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Tuesday March 19, 2024

Economic reforms

By Waqar Masood Khan
November 21, 2017
Economic notes
The term ‘economic reform’ is an amorphous concept. Since the word ‘reform’ is very attractive, anything can be sold in its garb. In this
article, we will explore the meaning and rationale behind this concept.
The word ‘reform’ is used with respect to a state that is not desirable and in relation to a desirable state that can be attained by altering or reforming the undesirable state. Thus, two elements are necessary for a reform to be meaningful: the recognition of the undesirable state and the identification of the desirable state.
An example would fix the ideas: the free market is a superior and more efficient arrangement to determine economic outcomes, such as prices and the quantities that are demanded and supplied on those prices. Instead, if the government takes upon itself the burden of setting prices (petroleum prices, electricity tariffs or Hajj fares), there would be consequences in the shape of inefficiencies.
An inefficiency is, theoretically, a very precise concept – though there may be issues with its measurement. It is called deadweight, which roughly means that if it was removed, society would be better-off by this amount even though it may accrue to consumers and producers in different magnitudes. Conversely, society is worse-off by the amount of this loss – both consumers and producers are losers.
A change aimed at eliminating government role in price-setting and allowing the market to do so would be termed a reform as it moves the economy closer to zero deadweight loss. In general, an economic reform is any change that aims to remove distortions. A distortion is the existence of rules and regulations that inhibit the efficient working of the market economy.
To be precise, we have given a fairly simplified version of such reforms. It may not be a straightforward decision to abandon, for example, the price-setting role across the board or government regulations for that matter. There are occasions when the government cannot allow the private sector to set prices or disregard the legitimate interests of consumers who lack the capacity to check market excesses.
In the case of monopolies and economic activities entailing externalities (a situation of market failure), the government has to play a primary role in ensuring the efficient working of the market. However, given the complexities inherent in determining the right prices as well as balancing the competing interests of various groups (consumers and producers), the international best practice is to establish an independent commission/authority with the mandate to regulate such economic activities. Banking and finance are activities that have historically required licencing and supervision from the central banks.
But with the opening of key monopolistic sectors – oil and gas, power and telecommunications – for private investment, it was imperative to establish such professional bodies that would be able to regulate them by taking on the price-setting role and ensuring the efficient working of large market players.
The establishment of the National Electric Power Authority (Nepra), the Pakistan Telecommunication Authority (PTA) and the Oil and Gas Regulatory Authority (Ogra) is based on this consideration.
Viewed in this perspective, economic reforms are indeed very beneficial for the economy. From 1947 to 1988, Pakistan’s economy was one of the most regulated economies. It was essentially based on import substitution and most of its exports were of primary commodities. The fixed exchange rate regime created price stability, except for the steep devaluation of 1973 when prices skyrocketed. Our foreign exchange needs were frequently met from bilateral and multilateral sources. The Aid-to-Pakistan Consortium in Paris (comprising OECD countries) would be the shopping house where so-called donors would pick their preferred development projects for official development assistance (ODA).
In 1989, with the fall of the Berlin Wall, the world was transformed as the Second World collapsed and a new world order emerged. This was the start of globalisation. Its defining characteristic was the free movement of capital across national borders and a steep fall in ODA. Concurrently, trading barriers were rapidly brought down and the stage was set for the so-called rules-based international trade to be supervised by the World Trade Organization.
Inevitably, Pakistan had to roll-out its own reforms programme. The catalyst for this was the first structural adjustment programme with the IMF, which was signed by the interim government in October 1988 but was enthusiastically adopted by Benazir’s government after the elections were held in November 1988.
The economic landscape in Pakistan has since been altered beyond recognition. Intermittently, we have done more than a dozen reforms programmes with the IMF and other IFIs. Although we have an economy that is primarily driven by market forces and our regime is comparable to many other economies in the region, we have faced a number of problems in this journey:
First, the process has been bumpy as it tends to frequently terminate mid-way. Second, the sequencing of reforms has always been an issue, with many things done in haste and subsequent reforms either being missed or delayed beyond permissible limits. Third, the ownership of reforms had mostly been missing as the programmes were generally agreed during critical moments of urgency in seeking loans. After that moment, the diligence required to ensure beneficial outcomes from reforms was abandoned. Fourth, without a financing requirement from these IFIs, we hardly had any desire to reform on our own motion.
The most recent example is the recently completed IMF programme, which saw the implementation of a broad set of reforms. Its components, which are related to privatisation, efficiency in the energy sector, the fiscal deficit and the SBP financing for the budget, have all been abandoned remorselessly. With such failure in consolidations, reforms often create distortions of their own (which we will explain in a separate article).
The writer is a former finance secretary. Email: waqarmkn@gmail.com