Thursday April 25, 2024

Action, curtains, repeat

By Shahrukh Wani
April 14, 2022

The curtains have drawn on Imran Khan’s premiership. His successor finds himself in a remarkably similar position as Khan did in 2018: struggling to pay for the large import bill, a budget deficit that likely needs to be financed by more debt, and a sliding rupee. That is the thing about Pakistan’s economy: nothing changes, even when things change.

Over the past three-odd years, Khan made some things worse, few better. He launched a remarkably ill-advised amnesty programme for the real-estate sector. He delayed an inevitable IMF programme, prolonging economic instability. But he also invested heavily in a public health insurance system through the Sehat Card, setting a precedent that would be hard to reverse for future governments. He also managed the pandemic response better than expected, potentially saving thousands of livelihoods.

But for most things, he did nothing. He — like many before him — ignored the underlying structural economic problems that persist across political cycles. Take Pakistan’s lack of tax revenue. The reason why we don’t generate enough tax revenue is because the governments have been reluctant to expand the number of people and firms who pay taxes — effectively leaving out urban landlords, large agriculturists, and many businesses un- or under-taxed.

Herein lies the tragedy: Pakistan’s economic problems require undertaking politically costly reforms – hence, they persist regardless of who is in office.

Part of the reason is that almost every government starts its economic policymaking with short-sighted firefighting measures, which eats up political capital and takes a few years before they have to start positioning themselves for the next election — timing which is not conducive to undertaking any of these costly reforms.

Prime Minister Shehbaz Sharif’s administration will also have to focus on such economic firefighting measures to get the budget deficit and external financing gap in control. This will include talking to the International Monetary Fund and, if they talk back, to ‘friendly countries’ to secure bilateral flows. Domestically, it will be a hard act to balance the reversal of Khan’s disastrous fuel subsidies while attempting to cushion the impact of increasing inflation on people ahead of elections.

Once this firefighting is done and elections are held with a new administration in place with a longer mandate, the focus needs to move to the causes of this fire: the structural problems that keep Pakistanis poor.

This requires twin focuses.

First, build greater domestic productive capacity so we generate and produce more goods and services locally that can compete globally. Doing so won’t be easy, but it can’t be ignored: it requires combining public investments in improving connectivity and education with the right incentives for firms to invest, modernize, and export.

Setting the right incentives is the key here. The government can’t and shouldn’t invest in everything that might generate prosperity, but it must create the right incentives for others to undertake the right activities.

For example, taxing urban land properly would be an important step in discouraging people and firms to invest in real estate for speculative reasons. Currently, Punjab with its 100 million-plus population, collects less urban property taxes than the city of Chennai, which is home to about 10 million people. A consequence of this is that money flows into real estate instead of sectors that either build capacity for more exports or substitutes the need for imports. We can’t, alas, export corner plots.

Making this structural shift requires taking on, even if so gradually, the privileged few that make money not through fair market competition but through government subsidies, protections, and perfectional treatment. It is no surprise that many firms decide to sell locally where many enjoy near-captive markets rather than compete globally. A case in point is our sugar industry, which wouldn’t exist without the government’s generous patronage.

Second, improve how public policy decisions are taken in Pakistan. Our policymaking remains reactionary, highly centralised, and dependent on a civil service that isn’t fit to deliver.

Civil service reform, a top promise for decades, needs to take a more pragmatic approach as opposed to grand big-bang reforms which either never start or fail due to the opposition they create. Setting up another committee dominated by ex-bureaucrats won’t accomplish much; the reform must be led by politicians with a clear purpose to build a system that provides better services to citizens. Without the people with the right skills, working under a structure that incentives them to perform well, policy decisions will remain siloed and reactionary. The consequence is economic mismanagement.

Effective policymaking must also decentralize decision-making beyond provincial capitals. It is near impossible to govern well a country of over 200 million people from five cities. Repeatedly, evidence from across the world has shown that decentralised governments are more responsive to people’s needs and better equipped to deal with policy challenges. You can’t know what residents of Bahawalpur need while sitting in Lahore.

The PTI-led Punjab government attempted to do so with the 2019 Local Government Act but never implemented it. This must change. Doing so will not only improve the quality of public policy decisions but will also open a new avenue for the political competition taking away ‘winner takes all’ stakes in federal and provincial governments.

Over the coming weeks and months, we will be told that times are tough. That’s true. And they will remain so if we don’t do something differently.

The writer is an economist at the University of Oxford.

He tweets @ShahrukhWani