Category Archives: Economics

The section will discuss economic theory, history, issue in Pakistans economy and international political economy. Will keep updating with issues and theories related to economics as well as links to online resources.

NGOs and development in Pakistan

An interesting article on Pakistan has been posted at Global Dashboard (a knowledge hub for issues in international affairs and foreign policy) by Seth Kaplan “Why do some countries have so few NGOs?“, a policy consultant on state instability, governance and development based in New York. The thesis of it is as follows:

Nongovernmental organizations (NGOs) are significant for service delivery to the poor, they hold governments accountable and are a positive impact on development. However, in Pakistan there is a very small number of NGOs, and as thus development Pakistan has suffered. Additionally respectable think tanks, and independent monitoring organizations (IMOs) are also few and far between.

Kaplan goes on to say that this lack of independent organizations extend to politics with political parties structures on kinship ties. However philanthropic contributions are huge (1% of GDP) but “a relatively small share of this money is going to build institutions that contribute to state building and social development. The poor may be gaining adequate relief from destitution—the streets of Pakistan have far fewer beggars than India—in ways that did little to change the situations.”

Firstly, the blame according to Kaplan falls on the Pakistani society dominated by kinship relationship that distrusts externally developed institutions. Secondly, institutions are not run by consensus but by cults of personality.

The arguments are not without merits but Kaplan forgets some of the subtleties of the cases of India and Bangladesh that have a proliferation of NGOs. Most NGOs start off providing a specific serves in a specific policy areas and this hold true for India and Bangladesh as well. In India much of the drive behind NGOs and independent service delivery is entrepreneurship and a good business environment. In Pakistan the economic environment is too complex to such NGO growth. It is not kinship and ethnic ties that doesn’t let NGOs proliferate, its taxation, security, terrorism, inflation, transportation costs, road infrastructures etc., that make wide scale operations too risky or too costly. With many NGOs in Pakistan trying to works as self sustaining non-profit organizations, much of the activity is constrained because of economic reasons rather than the frailty of trust networks.

Kaplans second point on institutions being hijacked by the people who are running them is also flawed because assuming NGOs to be independent ventures, initially NGOs are the effort of a few people but there is no evidence to suggest that these people are corrupt or grossly inefficient. Personal power in government institutions is a different matter and it is too much of a generalization to bunch NGOs with all other institutions and say that these are run on personal agendas.

Kaplan’s broad-brushed analysis then jumps to the weakness of civil society being weak and only advocating specific issues. But is that not how civil society and lobbying groups work?

Accepting that Pakistan has fewer NGOs, can we even say that NGO’s cause development? NGOs are small scale service provides where the state cannot reach, they fill in the gaps in development and give signals to the state and civil society highlighting vulnerabilities. Development has always been the job of the state. The weakness of civil society advocacy and participation is key to this. NGOs do have a role in this, however the case of Pakistan is different from that of Bangladesh and India. We have vast networks of charity based on societal trust (that Kaplan says is weak in Pakistan). Even NGOs like SOS Children’s Villages and CARE in Pakistan operate on these donations. Just because Pakistan does not have an NGO titan like Grameen, does not mean that philanthropy and non-state service delivery are not present. Additionally there is a large growing criticism of microfinance and its actual impact on development due to high interest rates and defaults with loans. The problem with too many NGOs is that the governments starts relying on these NGOs for development, and this is not a sustainable solution for long term economic and social development and it de-links civils society from the state.

Rather than just looking at the number of NGOs in Pakistan as a problem, a better question would be to see how significant NGOs actually are for development in Pakistn and what are the conditions that are inhibiting development as compared to India and Bangladesh? NGOs is probably not the answer.

Pakistan Policy Group 2012. 

Corruption and fundamentalist movements-Discussions from Africa

Published at Pakistan Policy Group

Lets start off by looking at the logic of corruption in society. This ‘logic’ come outs of experiences of systemic corruption, and is not just visible in Africa.

1.    Corruption is wide ranging, affecting many types of transaction;
2.    Corruption has become the norm;
3.    Everybody hates corruption; Nobody will denounce the corrupt;
4.    Corruption corrupts, and once the rot sets in little can be done to stop it;
5.    All political systems are prone to corruption (democracy offers no easy cure);
6.    Corruption is considered “fair” by its perpetrators, but not by its victims.

We have taken this description of corruption from a paper titled, “A moral economy of corruption in Africa” (De Sardan, 1999). The general conclusion drawn by the author  is that the most likely outcome of conscious and generalized corruption is a fundamentalist revolution. The description of corrupt practices, and our discussion to follow, is very relevant to the case of Pakistan.

Pakistans Corruption Rankings, Transparency International

Corruption is diverse in practice and is not marginal or sectoral  and ranges from petty corruption to major (state elite corruption). It is generalized and banalised, and a central part of civil discourse. However, everybody knows who is corrupt, but it would be unthinkable to denounce a relative or acquaintance to the police. Similarly, “Important individuals” are all compromised and dare not denounce each other, giving rise to a loose network of solidarity. Corruption is expanding, and seems to be irreversible due to its pervasiveness and “normalisation”. In the case of Africa this inability to regress comes from state failure, massive unemployment, unproductive civil servants, an irresponsible ruling elite and underpaid civil servants. Additionally development aid and income from illegal drugs trade and demands has caused clientelism favorable to corruption.

Single institution/sector perceived to be most affected by corruption, overall results. Source: Transparency International Global Corruption Barometer 2009. Percentages are weighted.

Such a situation offers dismal prospects for political solutions. De Sardan writes that, “There is no obvious correlation between the extent of corruption, on the one hand, and the types of political regime, their degree of despotism and their economic effectiveness, on the other.” Thus the type of government may affect the type of corruption in vogue, but not its scale. Secondly, corrupt practices are consider legitimate by perpetuators, it may sometimes only be exclusion from the gains of corruption that causes criticism and awareness- “A minister may think it fair to use government resources to build a villa, because he is far from being properly recompensed for his services.” Predatory authorities may even consider these gains a right of office- a mindset modeled on colonial relationships. Corruption is also necessary for social acceptance and the logic of solidarity requires linkages from school or family or middlemen, and bargaining patters or gift giving between them, to get things done.

What facilitates the acceptance and fuels the banality or ‘everyday-ness’ of corruption? Within traditional cultures there exists a practice of over-monetarisation. By over-monetarisation De Sadan means the social pressure to give gifts, especially in cash (e.g. marriage gifts, birth announcements, religious holiday gifts etc.) These social relations can form an “excuse”, or a vehicle, for corruption practices like bribery, concessions etc. Shame or guilt of not helping and acquaintance with the manipulation of the system is also a reason for acceptance of corruption and a legitimization of ones own actions. A study of civil servant corruption from Malawi says that three sets of rules intertwined- official rules, kinship rules and the unofficial code of conduct, are what encourage corrupt behavior (Anders, 2002).

Coming to the issue of a “fundamentalist revolution”, a major proposition in anthropological studies of corruption say that it is not realistic to combat corrupt practices as long as the people who take part in them view them as acceptable, thus systemic reform will be difficult. For success an almost utopian change at the administrative level will be needed. As long as political elites are unwilling to give up some of their privileges and to reform, changing the general public’s attitudes may ultimately take the form of ‘puritanical’ or ‘fundamentalist’ movements based in the ‘grassroots’ (Fjeldstad, Kolstad and Lange, 2003).

References
Anders, G, “Like Chameleons: Civil servants and corruption in Malawi”, 2002, La gouvernance au quitidien en Afrique, 23-24.
De Sardan, J P Olivier,  “A moral economy of corruption in Africa?, Journal of Modern African Studies”, 37, 1, 1999, pp 25 – 52
Fjeldstad, O, Ivar Kolstad and Siri Lange, “Autonomy incentives and patronage: A study of corruption in the Tanzania and Uganda revenue authority”, 2003, CMI: Norway.

A walled world keeping 86% of us out

Today in class we got talking about the Hobbsian state creating and how it creates deterrence politics… that the purpose of the state is to constrain violence, and thus the state becomes a legitimate wielder of power to cause violence. And this of course is the classical definition of the state, that the state is a legitimate monopoly over violence (Max Weber).

Thus territorial lines are drawn to keep violence out and we chest thump our sovereignty and applaud our militaries. And this is not just an extreme right position. Liberals and on left and right create and support policies and practice propose security to discipline and order the state and thus laws are used as instruments for the government and not the people. In fact this is Michel Foucault’s view of the French Physiocrats of the 18th century who laid the foundation for economic change and discontent right before the French Revolution… a time when International Relations was still a toddler. Today, it is an impulsive youth whose most publicized arguments keep giving us slap-on-the-face reasons for why the world is the way it is.

Development and progress thus are not going to happen without security, and  thus those best at this race, keep ‘us’ out. And well they have the sovereignty (common to liberals and realists)/rights (common to liberalism)/capability (neo-realists especially) to do so.

Got this image from http://i.imgur.com/Fqw2e.jpg

Flashback to the NFC Award debates: What about the budget deficits?

The NFC award after its approval in 2009 has become an issue of last year, so I wrote this to try to understand what it means for the current economic scenario. 

In December last year, the Annual Conference of the Pakistan Society of Development Economists, our national experts came to the conclusion that the 7th NFC Award approved in 2009 was a political and not an economic Award.

Pakistan’s macroeconomic management has remained centralized until 2009-10. However,the 7th NFC Award and 18th Amendment contributed heavily to the decentralization of the macroeconomic management. We are all aware of the problems plaguing the economy, a narrow tax base (A World Bank report from 2004 states that out of the 39.1 million employed only a paltry 2.14 million, or 5.59 percent, paid taxes), double-digit inflation, rising debt servicing and a large budget deficit. In such time, is such decentralization logical?

It is common economic knowledge that a good government is that which can maintain fiscal discipline by keeping the budget deficit low. But in developing countries, especially Pakistan, governments love to spend but hate to collect taxes. So does the NFC Award that hands over 56 percent of tax resources to the provinces help maintain fiscal discipline? For some like Ashfaque H. Khan, Dean of NUST Business School in Islamabad and Sohail Zafar, Dean of the Lahore School of Economics Business School, the answer is a big ‘no’. Governments federal and provincial are never going to spend this among prudently.

Why so? Well the timing is such that the federal government’s expenditure is growing rapidly (more than doubling of interest payments in three years from Rs.365 billion to over Rs.800 billion this year, high defence spending, power sector subsidies of over Rs.175 billion, and crumbling public sector enterprises eating resources). There are hardly enough resources for the federal government to meet it’s own set expenditures, how does it expect to cater for provinces? The provinces themselves only generate 0.5% of total tax revenues; and the NFC Award further dampens the incentives to step up tax collection.

A historical overview of the NFC Awards shows that even with the amounts promised aren’t transferred. Well simply because they don’t exist. The data below illustrates his fact (there isn’t data available on the latest NFC Award).

Only around 75% of expected funds are typically forthcoming. NWFP is the worst, receiving limited funds of around 50–60%. Baluchistan is the only province receiving more than what it had expected. This discrepancy has resulted in a considerable shortfall of funds to most provinces, forcing them to borrow to meet their expenditure needs. It has also made planning at the provincial level more difficult.

Pakistan can only come out of the present economic crisis if it maintains fiscal discipline keeping its budget deficit low. But economists feel this may not be possible with the 7th NFC Award unless the provinces themselves can deliver surpluses to meet the federal deficits.

‘Change comes from policy, not budgetary handouts’- Nadeem Ul Haq, Planning Commission Chief

Saadia Gardezi talks to Dr Nadeemul Haque, deputy chief of Pakistan Planning Commission and chancellor of Pakistan Institute of Development Economics, about the new budget and the new growth strategy- The Friday Times, 11th June, 2011

TFT: To what extent do you think the Ministry of Finance has been successful in making a budget that can draw Pakistan out of its current downslide? Economists like Shahid Javed Burki have said it is a disappointing budget. Are these concerns well founded?

Dr Nadeemul Haque: I think the ministry did as well as they could with the situation they have. We tend to think that the budget solves all problems of the economy. It cannot and it does not. That’s what the finance minister also said: the budget is just one part of government policy. The budget is just there to clarify expenditures and revenues. In Pakistan, we expect too much of the budget and seldom focus on the policy.

TFT: Do you think the current budget removes barriers to private investment mobilisation?
NH: I don’t know if it is the responsibility of the budget to do this. The budget is about what is and what is expected to come. For the impediments in the private sector you need a good growth strategy. And nobody reads the growth strategy.

TFT: One proposal of the budget is slashing subsidies, including those to the power sector, from Rs395 billion in 2010-11 to Rs166 billion. In the current fiscal, power sector subsidies alone remain more than Rs200 billion. What problems do you foresee with regards to cutting subsides?
NH: If the cutting of the subsidies means creating efficiency, it’s not going to cause problems. With subsidies to the power sector there’s a lot of wastage and theft. Line losses have to be decreased. On the other hand, subsides to the agriculture sector have not been touched.
The creation of efficiency and the movement away from protecting and subsidising is an important part of a reform we are trying to push for. Yes there will be opposition and some short term problems with cutting useless expenditures but hopefully we will grow.

TFT: The budget speech also promises to reduce inflation by half, to 9% in 2011-12. Do you think this is possible or is the government being too optimistic?
NH: Yes it can, I don’t think there is anything to stop us from moving in the right direction. If we control money supply, stop printing more money and keep the deficit small, inflation can come down. This requires strict fiscal discipline, but why not? Just because you get into trouble doesn’t mean you can’t grow up.

TFT: There has been a lot of discussion in the media that this is not a pro-poor budget. What is a pro-poor budget and is this budget pro-poor?
NH: I don’t think the budget allocations can be thought in terms of being less or more pro-poor. There a set amount that has to be given out. Now there is a huge allocation made for the Federal Public Sector Development Programme (PSDP), and I suppose you could call that pro-poor. The budget makes allocations for these sorts of development expenditures. It doesn’t make policies to tackle poverty, unemployment or underdevelopment.
For policy you have something like the growth strategy. A policy strategy that can guide the government towards better growth and expansion. With growth, employment will be created so that people can benefit. Making a concerted effort to reform the economy to encourage investment, entrepreneurship and growth to create new jobs is what is pro-poor. Handouts given in the budget are not pro-poor, creation of new jobs is. It doesn’t make sense to rely on budgetary handouts for poverty alleviation.

TFT: In the Planning Commission’s new growth strategy, the private sector is the growth-driver in an open market environment. Do you think the budget is structured according to this growth strategy?

NH: Yes it is. The budget simplifies the tax structure and the tariff structure and so encourages the private sector. This fits very well with the strategy to build an open economy. We have an economy that is often closed down for the sake of a few and we protect sections without viable economic reasons to do so. If we can stop doing that, stop regulating the economy for the sake of a few people, then we can create more space and create competitive markets. The budget is complementary to the growth strategy.

TFT: Are the provinces on board with the growth strategy?
NH: The growth strategy does not operate in a command economy, where we tell people what to do. It is a vision and a way forward. It talks of creating space for knowledge, for entrepreneurship, technology and capital formation. With the strategy we talked to the government and various ministries and everyone seem to largely support it and appreciate it.

TFT: Previous governments have also focused on growth led by the private sector. What is different about this growth strategy?
NH: Simply advocating private sector growth does not mean much. We have been talking about private sector-led growth for a long time. We are talking about entrepreneurship in this report. Encouraging entrepreneurship is going to create much more innovative competition.

TFT: How long are the reforms outlined in the growth strategy going to take? 
NH: A time frame has not been specified in the strategy. Reforms will take a long time, and at the end of the growth strategy we have defined the process. The government will need to stop competing with the private sector and provide public goods that have a higher social rate of return than the private rate of return, as well as transparent rules.
If the leadership takes an interest, then reforms can be implemented successfully. We have to create an open economy and society. The old 3-year and 5-year plans don’t work. They only worked in the Soviet Union. We are talking of gradual reform.

TFT: Can these reforms happen in the current political scenario? Will there be political opposition?
NH: Political opinion does not exist in isolation from public opinion. If the society wants change, then it cannot be stopped. I am looking towards ownership of these ideas in the society. If you accept these ideas, if universities buy into this type of a strategy, if people are wiling to talk about reform, then the political leadership will as well.

Pakistans Growth strategy can be downloaded as a pdf here

 

‘Not a panacea’- Inflation, private investment and growth in the new Budget 2011-12

Published in the Friday Times, June 10, 2011 in their issue on the budget. 

Current GDP growth estimates for Pakistan are at 2.4%. A figure insufficient to create jobs for the 2 million strong that join the labour force every year. According to IMF estimates an annual growth figure of 8% is needed to absorb the labour force while our target is 4.2%. Inflation, the evil twin of growth, is likely to increase with soaring oil and food prices threatening the current account into deficit. And then with the sad state of our finances, what of foreign donor confidence and private investment?

The budget has come under heat from major economists. Syed Akbar Zaidi for one said that “the finance minister’s speech yesterday was empty and disappointing. It was devoid of merit and failed to identify or address any of Pakistan’s numerous problems.” He went on to say that the budget panders to politicians due to its proximity to the election. Former Finance Minister Shahid Javed Burki was of the view that Hafeez Shaikh’s team consisted of brilliant minds, yet didn’t do much with the budget. Burki is of the opinion Hafeez Shaikh did well with the privatisation portfolio under Pervez Musharraf’s government and should have used his experience to hand over some of the poor performing public sector corporations. “Where will this budget take the economy over the next financial year? Not very far. It will not revive economic growth, not reduce the dependence on foreign flows, not reduce the incidence of poverty, nor integrate the economy with rest of the world.” But as Finance Minister Hafeez Shaikh says, it’s a budget not a panacea.

Key problems identified in the current Economic Survey released by the State Bank are persistent and high inflation, low growth, low revenue collection leading to a high fiscal deficit that continues to add to the overall debt, and a dramatic fall in the investment rate. As Dr Sohail Zafar, Dean of the Business School at the Lahore School of Economics put it, “It’s a gloom and doom scenario, and all attempts to be consciously optimistic are not supported by sane logic and data.”

Of deficits, inflation and other sins: Consider the 4.2% growth target for instance, not impossible to achieve, not enough for our needs and yet a bit ambitious considering last year’s performance. Other targets like decreasing inflation to 9% seem too optimistic. The idea here is that the smaller deficit target will reduce the printing of money and reduce inflation. All this requires strict fiscal discipline, and actually meeting the 4% fiscal deficit target which we bounded over last year.

The central bank has the same view, that the government tightening its belt will decrease inflation, reduce borrowing costs and encourage consumer demand. However, government borrowings have increased 55% since the end of the last fiscal year. In an interview with Bloomberg (June 4), director of the monetary policy department, Hamza Ali Malik said that further tightening would be difficult, “Low growth, high inflation, rising debt. It’s a nightmare for any economy.” Furthermore, Dr Sohail Zafar says that expectations about foreign resources to meet the deficit seem are not likely to be realized.

The core problem facing Pakistan that affects the situation of government expenditures is of taxation and revenues. The tax policy has been somewhat contradictory. On the one hand the finance minister said that only 1.5 million people have filed their tax returns this year, only half of those who are registered and over 70,000 have been given notices. On the other hand the budget raises the taxable income level by Rs 50,000 to give relief. Then there’s a 15% pay increase for government employees, above the 50% increase given last year. How’s that for fiscal discipline?

The one percent decrease in the GST rate, from 17% to 16% will hardy impact inflation. As Irfan Hussain writes in Dawn (7 June), “If international prices of sugar are rising in Chicago, not even a Supreme Court suo motu notice will keep them down in retail outlets across Pakistan. Artificially low prices enforced by the state will only succeed in driving stocks underground, and encourage the creation of a black market.” Which brings us to the issue of subsidies and price control.

Does subsidy removal cause inflation? The decrease in GST is to offset the effect of the withdrawal of exemptions in fertilisers, pesticides, tractors, leather, surgical items, sports goods, carpets and some other sectors. There has been much hue and cry over this cut that this would cause inflation. Speaking at a post-budget press conference on 4th June, Dr Hafeez Shaikh said this would not happen because the subsidies would be made more targeted so they were not misused by wealthy people.

Subsidy removal, without spending the associated savings, may increase poverty due to the rise in input costs relative to the selling prices of products sold by most firms and farms. But the government’s fiscal policy will ultimately determine the effects. Inflation resulting from subsidy removal can be reduced with a conservative fiscal policy. Inflation comes from two sources: the initial increase in general prices due to the higher cost of inputs and more spending by the government as funds are freed up. Therefore, if their goal is to reduce the inflationary effect, the government has to keep spending to a minimum, focusing only on areas that can increase the country’s productive capacity. Our focus is defence (Rs 495 billion) and interest payments (Rs791 billion).

Even with an expansionary policy, to keep inflation low, government spending of associated savings needs to increase purchasing power and raise production. Wasteful public projects which do not add much to the country’s productive capacity should be avoided and private production encouraged. The new growth strategy by the Planning Commission of Pakistan focuses solely on the private sector as an engine of growth.

Pakistan and the private sector: Private investment in Pakistan has been shrinking for some time. Investment in the large-scale manufacturing has declined by 32% (compared to 17% last year). The investment-to-GDP ratio dropped to below 17% last year because of decreasing private investment. The manufacturing sector has been hit the hardest.

An improvement in electricity generation will also have a large impact on production levels and costs in the country. It should kept in mind, however, that such investments may take years to materialise.

It seems that some efforts have been made in this budget to aid private sector growth by reducing some taxes and duties, but they may be too lean. All special excise duties have been abolished. Regulatory duty on 392 items have been abolished. It is now limited to luxury vehicles, cigarettes, arms and ammunition, betel nuts and sanitary ware. Federal excise duty on cement will be phased out in three years. The federal excise on beverages has also been reduced from 12% to 6%. The tax rate on interest income from government securities will be 10% with no tax return requirement. The finance minister also announced on June 4 a five-year tax holiday on loan-free equity investments.

It is unclear whether this budget will do well for industry. Dr Zafar is of the view that there is a disconnect between monetary policy and the fiscal policy embodied in the budget. “Interest rates may be low theoretically, but are too high practically to push the private sector. New investments in the industry are not likely to show improvement during the next year.” But at least no new taxes were imposed to hurt investment.

Saadia Gardezi is a political economist

Pakistan Budget 2011-12: Expenditures

Basically the total Rs 2.767 trillion is going to be spent as:

Expenditures Rs in Billion
Interest Payments 791
Defence affairs and services 495
Federal PDSP 300
Grants and transfers 295
Repayment of foreign loans 243
Running of civil governmnet 203
Subsidies 166
Other development expenditures 97
Pension 96
Development Loans and grants to provinces 55
Provision for pay and pension 25

Thats means 39% or so of the expenditure is debt servicing.

More on this later. Just wanted to post the colorful pie made for The Friday Times.

(Please credit if you copy-paste)