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Economic notes

June 26, 2018

Economic reform: Part-XXVI


June 26, 2018

The second major initiative taken in the last decade was the devolution of power to provinces under the 18th Constitutional Amendment Act, 2010.

Undoubtedly, parliament made these changes in accordance with its constitution-amending authority. After nearly ten months of deliberations at the level of parliamentary leaders of all political parties and without any dissenting voice, the amendment was passed.

What interests us here is the impact the amendment had on the social sector. The amendment greatly enhanced the social-sector responsibilities of the provincial governments and excluded the role of the federal government. To understand the extent of the displacement, notice that the following ministries were abolished at the federal level: (i) local government and rural development; (ii) population welfare; (iii) special initiatives; (iv) youth affairs; (v) zakat and ushr; (vi) culture; (vii) education; (viii) health; (ix) livestock and dairy development; (x) social welfare and special education; (xi) tourism; (xii) sports; (xiii) women development, (xiv) food and agriculture; (xv) labour and manpower and (xvi) environment.

The entire concurrent legislative list of subjects – which gave both the federal and provincial governments the power to make laws, with federal law taking precedence in case of any conflict – was abolished. The list contained 47 entries, mostly comprising ministries that were abolished.

Despite the fact that a commission was constituted to oversee the transition and implementation process of the devolution plan, which worked for one full year, there was confusion and difficulties in transferring and taking over responsibilities, changing the ownership of properties and winding down federal offices, relocating residual responsibilities and matters connected with employees. The residual functions were transferred haphazardly to the remaining ministries, ending-up in places that had nothing to do with them. For example, the economic affairs division became the recipient of all matters, in general, related to international treaties, agreements and contracts that the country had entered into in subjects which now stood devolved to the provinces. The division was at a loss to deal with these matters as it had no previous background of dealing with them.

Amid such confusion, many ministries resurfaced under different guises within the PPP’s own government. National Food Security, Professional Training, Human Resources and Health Regulation were reincarnations of erstwhile ministries but with hugely curtailed mandates. Also, soon there was the realisation that many sensitive matters, such as drug registration, were transferred at grave risks to inter-provincial coordination. This was rectified by forming a drug regulatory authority at the federal level after the provinces passed necessary resolutions under Article 144 of the constitution.

In this backdrop, the social-sector was affected the most as the provinces needed time to build their capacity, whereas division of federal assets (hospitals, schools and various institutes) across provinces also posed great challenges. Development partners faced huge coordination problems as there was no central authority to deal with. Proponents of the 18th Amendment had taken a very strong view of the devolution and would object even if names of the devolved subjects were mentioned at the federal level. But things have improved considerably over the last eight years. Provinces have organised and built their capacity and their interaction with development partners in key social sectors has also improved to a large extent.

The devolution was supplemented with a major transfer of resources from the federation to the provinces. Under the 6th National Finance Commission Award, announced almost simultaneously, the share of the provinces in the divisible pool was increased from 46.5 percent to 57.5 percent. Besides, the collection cost was reduced from five percent to only one percent, which the federal government used to get before the division of taxes. The resource transfer was phenomenal and has left a void in federal finances and fiscal system in general (a topic that we will deal with separately).

So with this high resource transfer and devolution of social sectors, let’s see how far the expenditures on poverty reduction have increased. In 2009-10, the year before the NFC Award, the Poverty Reduction Strategy Paper (PRSP) recorded expenditures at Rs1.1 trillion or 7.46 percent of GDP, with a federal share of 43 percent. In 2016-17, the expenditures have increased to Rs3.3 trillion or 9.5 percent of GDP, with a reduced federal share of 33 percent. So in terms of a larger measure, the devolution has improved the flow of the resources towards poverty-reducing activities. More interestingly, the expenditures on health and education have increased in real terms, from 2.41 percent of GDP to 3.2 percent during the above period.

A number of issues continue to afflict the social-sectors’ performance in the devolved regime. First, there is a competition in seeking foreign funding as it is based entirely on the province’s own initiatives, and those with weaker setups will be left behind. Second, there is a limited amount of foreign concessional financing available, which is fiercely contested by the federal and provincial governments for access. The federal government, understandably so, would want to maximise its use for national projects, leaving little room for social-sector funding.

Third, there are issues with respect to the transfer of foreign resources on original terms and conditions since provinces often want them as grants. The case in point is an IDB-Gates Foundation financing of nearly $800 million, for immunisation, which was held up for only this reason. Eventually, the federal government agreed to foot the bill. But with limited and constrained fiscal space, the federal government cannot carry out such financing frequently.

Finally, the greatest challenge is the absence of national policies on vital subjects like education, health, population welfare, labour, women development, environment protection, domestic trade – all of which are hopelessly missing at present. Without developing a coherent national view on these matters we will soon see uneven development of ideas, views, thoughts, perceptions, hopes and expectations across different provinces, which will become a serious threat to our national unity and character.

To be continued

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

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