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Economic notes

January 2, 2018

Economic reforms: Part - VII


January 2, 2018

We now turn to another area where the reforms process has been sporadic and which to this day remains a source of continuing economic inefficiencies as well as burdens on the national exchequer.

Public-sector enterprises (PSEs) were an outgrowth of widespread nationalisation undertaken by the PPP government in the early 1970s as part of its socialist agenda. A separate Ministry of Production and a board of management (BOM) were established to oversee these newly acquired public-sector assets. Besides these industrial units, all banking and financial sector assets were also nationalised and a new body – the Pakistan Banking Council (PBC) – was created to manage these entities.

At a later stage, flour mills, cotton ginning, rice husking mills and trading in rice, cotton and edible oil were also nationalised. The opposition had alleged that, in line with its socialist philosophy, the PPP government was planning to diffuse economic and political power onto the party cadres to consolidate its opower. There was, however, no such policy that was formally announced by the government.

The PPP government was still in its formative days and was developing a strategy to deal with this gigantic responsibility when it was removed by the military government in July 1977. Even though the nationalisation was done by a populist government, sensible minds doubted the ability of the public sector to shoulder such a humungous responsibility. They, therefore, counselled the military leader to return all the nationalised assets to their original owners.

A committee was formed under N M Uqaili, a former finance minister, to recommend a desirable course of action. The committee enthusiastically recommended that the public sector would be incapable to run these institutions efficiently and the best course to follow would therefore be to return these assets to their original owners.

In September 1978, the president promulgated a new law – the Transfer of Managed Establishment Order – that empowered the federal government to offer to former owners of nationalised industries shares or proprietary interest in acquiring their establishments. This order explicitly recognised the pre-emptive right of the previous owners for transferring management. However, in case there was no positive response from former owners, the government was free to transfer management and control to any other party on whatever terms it considered fit. No distinction was made between units that were profitable or in loss.

Before the report’s recommendations were implemented, the establishment struck-back by convincing the military leader that such a vast pool of state patronage would come in handy both for the longevity of military rule as well as for patronising the desirable political forces. This advice was, unfortunately, accepted, notwithstanding the following words in the white paper, ‘The economy under Bhutto’, released in 1979: “in the name of social-justice, ill-conceived, ill-prepared and inadequately analysed changes were introduced in a hurry, with only short-term policy objectives in view, with the result that instead of achieving social goals of better social justice these only succeeded in stifling growth”.

It went on to state that “nationalisation [was] intended to break the economic potential of any possible political opposition and, at the same time, it placed with the [government] tremendous economic power of patronage, resources and employment opportunities which could be used for the support of the party”.

Curiously, what Bhutto did not do – or could not do if at all he had such a scheme in mind – the military government ended up doing. The denationalisation plans were abandoned and the military-civil bureaucracy created a new edifice for the monitoring and regulation of the PSEs. The BOM was refashioned as the Expert Advisory Cell (ECA), headed by a retired general, and a new cadre of professional managers and commensurate pay-scales known as management scales were created to strengthen the stranglehold of the state on this vast economic empire spanning such lucrative sub-sectors with near monopoly power like cement, fertilisers, chemicals, automobiles, engineering, iron and steel as well as edible oil.

A new system of target-setting for, and performance evaluation of, the managers of the PSEs – the ‘signalling system’ – was introduced and instituted with considerable fanfare. Boston University’s Center for PSEs provided the advisory for this purpose.

The decision not to denationalise PSEs was a watershed in the country’s economic history. It laid the basis of a new economic model that would gradually assume the shape of crony capitalism. On the one hand, PSEs maintained their dominant position in key industrial sub-sectors (affording many opportunities of senior-level appointments that made the military-civil bureaucracy happy and to oblige other allies through jobs and awarding various PSEs contracts of input supplies and output distribution) while, on the other, new investments in the private sector were screened both through investment controls and the subsequent allocation of credit from banks and development finance institutions (DFIs).

The old private sector was terrified by the events of nationalisation and was no longer interested in taking on new challenges. An entirely different class of industrialists emerged in the country. The political vacuum provided the requisite environment for stealthily crafting and hoisting this new class with political ambitions. None of the members of the infamous 22 families had any political disposition. But now the ball-game had changed: political connections ensured a significant head start in terms of securing investment approvals in restricted sectors (even setting up a spinning unit required a licence) followed by easy access to cheap industrial finance from nationalised commercial banks and DFIs.

With a few exceptions, and nearly for a decade, the words denationalisation and divestment disappeared from the official lexicon. The departure of General Ziaul Haq led to a major shift in the economic regime both because of the onset of the political dispensation and injection of a fresh and younger thinking in the corridors of power. With anxiety, the nation looked towards the future, hoping that the new leaders would bring both political freedom and economic prosperity.

To be continued

The writer is a former finance secretary. Email: [email protected]

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