A tête-à-tête with Khalid Mirza

BR Research recently had a short chit-chat with Khalid Mirza in Karachi. Mirza has had the distinction of heading both the Competition Commission of Pakistan and the Securities & Exchange Commission during the past decade. In this interview, Mirza reflects on the governance aspects of the economy while discussing the impediments to growth. Here are the transcripts.
BR Research: What are your activities at the moment?
Khalid Mirza: I am teaching at LUMS at present. Other than that, I am also doing consultancy assignments essentially based on my investment experience. I am also the consultant on regulatory matters.
BRR: What is your candid opinion about Pakistan's current economic managers?
KM: I do believe that the current economic team is the best we have ever had - it is world class. But is it effective? I hardly see any economic direction.
BRR: What are the major issues that you see?
KM: There is no vision or determination to deal with inflation. I think the finance minister should rise above the political fray, and from that pedestal he might be effective. But right now, I don't see that.
Moving on, there is no growth strategy either. The government should facilitate the market and promote entrepreneurship. If we have working markets and there is connectivity, then productive efficiency is bound to increase. For markets to function optimally and for all economic agents to operate efficiently on a level playing field, sound and competent regulation is a must. The government does not seem to realise this. Regulators being appointed are neither fit, nor proper and regulation is being weakened.
BRR: But the Planning Commission's latest growth strategy talks exactly about fostering entrepreneurship.
KM: Indeed, the Planning Commission - in particular the present chief Nadeem-ul-Haque - has articulated it very well but has this been accepted by the government? That is not very clear.
I must compliment Nadeem for adroitly handling the challenges related to the PSDP, which comes under the Planning Commission, but then there are lots of expenditures which are outside the programme. The thing is that the government lacks vision.
The economic team has not been able to demonstrably project itself as non-partisan, which is why any initiative it espouses gets mired in politics. The central bank too has shown its weakness and has not been able to rise above the political frame. The monetary policy is not effective enough to deal with the huge fiscal gap. Unfortunately the economic team has just not been able to deliver.
BRR: Should the Planning Commission be construed as a part of finance ministry - as is being done at the moment?
KM: Planning Commission has to be an independent, non-political voice of rationality - and independence has to be asserted. I know this from personal experience. Nobody gives you independence - you have to take it. And in this context, it appears, Nadeem-ul-Haque has not been able to get the necessary traction for his well-considered views. You see, if the Planning Commission is made to work in the shadow of the finance ministry, it cannot be effective, since it will be viewed as playing to the tune of the political masters.
BRR: How do you see the economy? What is your view on growth and other indicators?
KM: As you know, I am not an economist. But from what I can see, there are a few basic things that we need to do....such as widening the tax base, bringing more people into the tax net, be fiscally prudent, improve governance and so forth. But I feel that the priorities have not been articulated or visualised; there is no clarity, which is a shame because we have high calibre people in the economic team.
It almost seems that institutions of market governance like regulatory agencies, essential for a market economy to deliver, are being deliberately weakened and no efforts are being made to ensure availability of risk capital and term funding to the private sector on a commercially viable basis.
BRR: Investment had been your area once; what is your view on the role of DFIs?
KM: I believe that in a developing economy, where financial systems are inadequate in terms of capacity and depth and there are huge un-ponderables - and 'black swans' - DFIs have a critical role to play not only to make available term finance and risk capital, but also to take initiatives to develop the financial sector and improve its efficacy.
We may need to construct DFIs or re-construct existing ones based on the wealth of experience with such institutions across the globe. Here, again, the government is not serious, or perhaps does not have a clue. All I see is lot of incompetent and/or unsuitable appointments, no initiative to strengthen these DFIs and a lot of uncalled for, or possibly even egregious, interference in the working of these institutions.
BRR: What is your view on the state of regulation and governance structure in the country?
KM: This is a sad story. I do not want to say much except that the government seems to attach little or no importance to economic regulation and anti-trust enforcement. The fact that the recent global financial crisis was at least partly caused by poor regulation and anti-trust enforcement, and the fact that the magic of the market place will not work without sound institutions of market governance are matters that are on the radar screen of the government.
It almost seems that there is some hidden hand that is making all-out efforts to weaken these regulatory agencies through irregular - even controversial - appointments; heads of such agencies are being appointed "till further orders" (which is, in any case illegal) or the financial autonomy of the agencies is being withheld or inadequate funding etc.
The result is that regulatory agencies cannot act independently to serve the needs of the market and are instead subservient to the political whims of the government, or get captured by the regulated.
BRR: What in your view are the essential qualities the head of a regulatory agency must have?
KM: At the outset, it is important for me to point out that the lack of sound and competent regulation in the sectors in which it is needed can adversely affect economic activity in those sectors, with negative repercussions for the economy as a whole, and the general retarding of economic growth. The quality of regulators is, therefore, a significant element for achieving economic well-being.
Be that as it may, I hate answering this question in specific terms mainly because there are quite a few regulatory agency heads in developing countries such as ours that do not have the qualities I consider essential.
Nonetheless, since you ask, I would like to say that apart from integrity which is a sine qua non and regarding which there can no compromise whatsoever, the head of a regulatory agency must be: firstly, technically very competent; secondly, very knowledgeable with respect to the market or sector being regulated; thirdly, a person with strong guts and gumption; fourthly, a person with considerable demonstrated management ability and administrative capacity; and fifthly, a person with leadership qualities of a high order ie some one who can inspire others and lead from the front. Leadership is a particularly important quality since in developing countries very often a regulatory agency needs to stand up to the government or strong vested interests in the market and it is only a real leader that can inspire his team to do that.
I cannot emphasise integrity enough. A regulator must not only be completely honest but also must be seen as being completely honest. There must be no actual or perceived conflict of interest. A market player should have remained out of the market for a sufficiently lengthy cooling period -- say two years -- before he can be considered for a regulatory position. Otherwise, there is a very strong perception of conflict, which can erode the credibility of the regulatory process. The fox must not look after the chicken coop. As you know, we have at least one such situation in Pakistan which is unfortunate. Also, the current tendency amongst regulators and law enforcers to forbear or drastically reduce enforcement action ostensibly as a consideration to secure compliance has an element of intellectual dishonesty and distorts the goals sought to be achieved through regulation."
BRR: What is your view on the bureaucratic style of working in the government and especially in the economic team?
KM: The problem is that the bureaucracy couldn't care less! Let me illustrate by saying this: if the CCP or the SECP was to get drowned in the Arabian Sea, the Joint Secretary In-charge in the Finance Division would not have any sleepless nights, as it would not affect his career, nor his promotion or reputation.
The problem is that the bureaucratic structure is designed to evade responsibility. In my experience, most government servants do not move a file unless they have a personal interest in the matter or there is a quid pro quo involved or there is a political direction. The system just does not function.