Pluck the low hanging fruit

What are the few things that need to be done immediately to arrest economic decline after the change in regime occurs?

There is not much hope that the people who currently hold the reins of power in Islamabad have the political will or the competence to arrest the current economic decline. It appears that the citizenry will have to wait for a regime change before serious action gets to be taken. It is important that this change comes through democratic means. Any other way would seriously set the country back. When the change does come, what should the people in power to do to revive the economy and set it on the trajectory of sustainable growth at a reasonably high level?

There are many lessons policymakers can learn from the experiences in other parts of the world. When I looked after Latin America and the Caribbean region for the World Bank, I saw many economies pick themselves up from almost free fall, steady their situation and then begin to grow and improve the well-being of the citizenry. Both, Argentina and Brazil were able to accomplish that feat. One thing that impressed me about the Latin American economies in extreme distress was that once the right set of policies were adopted, the bounce-back in the rate of economic expansion happened quickly. The recovery was fairly sharp and enduring. This is what is meant by plucking the low hanging fruit.

What are the few things that need to be done immediately — say in the first one hundred days — after the change in regime occurs? I would suggest four areas of economic reform. One consequence these suggested policies will have is to increase investor confidence in the future of the economy. That alone will bring new investments into the economy by the private sector.

The first is to indicate that there will be no tolerance for corruption in high places. Corruption takes many forms and affects people differently. It will take a while and serious institutional innovation to bring it under control at the lower-level. Significant amount of corruption is built into the administrative systems. The British designed the systems of land records and maintenance of law and order at the local (thana) level so that the people paid for the services of the patwari and the thanedar rather than have the state assume the entire budgetary burden of adequately paying these functionaries. Dealing with corruption at these levels will take time. There will need to be major systemic changes before this can be brought under control. But higher level misdemeanour can be dealt with through the setting of good examples by the policymakers who occupy senior levels and by putting in place a system of accountability that is independent of executive control. The previous attempts in Pakistan to create such a system became the victims of political exploitation. Once the signal goes out that there will be no tolerance for bad behaviour, it will have a salutary effect on the way policymakers will deal with the people.

The second area for attention by the new regime should be the improvement in the investment climate for the private sector. As economists have known for a long time, confidence in the future is an extremely important determinant of private investment and, hence, of economic growth. The private sector will also be encouraged if the regulatory system is overhauled. The new government would do well to review all the regulations in place and streamline them with a view to ridding the system of those that serve no economic or social purpose. They have remained in place since they provide handsome rents to those responsible for implementing them. Some of the laws on the books have long served their purpose but have been retained since some vested interests have turned their provisions into rent seeking activities.

The third area that should receive the attention of the new set of policymakers is the size and funding of the public sector development programme. The Planning Commission has carried out a thorough review of the programme as it stands today and found that there are thousands of projects on its books with trillions of rupees of throw-forward. This is the amount that was allocated but not actually provided and, therefore, remains undisbursed. Several projects are under implementation, providing funds for their managers, staffs, residences and offices. Cleaning up this programme will not only save the government considerable amount of resources, it will also help to rationalise public sector spending.

The fourth area requiring immediate attention is the energy sector. Pakistan’s energy problem now encompasses both electricity and natural gas. It is badly hurting the people and the people have begun to react. There was recently tire-burning on the Islamabad Highway as people expressed their anger at the shortage of gas in their cooking stoves. Gas and electricity shortages are also hurting the economy.

Solving the energy crisis will take time and also require a great deal of investment. The state does not have the resources to meet the growing needs. The private sector has to be brought in. One approach would be to allow the provinces to invite the private sector to invest in hydro power. If anecdotal evidence is any guide, various provinces in the country have hundreds of sites on canals, streams and rivers that can be tapped to produce electricity.

Licenses to invest should be given not on the basis of the price the state is prepared to pay for buying the power produced. This was done when the first wave of IPP (independent power producers) invested in developing the energy sector. Instead, licenses should be handed out on the basis of auctions, with those indicating the lowest price they want for the power they produce, getting the go-ahead. This should be the limit of the state’s involvement.

With these policies and initiatives in place, the Pakistani economy could bounce back from its current slump. They will also set the stage for undertaking deeper structural reforms without which the country cannot climb on a high growth trajectory. The four reform areas discussed above could add as much as a percentage and a half points to the rate of growth every year. This means that by the calendar year 2015, two years after a set of new rulers takes office, Pakistan’s growth rate could double, increasing from three to six per cent a year.

Published in The Express Tribune, January 9^th, 2012.