Time is running out
 

THE transfer of political power to the elected representatives of the people is occurring at an exceptionally difficult time for the Pakistani economy. I have been a student of the Pakistani economy for the last four decades and I know that the country has faced many crises before.

They were the ones in 1947 when Pakistan was born, in the late 1940s and the early 1950s when the Indian leadership attempted to smother Pakistan economically, and in 1969-71 when a deep political crisis resulted in splitting the country into two halves. Then came the 1970s when the momentum of growth was lost as a result of the deep restructuring of the economy. In 1998-99, the country had to deal with foreign economic sanctions imposed in the wake of the decision to test nuclear devices.

Now in 2008, we are watching the unravelling of the model of economic growth put in place by the previous administration. This is happening at a time when the global economy is going through enormous strains and stresses to which adjustments need to be made.

Is this crisis deeper than those the country dealt with previously? This is a question I will leave for economic historians to answer. But, while the developments in the global economy are playing a part, actions of men — those who made public policy in the last eight years — bear a great deal of responsibility for the grim situation we face today.

Some economists have counted several ‘deficits’ the new set of policymakers must deal with. I will briefly deal with four of these, three of which are increasing at an unsustainable level. These are fiscal deficits, trade deficit and the current account deficit.

The three deficits are related to one another. The fiscal deficit increases aggregate demand which increases imports. Trade deficit can result in a large balance of payments deficit when external flows are not available in needed amounts to cover the difference between the receipts of exports and the expenditure on imports.

Policymakers must simultaneously act to deal with all three deficits. They must examine the government’s revenues and expenditures in order to narrow the fiscal deficit; they must formulate a trade policy to increase exports and, if need be, to reduce imports; they must adopt measures to increase the inflow of foreign savings.

The fourth deficit the economy must handle relates to the quality of the human resource. This is the outcome of decades of neglect of education and research. This is the only deficit that is not increasing but it is still large. Its increase has been constrained by the combined effort of the private sector and, in recent years, by the public sector. I will write about this subject in a forthcoming article.

My colleagues, economists Hafiz Pasha and Pervez Hasan, have calculated what we consider to be sustainable levels of two of the four deficits listed above — five per cent for the fiscal and four per cent for the current account deficit. The actions needed to address these should be taken within policy frameworks in order to bring predictability and transparency to the process of adjustment. The Fiscal Responsibility and Debt Limitation Act enacted in 2005 provides a framework for the fiscal side. It needs to be strengthened with more focus on limiting the current expenditure.

There should also be a provision for reporting by the ministry of finance to the national legislature on a quarterly basis. Similarly, the central bank governor should appear every quarter before a committee of parliament to report on the state of inflation and various monetary targets that are being used to keep it under control.

Today, in discussing the direction of public policy I would like to focus more on how it should be made and where it should be made rather than its content. In discussing the ‘how’ and ‘where’ aspect, I would like to mention three things.

First the ‘how’. There should be much greater people’s input in the making of public policy. As democracy gains a foothold in our political culture, the legislative system must play a more active role in the making of policy and in keeping watch over its implementation. Legislative committees need to play a role and to do that they should be provided with staff support.

The legislators themselves will have to learn their trade. They have to realise that they are sent to their respective assemblies to serve the interests of their constituents and write legislations while keeping the working of the executive under review.

Second, in making economic policies, changes in the global system must be constantly factored in. Take, for instance, the recent rise in international commodity prices, which poses a problem for consumers in Pakistan but, at the same time, offers an opportunity for agricultural producers. The recent increase in the price of commodities has turned the terms of trade in favour of agricultural producers.

Price incentives that have become available should be used to increase agricultural productivity, the farmers’ income and reduce the incidence of rural poverty. At the same time, poor consumers for whom food purchases account for over 60 per cent of the family budget should be assisted through various measures including cash transfers and employment generating public works projects.

Let me now turn to the question of ‘when’? There has to be much greater responsibility assigned to the provinces in the making of public policy. This was accommodated in the original 1973 Constitution which, over time, got subverted.

Pakistan now has a highly centralised system of governance that needs to change and much greater authority needs to devolve to the provinces. The system of local government established in 2001 needs to be strengthened with greater authority devolving to the local government institutions.

I should emphasise that the ultimate objective of economic development is improving the lives of the citizenry, in particular of those who live in a state of absolute poverty. That too is a large subject and I will deal with it separately at a later date.

Time is fast running out for the new policymakers to address the problem the country faces. There must not be any further delay. While the teething problems faced by the emerging political order need to be dealt with, this must not occupy the entire time of the new political establishment. Politicians who have been voted into their offices by the people must give even more attention to economic matters. I hope the new set of policymakers will give it their full attention.