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BR Research

Interview with Dr. Ishrat Husain

“There is no congruence between electoral cycle and economic development cycle” BR Research recently ...
Updated 23 Aug 2021

“There is no congruence between electoral cycle and economic development cycle”

BR Research recently interviewed renowned economist Dr. Ishrat Husain, who has decided to hang up his boots after more than five decades of career in economic and social development in Pakistan and abroad. Dr. Ishrat has been serving as Advisor to the Prime Minister for Institutional Reforms & Austerity since 2018, an assignment that he will leave at the end of this month. He retired as Dean of the Institute of Business Administration in 2016. He has been a career bureaucrat and a former Governor of the State Bank of Pakistan, while also having a long and distinguished career with the World Bank. He has also worked as a Public Policy Fellow at the Woodrow Wilson Center in Washington DC. Below are edited excerpts from the interview:

BR Research: After decades of public service, you have chosen to retire. Please take us through your journey.

Dr. Ishrat Husain: I started my educational career as a scientist when I went to the University of British Columbia in Vancouver at the age of 19 and did my masters in Chemistry. Then I came back to Pakistan, although I was offered a job at Dow Chemical and a citizenship in 1961. I realized during those two years that I was not really cut out for science as you have to spend a lot of time in the odd hours in the labs; I was an extrovert and very much involved in extracurricular activities. I decided to compete in the CSS exams and I was 6th in order of merit in Pakistan. After I spent some time in the field in Sindh and then in East Pakistan as a civil servant, I came back to Lahore in 1970 and had the opportunity to work on the dissolution of One-Unit (West Pakistan) and formation of new provinces. After the breakup of One-Unit, I was assigned to Sindh, where I was posted first in the administration but soon I was transferred to planning & development.

Later I went to Williams College to study Economics and afterwards to Boston University for my PhD. After finishing my PhD, I came back to Pakistan and applied and got selected for a junior economist position at the World Bank after obtaining a three-year leave from the government. Soon I became a resident representative in Nigeria, following which I was made a Division Chief, then Chief Economist for Africa and later East Asia. Later, I became Director of Poverty and Social Development Division. As I was doing interesting work at the World Bank, I resigned from the Civil Service of Pakistan. Then came the Musharraf government in late 1999, they approached me and I was offered the job of the Governor of the State Bank of Pakistan. I didn't know any of the generals at the time because I had been away from the country. In that role, I spent six fulfilling years, and let me tell you I started in that role in the most challenging time because there were economic sanctions on Pakistan after the 1998 nuclear tests, investor confidence was low as foreign deposits were frozen, and our forex reserves were negative.

After I retired from the SBP, President Musharraf asked me that he wanted to reform the civil service, so he formed the National Commission for Government Reforms (NCGR) and appointed me its Chairman. I went from D.I. Khan all the way to Gwadar and studied the whole governance structure of Pakistan for two years along with my eminent commission members. We produced a report which was completed after President Musharraf’s exit, and I presented it to the new Prime Minister Yousuf Raza Gilani, who said that they would take some time to review it considering they were involved in crisis management at the time. So that was the report’s end and then nothing happened. In 2009, I was appointed Dean and Director at IBA Karachi, which I helped to turn around. Then I went to the leading Washington think-tank, Woodrow Wilson Center, where I wrote this book, Governing the Ungovernable. My book – Governing the Ungovernable – sparked the attention of Imran Khan, so when he became the Prime Minister he asked me to implement some of those reforms. That’s how I was appointed the Advisor to this government. In short, this is the background from my student days to the present.

BRR: Back in 1999, you wrote the book “Pakistan: The Economy of an Elitist State”. The economy is still elitist in many ways. What are your thoughts?

IH: I used to travel to many countries in the world when I was at the World Bank, and at the back of my mind was always the thought as to why Pakistan was not making that kind of progress it was making during the first 40 years of its history. Our economy used to be one of the most advanced among developing countries, growing at 6 to 6.5 percent. And I found that unlike many East Asian countries, there was a basic distortion in Pakistan. Markets are supposed to allocate resources efficiently, and therefore you have higher rates of return on your investments and that leads to higher growth. On the other hand, the state is very good at distributing the gains of the growth, because markets only favor those who have assets, be it real estate, financial or educational assets. Because the poor people do not have any assets, it is the state’s responsibility to distribute some of the gains from taxation towards poverty reduction, social safety nets and investments in education and health.

I discovered through my research that in Pakistan the markets had been rigged. The markets had been taken over by a small group of elitist businessmen, industrialists as well as large farmers. And the state was hijacked by the same elite groups. So you had a perversion of the roles of both the market and the state. The state was not able to help the poor and there was a concentration of income and wealth among the elite class, in which I included the civil servants, the military officials, the landlords, the industrialists, and the high-earning professionals. I documented that our education system, the financial system and the judicial system, all three were contributing to this phenomenon. And my agenda for reform was to fix these three sectors.

So the first opportunity which I got was at the SBP, where I said we had to reform the financial sector, which was to privatize the nationalized commercial banks so that the link between political masters, businessmen and the managers of those banks was severed. The economy had no allocation from the banks in order to do the capital formation, while the exchequer was draining its money on bearing the bank losses, whereas the beneficiaries were the people whom I called the willful defaulters. The first thing I did was to convince President Musharraf and the cabinet that we had to privatize the banks. From 80 percent of assets in the hands of the public sector, with the grace of Allah we were able to do reduce that number to 20 percent. There are a lot of difficulties now with the private sector banks because they are not doing what I thought was their role, which is to provide private sector credit to the small and medium businesses, to the small farmers, to low-cost housing and to the consumers. But at least they are making hundred billion rupees as tax payments to the government and there is efficiency and the non-performing loans have gone down.

The other thing which I am really proud of is to strengthen the central bank of Pakistan. When I came in, I never imagined that this would be the condition of the central bank, either technologically or human resource-wise or in terms of working environment. I had a six-year strategic plan, and you can see what it has accomplished. There used to be only one PhD economist in 1999 – by the time, I left there were 15 or 16 PhDs, and today there are 29 PhDs, all very well trained. Everything is now paper-less, all the data warehouses and all the banking solutions are so robust that they have their tentacles across all the banking system. The banks could not go in for Internet banking or mobile banking or real-time settlement system unless we had laid the infrastructure.

The other initiative I took was to introduce Islamic banking. I had realized that there were a lot of people who did not take part in commercial banking because of their faith, hence their savings were not coming into the banking system as deposits nor were these people borrowing. So I decided with the help of my colleagues that we should have a parallel banking system where Islamic banking would co-exist with conventional banking. Today, the fastest growing segment is Islamic banking. Another measure I am proud of is to bring in the microfinance sector under the central bank ambit. Microfinance regulations and ordinances were issued for microfinance banks, which was contrary to the advice I got from my mentor Prof. Muhammad Yunus of Bangladesh, who cautioned against bringing microfinance under the central bank. But today, all the central banks are moving in that direction because they have realized that small entrepreneurs, small borrowers and small depositors have to be protected.

BRR: When you joined the SBP, non-banking finance companies were under the central bank supervision. But during your time, NBFCs were transferred to the SECP’s ambit. In retrospect, how do you see that decision, considering that SME lending has remained below par?

IH: The reason why the SBP transferred NBFCs’ supervision to SECP is very simple. About 95 percent of financial assets were in the banking system and the rest in the non-banking system at the time. We used to have two supervision departments at the SBP – one for banking and the other for non-banking. As a result, we were not able to allocate sufficient supervisory resources to look at our commercial banks. For 5 percent of financial assets that belonged to non-banking system, we had to make 50 percent of our human resources available. That was not the right kind of thing to do for a central bank. So I said SECP was the other regulatory agency that should take NBFCs over.

Now, SMEs were never given loans even by NBFCs at that time. During our time, we reached 17 percent of the total loans for the SMEs from the banking system. It is a pity that it has now gone down to 7 percent. We removed the mandatory ceilings on agriculture credit and the private banks, which had no presence in rural areas, also started lending money. As a result, agriculture credit went up from Rs50 billion to Rs250 billion, and when I left it was over Rs600 billion. We also promoted consumer financing to create demand and economies of scale for production of cars, durables and other goods in the country. Those are the kinds of things I had hoped that they would continue. The advance-deposit ratio at the time was around 70-75 percent, which has sharply gone down now to 45-50 percent. There was no lending to the government, which was not incurring high fiscal deficits at the time. During the two times that we borrowed from the IMF, we completed all the conditionalities and returned two tranches because we did not need them. We did what every country should do is try to bring about fundamental structural changes. So I am disappointed that at this time, the banks are not doing what they ought to be doing – they are just making money available to the treasury bills and PIBs, which is not their only job.

BRR: The central bank seems to have deteriorated a little after you left. Some of your successors did not complete their tenure, and a few did not have the requisite experience. What are your thoughts?

IH: There has been some good leadership as well between now and the time I left. The institution was very strong, but leadership does matter. While the institution can do 80 percent, 20 percent depends on what the leader can do. Since the new governor has come in, the same people who were working in the SBP have turned around and they are doing the kind of things that nobody expected the central bank to do. They are in the leading edge so far as technology is concerned – just look at initiatives like Micropayment gateway, Roshan Digital Account, and facilitation for startups. The governor can provide the leadership, but it is the institutional strength that enables him to take the new measures. After being away for 15 years, I feel gratified that the SBP still enjoys the best reputation among all the public sector institutions.

BRR: What is your message for the current SBP team on the need to raise SME lending?

IH: That is a very pertinent question. My take is that we change the prudential regulations about SMEs. The banks want collaterals and securities – but you cannot expect SMEs to provide those kind of assurances. So the prudential regulation that we changed in 2003 or 2004 specifically noted that banks would give loans to the SMEs on the basis of cash flows rather than on collateral or security. Now the technology has gone so far advanced that you can have your loan officer monitor input and output prices to assess an SME’s cash flows and restructure the repayment streams accordingly if business conditions change. Doing so will require a lot of training and investment on human resources. The problem is that as long as you can give a loan to the government in one stroke of pen without consuming any capital or taking any risk and you get a very high return, you would barely spend time and energy on giving SME loans to thousands of people. That, I think, is the issue. We have to build incentives for the banks to go for the SME lending. Unless we meet the requirements of the SMEs, the economy will never be able to take off on a sustained basis.

BRR: Pivoting to public sector reforms, on which you have done considerable amount of work, why is it that in the three years that you have been directly spearheading the government’s reform portfolio, you have not been able to implement some of those reforms?

IH: People ask me why I was able to turn around both the SBP as well as the IBA, both public sector institutions, and why have I not been able to do this for the government of Pakistan. Remember, there are four million people working in the government of Pakistan, as compared to a few thousand which were working at the SBP and a few hundred that were working at the IBA. Secondly, I was the chief executive of both those institutions, where I had the power and authority to formulate the strategy and execute it as well, with the help of my team and other stakeholders. Both as the Chairman of the NCGR and now as Advisor to the PM, I am only providing the technical expertise and proposals in the form of reforms. The implementation of reforms is the responsibility of line ministries. So if there is a reform for performance management system, where the present system is totally rotten, it is the Establishment Division which has to change the whole guidelines and prescribe new procedures. I cannot do it, because I do not have those powers.

That being said, there has been some progress as well. Firstly, we have been very successful as far as Public Finance is concerned, as we approved the Public Finance Management law for the first time in Pakistan’s history where the powers of the Ministry of Finance have been delegated to line ministries. How can you reconcile to the idea that a 22-grade, Secretary-level officer has to rely on the judgments and the dictates of a section officer at the Ministry of Finance? Right now what we have done, you just give the Secretary a one-line budget, he or she does not have to go to the Ministry of Finance for spending approval, as they can choose however they want to allocate the resources for the best use and value of money. That reform itself will enable the Secretary to fulfill his or her performance targets. That has been done. Secondly, the whole Financial Advisor organisation has been abolished. Like the corporate sector, we have introduced a Chief Finance Officer in each ministry, who reports to the Secretary of the ministry and manages the finances.

The third area where I have received most support from the PM and the successive finance ministers was on the issue of State-owned Enterprises (SOEs). There are ten SOEs that are causing 89 percent of the annual cumulative losses to the exchequer. So we prepared a restructuring plan for PIA, Pakistan Railways, Pakistan Steel Mills, and energy-sector DISCOs. Those plans have been approved by the cabinet, but now it is up to the Aviation Ministry, Railway Ministry, Industry Ministry and Energy Ministry to implement those reforms. That is where the disconnect is, although the reform-minded PM himself takes lot of personal interest. It is the ministries that have to do it. Fourthly, thanks to the PM’s support, all the appointments of CEOs and MDs of public sector companies, statutory corporations and bodies are now done in a transparent and competitive basis. With the grace of God, we have been to recruit 62 top-notch Pakistanis from both within the country and outside the country to these positions. This process has encouraged so many qualified expats, who lacked political connections, to apply for a lot of these positions.

A disheartening aspect has been the fact that provinces did not take part in the task forces which we have established on reforms. They have maintained that provinces are quite autonomous post-18th Amendment and therefore they will not follow the federal government’s guidance on this subject. The reality is that the interactions of a common citizen for health, education, drinking water, sanitation, garbage disposal, public transport, etc., all take place at the local level, which the provincial governments are responsible for. Looking from my perspective, where civil service reforms and institutional reforms were intended to make the delivery of basic services available to a common citizen who doesn't have the money or the connections, I am frustrated because those reforms have not taken place. We wanted a security of tenure for bureaucrats so that if you appoint a Secretary or a Head of department, they should continue there for a certain period of time without being disturbed unless they have committed act(s) of corruption or other misconduct(s). But now you have too many frequent transfers in the provincial governments and there is no accountability at all.

BRR: Tell us a bit about education reforms when you were at the IBA.

IH: If you ask me one thing that I am really quite exulted about is the opportunity I got at one of the premier institutions of Pakistan, the IBA. I am proud that I was able to bring in the talented and bright children from the poor families in the backward areas of Pakistan to get quality education at the IBA. And this was through the National Talent Hunt Program, and through the Sindh, Balochistan and Khyber Pakhtunkhwa Talent Hunt Programs. Under these programs, students who were doing their Intermediate in backward areas were brought to the IBA at our own expenses, they lived in our hostels, and during the summers we gave them extra classes in order for them to come up to the level for our entrance exam. They were taught English, Computer Sciences and Mathematics, as well as trained on communication. Those who were selected from this pool received no concession to compete in our entrance exams. Once selected, we underwrote all their expenses, including their boarding, lodging and even pocket-money for next four years. We have been able to graduate hundreds of students under these programs, and these programs are still going on.

Social mobility in this country can only take place if you equip people from the backward areas and the poor families with those tools, and one of the best tools is higher education and quality education. Many of these students are now working at top multinationals or getting higher education abroad, and that is where lives of their own families have changed. This also creates a demonstration effect for others to work hard. That is an accomplishment for which I am very happy. And I am very grateful for the private sector contribution towards funding these programs. If Pakistan has to get out of the inequality syndrome, we need to pay more attention to human capital development. The IBA still maintains one of the highest standards of entrance examination, curriculum, and we never compromised on that.

What is the principle of education reforms? Do not discriminate on the basis of financial strength. Every third student in the IBA gets some kind of scholarship or financial aid. It’s a need-blind policy. We charge financially well-off students market fees, which we use to cross-subsidize student aid. Because we were able to charge higher tuition fees, we were able to offer foreign-trained PhD faculty salaries of 4 to 5 lac rupees. In short, we built a financial model that was sustainable and robust, which helped attract quality students and gave them the best teachers. When I joined there were only 19 PhDs at the IBA, and most of them were from Pakistan. When I left, there were 72 PhDs, mostly from the best universities in the world. Now I am told that the number of PhDs in the IBA faculty has exceeded 90.

During my time, the physical infrastructure at the IBA had to be expanded to meet the needs of growing number of students, faculty and staff. I was able to collect almost $50 million from the private sector and the philanthropists. This allowed us to expand from 6 buildings to 30 buildings, to build sports complex, add more hostels, have state of the art computer labs and libraries, as well as other facilities that are possessed by a decent university. Because I was known to the private sector, they knew that I would be using their money to the best advantage of the institution. They were very generous and I was able to undertake a complete transformation of the IBA. This has also helped us to attract very good faculty members, which in turn leads us to have quality students. About 95 percent of students are offered jobs even before they have graduated. The head-hunters visit the campus, interview students and make the offers. That is where quality education can make a transformation of the society – but unfortunately it is limited to very few institutions in Pakistan.

BRR: You are leaving after being associated with the economy in one capacity or the other. Where do you see things headed for Pakistan?

IH: It’s a complex issue, but I am an eternal optimist. I am very hopeful about the future of this country. Let me some share some thoughts with you. Here is a Prime Minister who is really sincere in his beliefs and in his doings that the vision of Pakistan should be to liberalize the energies of the private individuals, businesses and farmers, without too much hindrances from the governments, to create wealth, and part of this wealth should come to the government as tax revenues to help poor and backward segments of the population. This is a model of inclusive growth, which China and East Asian countries have followed very successfully.

The trick is that we have a constituency politics and the priorities of an elected MPA or MNA are that he or she should be re-elected at the next election. Now what are the contributory factors to his or her election? He or she should be able to spend funds for development projects in the constituency, besides they must have the power to choose the SHO and the Tehseeldar to get their work done. This elitist model is the bargaining model where the people who have no connections find the intermediaries in the politicians, who then mediate on the people’s behalf and get the basic services rendered to their areas. In the bargain, voters promise that at the time of the elections, they would vote for the politically-connected people. So, the politicians’ priorities are not the general well-being of the people of Pakistan, but the well-being of their constituents. This creates a conflict between the priorities of the elected representatives because of constituency compulsions and the vision of a leader who is not thinking in a five-year election-cycle but who is thinking in the long term.

In short, there is no congruence between electoral cycle and economic development cycle. What you need is continuity, predictability and consistency in economic policies. But unfortunately in Pakistan, when there is a change in the government, we often have complete reversal of even some of the good policies. And this creates an unpredictability.

BRR: Do you think Pakistan should change the system from a parliamentary system to a presidential system?

IH: No, you can modify this system. For instance, in Egypt, there is a constitutional arrangement where 50 percent of the seats are constituency contested, and the rest of the seats are given in proportional representation to the votes which are received by the political parties. In Egypt, this system helped bring in more than 100 PhDs in various subjects who got elected in the proportional representation system to the assembly. They have thus become resources for running the line ministries. And when they run a ministry, they are looking at the larger picture, they are over and above constituency politics, and they bring subject matter knowledge.

If I look at Pakistan’s present government, if the Prime Minister is given the power to nominate 50 percent of the MNAs on the basis of proportional representation, he will bring in these individuals who are competent in their fields but who don’t have their own constituencies. Already, the PM has appointed a number of special advisors/ assistants who are subject matter experts, because the business of the government is getting more complex. The other message that I have is that we must have a very strong local government system. The more powers are delegated to the local governments and the more financial resources are allocated to them, the better the economic outcomes and delivery of public goods and services to the common citizens.

BRR: Lastly, what are your plans for the future?

IH: Well, I want to be a little bit more flexible, as the current assignment is a little bit of a straitjacket for me, as the Prime Minister is a tough boss. He himself works 24/7 and does not like if his Cabinet members go on leave for extended periods. I have my grandchildren scattered in various continents and they always complain that I don’t spend much time with them. So, besides reading, writing, and going on some boards, I would have more flexibility to spend some time with them. Even before I joined this government, I was very fortunate that I used to be invited at international conferences and forums. I would continue to do that and also have interactions with the local media, think tanks and educational institutions.

© Copyright Business Recorder, 2021


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