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January 4, 2019

Rethinking the PSDP


January 4, 2019

In finding the right mix for long-term economic growth in Pakistan, we may look also at the role of public investment and its main instrument, the PSDP. Given that it uses five percent of GDP, it is time to review the PSDP’s impact – to jog it out from the routine exercise it has become.

How does public investment help? Despite doubts by some academics, there may now be an evolving consensus about its use. Studying fast-growing and emerging economies, the World Bank’s ‘Growth Report’ finds high levels of public investment as a key ingredient. Countering sceptics, Mariana Mazzucato of University College London also says, “active strategic public-sector investment is critical to growth”.

But along with the amount, the goals and quality of public spending matter – as does its source of funding. Writing for Project Syndicate, Nobel Laureate Michael Spence, who also chaired the World Bank’s Commission that produced the above report, says “Productivity gains are vital to long-term growth”. This is because more productivity gives higher return for the same input. The right set of public investment will bring productivity gains, he counsels. Dr Mazzucato says that most major technological breakthroughs have come through the state “acting as the investor of first resort”.

Pakistan’s public spending goal must also be to raise the economy’s productivity and competitiveness. This will boost manufacturing and export. Properly targeted, public investment can help productivity in many ways. It can improve human capital, innovation, and spur private investment. However, ‘properly targeted’ is an important qualifier. As there is a limit to how much the government can spend, it is important to prioritise and target spending.

Some caveats are in order. First, the PSDP alone is not enough for growth. Government spending should support a national effort to transform industrial structure, create jobs and reduce poverty. Led by the government, this effort must include the private sector and development partners. Federal and provincial governments must also coordinate their plans.

Also, we must see how much the government can fund prudently. Funding investment by debt carries risk, especially where there is no productivity growth. This may be one of the problems that we face today. The PSDP grew rapidly in recent years, but may have contributed to the current account deficit.

It is time to rethink the PSDP so that it directly supports the government’s economic goals. For that to happen, the government must have an economic strategy, with the PSDP as one component. Other economic policies, such as for trade and industry, must also flow from this umbrella document.

Even now, the PSDP purportedly is guided by five-year plans. In practice though their link is tenuous, and many project decisions are ad-hoc. Also, in its present shape, the five-year plan is hardly a good guide. Over decades, it has become a massive document of high-sounding good intentions. Lacking strategy, or having one in name alone, the plan is usually the sum of many parts that include everything one can imagine. It sets ambitious targets, but does not say how we will get there. And it is put together as though funding and institutional resources are unlimited.

It is time for the PSDP to realise its potential, but also its limits, as an instrument of economic growth. It should no longer be viewed as an abstract document and a source for funding disparate projects. This lack of focus and its inability to show impact is one reason that PSDP funding is considered a residual in the GoP’s fiscal planning. Its funding is the first to be cut when financial crunch builds up.

First, the cycle of the GoP’s five-year plans must coincide with the five-year election cycle and induction of a new government. From a bottom-up document, the five-year strategy, or its variant, must follow the broad goals of the elected leadership. It is no surprise that for decades five-year plans have had token ownership of the leadership.

Professionals at the Planning Commission, with other ministries and private experts, must then shape broad goals into a doable plan. Once such an economic strategy is approved, all PSDP projects must flow from it. The PSDP must prioritise what is critical as well as financially and institutionally possible.

With its focus clear, a major portion of the PSDP must serve that goal. To build productivity, the PSDP would continue with some of the current priorities, such as water, power, and logistics, but also move to new areas. These should include skills improvement and technology development.

The PSDP should also adopt unconventional delivery mechanisms and funding instruments. For example, execution of projects in the above new sectors must be done jointly with the private sector. Where appropriate, they may be funded partly by the private sector and the commerce ministry’s market development funds. Each party will retain control on their contribution. New financial instruments must include funds to enable SMEs and emerging businesses to compete. Such funds also must support development of new technologies. Productivity gains would give higher growth. This would also meet the government’s major goals of job creation and poverty reduction.

Some changes in preparing and executing the PSDP are essential. The prime minister must chair ECNEC meetings, the highest body for project approval in government. This will ensure that the PSDP aligns with the priority goals of the government. To realise their full impact, projects must prove direct link with productivity. The government must also ensure timely completion of the projects.

The Planning Commission has a sound monitoring and evaluation office. Its periodic reports show delays in execution and troubleshooting needs. Each quarter, the PM must receive a progress report of selected critical projects. Quarterly meetings at a sufficiently senior level may review progress, along with provinces. This will help troubleshoot for delays, especially where they need provincial help as with land acquisition. Also, in its present form, the PSDP is spread too thin, despite recent pruning. It must have fewer projects with guaranteed funding for timely completion.

The writer was commerce minister from 2002 till 2007. He is chair and CEO of the Institute for Policy Reforms.