Economic planning: Government needs to take a back seat??

Silent Spectator · #1 Tuesday, May 10, 2011

ECONOMIC PLANNING: GOVERNMENT NEEDS TO TAKE A BACK SEAT
By Jaffer Qamar
[The writer holds a PhD from the University of Chicago and is the Chief Economist of the Planning Commission. This article first appeared in the Express Tribune on April 4, 11, and 18, 2011.]
“A crisis is a terrible thing to waste.” Paul Romer
Part I
Pakistan’s Planning Commission has started a dialogue with citizens — it is about the so-called New Development Framework, which focuses on economic growth. I have put “growth” in bold characters because it is a term that we hear all the time without really understanding its meaning.
Since conversations founder on misunderstandings about terms, let us be clear first of all what economic growth is not. It is not about the value of Pakistan’s GDP increasing by five per cent, as it did last year. Surprised? Well that is not your fault because most people think of growth as how an economy increases in size. But what is important is the quality of life. A proxy of the standard of living is how an economy increases in size relative to its population. A nation realises real growth when the value of its output grows faster than its population. The formal term is per capita growth. A nation becomes more prosperous over time when it experiences high per capita growth.
Per capita growth is difficult to achieve when we look at the long time horizon (for example, over the past 200 years). Statistics on growth began to be recorded and compiled for the first time at the end of the eighteenth century in Western Europe. Before that economies as a whole had grown but the welfare of common folk had not changed. Every increase in national wealth led people to breed to the point where the increase was exhausted. Thomas Malthus, an English thinker of the nineteenth century believed that while a country’s wealth might grow, individuals would be trapped in poverty because its population would grow at a faster rate than the value of the economy. He would have been puzzled how a few years after his writings, European economies managed to increase not just their overall wealth but that of each individual. This is the situation which we also face in Pakistan.
Yet we do not need to feel our way around in the dark as did thinkers in Malthus’ time because the ingredients of growth are starting to become clear. One of the ingredients is innovation. But talk about the need to spread innovation is mostly economic twaddle. It is the stale rhetoric found in Western countries policy discussions during the 70s and 80s. The sad approach to innovation led to endless and spectacular policy failures in the heyday of industrial policy, the 1970s and 1980s, when the spirit of John Galbraith possessed even the sanest of economists. What economists have now realized is that it is not up to government to decide what innovation is. The work on Thomas Kuhn on the nature of scientific revolutions also taught us that there is no prescription for intellectual progress nor is there any bright line leading from discovery to implementation.
These are questions that are best addressed by Armen Alchian’s view of innovation and entrepreneurship as evolutionary processes. Those who survived were not necessarily the brightest, but simply those who by some quirk passed through the filters of market demand to produce something no great thinker had been able to divine. We in the government must not divine or judge what innovation is or entails. We must remain mute because in essence we are dumb on such issues. Our wisdom is in knowing how limited we are. In the recognition of our limitation we can discover a path to success and that is to stand back from markets and simply create the circumstances for their growth. What innovation is ultimately is a question that markets answer. The upshot of all of this is that we do not need to encourage innovation by targeting R&D. To say we must encourage innovation through active support of R&D is just a formal apology for instituting a structure of giving money to rent-seekers. Let us learn from the West and avoid their disasters in this field.
Innovation and economic growth are organic and spontaneous processes which occur when people take resources and arrange them into more valuable products and services, according to Paul Romer, a well known growth economist. He has a useful metaphor: production in the kitchen. To create delicious foods, we mix inexpensive ingredients according to a recipe. Economic growth comes from innovating fantastic recipes, not just from more cooking. We underestimate the potential for finding new recipes and ideas — we at the Planning Commission believe the possibilities are infinite.
So how exactly do we set up this economic kitchen (which we call markets) in which we can cook recipes no one imagined? In the recent past, development experts thought the answer lay in government command. Those in high ministries would choose industries producing goods with “high value-added” and would champion them at the expense of other industries and dole production rights, with special protection, to the rich and powerful. Well, things did not quite turn out as hoped and expected. By protecting certain industries government became subservient, pouring never-ending subsidies and funds into catastrophic ventures. The lesson was clear. The government is not good at choosing winners. What it is good at is in setting enabling conditions and environment out of which winners can emerge.
Part II
Finding the conditions that allowed winners to emerge was the intellectual programme of Adam Smith and later thinkers such as Friedrich Von Hayek, Milton Friedman, Ronald Coase, Gary Becker, Robert E Lucas, all Nobel prize winners in economics and recently Paul Romer and other economic growth theorists. Their message was and is that government does not have the information about what people want and what they are capable of. Without such information it makes no sense for government to design and orchestrate what people should consume and produce. Instead government should allow people to experiment and discover the answer themselves in the setting of a market based system, which is more flexible than the command system. In Adam Smith’s Invisible Hand, the market system establishes efficient prices, which play the dual role of guiding the economy to most efficient production and allocation of goods and services, based on free interactions between buyers and sellers.
If everything works right, the sorts of calculations individuals make in their own self interest will actually also be in the collective interest or at least not against it. What is at issue here is a sort of social calculus. Individuals calculate what is good for them. When we cumulate the result of these calculations is everyone better off or are we in stasis, or worse, going backwards? You might think of the economy as a sort of computer with algorithms which solve the problems of coordinating people. The algorithms guide the self equilibrating exchanges which ensure that a balance exists between what people put into the system and what they get out. Without this balance the individual elements of the system will move away and the system loses its coherence.
So what would be the elements of the economic computer algorithm of the sort we need in Pakistan? I think the answer lies in the observation that Pakistan has abundant human capital but little physical or financial capital. We invest in creating children because investments in physical capital are so risky. We do not protect property in Pakistan with the same resolution that brought Western countries out of their mire and propelled them into their industrial revolutions. Instead we resemble Imperial China where the only sort of capital one could be sure of holding on to was learning. The Chinese became a nation of sophisticated intellectuals traipsing on a substratum of shady entrepreneurs never certain of when the next expropriation would come, and continuously engaging in rent-seeking activities. That sort of society can last a long time provided no external threats present themselves. Well, we know that we do not benefit from such luxury. We must protect capital, too — both physical and intellectual capital. We must bring it under the rule of law and transparent governance with swift adjudication.
Property under the protection of law is the purest manifestation of what economists call the principle of Pareto-efficiency. There are always questions about the best use of such property. One way of resolving a difference of opinion is to let one party buy out another’s ownership of property which the buyer thinks is not being efficiently used. The purchase is Pareto efficient in the sense that it makes no one worse off and may make both better off. This is why economists revere private property under the protection of rule of law. And it is why we must concentrate on protecting property, including intellectual property, in Pakistan. There is no priority more urgent for our economic development.
Part III
In the concluding part, we take a look at what the government needs to do, so that it can play the role demanded of it.
Such is the philosophy behind the pronouncements you hear which call for government to provide a secure, credible, non-obstructing, and non-confiscatory business environment to attract investment, more trade, and transfer of knowledge and best practices from developed nations. This is why, in the New Development Approach, proposed by Pakistan’s Planning Commission, the role of the state is to facilitate the market system by protecting liberties, enforcing property and contract rights, policing, providing infrastructure, a monetary system, etc. and perhaps providing a subtle coordination role.
Can our government play a positive role as a coordinator, facilitator and a fair umpire to make such an economic “computer program” run? It is my conviction that when a government starts talking seriously about protecting property rights it is a truly important turning point and defining moment in the fortunes of the nation. This is what happened in Chile in the early 1970’s. Chile is in a way almost a mirror for our own. Chile has alternated between military and civil rule. The objective of the military and later of elected politicians was first and foremost to secure property rights. For what is a society without secure property but an assemblage of people at conflict and war with each other? Here is what the English philosopher Hobbes had to say on the matter of absence of property rights, “In such condition there is no place for industry, because the fruit thereof is uncertain and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man: solitary, poor, nasty, brutish, and short.”
Under the New Development Approach (NDA), the current planning system has to be gradually dismantled and replaced with a market based society. This is a revolution in the way we think of organising our society. It means taking power out of government hands and allowing Pakistani citizens (who are more knowledgeable about their own interests, environments and conditions than the bureaucrats, politicians and policy-makers) and to make their own decisions about their future.
Sustained growth is a process of continual transformation. Economic progress that has occurred since the Industrial Revolution would not have been possible if people and nations had not undergone wrenching changes. Economies that do not transform themselves fall off the golden path of economic growth, which generates prosperity and alleviates poverty. Our challenge is to wean ourselves away from the central planning mentality that has affected us since the 1940’s when Stalinist five year plans seemed the best way to go for developing economies. There are no plans government can make. The only thing government can do is set the conditions, hopefully set them right. The rest is up to us, the citizens, acting individually and collectively through communities. And for us, the citizens, to accept that after all that has been exchanged in public debate over the last 50 years, it all starts with a revolution in thought and then with thousands of independent experimentations.[Courtesy The Express Tribune]

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