Rethinking Development Strategy

: Dr. Nadeem ul Haque, a senior advisor with the IMF was invited as a distinguished guest speaker under the CPPG Faculty Seminar Series on January 28, 2009. He gave a talk on Rethinking Development Strategy.

Dr. Haque started by defining the structural issues of the Pakistani economy. He categorized Pakistan’s economy as a boom and bust economy, which had yet to break the begging bowl. Its growth was directly linked to external aid inflows during the 60s, 80s, and then 2000s managing up to 7% growth. He observed that during times of low aid inflows, the country was forced to go back to the IMF for help. Resultantly, poverty indicators had not changed much in the last 60 years. While a small number of poor came out of poverty during times of growth, a long-term sustained change had yet to occur. For decades the fiscal deficit had stood at 8-10% (of GDP) and kept the economy in a vicious debt trap that on occasions had only been temporarily relieved through debt rescheduling. Under these conditions little effort had been made to redesign and revamp the existing cropping, industrial and export structures.

Making a critical appraisal of civilian and military regimes’ economic policies he argued that their concentration was on a flawed economic policy; which equated strategy with acquiring financing & donor funding, with revamped sectoral policies and with investing capital in industry or agriculture. Dr. Haque asserted that in actuality it was the deep inertia within existing production and economic structures, which restrained sustained economic growth while keeping poverty and income distribution untouched.

He lamented the fact that because of a weak research culture, we did not have indigenous and reality grounded thinking on policy issues. He argued that the thinking sectors in the economy were poor and research generation was not valued owing to a lack of State support for think tanks, universities and researchers. Even the military did not have a policy and looked for the nearest possible avenue for policy formulation when it came into power. It was ironic that the political parties did not think of policy preparation and formulation when out of power.Consequently, donors took the lead and emerged as think tanks to fill this research gap in Pakistan. Thus considering that domestic thinkers were not involved in picking up local ideas while ownership of domestic policy development did not exist, it was only natural that policy agenda was set by donor driven research catering to donor needs and thinking.

“… domestic thinkers were not involved in picking up local ideas while ownership of domestic policy development did not exist, it was only natural that policy agenda was set by donor driven research catering to donor needs and thinking.”

He was critical of the role of the Planning Commission as a policy think tank and claimed that it still followed a thirty year old growth strategy concentrating on sector selection and capital acquisition for investment. Drawing the attention of the audience to new growth literature he remarked that it did not pay much attention to machines, money, stages of production or sector picking, instead concentrating on fixing the fundamentals of an integrated economy.

Given this premise, Haque argued for radically changing the perspective around policy making identifying five concepts that were crucial for sustainable growth and ought to be used as indicators to judge an economy.

1. The principle of Property Rights as the basis of every economy as well as of the system of law & order and justice. Regarding Government’s initiative of computerization of land records, he argued that it was but a small part as Property Rights entailed title guarantee, and feasible, speedy and just transactions. But the Pakistani State did not provide title sanctity, as exemplified by a board installed outside an open plot stating ‘Not for Sale: Property of FC College’. He argued that such examples where the owner had to advertise ownership meant a lack of Property Rights.

2. Competitive Markets, not just financial but all commodities including land, agriculture, industrial products and services were extremely important for an economy. The choice was not between Free Markets or Government Monopoly but instead government’s task was to fix markets to make them competitive, removing monopolies and oligopolies. In Pakistan, the land market could not function well because property rights were not well defined; some industries such as the car industry were monopolies while the government interfered in agriculture markets constantly by fixing government acquisition price of wheat.

3. Knowledge meant the acceptance of reason and scientific method within society. It did not at all mean latest technology while socio-cultural ideas continued to belong to the dark ages. Instead it meant a friendly and facilitating attitude towards knowledge, research and critical thinking. He highlighted the case of non-recognition of Dr. Abdus Salam who lies in an unmarked grave as an example of a knowledge indifferent society.

4. Transport and Communication led to better, faster transactions and easier exchange of information. Better logistics decreased transactional costs thus supporting economic growth.

5. Similarly Community and Local Social Capital also facilitated lower transactional costs in an economy by building trust among the populace through community building, associations and enhanced ability for teamwork. Instead, trust had been decreasing in Pakistani society.

“The choice was not between Free Markets or Government Monopoly but instead government’s task was to fix markets to make them competitive, removing monopolies and oligopolies.”

Moving on to the methodological process for policy formulation, he identified six different methodologies to approach economic behavior. He remarked that in the Pakistani case the current decision making either lacked structure or used dated methodologies. He suggested exploring New Economics which redefined wealth as improved well-being and environmental sustainability rather than just having and consuming more things, Experimental Economics which moved beyond the rational and included social, community and networking aspects of human behavior, Institutional Economics which suggested thinking of institutions as a source that shaped economic behavior, Game Theory which discussed strategic behavior assuming that success in making choices depended on the choices of others, Complexity which went against sector picking focusing instead on how to affect behavior of an integrated economic whole and lastly Economic Geography which included uneven and clustered development in the analysis arguing that urban will be more productive than rural and thus looking at cities as a cluster rather than an amorphous space.

“Knowledge did not at all mean latest technology while socio-cultural ideas continued to belong to the dark ages. Instead it meant a friendly and facilitating attitude towards knowledge, research and critical thinking.”

Shifting his analysis to the role of various Actors in economic policy formulation and management, Haque stated that the Government and Opposition spent more time on economic pronouncements than actual economic thinking. Bureaucracy was too politically dependent for its own survival, always worried about politicians’ or army’s onslaught that it was not capable of taking important and hard decisions and thus properly managing the economy. In the last three years, the average tenure of the planning secretary was about three months, which made economic planning impossible. Though the Army got heavily involved in policy making, its lack of thinking capability in terms of economic policy led it to recruit a banker to run the economy. Additionally because of the army’s huge economic enterprise with a vested interest to secure state subsidies for its businesses, army had a conflict of interest and could never be an honest broker in devising the country’s economic policy. Landlords and Industrialists had lost the ability to be change agents because most were dependent on State subsidy.

Summing up, Dr. Haque said, these actors only had one thing in common and that was to lobby the government for Rent Seeking – individual benefits not conducive to market fair play. The political economy of the country tied all these actors in a Rent Seeking game while the Academia was fragmented, disheartened and unwanted except by the donors and thus could not conceive domestic solutions and indigenous ideas for change. He argued that while there were regular well attended seminars in all countries including India, such tradition was lacking in Pakistan except when a donor held it (CPPG Monthly Seminar Series was an exceptional case!). Instead there was only one organized societal agent, the social scientist cum policy maker with a clear interest and a gaining influence that informed sections had been unable to challenge, the Mullah. This scenario did not present a hopeful picture for a youthful nation, with 67% of the 170 million below the age of thirty, as many as 30-40% below the poverty line and 50% never having been to school.

“Ideas always preceded reforms and thus there was no hope for a society ripe for change but without ideas.”

Having defined the malaise that pervaded economic thinking, policy formulation methodology and agent interests, Haque declared that he had more questions than solutions. His argument being that ideas and research widely understood and debated over time led to change. Ideas always preceded reforms and thus there was no hope for a society ripe for change but without ideas. Then he raised two critical questions:

1. What are the mechanisms of governance and laws that preserve Rent Seeking?

2. What are the mechanisms of exclusion of the poor?

In trying to provide an answer to these questions, he outlined his three point reform agenda.

First, Haque began dissecting the State by asking specific questions. Does the State have a social contract? Does this social contract include the poor? When the State borrows.

is it for you or me or is it to keep Rent Seeking alive? Giving an example of the 1990s when Pakistan borrowed and defaulted on $11B of its own people and $40B of international lending, he suggested that researchers and academics had not even asked why. Elaborating to make a case for research and structural change, he argued that a simple economic model could be built to assess how a different exchange rate policy, approach to economic management and distribution of income would have precluded the need for borrowing. But fixing the State did not mean that it should take over the Market and thus it was also important to understand the relationship between the State and the Market. Though provision of Public Goods (Magisterial- security of life, property and contract, Social- education and health, Infrastructural- roads) was the responsibility of the State, the means of provision should be based on the two important questions of Rent Seeking and exclusion of the poor. He argued that the State should actually withdraw from the Market limiting Rent Seeking and play its role as the ultimate arbiter of conflict while making sure that the poor were not excluded. But this required deep reforms in the State because constitution was the fundamental framework driving the economy and thus a speedy judicial system, an elite independent police system and working regulatory institutions free of corruption were essential prerequisites.

Second, in terms of Rent Seeking, he was clear that State subsidies especially those creating monopolies through protection such as the automobile industry needed to be removed. Similarly the system of special ministerial and army & civil bureaucratic privileges needed to give way to a single monetary payment as these facilitated invisible means of accumulating power. Hidden payments meant that people have to extract resources for themselves creating grounds for Rent Seeking and professional comprises. He gave the example of the Land Distribution System, which he considered to be one of the most important forms of Rent Seeking. In simple terms, it used the Land Acquisition Act, the Government’s Right of Domain to give land (money) to its members at cheap prices, amounting to robbing the poor to give to the rich. Additionally this encompassed an invisible means of distribution creating huge incentives for nepotism as a large number of people were spending resources to become part of this land distribution system. As a remedy to remove Rent Seeking.

he suggested getting rid of the Land Acquisition Act and the DHA to allow market based land development system.

His third suggestion was to develop Agencies of Change & a Constituency of Reform. He argued that groups demanding change existed in all societies but we had not invested in them. Academia was one of these groups, but institutionally it was under the bureaucracy, which was not technical enough to demand or generate the right product. Additionally a lack of State funds for independent research made the academia beholden to the donors and inept of developing independent ideas and thought.

Having suggested a way forward, he ended on the note that it was thus important to move beyond sector picking and think of economy from a system and complexity stand point. Stating that it was only after research that we could start asking the right questions, he summed up that the government needed to devise, discuss and debate a growth strategy while making public sector reforms mainstream and the syllabi modern.

Dr. Haque’s talk was followed by a vibrant question answer session. Regarding a question on whether he accepted the Infant Industry thesis, Haque argued that in principle subsidies led to Rent Seeking, thus the onus should be on the person asking for subsidies to prove that a particular infant industry was needed. He argued that we had been providing subsidies to industries for 60 years on the basis of this argument.

Answering a question “Where should we start from?” he stated that there was a need to move beyond Development Economics which prescribed particular dos and don’ts. It was important to understand that economics was not engineering as it involved reaction functions of all members of society thus fitting more in the Complexity and Game Theory domain. There were no packed solutions and interventions were never simple. But it was important to look at structural issues and devise our own solutions. He gave China’s example stating that they had used their own solutions learning from their mistakes in the process rather than importing donor based solutions.