There is a lot of spilt milk in terms of lost time to initiate meaningful, broad-based institutional, organizational, and market reforms, to take the economy away from an overall neoliberal/Washington-consensus mindset, and economic orientation to a truly inequality and poverty-reducing, sustainable development pathway; one that brought greater economic and political inclusion and, in turn, diminished elite capture or extractive institutional design, strengthened democracy and directed the country towards a truly welfare state.
Having said that, given the pandemic is still very much here, and the global commodity supply shock remains significantly deterministic of inflation and overall macroeconomic stability at home, primarily through the aspects of current account and debt sustainability, not to mention the fact that the government is already in its last leg of tenure, there is no time for either lamenting over the spilt milk of lost time nor is there enough relief from a little-changing pandemic, and supply-shock scenario to give the government and people some reasonable breathing space from high-rise inflation, to keep postponing economic reform that is essential for bringing both sustained macroeconomic stabilization and economic growth.
Given this context that demands utmost urgency in terms of initiating economic reforms, the coming year needs to be one that passes through the road of clear-headed and purpose-driven reforms, and in a mission-oriented way. The fate of the incumbent government in the next general elections, and the future of democracy, at least in the medium-term, appears to depend on the question whether the PM can walk the talk in terms of the ‘road less taken (meaningful economic reforms)’, one that has only been treaded rarely during Pakistan’s history. The year 2022 appears to bring that last chance to PM and his government to take journey on that road, if he really cares what PTI’s manifesto has pledged because given the shy-high economic misery that is grinding people on a daily basis, there is no more time to delay the needed reforms.
This will be no mean task. First of all, the government will need to call a spade a spade: it needs to be clear that neoliberal policies cannot undo elite capture and bring in an economic environment that allows safeguarding macroeconomic and distributional consequences for economy. It also needs to be understood that the IMF programmes are basically neoliberal in nature, and decades of experience with programme countries suggest they are counter-productive to bringing any sustained macroeconomic stabilization and growth, not to mention their overall strong consequences towards increasing income inequality, which also weakens the ability of demos to meet pre-conditions for a healthy democracy. Hence, the government cannot continue with a strong contradiction in its approach to policymaking. In other words, it cannot pursue a neoliberal IMF programme and emulate economic models of China or Scandinavian countries simultaneously. Regardless of the marginal benefits of remaining in an IMF programme, the first policy choice for 2022 should be to leave the IMF programme and delineate a clear-headed non-neoliberal policy direction.
So, the first and foremost reform is to reform the policy mindset away from neo-liberalism. This will help change the mindset of apparently using the instrument of interest rate to attract quite fickle foreign portfolio investment (FPI), and in turn not create enough policy emphasis to meaningfully improve economic institutional quality in the country to create greater pull for FDI (Foreign Direct Investment). On the other hand, interest rate hikes for this purpose hurt both demand and production levels, not to mention the reduction in export competitiveness that it causes. Such a policy also hurts import-substitution industry, and much-needed investments in renewable energy, which are both important components to reduce an otherwise strong imprint of imported inflation, and an overall greater import bill, and the problems it creates for current account and local currency.
Price reform is another major item that needs a focused and mission-oriented reform effort. For this, it is important to improve the functioning of markets in both the real and financial sectors. It underscores the need for setting up a ‘price commission’ especially formulated to reduce market imperfections, including adopting ‘hybrid markets’ to increase the role of government in an institutionalized way to create hierarchies that oversee better determination of demand and supply, reduces the role of middle-man, allows accruing rationalized profit margins to reach a price that reflects true market situation, and is fair for all economic players. Such correct price signals are missing in the economy— both for suppliers of goods and services, in the shape of revenues they earn, including the government. The situation is unfair to those who help produce goods and services, that is the wages or incomes that labour accrue. In the financial sector, for instance, it means reaching price of capital or interest rate that is fair for lenders or banks, or borrowers or consumers capital. Since the government is also an economic player, such rationalization would help, for instance, in domestic resource mobilization, in
boosting exports earnings, reducing import costs and rationalizing the level of interest payments.
Another thing that the government should internalize in its economic policy is that there are limits to using macroeconomic policy instruments, especially during the times of such phenomenon as a pandemic that creates much greater financial demands to meet higher stimulus/development expenditure needs. It should, therefore, realize that it is important to attract higher levels of external financial flows — FDI, development assistance, etc. Therefore, while every sector of the economy needs to improve in terms of institutional quality, organizational delivery and market performance, the government will, in the short-term starting from January 2022, have to pick some important ministries (or institutions). Every ministry or institution that the government selects will be required to enhance its efficiency by improving the performance of the sectors that it deals with. For this, the PM should formulate an ‘economic war council’ that works vigorously to improve the efficiency of involved ministries, underlying departments (or organizations), and market fundamentals. An important policy here would be the needed incentive structure, which gives the correct price in terms of revenue and wage, benefits/subsidy, and tax signal.
Side by side, this would require urgent and deep reforms to increase the efficiency of the ‘players of the game’, the workers in ministries, organizations and markets — both from the public and private sectors. Not only will regulating and skills enhancement agencies need to be created/strengthened, reforms in civil service will need to be quickly ushered in. The defining feature of the reform here should be to dismantle civil service and move towards one public service; details of which the writer has provided in his previous series of articles in this regard.
In addition, another major step to increase the fiscal envelope that should be taken in the short-term, in the upcoming year, is the creation of a nation-wide ‘development bank’, which may be called ‘Pakistan Development Bank’ (PDB). The Bank will provide one-window incentivization for involved ministries, development agencies, and foreign investors in terms of development projects related opportunities, and will have the advantage of better monitoring and evaluation of projects given they will all be housed at one place. This will also provide better possibilities to align development expenditures, foreign aid, and foreign investment with national economic goals and priorities.
(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund) He [email protected]
Copyright Business Recorder, 2021