Pillars of prosperity

by: Dr Salman Shah

In an open letter to the IMF carried by Business Recorder (October 24, 2016), Dr Ashfaque Hassan Khan, Dr Hafeez Pasha and this writer had reminded the IMF that the recently concluded EFF programme with Pakistan had not produced the victory that was being proclaimed by the government and the IMF through the media. We showed that the accomplishments were not sustainable because they were driven by excessive build-up of foreign debt. They primarily provided a brief respite as the macroeconomic stability had been achieved without reducing the vulnerabilities of the economy and without undertaking significant structural reforms needed to put the economy on a sustainable growth path.

The objective of writing an open letter was to highlight the fact that Pakistan had been in the intensive care of the IMF since 2008 and the economic policies during the the five year term of the PPP government and the four years of the PML(N) government had been under the tutelage of the IMF. The past nine years had neither provided the economic growth needed for employment generation and poverty alleviation, nor had it created the conditions for boosting investment and exports that were needed for sustainability.

To an extent the open letter did provoke a degree of debate in the official circles and the high fluted trumpets of victory by the government were tempered with a call by IMF Managing Director Christine Lagarde for ‘seizing the moment of opportunity’ and unleashing of a deep and strong economic reform program for the real economy. In a joint press conference, with the minister of finance she said:

 “Higher and more sustainable growth will also require completing important structural reforms in the energy sector, tax policy and administration, ending losses in public enterprises and making a sustained effort to improve governance and foster a dynamic and export-oriented private sector. At the same time, increased focus on improving health, education and closing the gender gap and providing social protection can ensure that gains in living standards are widely shared,” 

In addition to the future economic agenda, she also added the resolution of the Panama leaks issue as critical for moving ahead on the reform agenda. On the subject she said, “It is not a matter of persecution but a question of honesty, transparency and accountability whether it is incidentally in Panama or Bahamas or whatsoever,”

In a post-programme environment, her message was clear to Pakistanis, “Clean up your act and fix your economy yourself.” The question is whether we are prepared for seizing the opportunity. There are three parties to this, 1) the government, 2) the private sector and 3) the electorate. The electorate through the various mechanisms has to build up the pressure for change and delivery, the government and the private sector has to actually deliver the change on the ground. In my earlier article, The corridors of prosperity, Business Recorder (October 20, 2016) I had argued that to achieve prosperity for our people we have to mobilize all our resources of land, water, people , ability, natural and financial wealth in a comprehensive, coordinated, efficient and robust manner to unlock the potential of our nation. We know that in our globalized world of today it is the survival of the fittest that matters. Countries that have been single mindedly successful in building their economies as super productive machines are the winners in the ‘Race of Nations’ and have been able to unleash immense prosperity for their people.

What is the recipe for success? In the market economies of today, it is the private sector that leads the charge backed up by their national systems and governance. The country operates like an Incorporated entity beating the competition to get its due market share. It is the National Competitiveness that matters and underlying the national competitiveness is national productivity. The more output the country gets from a given input determines the prosperity of a nation. Thus to win the global race for prosperity a country has to be a winner in its global competitiveness and that is achieved by winning the global competition for productivity. The economic challenge for a government then rests with creating an economic environment within the country, in which productivity flourishes leading to global national competitiveness.

The role of the government in national competitiveness of the country is then multidimensional; inter alia 1) It is the designer of the national productive system and its enforcer, 2) it conducts fiscal and monetary policy of the country, 3) It is an active player in the provision of certain goods and services such as law and order, health, education and defense, 4) It is the provider of critical infrastructure, 5) it negotiates access to international markets for national producers. 6) It is answerable to the electorate for the overall health of the nation and its systems.

As system designers a critical element of an environment for productivity enhancement is the existence of even playing field free from corruption and opaqueness, where there are no favourite sons and sacred cows. An environment where there are no barriers to entry and exit, where there are no market distorting monopolies and cartels where efficiency and productivity are rewarded and inefficiency is consigned to the dust bin. This requires fostering intense competition in the national economy. A domestic survival of the fittest contest. The government of Pakistan has been singularly inapt at nurturing such an environment for competition in the country. This requires building and ensuring robust legal frameworks and institutions, effective enforcing institutions like Competition Commission of Pakistan, State Bank of Pakistan, SECP, and economic ministries at the federal and provincial levels.

In Pakistan the role of the private sector has been shaped by the business environment of the country that is in vogue and has been cultivated by successive governments. It has gone through periods of laissez-faire to nationalizations and mixed economy. The result is that today we have multi-tiered production system. At the bottom is the informal sector that reputedly encompasses half the economy and is most backward, inefficient, with poor technology and management systems; most farming, cottage industry, construction, transport, wholesale and trading activities fall in this sector. The next tier comprises the single product manufacturers that are spread over many segments of the economy and are generally undercapitalized, family owned and like the informal sector poorly managed, with obsolete technology, management systems and procedures. Above them are the more developed and multiproduct companies which are the Darlings of the banks and governmental largesse, listed on the stock markets with some technological and management system sophistication. The top tier is occupied by the local entities of global multinational corporations focused primarily on harvesting domestic markets based on superior products, technology and management systems and processes. A separate tier is the Public sector Enterprises that are generally highly inefficient, leaky and highly dependant on their monopoly status and handouts from the national budget. Overall the productive system of Pakistan is dismal compared to the rest of the world and this shows up in many global indices and indicators of economic success and capability.

The very pillars of the corridors of prosperity are missing in Pakistan and constructing these ‘pillars of prosperity’ is the job of the government that has been alluded to by Christine Lagarde in her ‘seizing the moment of opportunity’ speech. Back of the envelope type simple calculations would show that an average worker in the USA produces a yearly output of over $ 70,000; an average Pakistani produces an annual output of $ 3,000 or roughly 3.4 percent of US productivity levels. The informal sector is bringing down Pakistan’s average. At the top tier some multinationals are producing at around forty percent of US levels, our own multiproduct large companies are achieving around 25 percent of US levels. The good news is that our multiproduct companies can improve to the level of local MNCs by improving their management systems without a big injection of capital. Similarly the informal sector can improve if we can induce them out of informality into the formal economy the growth possibilities would be mindboggling. This all depends on the ‘seizing the moment’ producer friendly government’s reform programme.

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