Managing public investment the mission-oriented way

Two renowned intellectuals – Greece’s former finance minister Yanis Varoufakis, and columnist for Guardian George Monbiot – in two separate articles recently, pointed towards a common problem: neoliberalism, and austerity, and its extremely damaging impact in terms of lack of public investments, especially when climate change crisis is fast-unfolding and requires massive public investments for transitioning to green economies.

For instance, Neoliberalism-based risky finance, and ‘profit-over-people’ mindset of the private financial sector, on one hand, led to Global Financial Crisis 2007-08, but to fight which austerity policies were adopted in Europe overall, which not only led to drop in economic growth and unemployment, but also seriously affected public investments.

Highlighting these concerns, Yanis Varoufakis in his recent Project Syndicate (PS) published article ‘Europe’s 15-year slump’ pointed out the following: ‘Europe is languishing in a long-term economic slump whose origins lay in Wall Street’s near-death experience in 2008.

There have, of course, been subsequent spurts of growth (and hope), but these tend to fizzle out soon after they appear. Given the European Union’s policy choices, it could not have been otherwise.

These policies reflected the eurozone’s faulty design and guaranteed chronically low investment at precisely the time massive investments were necessary to shift Europe’s aging industrial base from dirty energy, chemicals, and the internal combustion engine to cloud capital and green technologies.’

Similarly, in Britain, as George Monbiot indicated in his recent Guardian published article ‘Britain is broken. What will fix it? Lots and lots of money’ there is a dire need to significantly increase public investments by rolling back the neoliberal model of the last four decades or so, as follows: ‘Many names have been proposed for our pathology: Thatcherism, Reaganism, austerity, Trussonomics. But they are all synonyms for the same ideology, a doctrine hardly anyone in public life can bring themselves to name: neoliberalism.

It has dominated decision-making in the UK for 44 years. One result is that the cumulative underfunding of public services is now approaching crisis point, possibly threatening state failure. …The obstacles are not economic, but political.

We need a government that seeks to improve our lives rather than to save an abstraction called money. Throughout the neoliberal era, the people have served the money. Let the money serve the people.’

Under the neoliberal assault, public sector’s capacity to deliver got diminished because of market fundamentalism—whereby private sector was mainly facilitated by following the popularized mantra of downsized governments, and regulation—and outsourcing.

However, during the last four decades, the philosophy of largely unhindered private sector mainly followed market signal that rewarded short-termism, and quick profits. This not only drew down on the depth of public infrastructure, which meant lack of preparation towards meaningfully inclusive, climate-resilient economies, but also reduced the technical capacity of the public sector to deliver needed public goods.

The same philosophy taking roots over the same period of time in Pakistan under the same neoliberal and austerity policy flowing both though International Monetary Fund (IMF) programmes and under influence of ‘Chicago boys’-styled policymakers in general has resulted in lack of commitment to long-term non-neoliberal, non-austerity, counter-cyclical green planning in terms of macroeconomic, and industrial/growth policies over the years.

This also reduced inclusivity in both economics, and politics, allowed greater perpetuation of influence of vested interest on public policy, deepening, in turn, the neoliberal, austerity-based model that helped such perpetuation.

Breaking this mould requires adopting a ‘big-push’ policy emphasis, one that is mission-oriented, and purpose driven. The routine model of individual ministries coming up with projects will not allow the needed thrust for the public purpose at hand to transform the economy, both out of its twin-deficit problem – by enhancing industrial production, exports, growth, and domestic resource mobilization – and into a climate-resilient, inclusive economy.

For instance, in a recently released technical assistance (TA) report ‘Public investment management assessment – PIMA and climate PIMA’, and as was indicated in its preface: ‘At the request of the Ministry of Finance of Pakistan, a team from the IMF’s Fiscal Affairs Department and the World Bank undertook a combined Public Investment Management Assessment (PIMA) and Climate PIMA (Climate-PIMA) during the period from March 14 to March 28, 2023.’

Coming primarily from Neoliberalism-oriented and austerity policy favouring platforms of IMF and World Bank, the TA report is a non-starter, given even a cursory look highlights that no reference is given to strong intellectual internalization of the negative impact of Neoliberalism, and austerity policies since GFC 2007-08.

Secondly, while the report does highlight the continuation of five-year plans, the comment in isolation to suggesting encapsulating these plans in a non-neoliberal mould, not calling in turn for a greater public sector role – for instance, in a social democratic way – and not highlighting the importance of changing governance, and incentive structures overall – under an industrial policy announced in this light, for example – only scratches the surface of the problem of lacklustre performance of public investments.

Thirdly, the continuation of the focus on projects, rather than placing these projects in a well-nested programme financing mode, and then as a super-structure a mission-oriented public sector, with ambitious, connected economic goals joining these programmes into main national targets – for which, the Council of Common Interest needs to be invoked more forcefully for federal-provincial coordination, and also incorporating a dedicated set of technical streams like economists, environmentalists, epidemiologists, etc. into civil service – also leaves a big hole in properly setting the needed momentum, especially since the country is among the top-ten most climate vulnerable countries.

Fourthly, and most importantly, calling IMF and World Bank to assess public investment management is even counter-productive, given their neoliberal basis does not allow them to seen the importance of transaction cost, the limitedness of individualism, and rationality aspects of economic agents, the non-clearing nature of markets, and hence, overall take a very limited approach to establishing the role of institutions.

Unfortunately, not enlarging and deepening this understanding of institutions leaves little margin for breaking the mould of market fundamentalism, limited governments – relying largely on outsourcing, just like this TA needed mainly because of such limited capacity of government to conduct such analysis in-house – which neither allow much-needed escape from price shock therapy, or approaching enhanced and efficient public investment strategy, and one that is based on understanding and capacity to reach climate resilient economy, and that too at a fast pace, given the fast-closing of window to curtail global warming to reasonable levels.

It is this neoliberal view, exhibited in the TA report that does not allow them – as application of heterodox, and institutional economics literature would otherwise allow – to see ministries as institutions since they formulate the laws, rules, and procedures, providing needed environment for organisations — state-owned enterprises (SOEs), government departments, and private sector entities — and markets.

Instead, the TA report expectedly sums up institutional design in a very limited way as ‘the objective facts indicating that appropriate organizations, policies, rules, and procedures are in place.’ Moreover, this depiction of institutional design is not just limited – reducing them to certain ‘facts’ with no practical orientation of what they are in terms of public sector governance structures — but also confusing since institutions — the rules of the game — provide the environment for organizations — the players of the game–and markets, and that institutions and organisations/markets are separate in such functions.

In adopting this approach their analysis of public investment management and its critique and recommendations for improvement thereof, remains largely narrow, and at best only tweaks the boundaries of the same project-cycle centered view of public purpose; one that is devoid of envisioning much needed greater role of mission-oriented role of government, and both in terms of provider of governance- and incentive structures, to overall reach an entrepreneurial state.

Highlighting this public orientation, noted economist Mariana Mazzucato and others pointed out in their chapter ‘Economic policy with a mission’ in an edited (2021) book ‘Public purpose: industrial policy’s comeback and government’s role in shared prosperity’ the meaningful dimensions of the role of public sector, and in turn the needed manifestation of public investments: ‘By undertaking well-defined missions, investing in a wide range of sectors, and nurturing new economic landscapes, policymakers can steer the overarching course of economic growth while leaving it to private enterprise to fill in the details. …This framework – what we call a mission-oriented approach to industrial policy – rejects many of the basic premises of market fundamentalism, especially its extremely limited vision for government.

At the same time, it recognizes the risks, both political and economic, of excessively top-down planning by an overbearing state.

Charting a course between these extremes, mission-oriented industrial policy instead uses government action to incentivize economic activity in the direction of ambitious social goals — whether reducing inequality, fostering sustainable development, or arresting climate catastrophe.

If we are to such problems, the last four decades [as in the case of Pakistan] have shown, we must embrace an active role of government in creating and shaping new markets — not just regulating them or intervening when they fail.’

Copyright Business Recorder, 2023