at least 4
percent on health, education, water supply and sanitation.
Donors have to agree on an integrated plan of human resource
development that will meet the MDGs as well as the objectives set out in the
MDTF. They should then channel their resources on the basis of certain
criteria i.e. cost effectiveness, efficiency in the resource use, targeting the
poor households, quality of service etc. Competition for these resources
among the various providers of services will give them a better bang for the
buck. For primary education and basic health services it is proposed that the
30 most deprived districts of Pakistan (Annex II) where the majority of the
population live at the poverty or fringes of poverty and have the weakest
social indicators should be chosen for grants in aid, scholarships, stipends,
and other financial assistance. This will spur into action these providers of
services who are at present reluctant to extend their outreach to these poor
districts because of higher set up and operating costs. The assistance to
them should be linked to the outcomes such as net enrolment ratios, drop out
rates, immunization etc.
In my view the approach outlined in the above paper has a much
better chance of achieving both the MDGs as well as the objectives set out in
the PRSP and the MDTF.
[B]Annex- I[/B]
[B]Major Service Providers in the Non-Governmental sector.[/B]
1. National Commission on Human Development
2. Beaconhouse School System
3. CARE
4. Bahria Foundation
5. Shaheen Foundation
6. The Citizens Foundation (TCF)
7. Fauji Foundation
8. Sindh Education Foundation (SEF)
9. Bunyad Foundation
10. Al-Sahiffa Hospital
11. Rural Support Programs (RSPs)
12. Punjab Education Foundation (PEF)
13. Agha Khan Education Service (AKES)
14. Agha Khan Health Service (SKHS)
15. Edhi Welfare Services
16. Shaukat Khanum Trust
17. National Education Foundation (NEF)
18. Overseas Pakistanis Foundation (OPF)
19. Lahore University of Management Sciences (LUMS)
20. Frontier Education Foundation (FEF)
21. Community Learning/Literacy Centers
22. Pakistan Centre for Philanthropy (PCP)
23. Marie – Adelaide Trust
24. Layton Rahamtullah Trust
25. Infaq Foundation
26. G.I.K. Institute
27. Agha Khan University
28. FAST
29. Shaikh Zaid Hospital, Lahore
30. Al-Shifa Trust
Annex-II
[B]30 most deprived districts in Pakistan[/B]
(Based on overall Deprivation Index published by
Haroon Jamal et al in Pakistan Development Review
Summer 2003
100 Musakhel 79 Chagai
99 Kohistan 78 Thatta
98 Kharan 77 Lasbela
97 Kohlu 76 Badin
96 Awaran 75 Jafarabad
95 Zhob 74 Loralai
94 Jhal Magsi 73 Muzaffargadh
93 Panjgur 72 D.G. Khan
92 Khuzdar 71 Kalat
91 Shangla
90 Batagram Provincial breakdown
89 Dera Bugti Balochistan 20/26
88 Barkhan NWFP 4/24
87 Nasirabad Sindh 3/16
86 Killa Saifullah Punjab 3/34
85 Killal Abdullah
84 Tharparkar
83 Bolan
82 Rajanpur
81 Upper Dir
80 Mastung
1 Speech delivered at the Pakistan Development Forum held at the Convention Center, Islamabad on April 25, 2005

The Perils Of Higher Skill Shortages For Pakistan Economy
 

[B][FONT=&quot]WHAT CAN WE DO ABOUT IT?[/FONT][/B]
[B][FONT=&quot]ISHRAT HUSAIN[/FONT][/B]
[FONT=&quot]It is highly paradoxical that in a developing country such as Pakistan, we are experiencing serious skill shortages and, at the same time, high rates of open and under employment. A lot has already been said about the causes of the mismatch between the skills required by the economy and the skills generated by the educational institutions. In this paper, I am also not going to focus on technical and vocational skills such as carpenters, masons, electricians, plumbers, automobile, air conditioning, refrigeration mechanics, medical technicians, nurses, foremen, etc. but mostly on higher skills such as needed by the I.T. and telecommunications industry, aviation industry, financial sector, accountancy, engineering goods industry, infrastructure industries, bio-medical sciences and bio-medical engineering, media industry, etc. A box, containing my assessment of where the shortages and surpluses are, is presented for provoking further refinement and discussions. (Box I).[/FONT]
[B][FONT=&quot]BOX I[/FONT][/B]
[B][U][FONT=&quot]Emerging Employment Scenario in Pakistan[/FONT][/U][/B]
[B][FONT=&quot]Where are the Jobs Being Created?[/FONT][/B][LIST][*][FONT=&quot]Mobile Phone, Wireless Loop and LDI Companies[/FONT][*][FONT=&quot]Public Call Offices[/FONT][*][FONT=&quot]Internet Service Providers and Broad Band Service Providers[/FONT][*][FONT=&quot]Cable Services[/FONT][*][FONT=&quot]Electronic Media Companies[/FONT][*][FONT=&quot]Private and Non-Governmental Educational Institutions[/FONT][*][FONT=&quot]Scientific Research and Development Organizations[/FONT][*][FONT=&quot]Private and Philanthropic Hospitals and Clinics[/FONT][*][FONT=&quot]Agriculture Farm Machinery Sales and Workshops[/FONT][*][FONT=&quot]Automobile Service Stations and Show Rooms[/FONT][*][FONT=&quot]Automotive Vendor Industries[/FONT][*][FONT=&quot]Fertilizer, Pesticides, Seeds and Agro-chemical Distribution[/FONT][*][FONT=&quot]Dairy and Milk Processing Packaging and Marketing[/FONT][*][FONT=&quot]Livestock, Fisheries, Fruits and Vegetable Industry[/FONT][*][FONT=&quot]Feed Mills[/FONT][*][FONT=&quot]New Private Banks including Microfinance Institutions[/FONT][*][FONT=&quot]Advertising, Marketing and Creative Services[/FONT][*][FONT=&quot]Inter-city and Intra-city Coach, Bus and Transport Services[/FONT][*][FONT=&quot]CNG Filling Stations[/FONT][*][FONT=&quot]Hotels and Restaurants[/FONT][*][FONT=&quot]Information Technology and Internet related Companies, Call Centers[/FONT][*][FONT=&quot]Accountancy and Management Consultancy[/FONT][*][FONT=&quot]Construction Services particularly Plumbers, Electricians, Masons[/FONT][*][FONT=&quot]Islamic Banking Services[/FONT][*][FONT=&quot]Risk Managers in the Financial Sector[/FONT][*][FONT=&quot]Private Airline Companies[/FONT][*][FONT=&quot]Oil and Gas Exploration, Drilling[/FONT][*][FONT=&quot]Biomedical Sciences, Biomedical and Genetic Engineering[/FONT][/LIST][B][FONT=&quot]Where are the Jobs disappearing or Stagnating?[/FONT][/B][LIST][*][FONT=&quot]Federal Government Ministries and Attached Departments[/FONT][*][FONT=&quot]Provincial Government Departments and Agencies[/FONT][*][FONT=&quot]Public Sector Corporations[/FONT][*][FONT=&quot]Nationalized Commercial Banks[/FONT][*][FONT=&quot]Public[/FONT][FONT=&quot] Sector Universities[/FONT][FONT=&quot] and Colleges (except for certain disciplines)[/FONT][*][FONT=&quot]Print Media Companies[/FONT][*][FONT=&quot]PIA, Pakistan Steel, Pakistan Railways[/FONT][*][FONT=&quot]Water and Power Development Authority[/FONT][*][FONT=&quot]Provincial Government Owned Enterprises and Corporations[/FONT][/LIST]
[FONT=&quot]The basic thesis of this paper is that in absence of an integrated model of skill formation, up gradation and maintenance, the adhoc and piecemeal approaches will remain unproductive and inadequate. It is true that the start-up costs and time involved in getting this integrated model up and going are high but we have already wasted so much time and energy that we are lagging behind other countries. Moreover, this proposed model has been tested and applied in case of the State Bank of Pakistan (SBP). We should, therefore, adopt a bootstraps approach and lay solid foundations for reliable flows of high quality skilled manpower responsive to the changing needs of the economy. The pipeline we have constructed in the State Bank in the last six years has already produced 400 out of 800 professional staff easing the shortages of skills in the Central Banking segment. These young men and women, I am very proud to say, are in heavy demand both within and outside the country. From a situation that we were stuck with people who could not be used anywhere now there is a high degree of mobility and the SBP professionals recruited and trained in the recent years are commanding premiums in the market place. We have not adopted a myopic approach by preventing them from leaving the SBP as this will be highly counter-productive; on the other hand, we are enlarging the capacity of our pipeline by increasing the number of recruits and training and developing the staff in-house and outside. We are keen to maintain the quality of intake as once the quality is compromised then the model which I am proposing will become dysfunctional.[/FONT]
[FONT=&quot]The structural reforms in the banking industry have brought about some unintended consequences that are creating serious pressures on the future growth of the industry. From a situation where the movement in and out of the banks was almost non-existent and life-time secure tenure was assured for all the insiders, the industry is going through a major upheaval in achieving stable and cost effective work force. During my recent farewell visits to more than 30 banks in the country, the common theme was the complaints about the widespread poaching of staff among the banks, the unwarranted escalation in compensation packages to attract and retain the staff and the consequent instability in the work force. In a way it is extremely satisfying to witness that the banking industry is going through the early pangs of professionalization where the market is able to discern and reward people on the basis of their output and performance and hunt for the talent. Another positive aspect is that this process gives signals to the rest of the employees and potential entrants that they should also acquire and master the skills that are in short supply if they have to advance their careers or earn more money. Overtime, the expansion in the supply brings back the equilibrium in the market and normalizes compensation packages. But in the transition period the pains are felt by everyone. In this transition phase, this instability gives rise to dangerous trends of out pricing of banking products with adverse impact on the consumers, the widening gaps between the marginal and average salary scales in the industry and thus the consequences for motivation of the majority staff and the perpetual struggle by the senior management to manage the scarcity and mobility of human resources.[/FONT]
[FONT=&quot]What can be done to smooth this transition and enhance the requisite supply of skills? Let me first say that there is no short cut and it will take time, efforts, coordination among various players and agencies and continuous monitoring and follow-up. The business model for the skill formation, up gradation and maintenance process is presented graphically below. There are three distinct stages of this process with spheres of responsibilities and inputs.[/FONT]

cotinue
 

[FONT=&quot]The starting stage is the quality and quantity of student intake into our universities, professional colleges and institutes, along with strong accreditation bodies. In Pakistan, we all have become familiar, with the passage of time, as to which institutions are the breeding grounds for quality raw materials of skills for various industries. The problem at this stage is that the numbers being produced from the quality institutions are totally inadequate in relation to the demand. For example, the banking industry is now moving to second tier educational institutions for sourcing their recruitment. This may give a false sense of complacency to these institutions that as their graduates are finding jobs in the market they have attained the required standards of acceptance. Nothing could be far from the truth. The banking institutions have no other alternative but to scrape at the bottom of the barrel to bring people on board to meet their rapidly growing demands.
[FONT=&quot]At this stage, the Universities should work closely with the Industry Associations such as Pakistan Banks Association to revise the curriculum, attract qualified faculty and instructional staff, and modify the testing and examination methodology to produce the required number and quality of graduates. There should be no compromises and short cuts by the universities to meet this upsurge in demand. Linkages should be established to train the trainers at world class institutes of learning. This will have a multiplier effect in producing both the numbers and quality.[/FONT][/FONT]
[FONT=&quot]
[FONT=&quot]The Industry Associations or individual large firms can help upgrade the quality of our Universities and institutes by setting up endowed chairs and attracting world class scholars, establishing competitive research grants for exploring practical issues of interest to them, funding scholarships for the best and brightest, who cannot otherwise afford to study at the top private universities and provide travel grants to teachers to attend international conferences, symposia, etc. These initiatives will not cost very much in terms of actual outlays but produce highly desirable results in enhancing the quality of our educational institutions and promoting scientific and technological disciplines needed by the economy.[/FONT]

[FONT=&quot]The second stage is the recruitment process and post-induction period after the professionals have entered the industry. The recruitment should be based on merit through a highly competitive process. The written test should be more a test of applying knowledge and techniques to solving problems rather than reproduction of memorized material. The interviews should be structured to find out the interpersonal communication skills, suitability to work in a team environment and the values and attitudes. At this post induction stage, the responsibility shifts from individual company to the industry associations which should develop, certify and help maintain excellent centers for imparting standardized, uniform, theoretical, applied and hands-on training to the new recruits. In some cases, passing of professional examinations such as the Diploma in Banking may also be the pre-requisite for career progression.[/FONT]

[FONT=&quot]The experience of the State Bank of Pakistan in this regard may be illuminating. The recruitment practices initiated by SBP several years ago have been adapted by almost all the banks and are becoming industry-wide standard practices. Post-entry training is also catching on rapidly but the efforts of individual banks should be supplanted by a collective effort of Pakistan Banks Association (PBA) and the Institute of Bankers, Pakistan (IBP) to develop standardized curriculum, approved list of trainers, pedagogical tools, testing methodology, and minimum acceptable grading system. The training delivery can then be decentralized under these parameters and quality control and assurance can be centralized by the PBA and IBP.[/FONT]
[FONT=&quot]The process of value addition does not end simply with the post-entry training. We have found that the direct linkage of intermediate training courses and advanced training courses and passing of professional examinations linked with promotion plays a critical role in the continuous improvement and voluntary up gradation of skills. As there is overall shortage of trainers in these areas, the PBA and IBP should enter into strategic alliances or joint ventures with foreign and international banks or training institutions. This will minimize the costs to individual member banks and also relieve them of the search and organizational costs.[/FONT]

[FONT=&quot]Another clever way of skill upgradation is to send the rising stars in the industry or profession for attachments to foreign banks for short periods of time to acquire the state-of-art knowledge and practices. They should be expected, on their return, to disseminate and share their learning with their peers and colleagues and take the lead in applying those practices in their own institutions.[/FONT]
[FONT=&quot]The SBP has so far sent almost one half of their 800 professional staff for foreign training and attachments and the results are for everyone to see. Those Chief Executives, who only focus on the cost side of the equation and miss the benefit side, are indeed doing a great disservice to their own organizations as the competition will sooner or later beat them because of this inadequacy in the skill acquisition by their staff.[/FONT]

[FONT=&quot]The universities should organize Executive Development Programs such as being done by the business schools. The banks should also avail of these courses and work with the business schools to tailor them to their requirements. Institutions such as GIK, NED, UET, NUST, FAST, etc. should not only organize refresher technical courses for the executives working in engineering profession but also hold management courses for the middle level managers of various companies.[/FONT]

[FONT=&quot]There is an acute shortage of project management skills in this country. To begin with, our engineering universities can bring in foreign trainers or institutions as partners and then gradually build up their own capacity. Continuous collaboration with leading universities such as Caltech, Georgia Tech, etc. would be the best way to value addition of our engineering professionals.[/FONT]

[FONT=&quot]At the last stage, the finished product rising from within the organization or recruited from outside should remain engaged in learning and skill upgradation.[/FONT]

[FONT=&quot]At this stage, the job content emphasizes less of technical skills but more of leadership and managerial skills. We do not realize how much difference a good manager can make to the efficiency and productivity of an organization. But our senior managers feel they have reached the nirvana, they know everything and nobody can teach anything to them anymore. I believe they are sadly mistaken as they do not realize how much they are missing in terms of their own personal and professional growth. Management Development Programs both at our universities and institutes of higher learning and at foreign institutes should be encouraged and made an integral part of their career management.[/FONT]

[FONT=&quot]The model that I have laid out is nothing new or spectacular. The different elements of this model do exist in bits and pieces and have been applied in varying intensity across many companies in Pakistan. I have mostly relied upon the examples of banking industry as I am more familiar with the developments there. I do not know very much about the other sectors and I am sure a lot must be happening there. If it is not happening, then I will urge the universities, institutes, industry associations to work together and test this model, adapt it and apply it widely and in a systematic say. I am confident that the skill shortages, which we are observing today in Pakistan, will not only disappear domestically but we will become the conduit for supplying these skills to other countries and a magnet for outsourcing business.[/FONT]

[/FONT]

Why Privatization Is Necessary For Economic Growth In Paksitan
 

[B][FONT=&quot]WHY PRIVATIZATION IS NECESSARY FOR ECONOMIC GROWTH IN[/FONT][/B]
[B][FONT=&quot]PAKISTAN[/FONT][/B][B][FONT=&quot]?[/FONT][/B]
[B][FONT=&quot]ISHRAT HUSAIN[/FONT][/B]

[FONT=&quot]The decade of 1970s in Pakistan witnessed a massive redistribution of national assets from the private owners to the state. The reason underlying the then Government’s thinking for this extremely radical action was that the national wealth was being concentrated in the hands of few families and the rich was getting richer and the poor getting poorer. It was asserted by the proponents of this strategy that the state control over allocation of the resources would promote the best interests of the poor. The intellectual support for this strategy was drawn from the success of the Soviet Union and the socialist economic model practiced in that part of the world.[/FONT]
[FONT=&quot]Two decades later it turned out that these assertions and assumptions that drove this particular line of action i.e. nationalization was not only unrealistic and flawed but the consequences were exactly opposite to what the intentions were. The collapse of the Soviet Union and the bankruptcy of the socialist model eroded the ideological underpinning of this strategy and the actual results on the ground in Pakistan and almost all the developing countries shattered the ideal and utopian dreams of the proponents of this philosophy. Pakistan’s public enterprises including banks became a drain on the country’s finances through continuous hemorrhaging and leakages and a drag on the economic growth impulses. The poor instead of benefiting from the state’s control over these assets were actually worse off as almost Rs. 100 billion a year were spent out of the budget annually on plugging the losses of these corporations, banks and other enterprises.[/FONT]

[FONT=&quot]These public enterprises became the conduit for employing thousands of supporters of political parties that assumed power in the country in rapid succession and a source of patronage, perks and privileges for the ministers and the favored bureaucrats appointed to manage these enterprises. These employees and managers had neither the managerial expertise nor technical competence to carry out the job. Instead of providing goods & services to the common citizens at competitive prices efficiently, the public enterprises turned into avenues for loot and plunder, inefficient provision of services and production of shoddy goods. It was a common knowledge that getting a telephone connection in Pakistan required years not months and that too with the help of sifarish and exchange of bribes. No wonder the country was able to install less than 3 million telephones in the entire 50 years of its history while under a deregulated and private sector driven environment an additional 6 to 7 million mobile phone connections were given to Pakistanis from all walks of life without any favor or discrimination in one year alone i.e. 2004.[/FONT]

[FONT=&quot]The hangover of the past in general and the lingering fascination for the socialist model among some of our intellectuals in particular continue to have a dominant influence on our thinking. Some of the resentment against private profit making is also quite legitimate and understandable. In the past, private entrepreneurs in Pakistan did not make ‘profits’ in the real economic sense of the word by earning a return on their investment in a competitive world. On the contrary, they earned ‘rents’ through the maze of permits, licenses, preferred credit by the banks, subsidies, privileges, concessions and specific SROs granted to the favored few. Naturally when one sees people becoming rich not through the dint of their hard work and enterprise but by manipulation, back door entry, connections, reciprocity, paying bribes, adopting extra legal means, bypassing the established rules and laws, getting scarce foreign exchange quotas, evading taxes, defaulting on bank loans and rigging the markets etc., we should not be surprised to see the venom against the so called ‘private profits’.[/FONT]

[FONT=&quot]The policy reforms introduced in Pakistan by the Nawaz Sharif Government in 1991 and more importantly followed by that strong citadel of socialist raj – India – were a watershed reflecting the new realities of economic life. These reforms, though quite extensive and diverse, could be summed up for the sake of simplification in three words – Liberalization, Deregulation and Privatization. The results of Indian reforms are quite evident before us. During the first 45 years of its independence until 1991, India was hardly able to achieve per capita income growth of 1 percent per year and the incidence of poverty remained persistently high. In the 12-year period since 1991, India’s average per capita income growth has been 4 percent per year, poverty has been declining ever since and has fallen below 25 percent. Pakistan, unfortunately, could not follow through these reforms in a continuous and consistent manner despite the fact that both Benazir and Nawaz Sharif governments were fully committed to these reforms. For example, 12 percent shares of PTCL were first sold to the general public in 1993-94 and it has been on the privatization agenda of every successive government since then. The short term political expediency may dictate a different behaviour at present, but I am quite sanguine that the PPP and PML (N) would have pursued the same path were they at the helm of the affairs. Thus, there is a broad political consensus in the country that privatization is in the larger national interest of the country.[/FONT]

[FONT=&quot]Privatization has to be seen in the overall context of the respective roles of the state and markets. The State has to be strong to combat the excesses of the market and cope with market failures. It is not that the state should play a lesser or reduced role but a different role in so far as it provides an enabling environment for equitable development and creates necessary conditions for growth through investment in human development and infrastructure. The government’s effective role in regulating and monitoring the market has to be strengthened to promote healthy competition and avoid the rigging of the market by a few. Markets are the best known vehicle for efficient allocation and utilization of resources and thus the decisions as what goods and services to produce, how much to produce, distribute and trade can be done well only by the private sector and not by the bureaucrats. This division and redefinition is also essential to reduce corruption and generate sustained and equitable growth in the country. Market-based competition, privatization of public banks and a strong regulator have successfully reformed the banking sector in Pakistan during the last several years and this model should be replicated elsewhere in the economy. It is not ideology but pragmatism and learning from the past mistakes that should drive our economic policies and strategies. Growth takes place only when productivity from the existing resources keeps on rising.[/FONT]
[FONT=&quot]The global experience shows that by and large, productivity actually declines or remains stagnant when the businesses are managed and operated by the government thus slowing down or hurting the pace of growth.[/FONT]
[FONT=&quot]I will now turn to the economic rationale of privatization that is not fully understood by many. In particular, there is a popular view that it is okay to sell the loss making enterprises but retain the profit making entities such as PTCL and PSO in the public sector. It is true that the budgetary stress and commercial bank borrowing factors are not valid in such cases but there is a larger economic case for the divestiture of even such profit making enterprises. The main logic behind this divestiture is that it will[/FONT]
[FONT=&quot]promote efficient allocation of scarce resources, optimal utilization of resources, making sound, timely and market responsive investment choices, winning and retaining customer’s loyalty through better service standards and lower product prices or user charges and contributing to the expansion of the economy through taxes, dividends etc. I would take the most debated example – that of the PTCL – as an illustration of the general point I am making about the economic rationale for privatizing profit making public sector enterprises.[/FONT]

[FONT=&quot]The most oft pronounced arguments against privatization of profit making enterprises are (a) why fix it when it ain’t broke? (b) Protection of workers (c) a better and more professional management can bring about the same results as under privatization. The basic reason for privatizing these enterprises is that the government should not be in the business of running businesses but regulating businesses. The role of the government should be that of a neutral umpire, who lays down the ground rules for businesses to operate and compete, to monitor and enforce these rules, to penalize those found guilty of contraventions and to adjudicate disputes between the competing business firms. If the government owned firm itself is one of the players in the market, there is a strong conflict of interest and the other market players lose confidence in the neutrality of the umpire. Under these circumstances, the market becomes chaotic, disorderly and unruly as there is no neutral ‘person’ to monitor and enforce the rules. The economy thus pays a heavy price for this loss of the market mechanism in the production, sale and distribution of goods and services. The present controversy between the PIA and private airlines is a manifestation of this tendency. If the ‘umpire’ favours its owned enterprise i.e. PIA and discriminates against the rival private airlines, the ultimate result would be the winding up of these airlines. The growth of aviation industry would suffer as the present competition is cutting down the prices and stimulating demand for air travel in the country. In absence of such competition, the PIA would have the sole monopoly and the planes would fly with empty seats as the ticket prices would not be market based but arbitrarily high. The consumers of airline industry – existing and potential – will be the loser in this bargain. The same argument can be applied in case of PTCL. If the Government had continued to own and manage PTCL, the private sector competing firms would have felt that they would always remain at a disadvantage in relation to the PTCL. The constant fear that the government’s coercive powers and full force of policy making ability would always be used to safeguard and enhance the interests of PTCL. This would have kept the private firms away from investment in the fixed telephone or wireless loop segments.[/FONT]

[FONT=&quot]If this may not be true under one particular set of rulers, the apprehension that such an eventuality may happen at some time in the future keeps prospective investors away from that field of business. The growth of a dynamic private sector in the economy is thus stifled. The PTCL would under that scenario preserve its monopoly; pass on its inefficiencies to the customers, charge exorbitant prices and resort to seeking concessions of various kinds from the government. The result would be stagnation in the growth of fixed telephony in the country and poor service to the customer. So while the PTCL is not broke and is indeed profitable it needs to be privatized to provide a level playing field for fostering competition, stimulating demand, expanding telecom customer base, improving service delivery and contribute to rapid economic growth. None of this will happen if the PTCL remains a public owned and managed firm.[/FONT]

[FONT=&quot]A lot is being made of the fact that the PTCL was making huge profits for the exchequer and these profits will now be diverted to the private owner. The facts are quite contrary to this assertion. The Government of Pakistan will still retain 62 percent of the shares while the private operator will have only 26 percent. Thus out of each billion rupees of profits earned by PTCL, the GoP will receive Rs. 620 million while the private operator only Rs. 260 million. In addition, the PTCL will continue to pay the corporate tax on its income. The burning desire to transfer the management to a private investor was that the profits earned by the PTCL were largely derived not from its own efficient operations but from its monopoly status as the sole provider of fixed telephony in the country. In the coming years, the PTCL will have to compete for its market share as it has lost its monopoly and it was quite likely that the public sector ownership will act as a serious constraint and the level of profits will be eroded over time.[/FONT]

[FONT=&quot]Since the private sector competitors of PTCL will have more flexibility, agility and capacity to respond and seize the opportunities for expansion and improved customer service, they will give a hard time to rule bound, inflexible and slow moving public sector owned PTCL. However, competent and able top managers and the Board of Directors may be, they have to follow set procedures, prior clearances and approvals by multiple ministerial bodies before they can make any operational decisions of significance. U-Fone lost 18 months’ valuable time facing various inquiries into its procurement while its competitors were enhancing their market share at its cost. Such a scenario is likely to recur once a government owned PTCL is pitted against several private competitors.[/FONT]

[FONT=&quot]The fears about employment losses in the industry as a result of privatization are also, by and large, unfounded. The example of the banking industry privatization controverts those who claim that privatization means jobs are lost. In 1997 when the restructuring, down-sizing and privatization of the nationalized commercial banks picked up speed there were 105,000 employees working in the financial sector. After privatization was completed, the banking industry has expanded and the work force has expanded to 114,000. It is true that the pattern of employment has changed and more productive and skilled workers have been taken in at the expense of low skilled or unskilled. There is no doubt that the PTCL will also expand under its new owners and employ more people but in the skilled category. This upgradation of skills will raise productivity of the firm as well as of the industry. The skill mix of the staff employed by the PTCL and its numbers at present is inappropriate to meet the new challenges of providing high standards of value added services and new product development. One of the difficulties faced by the public sector businesses is that they cannot pay market based remunerations to their executives or highly technical manpower. If the PTCL is not allowed to pay more than MP1 scale to its Chief Executive i.e. Rs. 200,000 per month which is a fraction of what senior executives in the rival private firms get, should we expect the PTCL to attract, retain or motivate high performing manpower. The field gets tilted against a public sector company as it has skill gaps and redundancies and is unable to provide value added services of the same quality as provided by the private sector rivals.[/FONT]

[FONT=&quot]The process of hiring and firing of employees in a public sector company such a PTCL is highly convoluted, complex and cumbersome. Those found guilty of infractions or negligence of duties or even corruption can only be dispensed with after a protracted process of disciplinary proceedings that sometimes take several years to complete. In the meanwhile, the employee continues to stay put in service and receives all the emoluments and perks. In a rare case, a departmental inquiry comes up with a guilty verdict, the employee can appeal to the Federal Services Tribunal and if he is unsuccessful, then all the way to the Supreme Court. Why will any right minded boss choose to go through such an ordeal? [/FONT]

[FONT=&quot]The alarm of employment losses after privatization is also unjustified for another reason. Telecom sector has already generated, after deregulation, hundreds of thousands of new jobs through public call offices, calling cards and pre-paid card companies, Internet Service Providers, mobile phone companies, broad band services, and other value added services under the private sector. As the penetration ratios in Pakistan are still quite low, there is going to be a large expansion in the telecom sector. The losses of redundant jobs in PTCL, if any, will be more than offset by new productive jobs in the Local Loop, Wireless Loop and LDI companies being set up in the private sector. Industry estimates that 100,000 new jobs will be added during next 3 – 5 years. The substitution of unskilled jobs in the PTCL by the skilled jobs in the telecom industry as a whole will raise the productivity of the sector as well as that of the user companies and institutions. Those among the unskilled who can be retrained or redeployed could be retained minimizing the overall loss of jobs within the PTCL itself.[/FONT]

[FONT=&quot]If the PTCL itself is able to expand its services and operations, the manpower that is surplus to its present requirements can be productively employed. Thus the fears of workers losing protection under a privatized entity appear to be misplaced. After all, the PTCL is the only telecom company that has been in the business for the last 58 years.[/FONT]

[FONT=&quot]The oversight, monitoring and guidance capabilities of public enterprises are ridden with the aggravated problems of principal – agent relationship. As the Board Members, however able and honest they may be, have no direct personal stakes in the well-functioning of a public enterprise, they cannot be expected to devote as much time or energy to the Board’s affairs as the private strategic investors would. Thus, the PTCL’s governance structure would always remain second best to its private sector competitors and put it at a comparative disadvantage. If a more callous Minister is unfortunately appointed to chair the Board, the appointments, award of contracts and transfers and postings will do further damage to the performance of the PTCL. The temptation by the elected political leaders or other rulers to interfere in the affairs of the public sector companies is not only high but natural. They are constantly accosted by their constituents for jobs, contracts, postings and transfers and it is not possible for them to keep on saying no to everyone all the time. In some cases, they have to yield to pressures. It is, therefore, necessary to sever the connection between the government and the business.[/FONT]

[FONT=&quot]How can a public sector company then be expected to show same results as its private sector competitors whose compensation structure is driven by performance, whose managers enjoy full powers of hiring and firing without any restraint, their Boards have direct stakes in ensuring good governance and the political interference is almost non existent?[/FONT]

[FONT=&quot]The legacy of PTCL inherited from the culture of the Post and Telegraph Department cannot therefore be washed away if it operates under these constraints. This culture can only be replaced by a dynamic competition-oriented culture under the leadership of a private sector operator.[/FONT]

[FONT=&quot]As a government entity, PTCL is considered a rich cash cow to meet the fiscal needs rather than a business enterprise that requires funds for its own maintenance and operations and more important for its investment needs. The compulsions of extracting as much profits and cash for meeting fiscal deficit will always predominate and the imperatives of expanding the network, infrastructure and services through retained earnings will be neglected. Even assuming that a perceptive government does allow PTCL the funds to make investment, it is not obvious if these will be used in an efficient and cost-effective manner. The World Bank has recently blacklisted 200 firms for padding contracts and bribing officials in public sector procurement awards in a number of developing countries. It must once again be stressed that private sector ownership and efficient functioning of market mechanism require certain legal and regulatory institutions. In absence of these institutions, private monopolies or oligopolies can surface, market distortions can accentuate and markets can be rigged for the benefit of few. Strong legal and regulatory institutions would be able to counter these evils forcefully and provide a level playing field for all market participants. We have to strengthen these legal and regulatory institutions in the country.[/FONT]
[FONT=&quot]Public policy should also be geared at removing preferential treatment or granting of concessions or privileges to a particular segment of the population. During the last five years, the Government has endeavoured to move in this direction and act in an even handed manner. No firm specific SROs have been issued to favour a particular enterprise at the expense of others. Under these circumstances, private sector will earn true ‘profits’ through competition and not ‘rents’ and the justified grudge against the private sector will be minimized.[/FONT]

[B][FONT=&quot]CONCLUSION:[/FONT][/B]

[FONT=&quot]Privatization contributes to economic growth through productivity gains, efficient utilization of resources, better governance and expansion in output and employment. Profit making enterprises under the public sector may be making profits due to the unique market structure such as monopoly or other privileges or concessions conferred upon them by the government but it does so at the expense of the consumer who has to pay higher than market price for the product or the services. The ordinary consumer gets a benefit only through competition among private sector firms in form of lower prices and better services as has been demonstrated in the cases of banking, telecommunications and, more recently, air travel. In a deregulated market environment, public ownership becomes a serious constraint as the rule – bound procedures and the rigidity in the structure do not allow public sector companies the flexibility to respond promptly to dynamic market conditions. Furthermore, the government’s role as a regulator and neutral umpire becomes questionable once it is itself a participant in the game through its own company.[/FONT]
[FONT=&quot]This stifles competition and subverts expansion and growth by the private sector companies.[/FONT]

Distributing Benefits Of Growth To The Majority
 

[B][FONT=&quot]DISTRIBUTING BENEFITS OF GROWTH TO THE MAJORITY[/FONT][/B]
[B][FONT=&quot]Ishrat Husain[/FONT][/B]

[FONT=&quot]The major recurring themes in the popular discussion on the economy have been shifting over the last six years. In the earlier years of the Musharraf period it was widely believed that the country was going to default on its external obligations. When this did not happen there was a loud consensus that Pakistan would not be able to comply with the stringent conditionalities of the IMF and would, sooner or later, get off the track.[/FONT]

[FONT=&quot]Since the country successfully completed the programme, the concern was raised that we had emphasized too much on macroeconomic stabilization such as large foreign exchange reserves while growth rates remained quite weak. Now that the growth rates have risen consecutively for the last three years, there is an anxiety that the benefits of growth are confined to a small minority of the population and are not being shared widely.[/FONT]

[FONT=&quot]It should be admitted at the outset that the incidence of poverty in the country is quite high i.e. almost one-third of the population is living below the poverty line and unemployment and underemployment levels are also high, particularly among the urban educated youth. But, it must be realized that there is a well established empirical regularity in economic development – whenever economic growth rates are low, poverty and unemployment are high. Conversely, whenever a country records high growth rate, there is a general tendency for the level of poverty and unemployment to decline. This is also borne out by the past economic history of Pakistan. For thirty years i.e. between 1960 and 1990 Pakistan’s economic growth rate was an impressive 6 per cent per year and the incidence of poverty went down from 46 per cent to 18 per cent of the population.[/FONT]

[FONT=&quot]This happened at a time when there was no explicit policy emphasis on poverty targeted interventions and social indicators were not improving. But during the 1990s when the growth rate fell to 3 to 4 per cent per annum, poverty resurfaced and by the end of the decade it was up once again reaching 33 per cent. As the first three years of the present they were devoted to putting the economy back on track after the crisis of 1998, growth rates remained low and poverty and unemployment remained high. It is only in the last three years that we have witnessed growth rates of 5.4 per cent, 6.6 per cent and more than 8 per cent. If growth remains on this trajectory and poverty targeted interventions including investment in human development are implemented, there is no doubt in my mind that we would once again see a reduction in poverty and decline in unemployment rates.[/FONT]
[FONT=&quot]What is the basis of this assertion? Higher growth rate in real terms means that all households in the economy with the exception of those not in labour forces or not fully employed receive higher incomes after adjusting for inflation. Of course, these higher incomes accrue in proportion to the assets held by different income groups. Top 20 per cent of the population receives almost 50 per cent of the national income. So they receive higher incomes than the bottom 20 per cent who get only 7 per cent of the national income. But still this segment of the population is recipient of additional income generated as a result of faster growth compared to a situation where growth is low or stagnant.[/FONT]

[FONT=&quot]Higher incomes translate into increased demand for goods and services. This puts pressures on prices in the short run as there are too many people chasing a limited supply of goods and services. But higher prices also signal to the producers that there are shortages and they should enhance their production so that they can meet these shortages.[/FONT]

[FONT=&quot]To increase their production, they have to invest in new plants & machinery and employ more people. As more people find jobs, they are moved out of the ranks of unemployed and unemployment rates decline. As incomes accrue to these previously jobless or underemployed households they are lifted out of poverty and hence the incidence of poverty falls. This is exactly what happened in Pakistan until 1988/89 and that is what is happening at present.[/FONT]
[FONT=&quot]Sixty per cent of our population relies on agriculture directly or indirectly. Those engaged in agriculture are not employed in the strict sense of terms as we think about employment in factories, firms, government departments, etc. In agriculture, higher incomes accrue to the landholders through higher output prices and higher productivity.[/FONT]

[FONT=&quot]Farm labour also benefits as the demand for their services also rises and poverty declines in rural areas too. Part of this income finds its way into demand for consumer goods.[/FONT]

[FONT=&quot]Manufacturers seeing this upsurge respond by first increasing utilization of existing capacity and then expanding capacity through new investment. That is why we have seen double digit growth in investment, manufacturing production and sales and high overall growth rate of GDP.[/FONT]

[FONT=&quot]But it must also be admitted that poverty is not only a phenomenon of low incomes but that of powerlessness, state of helplessness and lack of access and opportunities. In Pakistan, literacy rate is about 50 per cent and there is a high correlation between poverty and literacy. Those who are poor are preponderantly illiterate.[/FONT]

[FONT=&quot]Therefore, intensified efforts for education and literacy will certainly help in alleviating poverty. The educational system which is usually leveler of incomes has created inequities in Pakistan. The children of the well-to-do families study in English Medium [/FONT][FONT=&quot]Schools go abroad for higher education and return to occupy high positions in the country. The children of the poor families remain illiterate or go to madarsah or attend [/FONT][FONT=&quot]Urdu Medium Schools and generally become clerks. This is not fair at all. We should have a system whereby those who are bright and talented but do not have means to attend the best educational institutions should be given scholarships by the government. It is gratifying to see that the talented students from backward areas of FATA have been able to get into the State Bank of Pakistan by dint of their merit and not sifarish.[/FONT]

[FONT=&quot]Drop out rates in our educational system are extremely high, the quality is poor and the skills imparted at government schools and colleges are highly irrelevant to the demands of the economy. The output from such educational institutions is, therefore, relegated to the ranks of the unemployed. While the economy has serious shortages of technical and professional manpower, we have surplus of ordinary BAs and MAs who do not have employable skills. This imbalance is one of the major factors for high unemployment among the urban educated youth. Gulf States and Malaysia are also looking for engineers, architects, technicians, mechanics, para-medical staff, nurses, etc. but we do not have adequate numbers available in the country.[/FONT]
[FONT=&quot]Access to health facilities is also highly differentiated and parallels the story of educational facilities. The government-run hospitals, clinics and dispensaries are in terrible shape, devoid of basic drugs and equipment. The doctors manning these facilities concentrate on private practice and are indifferent towards the patients from the poor households. The drugs supplied by the government for free distribution are sold in the market to earn private profits while private patients have to fend for themselves.[/FONT]

[FONT=&quot]Access to thana, kutchery and tehsil is also heavily tilted against the poor. They have to either seek the assistance of an influential person or offer bribes to get redressal of their grievances. As most of the time they do not have adequate financial resources, they resort to the first option. They, therefore, fall in the trap of patron-client relationship or mai-bap relationship that makes them permanently subservient to the well-to-do and influentials of their areas. They lose their autonomy and the decisions are made on their behalf by these elite groups. This loss in autonomy is translated into electoral support at the time of the elections for this elite class. Thus, powerlessness and loss of autonomy perpetuate poverty even when incomes may rise in the short run.[/FONT]

[FONT=&quot]This state of affairs will continue to prevail until we bring about major reforms in our institutions particularly Civil Service, Judiciary and Police. Their orientation and mind set have to change and their performance should be evaluated on the basis of their providing access to the poor and common citizens. In essence, it is a matter of good governance not only at the highest level but at all levels of the public institutions – legislature, judiciary and executive.[/FONT]

[FONT=&quot]The legal system and financial rules in the bureaucracy are also highly complex and full of obfuscations. Even if some well-meaning top officials are committed to bringing about some changes, the administrative machinery down the hierarchy is so cumbersome and anachronistic and the financial rules are so outdated and restrictive that good policy intentions are seldom translated into action.[/FONT]

[FONT=&quot]What is the way forward to end this powerlessness and lack of access of the poor? [B]Good governance should therefore start with a review of the structure, processes, practices and rules and regulations of our administrative machinery and then bring about revisions wherever required[/B]. There are some positive changes that are taking place or are underway. Devolution to local governments, civil service reforms, police reforms and judicial reforms are being implemented and the sooner they take firm root the encumbrances on the poor of this country will be eased.[/FONT]
[FONT=&quot]Media – both electronic and print – have become more vigilant. They should undertake more in-depth investigative reporting and expose the malpractices prevalent in the system and ensure that the poor have better access to delivery of public services and institutions.[/FONT]

[FONT=&quot]Non-government and civil society organizations have become quite active in the fields of education and health care. Some of them are providing quality services without imposing severe financial burden on the poor. Private-public partnership should be strengthened to scale up these activities whereby the government provides the facilities and finances while the private and not-for-profit sector delivers the services to the poor.[/FONT]

[FONT=&quot]Financial system is one of the most potent instruments for creating wealth and distributing benefits of growth to the poor. As financial sector has been restructured and competition introduced, there is a broadening of access for their products and services.[/FONT]

[FONT=&quot]Agriculture credit, consumer financing, SME loans, mortgages and microfinance are becoming quite widespread and the number of borrowers from middle and poor classes is gradually increasing. Although the number of beneficiaries is still between 2 and 2.5 million household, the State Bank of Pakistan is committed to double this number in the next five years.[/FONT]
[FONT=&quot]In addition, public accounts committees of the legislatures, independent regulatory agencies, the National Accountability Bureau, offices of the Auditor General of Pakistan, Chairman, Federal Public Service Commission, Wafaqi Mohtasib, Provincial Mohtasibs, Federal Tax Ombudsman and Banking Ombudsman are some of the elements that will improve governance in the country and take action against the misuse of office, misappropriation of funds, indulgence in corruption and also take actions for redressing the grievances of common people.[/FONT]

[B][FONT=&quot]Conclusion:[/FONT][/B]
[FONT=&quot]The government has provided an enabling and conducive environment for growth of economic activities in the future and foundation has been laid which will result in economic prosperity and stability. In the short term, we have to fight against inflation because it has hit the lower income groups and fixed wage earners the most. It will take five to ten years of sustainable high growth rates of 6 per cent or above to bring the incidence of poverty down to 16-17 per cent from the present level and improve the standards of living of the majority of population[I]. This is possible if the policies are consistent and continued, external environment remains favourable and there are no sanctions or discrimination against Pakistan, good governance is practised, institutions for delivery of basic services to the poor are devolved and strengthened but most important political stability is entrenched. All political parties should agree on a common agenda that economic policies would continue in the larger interest of the country whichever party comes to power. After all they are all agreed on the need for rapid economic growth, macroeconomic stability, poverty reduction, improvement in social indicators and prosperity for the majority of the population. Of course, there will be fine tuning, adjustments and adaptation during the course of implementation, but the vision and direction would remain unchanged.[/I][/FONT]

[FONT=&quot]China[/FONT][FONT=&quot] has set its path to economic progress as far back as 1980 and there have been changes in the leadership of the Party but the direction and policies have remained the same. They have proactively managed the policies in light of changing external and domestic conditions. We can all see the spectacular results China has achieved in reducing poverty and bringing prosperity to the majority of their population.[/FONT]

[FONT=&quot]In Pakistan also, the policies have to be adjusted in the light of unforeseen or unanticipated events. When inflation was low, the benefits of financial sector reforms, liberalization and competition were passed on to the borrowers as a policy aimed at kick start of the economy. As inflationary pressures have intensified in the recent months, the higher interest rates will raise the rates of return to the bank depositors who have been suffering for the last four to five years. State Bank of Pakistan will do its best to bring inflation under control but is also requires supply-side interventions.[/FONT]

[FONT=&quot]In the medium term, the agenda for reforms is quite tall but I am confident that honesty, hard work, straightforwardness can push the country and individuals forward. Our own religion teaches us to help the poor and hungry residing in our neighborhoods.[/FONT]

[FONT=&quot]Zakat system can transfer finances from the rich to the poor. If we follow these teachings of our religion we can provide stability to the social order and the future of the nation will become bright.[/FONT]

National Economy And Impact Of Foreign Aid
 

[B][FONT=&quot]NATIONAL ECONOMY AND IMPACT OF FOREIGN AID[/FONT][/B]
[B][FONT=&quot]Ishrat Husain[/FONT][/B][B][FONT=&quot][/FONT][/B]
[B][FONT=&quot]OUTLINE:[/FONT][/B]
[FONT=&quot]I. Types and Forms of Aid/Loans[/FONT]
[FONT=&quot]II. Role of Donor Agencies and their Conditionalities[/FONT]
[FONT=&quot]III. Impact of Foreign Aid on National Economic Policy[/FONT]
[FONT=&quot]IV. Current state of the Economic Policy[/FONT]
[FONT=&quot]V. Prospects and Challenges[/FONT]
[B][FONT=&quot]I. TYPES AND FORMS OF AID/LOANS[/FONT][/B]
[FONT=&quot]Foreign economic assistance broadly falls under the following two categories:[/FONT]
[FONT=&quot]A) Foreign grants[/FONT]
[FONT=&quot]B) Foreign loans and credits[/FONT]
[B][FONT=&quot]A) Foreign Grants:[/FONT][/B]
[FONT=&quot]Foreign grants provided by the donor countries/agencies comprise the following:[/FONT][LIST][*][B][FONT=&quot]Project Assistance - [/FONT][/B][FONT=&quot]covers the cost of machinery and equipment for projects.[/FONT][*][B][FONT=&quot]Commodity Assistance - [/FONT][/B][FONT=&quot]represents imports of industrial raw material and essential consumer goods.[/FONT][*][B][FONT=&quot]Technical Assistance - [/FONT][/B][FONT=&quot]includes Experts/Advisory Services, training facilities abroad and Supply of equipment for purposes of training and demonstration.[/FONT][*][B][FONT=&quot]Other Grants - [/FONT][/B][FONT=&quot]such as Relief Aid, foreign aid received in cash.[/FONT][/LIST][B][FONT=&quot]B) External Debt:[/FONT][/B]
[FONT=&quot]External Debt can broadly be viewed from three angles:[/FONT]
[B][FONT=&quot]a) By Borrower Type[/FONT][/B][LIST][*][FONT=&quot]Central Borrowing – Loans contracted by the government.[/FONT][*][FONT=&quot]Guaranteed Loans – Loans contracted by the regional/provincial governments; autonomous bodies/corporations; financial institutions, credit agencies and industrial concerns etc. in the private sector guaranteed by the government.[/FONT][*][FONT=&quot]Private Non-Guaranteed – external obligation of a private debtor.[/FONT][/LIST][B][FONT=&quot]b) By Utilization:[/FONT][/B][LIST][*][FONT=&quot]Project loans - to finance the cost of machinery, equipment and technical services for a specific project.[/FONT][*][FONT=&quot]Non-project commodity loans or program loans - to finance imports of industrial raw material and essential consumer goods and are always contracted by the national government.[/FONT][/LIST][B][FONT=&quot]c) By Creditor Type[/FONT][/B][LIST][*][FONT=&quot]Official Creditors – includes multilateral (World Bank, ADB, IDB etc.) and bilateral loans (including governments and their agencies). This is also termed as Capital Aid or Official Development Assistance (ODA). These cover the cost of capital goods, machinery and equipment for the projects.[/FONT][*][FONT=&quot]Private Creditors – it mainly includes Suppliers’ credits from manufacturers, exporters, or other suppliers of goods; loans extended by private banks and other private financial institutions.[/FONT][/LIST][B][FONT=&quot]II. ROLE OF DONOR AGENCIES AND THE CONDITIONALITIES IMPOSED BY THEM/INFLUENCE OF AID ON ECONOMIC POLICY[/FONT][/B]
[FONT=&quot]There are three leading multilateral agencies viz. IMF, World Bank and the ADB that provide loans and credit on soft and hard terms. The core function of IMF is to provide support to countries facing acute imbalances between their external payments and receipts. The World Bank or the ADB, unlike the IMF, are development banks dedicated purely for poverty reduction and improving the living standards of people. Nevertheless, all the three institutions pursue a common objective of promoting economic growth and reduce unemployment. For Pakistan all the three agencies have contributed significantly in providing assistance and almost 50 percent of our external debt is owed to these to these institutions.[/FONT]
[FONT=&quot] [/FONT]
[B][FONT=&quot]a) International Monetary Fund (IMF):[/FONT][/B]
[FONT=&quot]The IMF was established in 1945 to promote international monetary co-operation, facilitate the expansion and balanced growth in international trade, promote exchange rate stability and orderly exchange arrangements among members, assist in the establishment of a multilateral system of payments in respect of current transactions, give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, etc. The Fund provides financial resources to its members to overcome temporary balance of payments difficulties through a variety of facilities and policies, which differ mainly in the type of BOP need they address and in the degree of conditionality attached to them.[/FONT]
[B][I][FONT=&quot]IMF and its Conditionalities:[/FONT][/I][/B][LIST][*][FONT=&quot]The primary objective of conditionalities in an IMF program is to restrain budget deficit and reserve money growth to address the macroeconomic imbalances faced by a country.[/FONT][*][FONT=&quot]The guidelines attached by the IMF with its credit programs generally include: [I]adopting policies of fiscal and budgetary austerity; exchange rate devaluation; "getting the prices right", stimulating investment instead of consumption; cuts in real wages; cuts in public expenditure; prioritizing external debt service; and import liberalization[/I]. Indebted statesare required to comply with these guidelines in return for balance of payments assistance.[/FONT][*][FONT=&quot]IMFs conditionalities are criticized for a number of reasons among which are:[/FONT][LIST][*][FONT=&quot]Imposing too many conditions on debtor countries in a time frame that is not always realistic.[/FONT][*][FONT=&quot]The robustness of assumptions on which conditionalities are based is questionable.[/FONT][*][FONT=&quot]Imposition of a large number of conditionalities that do not conform to the political economy conditions of the borrowing country generally results in[/FONT][*][FONT=&quot]higher probability of failure, deviations and slippages.[/FONT][/LIST][*][FONT=&quot]The IMF has been the target of criticism for a number of years and it was heavily criticized in the wake of the 1997-98 financial crises for failing to predict these crises and its ensuing crisis management in the Asian countries.[/FONT][*][FONT=&quot]In case of Pakistan, it had to take a dozen prior actions, fulfill 30 performance criteria and structural benchmarks over a 15-month period in 2000-2001.[/FONT][*][FONT=&quot]The measurement of actual outcomes of conditionalities is quite difficult and problematic because of the role of exogenous variables.[/FONT][/LIST][B][I][FONT=&quot]Pakistan[/FONT][/I][/B][B][I][FONT=&quot] and the IMF:[/FONT][/I][/B][LIST][*][FONT=&quot]Pakistan[/FONT][FONT=&quot] entered into nine different Agreements with the IMF during the period 1988-[/FONT][*][FONT=&quot]2000. There are one programs (SBA: Nov. 2000 to Sep. 2001) and the PRGF (Dec. 2001 to 2004), which were fully implemented. Although in the case of PRGF the Government chose not to draw down the last two tranches to which they were entitled.[/FONT][*][FONT=&quot]Pakistan[/FONT][FONT=&quot] did not accept the last of the 12 tranche PRGF program and seek any successor arrangement. The program was discontinued by the Government of Pakistan given the strong state of the economy and the foreign exchange reserves.[/FONT][*][FONT=&quot]The major factors which contributed towards the motivation of obtaining loans from IMF included: need to obtain financial resources for BoP problem, secure access of funds from other IFIs and bilateral donors, to get debt relief and rescheduling in the post 1998 period.[/FONT][*][FONT=&quot]During the period 1988-2000, the prolonged uses of Fund resources in Pakistan can be characterized as less successful in achieving the desired objectives. One of the major reasons was that the successive governments used foreign resources to fix the external payment imbalances but they did not adopt complementary policy reform. Macroeconomic management was not prudent which resulted in high external debts and debt servicing problems.[/FONT][*][FONT=&quot]After 2000, the Stand-by Arrangement (SBA) was fully implemented and its progress on the poverty reduction has also been on track. This was mainly because of the concordance between ownership and conditionality as the agenda designed by the Government has the right mix of policy actions which can be reinforced and strengthened by conditionality of the IMF.[/FONT][/LIST][B][FONT=&quot]b) International Bank for Reconstruction & Development (IBRD):[/FONT][/B]
[FONT=&quot]The IBRD was established in 1945. Initially, it was devoted to post-war reconstruction in Europe and afterwards its aim has been to assist the economic development of member nations by making loans where private capital is not available on reasonable terms. In 1980, the Bank introduced an element of structural adjustment lending, which supports programs and changes necessary to modify the structure of an economy so that it can restore or maintain its growth. Subsequently, it enhanced efforts to alleviate poverty, mitigate the social effects of economic adjustment programs, promote productive employment, and provides the poor greater access to health care, education and physical infrastructure, environmentally sustainable development and to improve conditions of women.[/FONT]
[B][I][FONT=&quot]The World Bank’s Role in Pakistan:[/FONT][/I][/B][LIST][*][FONT=&quot]The World Bank has played an important and essential role in the development process of Pakistan particularly in modifying the structure of the economy to restore growth through the structural adjustment-lending program introduced in 1980.[/FONT][*][FONT=&quot]The Bank Group’s assistance strategy focuses intently on supporting the government’s development strategy and is organized around three mutually reinforcing pillars which are: Strengthening Macroeconomic Stability and Government Effectiveness,Strengthening and Enabling the Investment Climate and Supporting Pro-poor and Pro-gender Equity Policies.[/FONT][*][FONT=&quot]The Bank has contributed to alleviate poverty, mitigate the social effects of economic adjustment programs, and provides the poor greater access to health care, education and physical infrastructure, environmentally sustainable development and to improve conditions of women in Pakistan.[/FONT][*][FONT=&quot]The government of Pakistan has shown a strong commitment to reducing poverty and is receiving support from the World Bank through around US$ 1.2 billion in financing for 18 active projects and, over the past five years, an additional US$ 1.5 billion in adjustment lending to strengthen the government's broader reform programs.[/FONT][*][FONT=&quot]The Country Assistance Strategy (CAS), endorsed by the Bank in 2002, was designed to support Pakistan’s reform program, which aimed at engendering growth, reforming governance, creating income-generating opportunities, and improving human development.[/FONT][*][FONT=&quot]The World Bank is the main financer of Pakistan’s Poverty Alleviation Fund, which provides assistance to poor communities throughout the country. The Fund has been working with nearly 40 local organizations and has extended micro-credit loans to more than 275 thousand borrowers, of which 45 percent are women.[/FONT][*][FONT=&quot]Recently, Pakistan has sought additional soft-term loan facility from the World Bank for its infrastructure development and poverty alleviation efforts through a long-term development partnership to transform the country and facilitate second generation reforms.[/FONT][/LIST][B][FONT=&quot]c) Asian Development Bank (ADB):[/FONT][/B]
[FONT=&quot]The ADB, functioning since December, 1966, has been engaged in promoting the economic and social progress of its developing member countries in the Asia-Pacific region. The Bank’s principal functions are: [/FONT][LIST][*][FONT=&quot]to make loans and equity investments for the economic and social advancement of developing member countries, [/FONT][*][FONT=&quot] provide technical assistance for the preparation and execution of development projects and advisory services, [/FONT][*][FONT=&quot]promote investment of public and private capital for development purposes [/FONT][*][FONT=&quot]respond to requests for assistance in coordinating development policies and plans of member countries. [/FONT][/LIST][FONT=&quot]The Bank’s operations cover the entire spectrum of economic development, with particular emphasis on agriculture, energy, capital market development, transport & communications and social infrastructure.[/FONT]
[B][I][FONT=&quot]ADB Role in Pakistan:[/FONT][/I][/B][LIST][*][FONT=&quot]ADB in Pakistan is presently undertaking various initiatives to promote social protection and social safety mechanisms, capital market reforms, reforms at the Provincial level, support for Devolution, etc.[/FONT][*][FONT=&quot]Eleven loans totaling US$870.7 million were approved in 2003 to [/FONT][LIST][*][FONT=&quot]implement a public sector reform program in the province of Punjab, [/FONT][*][FONT=&quot]develop the road sector network in Balochistan, [/FONT][*][FONT=&quot]enhance social service provision in Sindh, [/FONT][*][FONT=&quot]reform the regulatory structure for small and medium enterprises, [/FONT][*][FONT=&quot]and develop basic urban services in Southern Punjab. [/FONT][/LIST][*][FONT=&quot]Twenty technical assistance projects totaling US$10.0 million, including co-financed grants, were also approved.[/FONT][*][FONT=&quot]Cumulative ADB lending to Pakistan as of 31 December 2003 was US$13.55 billion in the form of 213 public sector loans. Of this amount, $6.4 billion was from the concessional Asian Development Fund (ADF) and $6.8 billion from Ordinary Capital Resources (OCR).[/FONT][*][FONT=&quot]The ADB public-private infrastructure finance (PPIF) project is the first major effort of any institution to help accelerate infrastructure development through increased private sector participation in infrastructure development in Pakistan.[/FONT][/LIST][B][FONT=&quot]III. IMPACT OF FOREIGN AID ON THE NATIONAL ECONOMIC POLICY:[/FONT][/B][LIST][*][FONT=&quot]Let us examine the facts about foreign aid and its importance in Pakistan’s economy and particularly the widely held impression that we got a big bonanza after September 11, 2001. As I explained, foreign aid consists of loans and grants. Table I shows the picture about net resource flows and net transfers from all official sources – bilateral and multilateral. You can notice that the net flows as percentage of gross national income have gradually declined from 4.3% in 1970 to 1.5% in 2003 and net transfers from 3.6% to 0.7%. The deduction from this evidence is quite obvious – Pakistan’s dependence on foreign aid is so low and insignificant that it won’t make much of a difference to our national economy.[/FONT][*][FONT=&quot]The popular myth that the economic turnaround in Pakistan can be attributed to September 11, 2001 events can be exploded by looking at the net flows and net transfers for 2002 and 2003. For both these years they have actually declined as proportion of national income compared to 1999.[/FONT][*][FONT=&quot]Looking at external debt and debt servicing, it can be seen that there was a big jump between 1990 and 1999 and 2003. In terms of external debt indicators the burden has actually fallen in the last four years. The ratio for 2004 is even much lower.[/FONT][*][FONT=&quot]Similarly, there has been a big drop in the debt servicing as the country has to pay only 16 percent of export receipts as debt servicing compared to almost 29 percent in 1999. Foreign reserves which in actual fact demonstrate the strength of a country’s capacity to manage its external payments now account for almost one third of the total external debt and liabilities. Four years ago this ratio was so precarious that we were not in a position to meet all our obligations. This strength has actually allowed us to say good bye to the[/FONT][*][FONT=&quot]IMF and regain our economic sovereignty.[/FONT][/LIST][B][FONT=&quot]IV. CURRENT STATE OF PAKISTAN’S ECONOMY:[/FONT][/B]
[FONT=&quot]At the time of 1998-99 crises, Pakistan was facing multidimensional challenges which included: restoring investors’ confidence, reinvigorating growth, restoring macroeconomic stability, serious external payments crisis threatening imminent default, reducing poverty, improving social indicators and improving governance[I].[/I][/FONT]
[FONT=&quot]Since 1998-99, Pakistan has traversed the road from a difficult default situation on its external payments to a vigilant program under the IMF and finally reestablished access to international capital markets. This was possible mainly because of structural reforms, which included: tax and tariff reforms, privatization, deregulation, financial sector reforms and high standards of economic governance.[/FONT]
[FONT=&quot]Pakistan[/FONT][FONT=&quot]'s economy has gained more strength, underpinned by a buoyant private sector during the current fiscal year. Acceleration in growth accompanied by a sharp pick up in industrial production, a strong upsurge in investment, and a further strengthening of the external balance of payments have been the hallmarks of performance of Pakistan’s economy in the current year.[/FONT]
[FONT=&quot]After a remarkably successful Euro bond issue in FY04, Pakistan re-entered the international capital markets with a US$600 million offering in January 2005 named as Sukuk bond. The bonds have a five-year maturity period, ending 2010. This Issue was the first offshore sovereign debt offering from Asia in 2005 and this floatation is the largest Islamic bond ever issued internationally.[/FONT][LIST][*][FONT=&quot]To put Pakistan’s name on the radar screen of the International capital market to enable international investors, credit rating agencies, and research analysts etc. to observe Pakistan’s economic performance on a permanent basis and to test Pakistan’s sovereignty in the financial global market, expand investor base, attracting the Islamic funds.[/FONT][*][FONT=&quot]Pakistan[/FONT][FONT=&quot] selected Sukuk to capture funds from international capital market because globally, the demand for Islamic products and financial instruments is currently growing at 15 percent a year. The present, globally accumulated investment in Islamic instruments is estimated at $ 270 billion.[/FONT][/LIST][FONT=&quot] [/FONT]
[FONT=&quot] [/FONT]
[B][I][FONT=&quot]Significant Achievements:[/FONT][/I][/B][LIST][*][B][FONT=&quot]GDP [/FONT][/B][FONT=&quot]growth rate has exceeded 6 percent,[/FONT][*][B][FONT=&quot]Inflation [/FONT][/B][FONT=&quot]had remained under control for four out of five years,[/FONT][*][B][FONT=&quot]Fiscal deficit [/FONT][/B][FONT=&quot]has been reduced significantly,[/FONT][*][B][FONT=&quot]Public debt ratios [/FONT][/B][FONT=&quot]have declined,[/FONT][*][B][FONT=&quot]External debt burden [/FONT][/B][FONT=&quot]has been lowered,[/FONT][*][B][FONT=&quot]Exchange rate [/FONT][/B][FONT=&quot]has remained stable,[/FONT][*][B][FONT=&quot]Exports [/FONT][/B][FONT=&quot]have almost doubled,[/FONT][*][B][FONT=&quot]Tax revenues [/FONT][/B][FONT=&quot]are recording double digit growth,[/FONT][*][B][FONT=&quot]Interest rates [/FONT][/B][FONT=&quot]had never been at such low levels in the history,[/FONT][*][B][FONT=&quot]Remittances [/FONT][/B][FONT=&quot]of Pakistanis overseas have multiplied by a factor of four,[/FONT][*][B][FONT=&quot]Foreign exchange reserves [/FONT][/B][FONT=&quot]have expanded twelve times from their 1999 level.[/FONT][/LIST][B][FONT=&quot]Can these impressive achievements be sustained in the years to come? It would depend how we would be able to tackle the future challenges.[/FONT][/B]
[B][FONT=&quot]V. PROSPECTS AND CHALLENGES FOR THE FUTURE:[/FONT][/B]
[FONT=&quot]At present there are two major challenges in the short and the long run – to fight inflation (short run) and to eradicate poverty (long run).[/FONT]
[FONT=&quot]While inflation recently touched the double digit level, the persistence on inflation at higher levels during FY05, could fuel the inflationary expectations. Major reasons for the current hike include: rise in aggregate demand due to an unprecedented rise in private sector credit the oil price spike and the food shortages.[/FONT]
[FONT=&quot]Another challenge in the short run, though not as worrisome as inflation, is the increasing trade deficit. The trade deficit is widening due to an unprecedented rise in imports due[/FONT]
[FONT=&quot](i) higher trade deficit and (ii) increase in imports of machinery. The higher oil import bill due to higher international oil prices is a source of concern but is beyond our control. The higher machinery import, on the other hand, is still welcome as it is a reflection of the growing capacity of the economy.[/FONT]
[B][FONT=&quot]Other Long Term Challenges Include:[/FONT][/B][LIST][*][FONT=&quot]Investment in developing human resources, which is the single most dominating factor that has kept the country below its potential. Technical and vocational education should be given priority to produce the skills that are required by the economy.[/FONT][*][FONT=&quot]Investment in infrastructure: Higher growth rates for an extended period of time in the range of 7 to 8 percent annually are possible only if energy, water resources and infrastructure needs are fully met.[/FONT][*][FONT=&quot]Growth alone will not suffice to reduce the incidence of poverty. It has to be accompanied by poverty-targeted interventions and social safety nets.[/FONT][*][FONT=&quot]We need to diversify our export base and export markets to insulate from fluctuations and volatility especially in cotton and textile output and trade.[/FONT][*][FONT=&quot]Judicial and legal reforms: Institutions Civil Service, Judiciary and Police need to be restructured and their capacity strengthened because these key institutions affect a common man’s daily life.[/FONT][*][FONT=&quot]Widening the tax base: There is severe need to introduce tax reforms especially to widen the tax base in the country.[/FONT][/LIST][B][FONT=&quot]CONCLUSION:[/FONT][/B][LIST][*][FONT=&quot]Although Pakistan has achieved major successes on the socio-economic front, the progress made so far is not commensurate with the country's considerable potential.[/FONT][*][FONT=&quot]Going forward, consistency and continuity of sound macroeconomic policies along with a credible reform program will be an absolute necessity to realize our full potential.[/FONT][*][FONT=&quot]The second-generation reforms aimed at strengthening the country’s institutions and their capacity to deliver basic services and investment in human development and infrastructure will be able to steer the country on the right course.[/FONT][/LIST][B][FONT=&quot]TABLE I[/FONT][/B]
[FONT=&quot] [/FONT]

[B]Reforming government in Pakistan [/B] By Ishrat Husain

Part I

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.

Rational 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.

Long term vision and external environment: Vision 2030 prepared by the Planning Commission in consultation with the private sector, academia, civil society organizations 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 globalization through competitiveness. Pakistan is therefore opting to become an active participant in the globalised economy for goods, labour, capital, technology and services and this option has serious consequences for 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 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 globalised 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 minimizing the costs of adjustment and maximizing 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 they need to be re-vamped 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 i.e. 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.

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 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 Industrialised Countries (NICs), Asean countries and China is a matter of serious debate among development economists. Neoclassical 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 Robert Wade (professor of political economy at LSE) and Alice Amsden (professor of political economy at MIT) 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 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, provide the way for judicial independence, provided dispute resolution mechanisms and enforced contracts, promoted transparency, observed rule 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 decentralization and greater devolution of power, authority and resources to lower tiers of government also makes a difference through better allocation and more efficient utilization of resources. Devolution also helps in moving towards more relatively egalitarian outcome in the provision of basic public goods services.

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 organizations. Private-public 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 organizations.

To be concluded



The writer is a former governor of the State Bank of Pakistan. He is currently the chairman of the National Commission for Government Reforms. Email: [email]ihusain@pmsectt.gov.pk[/email]

[B]Reforming the government in Pakistan
[/B] PART II

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.

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 bodies 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 will form part of the NCGR's recommendations. Besides, there have been at least seven new developments in the last few years that 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. 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 governmental machinery at the federal, provincial and local levels has become largely dysfunctional due to the protracted neglect of our institutions.

Almost all comparative country rankings whether originating from the world bank or the 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 difficult. The impact of good economic policies upon the lower strata of our society thus gets muted. The hue and cry about the absence of trickle-down effect of good economic policies is a manifestation of the dysfunctional nature of our public sector governance.

Second, the responsibilities of the government in the field of owning, managing and operating public enterprises and corporations have undergone significant change both in 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 transfer of some functions listed in the concurrent list of the constitution to the provincial governments 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 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, 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. Government departments and ministries have to be reconfigured for developing the capacity to design and operate these partnerships.

Sixth, there is uncertainty and anxiety among the members of the civil services about their future prospects. Those specialists serving in ex-cadre jobs such as scientists, engineers, medical doctors, accountants etc are demoralised. 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 moving towards E-government would require a look at the skill 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 a few of the clerical and subordinate staff positions can be utilised in the future government organisation.

Expectations-delivery gap: The recent political history of South Asia clearly points to the failure of successive governments to come up to the expectations of the majority of their population. This trend has become even more acute in the last decade or so with the advent and spread of the electronic media. Although all the countries in the region have performed well and attained respectable rates of economic growth yet every incumbent government has been voted out of power at the time of elections.

The benefits of growth may have filtered down but the speed and their distribution have not been able to satisfy the electorate. The ICT (information communication technology) revolution that has touched even the remote areas of these countries has in fact tended to exaggerate the disparities and contributed to higher expectations from the governments. On one hand the capacity of the government institutions responsible for delivery of public goods and services has rapidly eroded and is in a debilitating and feeble state while a large variety of goods and services available, advertised and visually observed on the electronic media has whetted the appetite of the poor.

These low income groups believe that the means through which they can acquire these goods and services for themselves and their children is via public sector employment, education and training and government transfers. In actual practice the allocation of public goods, services, employment and subsidies is rationed by access to the government functionaries or by paying bribes .As these groups have neither the access nor the money to pay the bribes they suffer from a relative sense of deprivation while observing that the influential and well to do segments of the population preempting and enjoying the benefits of government jobs, contracts, permits, land etc. Large untaxed incomes are also accruing to the same privileged groups and individuals. The resentment of this poor and unconnected population is conveyed through the only instrument they possess i.e. the vote at the time of elections. This gap between expectations and delivery is one of the biggest challenges for Pakistan too.

The popular perceptions as expressed in public opinion polls, media commentaries and editorials, articles and papers, seminars and discussions, observations of politicians and civil society actors all convey with a few honourable exceptions, a negative image of the civil servants in Pakistan and a high level of dissatisfaction with the functioning of the ministries, departments, corporations and agencies of the different tiers of the government. These perceptions are in contrast to the views of the civil servants themselves who see themselves as poorly paid, highly demoralised and too much stressed individuals. They feel that they have been unfairly treated by their political bosses and un-appreciated by the general public. Empirical studies and casual observations show that the root cause of this disenchantment of civil society and the disillusionment of civil servants can be traced to structural, procedural and motivational deficiencies in the overall system of governance. Any attempts to treat the symptoms in isolated manner without coming to grips with the root causes will be counterproductive. The reform package should be comprehensive with a clear blue print but the introduction of each set of reforms could be phased and sequenced. The methodology adopted by the NCGR therefore follows with logic.

In the light of this changing scene the role and functions of the government have to be redefined. The government has to provide: (i) external and internal security for the people, (ii) collect taxes, (iii) manage the public finances, (iv) conduct foreign affairs, (v) maintain a stable macroeconomic environment including a sound and healthy financial system, (vi) make available the basic infrastructural facilities, (vii) develop an education and training system capable of supplying the skilled manpower, (viii) encourage as well as undertake research and development and (ix) ensure an enabling regulatory framework for private sector and community participation in development. The future restructuring should therefore be guided by this role and functions of the government.



To be concluded

Email: [email]ihusain@pmsectt.gov.pk[/email]

[B]Reforming the government [/B] 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.

(Concluded)



Email: [email]ihusain@pmsectt.gov.pk[/email]

[B][SIZE="4"][COLOR="Blue"][CENTER]Reforming the government in Pakistan: rationale, principles and proposed approach-I [/CENTER][/COLOR][/SIZE][/B]

[I][LEFT]ISHRAT HUSAIN[/LEFT][/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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[B][SIZE="4"][CENTER][COLOR="Blue"]Reforming the government in Pakistan: rationale, principles and proposed approach-II [/COLOR][/CENTER][/SIZE][/B]

[LEFT][I]ISHRAT HUSAIN[/I][/LEFT]

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.

(C) CHANGES IN PAKISTANI SCENE:

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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Education, employment and economic development in pakistan
 

[B][CENTER]EDUCATION, EMPLOYMENT AND ECONOMIC
DEVELOPMENT IN PAKISTAN

Ishrat Husain

Governor, State Bank of Pakistan [/B]
[/CENTER]

[B]Reasons of Economic Backwardness[/B]

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).

[B]Role of Education in Poverty Reduction[/B]

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).

[B]Poor Economic Scenario of Pakistan[/B]

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.

[B]Pakistan's Educational System is Fragmented[/B]

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.

[B]Poor Enrolment Ratios in Primary Schools[/B]

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.

[B]Low Share of Females in Economic Productivity[/B]

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.

[B]Role of Private Sector Organizations [/B]

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.

[B]Causes of Unemployment in Pakistan[/B]

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.

Challenges to Pakistan's Economy
 

[B][CENTER]PAKISTAN’S ECONOMIC PROSPECTS – CHALLENGES AND OPPORTUNITIES

ISHRAT HUSAIN[/CENTER][/B]

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


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.

[B]Brief Overview of Pakistan's Economy since 1947[/B]

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.
[B][U]
CHALLENGES TO PAKISTAN’S ECONOMY[/U][/B]

[B]a. Low Domestic Savings[/B]

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]b. Low Export Growth[/B]

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.
[B]
c. Fiscal Deficits Are High[/B]

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.

[B]d. Lagging Social Indicators[/B]

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.

[B]e. Energy and Water Shortages[/B]

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.

[B]f. Governance and Implementation Weaknesses[/B]

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.

[B]g. Political Stability, Law and Order / Security[/B]

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.

[B][U]OPPORTUNITIES/WAYS TO OVERCOME CHALLENGES[/U][/B]

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.

[B]1. Increase Domestic Resource Mobilization[/B]

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 .


[B]2. Expand the Share in the World Trade[/B]

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.


[B]3. Building of Human Capital[/B]

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.

[B]4. Use of Technology[/B]

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.

[B]4. Young Labor Force[/B]

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.

[B]6. Devolution and Decentralization[/B]

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.

[B]7. Income Distribution[/B]

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.



[B][U]CONCLUSION[/U][/B]

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.