Reformer-in-chief: In conversation with Dr Ishrat Husain

Dr Ishrat Husain has recently retired as the dean of Institute of Business Administration (IBA), Karachi. He has also worked as the governor of the State Bank of Pakistan (SBP) from 1999 to 2005. Before that, he had a long and distinguished career with the World Bank – from 1979 to 1999 – during which he served at several key positions in Africa and East Asia. Husain also headed the National Commission for Government Reforms from 2006 to 2008.

With such extensive and varied work experiences, he has attracted both admiration and criticism. Some of his critics point towards the relaxed monetary policy he pursued at the SBP while many of his admirers draw attention to his steering of Pakistan’s economy through difficult times as well as IBA’s transformation under him from a business school to an institution of excellence in higher education.

Here are excerpts of a recent conversation with Husain:

Fahd Ali. What were the challenges you faced after taking over IBA in 2008?

Ishrat Husain. When IBA was set up in 1955, it was the first business school outside North America. Why the heck is it still so unknown outside Pakistan? To me, the challenge was that this institution should be one of the top institutions like the Indian Institutes of Management, which are household names abroad. Why isn’t IBA in the same league?

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Being a public sector institution, my first condition for taking on the job was that I would not allow interference from any political quarters. The second condition was that the government must give me the freedom to approach the private sector and charities to raise money because the government did not have the money [required to restructure IBA].

Ali. What necessitated IBA’s restructuring?

Husain. I wanted to put IBA among the top 100 global business schools and among the top 10 in the region. In order to do that, I had to realign its programmes with the best international practices that are also rooted in local circumstances. IBA also had to apply for accreditation with the international agencies. The changes were necessary in order to obtain those accreditations.

Ali. What was your restructuring strategy?

Husain. I enhanced the quality of the existing academic programmes and brought in new ones. I transformed IBA’s flagship MBA programme and aligned it with the best international practice: that everybody has to have a two-year post-graduation work experience before they can enrol.

When, however, we started the new MBA programme in 2010, the enrolment went down drastically — from 150 to 25. This was a big shock. Tuition fee collection declined substantially and many members of the faculty had no courses to teach, but I persisted. The market has now recognised there is a qualitative difference in graduates who join an MBA programme straight after a BBA and those who are now coming out of [the restructured] MBA programme. The new graduates are more mature. They are not chasing grades; they apply their knowledge to real world problems.

The state is not a monolithic, homogenous mass. It is highly amorphous.

The BBA programme was not a terminal degree. The majority of its graduates would go for the master’s programme either in Pakistan or abroad. Very few went into the job market. I have made BBA a terminal degree and made eight social sciences courses mandatory for every BBA student. My philosophy is that a student has to be a good human being before he becomes a competent professional.

I brought in an experiential learning project. In the final year, each student is assigned a problem-solving project in a company for hands-on experience. I also introduced a “Responsible Citizen Initiative” that requires BBA students to do an eight-week community-based internship.

The second pillar of my strategy was bringing in new faculty. IBA had only 19 PhDs in 2009; today it has 60. Another 24 members of the faculty are doing their PhDs abroad. In the next few years, 80 per cent of the faculty will have a PhD, with degrees secured mostly from outside Pakistan.

The third pillar was physical infrastructure. There was no proper office for any faculty member. They were all sitting in a common lounge. Not a single laboratory or classroom had been added after 1965, even though the number of students had gone up from 200 to 2,000. How could I attract people from Berkeley, Northwestern and Cambridge universities to teach at IBA in those conditions?

I undertook a major programme of remodelling and expanding the existing physical infrastructure. I mobilised some five billion rupees and completed 21 new projects. This expansion has helped IBA increase its enrolment from 2,000 to 3,600 this year. Its financial resources have almost doubled. With internal revenues providing 70 per cent of operational expenditure, dependence on outside resources has decreased. I raised one billion rupees to set up an endowment fund. The income from that fund also supports the expenditure.

And the final pillar was community outreach. I have established four centres. The Centre for Executive Education trains mid-career professionals in strategy, leadership and supply chain management. The Centre for Business and Economic Research assists the Sindh government on taxation and the SBP on consumer confidence and business confidence surveys. It also does studies for the World Bank, for example, on the textile industry in Pakistan among other things.

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The Centre for Excellence in Journalism has been set up in partnership with the Medill School of Journalism at the Northwestern University, which is one of the top journalism schools in the United States. The centre has a state-of-the-art television studio comparable to any newsroom at any news channel. The Centre for Excellence in Islamic Finance is the fourth one. Islamic finance is expanding quite rapidly in Pakistan, but the manpower for it is hardly distinguishable from that of conventional banking. IBA competed with other universities and won a grant from the SBP for setting it up.

Personally satisfying for me are the talent hunt programmes to recruit students from backward districts and poor families who have done well in their intermediate examinations. IBA brings them to Karachi at its own expense and mentors them. Last year, we received 1,600 applications under this programme — 25 of them passed IBA’s entry test. We have the son of a factory worker in the same class where the daughter of his father’s employer is also studying.

Ali. How did the staff and faculty respond to the changes?

Husain. The old faculty and the old staff were very annoyed because they wanted to retain their comfort level. They were always threatening to go on strike. They wrote newspaper articles against the changes. I, however, refused to be distracted. When they saw that progress has been made, they could not do much [against it].

Ali. The freedom to ask questions is an essential aspect of the intellectual environment at an educational institution. A lot of people feel that such freedom is shrinking in Pakistan. What do you think?

The military has completely changed. It is now convinced that ourinternal problems are our worst enemies and that we have to take careof these problems.

Husain. You are right. Intellectual curiosity and academic freedom are the cornerstones of the environment at any university. Teachers at IBA are quite free to express their views openly. I also encouraged IBA students to ask all the difficult questions. On their first day at IBA, I would tell them that the best way of learning was through inquisitiveness and that no question was a stupid question.

Ali. To be specific, new historiography in Pakistan is not possible unless higher education institutions protect the freedom to ask questions …

Husain. I think this is happening. There was a certain ethnic party in Karachi, for example, that nobody could even point a finger to because they were all scared that some retaliation would take place. For the last four years, the media has been full of stories about that party.

We expect social change to take place overnight, but you have to see whether the pointers are in the right direction.

Ali. What about [questioning] the military?

Husain. The military has completely changed. It is now convinced that our internal problems are our worst enemies and that we have to take care of these problems.

Ali. When an individual leaves an institution, his good work also leaves with him. Do you see the same happening at IBA after you?

Husain. I believe in institution building. My decision to not renew my contract for a third term is embedded in the principle that human beings are not indispensable and that institutions have to be built by a succession of people. It is quite possible that the next person has better ideas and better execution than me. If I have put in place systems and procedures, then the 80-20 formula for institution building will prevail — 20 per cent is the influence of the individual, but 80 per cent is system-driven.

Ali. Do you have any targets that you missed?

Husain. I wanted to make the faculty work in teams. They are working in silos. My goal was to develop teams for collaborative multidisciplinary research because our problems cannot be compartmentalised. I could not do anything on this front because my time was taken up by other preoccupations.

Ali. There is a focus on the social sciences in higher education these days. What do you think is the reason for that?

Husain. I presented a paper, Public Policy and Social Sciences, at a conference at the Government College University in Lahore about seven years ago. In that paper, I discussed the status of social sciences teaching and research in Pakistan. [My diagnosis was that] people who did not pass the civil service exam became teachers of history and social sciences.

But that trend has changed. Some of it owes to the Higher Education Commission (HEC) that has started investing in PhD programmes. Some very bright young men and women have gone to good schools abroad and come back with PhDs recently. We should have people who are conducting research on our political system, our social and economic problems and our history. We should have more Ayesha Jalals.

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[Social sciences] is also virgin territory: if you write about Pakistan’s historical, political and religious problems in a scientific manner, you will get published in the best journals. The critical mass has been created by the HEC and an incentive structure exists that induces young teachers to specialise in these fields.

The HEC also offers competitive research grants in the social sciences every year. You do not have to be part of a public sector university in order to compete for these grants. You can compete if you have developed a good proposal. The state is, thus, modifying its postures as far as research in the social sciences is concerned.

Ali. How committed is the state to maintain this posture?

Husain. The state is not a monolithic, homogenous mass. It is highly amorphous. If you are talking to the chief minister of Punjab, you get one picture of the state. If you talk to the chief minister of Sindh, you will get another picture. There are, however, opportunities and the educationists must alook for those wherever they can be found.

The government in power between 2008 and 2013 did not pay muchattention to economic management. It changed five finance ministersand five governors of the central bank.

There was a gap after General Pervez Musharraf left. From 2008 to 2013, the government completely starved the HEC of funds and then diluted its powers by decentralising its functions to the provinces. All the overseas scholarships were discontinued. People studying abroad did not have money to pay their tuition fee. That has really done a great disservice to education in Pakistan. This government is trying to put things back on track, although the damage done will take a long time to correct.

Ali. Moving to your stint at the SBP, people say one of the outcomes of your monetary policy was that it encouraged consumerism rather than focussing on supporting manufacturing. Your response?

Husain. You have to take economic conditions into consideration when devising your policies. After May 1998, Pakistan was under nuclear sanctions. Freezing of foreign currency accounts had shattered the confidence of Pakistanis — both residents and non-residents. Growth rates had tumbled and foreign exchange reserves were negative. Soon the military took over and more sanctions were imposed.

Our fiscal policy lever was jammed because the debt–Gross Domestic Product (GDP) ratio at that time was 100 per cent. There was no purchasing power. The aggregate demand was deficient. How do you kick-start an economy under these conditions? You only have the lever of monetary policy to play around. You bring down interest rates so that this can provide a stimulus to the economy working below its production capacity.

If you are producing 30,000 cars when the installed capacity is 20,000 cars or cement production is nine million tonnes against the installed capacity of 18 million, then the first thing that you do is to take steps that can enhance the purchasing power which will lead to rising demand, resulting in higher capacity utilisation. It is only after the existing capacity is fully utilised that expansion will take place through investment. Our consumers did not have cash to purchase a car or motorcycle or an apartment available on a lump sum payment. We decided to give them loans against their incomes which they could use to make a purchase on instalment basis. This pushed the aggregate demand upwards and the existing capacity was utilised.

In the second phase, when demand for steel, automobiles and cement went up, there was new investment to expand the production capacity. By 2006-2007, the investment–GDP ratio was highest in the country’s history, at 23 per cent. When the investment rose, the GDP growth rate averaged six to seven per cent per annum.

We have the son of a factory worker in the same class where the daughter of his father's employer is also studying.

If we had not kick-started the economy through an increase in aggregate demand using the monetary policy lever, we would not have been able to attain this virtuous cycle of increased capacity utilisation followed by new investment.

Ali. What did not go up at the same time were public sector investments…

Husain. No, public sector investment did go up but not by the same extent as the private investment. Public sector investment -- at seven per cent of the GDP -- accounted for more than one third of the aggregate investment. Even today you don’t have that level of public investment. The motorway between Peshawar and Lahore was made during that period; development at seaports and airports also took place then.

The only area where the government underestimated the problem was the energy sector. The government did not realise that demand for electricity and gas would increase with a GDP growth of six per cent. We should have at least kept energy production at a level commensurate with the future demand.

Ali. What do you think went wrong 2007 onwards?

Husain. There was a lack of timely decision-making on key issues in the post-March 2007 period. If you don’t take timely decisions, the cumulative effect of the postponed decisions is huge. I have said the same thing about the import of Liquefied Natural Gas (LNG). There were very good deals available in 2010 but the Supreme Court did not allow even one of those deals to be completed. Today in 2016, we are suffering because of the indecisions and postponed decisions.

Ali. How do you compare the economic policies of different civilian and military regimes in the recent past?

Husain. I would say 2000–2002, when we had a cabinet of technocrats, was the best period of economic management in Pakistan’s history. It was during that period that all the tough reforms – including those in the structure and administration of taxes – were introduced. The period between 2003 and 2006 was reasonably good because the momentum for growth had been created earlier. International confidence in Pakistan’s economy was high and the Foreign Direct Investment flows were at their peak.

The turning point came in 2007, with the announcement of elections, judicial issues and the Lal Masjid episode. In 2008, there was tension between Musharraf and the army on the one hand, and the new civilian government on the other. The government in power between 2008 and 2013 did not pay much attention to economic management. It changed five finance ministers and five governors of the central bank. When the ship is in turbulent waters, you need strong hands on the wheel to bring it to shore safely. We had an economy in trouble between 2008 and 2013 but there was no one minding the store. That created a lot of problems. We did not even implement conditionalities of the International Monetary Fund loan programme.

The current government at least has a very clearly designated steward of the economy. You may disagree with him, but at least we all know somebody is minding the store.

Ali. Why can’t we catch tax evaders?

Husain. When Abdullah Yusuf was heading the Federal Board of Revenue (FBR), tax administration was doing well. The moment the government removed him, the whole process turned topsy-turvy.

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Let me give you a very specific example. The FBR had a merit-based selection process for key postings in the customs and income tax departments. Those selected were given double the usual salary. As a result of this policy, very good people were selected as regional tax officers and they started generating additional revenues.

The new government came in 2008, and the FBR officials who were not hired for those posts went to politicians and said that they were being treated unfairly. The government doubled the salaries of all the officials irrespective of their merit or performance and the old culture was restored. If the merit-based, performance-related evaluation process and compensation system was allowed to continue, I can tell you things would have improved.

The current government at least has a very clearly designated stewardof the economy. You may disagree with him, but at least we all knowsomebody is minding the store.

Decline in revenues has widened the fiscal deficit and we are seeing the re-emergence of multiple slabs in customs and regulatory duties. You do not know which good is going to attract what duty. The lack of transparency and greater complexity in rules has given enormous discretionary powers to tax officials. [If the government] simplifies the tax code, removes discretionary powers of tax collectors and makes the tax collection system transparent, computerised and automated, I can bet tax collection will go up.

Experts such as Hafeez Pasha have been saying that the Statutory Regulatory Orders (SROs) have distorted the entire taxation structure and should be put to rest. We should have a level playing field in the tax structure. Taking away the power to issue SROs from the FBR and giving it to parliament is resented by many FBR officials who have been the beneficiaries of the SRO regime, along with businessmen.

Ali. You have been involved in reforming the bureaucracy, too. How has your experience been?

Husain. I am disappointed but I have not given up. Today, there is no performance evaluation system in the government. Everybody in the same grade gets the same salary and everybody is promoted after a given time.

In the structure I have proposed, selection is based on open merit and performance evaluation is not based on annual confidential reports but on key performance indicators. You do not get an automatic promotion. Reward and compensation are linked to performance, the outcome of training you acquire, and the competence to do the next level job.

Some people argue that the army has occupied a lot of space in Pakistan’s governance. I’ll give you my own explanation of that. In 1964, when I joined the civil service, bureaucracy would have been somewhere between 90 and 95 out of 100 on the efficiency and integrity index. The armed forces, at the same time, would be close to 30 or 40. Because the army used to recruit its officers from those who had only passed intermediate examination, it was not getting the brightest and the best who invariably competed for the civil service.

This was reversed 10 years later. When you have a civil service going downwards and a military service going upwards, who do you think will occupy the space for governance? And why do you think the army is more efficient? The armed forces have maintained the highest standard of selection, rigorous training and performance-based promotion. Performance evaluation is extremely stringent in the military and is based on predefined parameters. Promotion is decided collectively, not by one individual, where every candidate is discussed based on their record. Out of 350 cadets who join the military academy at the same time in a given year, only one or two become three star generals.

The armed forces have maintained the highest standard of selection, rigorous training and performance based promotion. Performance evaluation is extremely stringent in the military.

There were 20 people from West Pakistan in my civil service batch. Out of them, Farooq Leghari became the president of the country. Shahid Hamid became the governor of Punjab. I went away to the World Bank. Two of my colleagues were sacked. Each one of the remaining 15 went on to become a federal secretary.

Now, which is a better system: the one where I know that I will be automatically promoted to the next grade after every five years or the one where we always have to remain on our toes to cross the next hurdle? The commission on government reforms has proposed a process where everybody has to compete for higher-level positions after reaching grade 19 through a merit-based selection process conducted by the Public Service Commission.

In an economy that is becoming complex and specialised, we are giving a short shrift to specialists and have created a sense of entitlement among generalists for the top slots. Scientists, engineers, agriculture researchers, economists, lawyers, accountants and doctors languish all their lives in lower grades, frustrated and demotivated — subtracting rather than adding value to the society and economy. This kind of a system is not viable for any country.

The commission’s report has not seen the light of day because those who are presently enjoying unrestrained entitlement to top jobs are closer to the powers that be and would not allow these recommendations to be implemented.

Ali. What do you think are the most pressing economic issues or challenges that Pakistan is facing?

Husain. I think we have had enough of stabilisation policies. The sooner we get on the growth trajectory of six to seven per cent the better.

There is a big gap between the delivery capacity of the government and the expectation level of the general public. Because of powerful communication platforms such as social and electronic media, the public has heightened expectations. In 2000, social media was not as popular. Even the educated, urbanised middle class has become quite large now, which was not the case in 2000.

Local governments, on the other hand, have been disempowered from delivering services such as education, health, water supply, sanitation and solid waste disposal under the new laws. These services and their associated resources are concentrated in the hands of provincial governments but whatever the provinces are getting from the federal divisible tax pool is not reaching the ordinary citizens.

Efficiency in resource allocation is greater [under a local government system] because people at the grass-roots level know what their problems are. As secretary planning, I used to allocate money for 500 primary schools but I did not know whether those schools were even there or whether they had teachers. Local governments can decide whether a locality needs a road more than a school because they know the situation much better than those sitting at the provincial headquarters. Just like the 18th Constitutional Amendment has devolved powers from the federal government to the provincial governments, devolution from the provincial government to the local governments is also needed.

Ali. Why are provincial governments so reluctant to give powers to local governments?

Husain. When the local government system was introduced [in 2001], nazims became very powerful. A person like Shah Mehmood Qureshi, who had been a provincial minister and a member of the National Assembly, chose to become the nazim [of Multan district].

The local government system diluted the powers of provincial and federal legislators [in devising and implementing development schemes in their constituencies]. As a legislator, you should make laws. You cannot run local governments. If you are interested in running a local government, then leave your legislative office. The legislators, however, want to become as powerful as the nazims in running the local government system; at the same time, they want to remain in the legislature. This is the root cause of weak local government legislation in recent years. Strong, empowered local governments hurt legislators. They, therefore, have made local government totally impotent.

Ali. One of the most important economic issues these days is the China-Pakistan Economic Corridor. How do you see it?

Husain. It [offers] a win-win situation for both countries. China is very serious in addressing the backwardness of its western provinces by linking them with the shortest and most efficient international trade routes. If we are smart, we can use this corridor to open up the backward districts of Pakistan, which are located on its proposed western route — linking Gwadar with Khuzdar, Quetta, Zhob and Dera Ismail Khan.

Providing roads and electricity to these districts can be a game changer. Some of these districts have minerals which cannot be processed because they are not accessible. Others have horticulture which cannot be marketed because there are no roads. In some places, there are fisheries [which rot because of the lack of transportation]. The economy of these districts will bloom if we open them up.

If we are smart, we can use this corridor to open up the backwarddistricts of Pakistan, which are located on its proposed western route— linking Gwadar with Khuzdar, Quetta, Zhob and Dera Ismail Khan.

If, however, we indulge in political point-scoring, then this corridor is going to meet the same fate as other mega projects such as the Kalabagh Dam. We have to develop understanding among all the provinces and all the political parties that this project will benefit the vast majority of Pakistanis. In the 15 years required for its completion, the same party will not remain in power; all parties, therefore, have to work together. All the provincial governments, irrespective of their political affiliations, have to work together.

There is a huge coordination challenge in implementing the corridor. The federal ministries are fighting with each other and the central government is at odds with the provinces, which are also fighting among themselves. This is not the model that will take us forward. It might take us back even further.

The idea of special economic zones [to be set up for the Chinese industries along the corridor] is nothing new. Demonstrate the efficacy of this and you will find that other countries will be saying, “If you give this opportunity to the Chinese then consider us as well.” Make it work first.We are blessed that two giant economies [China and India] that are growing rapidly are our neighbours. We should take advantage of that. We should not play one against the other. We should have good economic relations with India, China, Iran and Central Asia. That is a smart thing to do.

This was originally published in the Herald's May 2016 issue. To read more subscribe to the Herald in print.

The writer is an economist and assistant professor at Habib University in Karachi.