What are the major economics challenges of a ‘Naya Pakistan’?

'Naya Pakistan’, the slogan of the incoming Pakistan Tehreek-e-Insaf (PTI) government, has caught the imagination of an overwhelming number of ordinary people. The party now beckons towards framing a new people-centred development paradigm — one that will result in a welfare state that meets basic needs in education, healthcare, housing and employment, provides direct income support to the poor and the vulnerable, reduces extreme income inequality and shuns wasteful consumption and lavish expenditure.

To accomplish all this appears to be a Herculean task, especially for a government that has come in through an elected democratic process and not a revolutionary change involving the overthrow of the ruling propertied classes. Yet, as many countries – including the United Kingdom in the distant past and, more recently, China and Brazil – have shown, it is possible to spread the gains of economic development through social welfare measures that reduce poverty and inequality. This, however, requires prudent economic management, reduction of wasteful expenditures and the stamping out of widespread corruption. Most importantly, it needs an honest, sincere and committed leadership that enjoys public confidence.

What, then, are the major challenges to realising the dream of a ‘Naya Pakistan’?

For a start, any process of structural change must be anchored to a strong foundation of macroeconomic stability and overall peace and security in which all people and sectors of the economy can realise their potential. While Pakistan has made significant improvement in peace and security in recent years, its current macroeconomic situation is in a shamble. The country’s foreign exchange reserves are precariously low at just over 12 billion US dollars (including recent inflows from China) and would fund less than three months of imports. Our unsustainable trade deficit reached almost 30 billion US dollars last year and a spending spree by the outgoing government has pushed the budget deficit to over seven per cent of the Gross Domestic Product (GDP), necessitating increased borrowing from abroad and thus raising pressure on the current account deficit.

Regaining a macroeconomic balance must, therefore, be the immediate aim and priority of the new government. To overcome this crisis, the incoming government must try to increase foreign exchange reserves – whether through reaching an agreement with the International Monetary Fund (IMF), or by borrowing from friendly countries, or by raising funds in global financial markets – and on terms that do not throttle the little growth momentum Pakistan has built up or seriously restrict the country’s capacity to move the economy in the direction that PTI has promised. While the government must also cut down the budget deficit, it should do so by curtailing non-development and wasteful expenditures. It must not agree to any further devaluation of the Pak rupee. This has already been done by the interim government and some downward corrections are correctly being made in the local currency’s value to achieve a sustainable equilibrium.

The impact of measures to stabilise the macroeconomy, which any lender will certainly insist upon, will have an adverse impact on ordinary people, as energy subsidies will need to be reduced to bring down the increasing circular debt, which has now reached over seven billion US dollars. The prices of other utilities will also need to be adjusted upwards.

However, people will likely be prepared to accept this spike in prices if they are assured of a decline in line and delivery losses, a reliable supply of electricity and gas, and minimal load-shedding. The incoming government must present in stark terms the situation it has inherited and the need for these price adjustments in order to ensure timely service delivery in the future. It is better to start early than merely delay the inevitable.

The government will face strong opposition to the privatisation of inefficient and loss-making public sector enterprises — including the Pakistan International Airlines (PIA), Pakistan Steel Mills and Pakistan Railways, but they can be made to function more efficiently were the government to initiate a restructuring process, including some reduction in their workforce. This can only be done by taking the representatives of employees on board and reaching an agreement with them over settlement packages and re-skilling programmes for displaced workers.

We must all realise that sustainable macroeconomic stability can only result from a rapid increase in our export earnings (‘export or economically perish’ as goes the economic widom) which, at 25 billion US dollars, currently pay for only 40 per cent of our import bill. The latter crossed 60 billion US dollars last year and, with expected further increases in oil prices, will continue to rise. This is a major challenge that the incoming government must address. It can do so through arbitrary increases in tariffs on imports of a long list of goods although taking such short-term measures to reduce the trade deficit does more harm than good in the longer run. Given that Pakistan has lost its share in global markets in recent years, aggressively marketing our exports may hold the key to solving the problem on a sustainable basis. Selected but targeted government support for exporters could make a significant difference here. Framing a new trade policy and building on the lessons of the disastrous trade and exchange rate regime of the recent years must, therefore, be given priority.

Increases in development expenditure must be planned and evaluated to ensure cost-effective and timely project delivery. Moreover, wherever possible, public-private partnerships should be encouraged to realise and finance a planned shift towards ‘investing in people’ and increase the dismal amounts of money currently spent on education, healthcare and housing. The tax-to-GDP ratio will also need to be increased from around 11 per cent to 16 per cent over the next five years.

This will require deft handling because this increase is bound to create considerable friction with tax avoiders, especially among the trading classes. The government must adopt a carrot-and-stick policy, providing incentives to taxpayers but coming down hard on those who deliberately avoid paying their due taxes. While a carefully planned restructuring of the Federal Board of Revenue must be given priority, this must be done at a pace that does not disrupt or sabotage the department’s working.

An aggressive skills training programme and a certification system for existing skills must be started. Where existing programmes are functioning well, they must be expanded.

The new government must also bear in mind that any attempt to significantly shift priorities in development expenditure from physical infrastructure to investing in people and enhancing social welfare benefits will mean curtailing the very large amount of money required for ongoing and planned public sector projects. This amount is estimated at between five to ten times of the annual development expenditure, depending on whether we include or exclude some major capital-intensive projects such as dams and motorways. The real challenge for the government will lie in deciding which projects to continue and which to drop or modify at an early stage.

To conduct this exercise rationally and ensure a balance between badly needed infrastructure — especially to replenish our shrinking water resources, meet our growing energy needs and giving higher priority to human development, we will need to resurrect our planning machinery. This must be done at the federal level and (equally importantly) at the provincial and local levels. It is not just technical competence that needs to be revitalised: we need to rebuild the confidence of our economic and financial policymakers so that they can think independently and speak their minds without fear or favour. They seem to have lost these abilities after many years in which those in power have dictated their preferences and refused to tolerate those who disagreed with them. The domineering influence of the World Bank and other influential donors must be critically re-examined and evaluated while recognising the need for benefiting from their expertise and global experience.

Rebuilding what was known earlier as the ‘steel frame’ of dedicated, competent and honest public servants is a prerequisite to bringing about a ‘Naya Pakistan’ at all levels of government. This is a major challenge and can only succeed if merit replaces the current system of personal loyalty to those in power, and security of service and tenure is ensured. The current Central Superior Service (CSS) examination should be deeply looked into and changed because it appears to unduly penalise those who have not passed through the ‘English-medium’ system.

Of all the promises it has made, a key challenge for PTI will be to create 10 million jobs over the next five years. The accompanying promise of building five million houses will help realise this promise, given the strong forward and backward linkages of the construction sector with the rest of the economy. But this will require government support to rebuild the domestic industry that had previously met similar demands and created jobs in the process. There is a real need for the incoming government to come up with an industrial policy that halts deindustrialisation and reignites an efficient and globally competitive industrial sector. In doing this, we must not move backward to the now discarded import substitution strategy of industrial growth but, instead, develop an export-oriented, competitive domestic industry.

An aggressive skills training programme and a certification system for existing skills must be started. Where existing programmes are functioning well, they must be expanded. The government could consider giving to unemployed workers or those who want to upgrade their skills government-funded vouchers to help pay for certified skill training in schools and colleges. Job generation programmes must be calibrated to meet the separate needs of the educated unemployed as well as those of skilled, semi-skilled and unskilled workers. A well-thought-through active employment agency could be set up under the human resources ministry, including an employment exchange for the private sector that also operates online.

Earlier, only industry could boast of enjoying rapid technological change, new innovations and the economies of large-scale production. In recent years, agriculture too has been recognised as a leading sector for growth and development. The incoming PTI government rightly recognises this but, again, this transformation must not rely on the crutches of unaffordable subsidies. Instead, agriculture must realise its potential for sustained productivity and labour-absorbing growth. An active-support policy for small farmers – one that concentrates not just on credit and loans but also encourages the use of new seeds and technology and is bolstered by a well-functioning and competent farmers’ decision support system – should replace the existing arrangements.

The emphasis on industry and agriculture must be actively supplemented with a policy framework to encourage the growth of new and dynamic sectors driven by technology and innovative interventions. Information technology and tourism could be part of this initiative.

The increase in emphasis on and resources for education and healthcare – which are primarily the responsibility of provincial and local governments – could be supported by instituting a system of financial rewards in terms of additional grants by the federal government for districts and tehsils that meet their development targets and show real gains in the quality of education and healthcare services.

The social welfare system will also need to be expanded to gradually extend the current Benazir Income Support Programme to ensure a secure minimum income for those living below the poverty line. This will require resources and time to put a working system in place. In the meantime, extending and gradually enforcing minimum wages in rural areas, in the informal economy and for domestic workers could substantially improve the earnings of the poorer working classes.

Finally, the new government could set up several commissions to investigate the key economic challenges outlined above for which it should tap the best minds both inside and outside the country. Initiating the process of framing the 12th Five-Year Plan by the Planning Commission is a step in the right direction which the new government can now steer to meet its economic objectives.

The time has come to support the long overdue goal of a ‘Naya Pakistan’ in which people from all walks of life can play a dynamic and meaningful role in national life. Concentrating resources on a few key objectives, starting with healthcare and education and monitoring the results are the key to success.

The writer is a professor of economics at the Lahore School of Economics and a former vice chancellor of the Pakistan Institute of Development Economics.

This was originally published in the August 2018 issue of the Herald. To read more, subscribe to the Herald in print.