Need for Promoting Public-Private Partnership

(edit: few changes have been made to this articles after it was first published in The News. These changes include change of title and few textual changes.)

With increasing cost of construction, frequent occurrence of large-scale natural disasters, and ongoing fight against insurgents, it has become impossible for the government to continue financing infrastructure projects. This can be seen from the recent reductions in the budget of public sector development projects (PSDP). Historically, PSDP has been the main source of finance in addition to foreign loans. Much of the international aid, however, was directed towards social sector projects which were arguably of temporary relief.

To deal with these challenging circumstances, IMF has highlighted some key issues which need to be looked at when undertaking any infrastructure development project. These include: what investments offer the biggest boost to growth? How much investment is needed and by whom? How to finance this investment without taking on too much debt? Without looking at these issues, there remains a much higher probability that the project will get delayed to an extent that it no longer remains needed. If the project does get completed, long delays will push the cost to an extent that the cost-benefit analysis done when the project was conceived is no longer valid. Countries like Pakistan which are very much financially constrained must realise these issues and bring out policies aimed at utilising their full strength.

In answer to the first question, National Trade Corridor Management Unit (NTCMU) was established to come up with projects which help improve trade-related infrastructure facilities with the end goal of making Pakistan a regional trade hub. However, projects are still being approved in isolation with no broader vision of achieving sustainable growth. Ideally, a strategy should have been prepared by now and we should have moved on towards implementation stage.

Similarly, there is a need for improving PC-I with respect to involving private sector in development projects. The entire PC-I documents, expect the project to be fully financed from the PSDP. Instead, it should be made sure that first the project is floated to the private sector for take up with full ownership and if not successful, only then the government is approached for funding. Another section on ‘Public-Private Partnership (PPP) Option Analysis’ in the PC-I document, as suggested by the Infrastructure Management Unit (IMU), can be a good addition.

IMU (2007) has also done an extensive and useful study on constraints to private sector investment in infrastructure. But much needs to be done in removing these constraints. Some of the key constraints highlighted by the study are related to ‘procurement laws’ and ‘procurement processes’. Existing procurement laws do not include a requirement for the public body to consider infrastructure service delivery through the private sector. Procurement processes, on the other hand, are too centralised. All procurement decisions for a value as low as US $4-5 million are made at the highest level of the government. This is the case even for projects which are 100 per cent PPP and will not require any public expenditure.

Despite considerable realisation and wide consensus, Pakistan is still to come up with a detailed yet clear framework on PPP. This is mainly because the direction, content and the responsibility for the PPP framework still remains unsettled. Restriction on local governments against financing development projects through user charges or fees is also a major constraint to PPP at municipal level. Knowing that various amendments are being considered in local government law at provincial levels, these issues can be revisited with the approach of promoting private sector in infrastructure projects. Furthermore, land acquisition laws are currently in conflict with international norms. It is one of the major issues and has often resulted into delays and sometimes abandonment of the project.

National Highway Authority Act, which does not contain any requirement for PPP Option Analysis, also appears to discourage private sector participation. It does not empower assignment of toll receivables in favour of the private project company executing the project. Another issue is that of competition with public sector construction firms. It is argued by the private construction companies that lucrative projects are always given to public sector corporations in a non-transparent and discriminatory manner. Such attitude discourages growth of private sector firms and hence their ability to undertake projects which are spread thin over the time horizon. 

The 'New Growth Strategy' being drafted by the Planning Commission does highlight these challenges and proposes relevant reforms in this sphere. 

Pakistan's first (mis)planned city

For the relatively well-off people in Pakistan, Islamabad seems to be a great city to live in: Minimal traffic, scenic views, quiet lush green neighbourhoods, decent weather, some nice restaurants and a generally slow-paced but peaceful vibe. Beautiful, wide roads and new avenues cropping up have reduced travel times even further. But, what is the city like for the not so well-off? It is evident to most of us, that the city is only friendly to the automobile driving population. How about the non-automobile driving population – where do they live? Where do they work? If they want to start up a small business, where do they set up? If we look at just the basics – housing, schooling, business, and leisure – how does the city fare?

Let’s start by looking at the overall planning. The zoning laws of the city seem to be beset by an anti-commerce bias, as they disproportionately lean towards residential housing – specifically large houses for the elite. Coupled with the restriction on conversion (to commercial) of residential areas, a large number of offices, restaurants and small businesses are illegally operating through houses in these areas. Commercial areas are allocated just 5 percent in the schemes compared to 55 percent for residential houses. The maintenance of the current commercial areas has been severely neglected resulting in a deteriorated outlook – explaining one reason for the reluctance of these businesses to move to commercial areas. If maintenance standards exist, they lack efficient implementation. The more important reason, of course, is that businesses save time and money. That is a huge revenue loss for CDA and a loss of opportunities for the business not being situated in a commercial area.

Mixed-use areas are also conspicuously missing from the zoning laws. City productivity and employment generation needs the growth of entertainment, hotels, shopping areas and offices in large complexes. Moreover, mixed-use areas and city centres ideally contain high-rise buildings, as land prices are at a premium, making tall buildings economically favourable. Height restrictions imposed by the development authorities discourage high-rises, thus pushing up the cost per square foot. It is clear that the current commercial areas are not adequately catering to the needs of businesses and offices. Upcoming business ventures find it near to impossible to afford the exorbitant rental rates of commercial areas. Are these regulations then, restricting innovation, entrepreneurship and the resulting economic benefits?

In the case of housing, the focus on large single-family homes has resulted in a shortage of housing and has especially highlighted the absence of affordable multiple-family homes, flats and apartments. Furthermore, the lack of adequate rent control legislation makes it difficult to maintain flats and apartments. The real estate market in Islamabad is based on massive speculation, with properties often purchased, but not developed and resold for profit. A vacant land tax or property speculation tax could be implemented to counter speculative property purchasing. The lack of adequate property rights protection, on the other hand, is leading to increasing incidents of land grabbing in the suburban areas of Islamabad and giving rise to qabza groups.

Looking at the schooling system, schools are part of the 4 percent allocated to public buildings in the zoning laws. Public buildings include schools, mosques, community centres, hospitals, dispensaries, and post offices; yes all that in only 4 percent. Can we be surprised then, that some of the best private schools are operating through houses in residential areas? With the public schools standards deteriorating, the demand for private education is on the rise, but these schools have not been provided space. They continue to operate through illegal encroachments and cause massive traffic jams and parking problems. But when it comes to anti-encroachment drives, it is the rehriwalas (street vendors), the poor entrepreneurs, that bear the brunt.

What about the space for community, leisure and entertainment? Islamabad has no cinemas, theatres or space to facilitate people to come together and share ideas. There are also no public libraries of any significance. These places are essential for learning, bringing people together, increasing interactions and stimulating community discussions. What social or economic opportunities does the city provide to the youth? If we continue to stick to our mindset of ‘small is beautiful’, the opportunities will continue to dwindle.

These are just some ideas scratching only the surface of a problem that is not only limited to Islamabad. Urban planning and city development is an under-researched area in Pakistan’s economic and development spheres. The Planning Commission’s New Growth Strategy developed under the guidance of Dr Nadeemul Haque, for the first time in Pakistan’s growth strategy, includes cities as an essential ingredient to the country’s economic growth and development. It is time for communities to take a stance on what they want from their cities. Physical infrastructure is being built without first analysing the governance and ‘software’ issues.

This strategy attempts to identify laws and regulations that are preventing cities from realising their true potential and presses for deregulation. It will be the first step in bringing these issues to the forefront of the country’s policy spheres and get a dialogue started between the community, upcoming entrepreneurs, youth and policymakers towards a more inclusive and tolerant society.

Sana Shahid

Published in The Nation on February 4, 2011

Answering the critics: New Growth Strategy

Much of the response received by the Growth document of planning commission has so far remained very much encouraging. It will be alright for me to reveal that significant number of comments received from the civil society, youth, educationists, donor agencies etc. have been incorporated in the revised draft which will be shared in few weeks time. However, there still are some comments which can only be answered through increased interaction between the growth team lead by Dr. Nadeem Ul Haque and interested community.

Following are some of the criticisms which have been observed on different forums:

Whats so ‘New’ about it?

The word ‘new’ is often received with lots of skepticism. A clear distinction needs to be observed between growth theory and strategy. While the growth theory remains the same, overall strategy is significantly new when looked at in context of Pakistan. In economics, growth (output) is treated as a function of productivity, labour and capital. Throughout Pakistan’s history, productivity has been observed as an exogenous variable – something that will happen on its own. The ‘New Growth Strategy’ endogenizes productivity by looking at the microeconomic underpinnings of this macroeconomic problem. The result will be improved growth levels through enhanced productivity even if labour and capital do not change.

Expecting people’s welfare from Private Sector?

The strategy does not talk about complete withdrawal of government from market management. Instead it is to confine its role to market regulation: away from its current approach of acting as an active market player.

Formulating and implementing regulations is a sufficient tool to deal with cartels/monopolies. One needs not be a market player but require a strong regulatory framework in the form of regulatory bodies such as competition commission, PTA etc. 

Why do we still have cartels despite having numerous regulatory bodies? We often tend to hear this question in response to the idea of government withdrawing itself as a market player. Answer to this question lies in the strengthening of regulatory bodies and not in government re-entering the market. Our existing institutions not only lack the required strength but in some cases their own organizational structure is also contrary to promoting competition and fighting cartels. It is well established that privatization without regulation often leads to consumer exploitation. This is exactly what the role of government should be – ensuring that overall consumer welfare is not marginalized.  

Why talk about cities alone?

In almost all the conferences organized by the Planning Commission as a part of consultative process, one standard question was always raised. What about the rural areas? This takes us to another interesting question. What are cities? Out of many things, cities must also be seen as markets for rural areas. It is in the cities where much of the rural products are bought and sold. Therefore cities are the only place where major chunk of rural income is generated.

However, the Growth document is still not silent on rural development. Under the ‘Markets’ pillar, the document talks about agricultural markets in great detail. Similarly, constraints to infrastructure development at municipal level are also highlighted under ‘Connectivity’ theme.

‘Implementation’

Here comes the tricky bit! Ask this question and many policy makers would prefer to shy away. In my personal view, it’s not up to any policy maker to implement his/her policy unless the public wants it. This is especially true when you are a democratic country. Why is it that the judiciary gets restored despite significant pressure from the opposing group? The answer is simple. Our general public wanted it to happen.

What we here at Planning Commission intend to do is to get people to own this strategy. It is exactly this reason why this wide consultative process is being carried out. It is exactly this reason why we are doing our best to incorporate majority of the received comments. And it is exactly this reason why we are having this much more direct and interactive blog to reach people. Once people – like the respected reader – start owning the Growth document and wish for the proposed changes to take place, implementation will soon follow its own course. 

Innovation through new lens

Pakistan needs an annual growth of eight per cent to channel its massive youth bulge from becoming a liability into an opportunity and this must be done now. For such drastic change, we need to challenge entrenched orthodoxies because they have started to smother rather than stimulate progress. Such a status quo is blinding us to the promises of new global norms and competitive spaces, and to come out of this conventional stranglehold we need to inculcate a habit of questioning beliefs which have been taken for granted

We seem to be consistently missing bandwagons because we are always embroiled in one crisis or the other. The difference between them and us is our habit of making every crisis an occupation of national interest, “letting every opportunity go to waste”, while they with all their problems, even some greater than ours, never lose their sense of purpose.

To start with, our leadership should stop seeing this country as a collection of ethnicities in geographical confines rather it should consider them as a portfolio of competencies and strategic assets which could be leveraged in varying ways to generate new worth. We need innovation in our thinking, our way of looking and our dealings to maximise resource utilisation.

Youth bulge

Does anybody realise that this nation is going through a massive youth bulge as nearly 63 per cent of the population is under the age of 25, reminding us of the Baby Boom that made the United States a global power. Are we going to miss this boat too that almost every other nation exploited to enhance its stature, shall we utilise this asset in ways better than just blowing it off in extremist hands?

We all know that the future is gravitating irrevocably towards Asia. Look at China and India, they are breathing business. One thing that is unique with such miracles is the tendency to convert problems, some even unprecedented, into opportunities. But such a transformation comes through unparalleled innovation and not just in a traditional course.

Gupta’s Honey Bee Network and Yunus’s Grameen Bank are striking examples of how social causes can be blended into profitable business innovations to deliver Murthy’s ‘compassionate capitalism’.

Innovation requires neither genius nor inheritance and wealth, it is the unorthodox perspective of seeing through the common and spotting the unseen. And to achieve such a threshold, we need to turn the population, at least the ordinary 113 million youth, into extraordinary innovators, by inculcating a deep nationwide conviction that ‘innovation starts with me’.

It is time to imagine the future as imagination is more important than knowledge. Tomorrow is for smart nations that know how best to optimise their strengths, capitalise on existing knowledge and evaluate the circumstances to pre-conceive and chart their own future. We need to espouse the corporate theory of relationship capital to re-synapse people, ideas and assets across and beyond this country to make innovation essentials possible that unfurl more often by combining the same ingredients through new recipes. If we cannot become the world’s factory or the information technology hub, could we not wish to become an ‘idea hub’ of the world?

Muhammad Shafqat
Published in The Express Tribune, January 24th 2011

Stuck in the past

In the midst of multiple economic and social problems that the country is facing today, we seem to have lost our ability to think. We often get so engrossed in these ad hoc developments that we tend to lose sight of the bigger picture. The point is, what we think about most when we talk of Pakistan is not how the country can or will develop, but rather what the latest political scandal or economic dilemma is.

Let's for a minute, look past all the drama and ask ourselves, what is the government really doing anyway? Well, recently the Planning Commission of Pakistan under the guidance of Dr. Nadeem Ul Haque has started to work on changing the way we think about growth and development. The idea is to progress beyond our current focus on sectors, projects and brick and mortar toward greater emphasis on ‘themes’ of productivity, innovation and entrepreneurship. The “New Development Approach” as Dr Haque calls it rebalances our current emphasis on ‘hardware’ (building, infrastructure and PSDP) to a greater emphasis on the ‘software’ (management, governance reform) of growth.

Why don't we have a political debate about that?

Our economic growth strategy throughout our history has been based on choosing sectors to promote and heavily assisting them through subsidies and tax incentives. The analysis stops at the input stage and we forget to wait for the results or output.

We might be producing more but are we producing it more efficiently? Are we adapting new techniques and ideas to enhance productivity? Are we spending on research and development? Another one of our favourite measures of development is infrastructure – building sophisticated road networks and motorways instead of using existing infrastructure more efficiently.

I was at Jinnah Super market in Islamabad yesterday to buy some DVDs and stopped to get french fries from an Afghani vendor who sets up his stall in the walkway outside the shops. Jalal has been setting up his stall at different spots in markets for several years, but is there any way that he could even conceive of one day having his own proper shop? Maybe hire a few people, give his outlet a fancy name, package the fries well and charge Rs100 instead of Rs20 like he does now? I know a few up-scale places that easily charge more than that and their fries do not taste nearly as good. What about our skilled craftsmen, our talented women who weave beautiful shawls and embroidered fabrics? Where can they set up their stalls and sell their items? They are not allowed anywhere near the city centre. The poor entrepreneur has absolutely no opportunity to succeed - our cities and our local markets are closed to the poor.

Our retail markets - the small cubicle-like shops that we find all around our cities, seem to be stuck in the past like our thinking. What about our boutiques, salons, small offices? Do we wonder why they are operating two houses down on our street instead of in commercial areas? City zoning has refused to adapt to increasing population and changing trends with the common excuse being that the city has already been planned, what can we do now? Re-zone residential areas! Cities are supposed to be fluid and adaptable.

Speaking of being stuck in the past, I came across the state emblem of Pakistan the other day and found that it is comprised of pictures of four crops to show our agricultural-based economy. The four crops are cotton, wheat, jute and tea. Wait – jute and tea?? Do we even grow those – oh that's right, that was East Pakistan.

The ‘new development approach’ identifies well-functioning and ‘creative’ cities and local markets as one of the key ingredients to Pakistan’s economic growth and development. There is a focus on youth and community and most importantly, in the attempt to reach a workable conceptual framework, the ‘new development approach’ asks the right questions.

Pakistan is in need of a complete development strategy overhaul – a shift away from depending on hand-outs and project-based funding. The Planning Commission has decided to take its new approach to the people – through consultations with civil society organisations and workshops with university students and professors across the country. Here is our chance to give new ideas for growth and development. Question is – do we have any?

Published in The News on October 18, 2010

Urban Development Task Force Report launched in Karachi

The Planning Commission launched its Urban Task Force Report in Karachi on February 4th, 2011. Here's a news report on it published in The Express Tribune on the 5th of Feb:

Urban development report 2011: Big landlords determining urban expansion

KARACHI: Land around smaller towns is owned either by big landlords, small farmers or by the revenue department and as such big landlords determine the nature and shape of urban expansion.
This and other points are part of a task force report on urban development that was discussed on Friday at a roundtable session chaired by Planning Commission Deputy Chairman Dr Nadeemul Haque at the Municipal Training and Research Institute in Clifton.

By the year 2030, it is estimated that nearly half of Pakistan’s population will be living in urban areas and about 17 cities will have a population of more than one million people.
The pattern of urbanisation across the four provinces has exhibited a large variation and Sindh tops the list. According to the 1998 census, 49 per cent of Sindh’s population was living in towns and cities followed by the Punjab (31 per cent) and Balochistan (23 per cent). While in Khyber-Pakhtunkhwa, only 17 per cent of the population was living in urban areas.

Karachi, with its population already bubbling over 19 million, is the favourite city for migrants. The report recommends focusing on this trend during land planning. Over 63.7 per cent of the migrant population was heading to the urban areas, with 13 per cent of them with just Karachi on their minds.
While urbanisation comes with its host of problems, more people to feed, shelter and employ in a limited area, rising crime and environmental issues, the task force has some good news too: the economic activity in urban areas produces 78 per cent of Pakistan’s GDP.

Other good trends include an expanding middle class comprising a youthful and skilled labour force. More women are joining the labour force and poverty has also declined in the recent decade from 22.7 per cent to 13.1 per cent, even though about 7.1 million people in cities live below the poverty line.
Meanwhile, people in Karachi have even more reason to be proud of their polluted, crime-infested hub: the national literacy rate of people between 15 and 25 years was 58 per cent in 1991. By 1998, it rose to 71.6 per cent, while in Karachi it rose even further to 73.65 per cent. Female literacy also increased from 51 per cent to 66.7 per cent, with 71 per cent for Karachi, between the inter-census years.

And while the report says that just five per cent of households have proper access to municipal garbage collection systems, Karachi is given a pat on the back for treating sewage and using it for farming.
The responsibility of urban spatial planning, under the law, with local governments (and, in larger urban areas, with city district governments) and development authorities (DAs) was also created. Urban local governments and DAs were intended to work in tandem, with local governments responsible for macro issues such as planning, governance, administration and enforcement and DAs responsible for developing urban areas in response to the needs of the urban population.

After the promulgation of the Local Government Ordinance 2001, some urban areas integrated their respective DAs with their local governments. Karachi is a good example of where the Karachi Development Authority (KDA) and Karachi Building Control Authority (KBCA) were brought into the fold of the City District Government of Karachi.

The bad news in the report included an abysmal transport system. Because there is no affordable and comfortable public transport, the number of motorcycles is steadily increasing. In Karachi, the number has doubled in the last six years. Traffic has become a major problem, not just in large cities like Karachi but in medium ones such as Sukkur.

Recommendations for urban planning:
1. Projects should not damage the ecology of the region
2. Projects should serve the interests of the majority population and should not promote dislocation and poverty
3. Projects should support and/or promote the tangible and intangible cultural heritage of the communities that live in the cities
4. Elite commercial and entertainment related activities such as malls, ciniplexes, etc. should be supported but along with them properly planned hawkers’ bazaars and economic activity for the lower income groups should be developed to create an inclusive economic, physical and social environment

Governing for a change

Good governance has been the term thrown around quite often, both in documents and conversations. Governance is an important topic, especially important for developing countries which need guidance and better management not only to deal with their many crises (such as corruption, inflation, political uncertainty, natural disasters and terrorist attacks), but also to increasing their productivity of labor and capital and achieve growth and development. But somehow in Pakistan, “good” governance has been reduced to tax breaks, subsidies to large corporations and arguments about the definitions and measurements of corruption. And since these have been going on for a while, their results (or the lack thereof) are apparent.

While most countries cite market failure as the reason behind inefficiencies, Pakistan is one of those countries in which government failure seems to be the bigger problem. Through corruption and complicated procedures, the government has hurt more than helped the markets in Pakistan. An average of 10 procedures are required just to set up a business spanning an average of 21 days, whereas in Singapore 3 procedures are required spanning 3 days. Given such high time costs and monetary costs of starting a business, a large number of businesses operate informally (i.e. most of the time illegally) which results in lower tax collections for the government which further results in drastic measures such as the RGST which result in further uproar.

How about trying a different approach with governance? With its new growth strategy, the Planning Commission is trying a different way of dealing with growth in Pakistan by trying to get the government out of the functioning of the markets- letting the markets function on their own, with minimal government involvement.

Pakistan has already experimented with privatization and deregulation, and quite successfully. Privatization of PTCL helped reduce costs for businesses by almost 65% through facilitation of communication, trade and contract enforcements. How about trying the same for other important business-related industries and transportation agents, such as PIA and Pakistan Railways? Not only are these the hubs of overstaffing and underachieving, they are monopolies in their sectors stopping other private companies from doing well in these sectors, while also aggregating losses of Rs. 76.6 billion and Rs 86.7 billion respectively,.

And the private sector is more than capable of handling things on its own. Sialkot is an example of a city where private sector has shown that they don’t need a lot of government intervention by showing initiative and taking over the projects that are traditionally government owned and operated. Sialkot entrepreneurs made their mark not only in Pakistan but in the region by constructing the first-ever private-sector Dry Port in Asia in 1984 followed by the first private-sector airport (Sialkot International Airport) in South Asia in 2003. Sialkot also boasts of a private-sector Export Processing Zone (EPZ) and the Sialkot businessmen under the Sialkot Chamber of Commerce are also collaborating with the federal and provincial governments in improvement of roads through provision of half the funds. These entrepreneurs realize that they are the main beneficiaries of such projects and decide to take matters into their own hands rather than waiting for government to help them. Why can’t entrepreneurs in other cities follow Sialkot’s example and collaborate with their Chambers of Commerce to minimize government intervention and carry on projects on their own?

Over the past many years, the government’s tactics of state control and regulation have failed in giving Pakistan the development and growth it needs. Government run companies are regarded as the most corrupt and the public sector has made a reputation for itself in being slow and inefficient. I think it is about time for the government to get out of the markets and let the markets and businesses function mostly on their own. The businesses also need to show some drive and try to take steps themselves rather than waiting for government funding and assistance. The New Development Approach of the Planning Commission is seeking to build a synergy between better markets and better governance to deliver productivity, growth and better public service to the people of Pakistan. It hopes to promote reform and foster efficiency in the government itself as well as in cities, markets and communities. Maybe this kind of new focus is what the economy and the country need. After all, we couldn’t possibly do worse than what we are already doing.

An edited version of this article was published in Dawn, February 7th, 2011

http://www.dawn.com/2011/02/07/governing-for-a-change.html

Let’s get it right this time

The favourite statements or slogans to divert attention from real issues and woo people during the election period to vote for this party or that: “We will bring the growth in double digits. We will bring in FDIs. We will create employment opportunities. We will provide housing for poor. We will develop a tolerant and talented society. We will alleviate poverty.” By now it is obvious; it very much sounds like a manifesto of a political party. Those who will cry these words out in a more enthusiastic way will surely win the elections. Fair enough! This is how elections are fought. But what is not fair is that our policy makers have also relied on similar statements without feeling the need to explain one critical question: how will they make all this happen?

Well some might already be thinking of ways the government can bring this change. Many would know for sure that all this can not happen in the parliament’s lifetime. Or some may be thinking that some of these may be possible probably by initiating various mega projects, focusing on trade and not aid, giving subsidies to lets say textile sector, and so on. Unfortunately we do not have enough money for the mega projects, developed countries prefer to give aid than removing trade barriers to foreign goods and we have been giving subsidies to various sectors for the last six decades, but they have still not developed enough to sustain themselves without needing financial help.

In recent conferences organised by the Planning Commission to debate on the New Development Approach (NDA) being developed internally, some many interesting questions were raised by civil society, donor agencies and the Planning Commission itself. Just to give you a taste of it let me state a few over here:

Everyone talks about promoting public-private partnership but has anyone pondered on what does it mean? Or do we have set rules defining public-private partnership necessary to send some sort of a signal to the private sector?

We often say that the government should do this and that. But who is the government and what exactly should its role be?

One way is to keep looking for all these answers which we might never find given inefficient bureaucracy, frequent changes in political setup and deficit of constructive thinking. Second is to get the government out of all the sectors through deregulation and privatisation and let the markets work on competitive basis. At least going with the latter option, we would not have to waste time in finding incomplete answers.

To ponder a bit more, let’s focus on our current growth cycle. We get foreign aid which gets spent on fiscal incentives leading to rapid growth. Now when we should introduce market reforms we prefer to relax and wait for the fiscal pressure to build up, which when gets coupled with some external shock bringing us back to where we started from. Making foreign trips to look for financial aid! Honestly, it sounds more like our CRISIS CYCLE? I will leave it to the readers to decide.

YES, some of you are right. If we replace aid with more consistent investment, we might manage to move out of this low level equilibrium trap. But why should anyone invest in our market which is marked by government presence in all the sectors? This is not all, inefficient infrastructure and law and order, unskilled workers and acute energy shortage are enough to keep the investors away. Furthermore, would you like to compete against Pakistan Railways which is also responsible for devising rules governing railway business in Pakistan? Or what about the aviation industry where the national carrier gets preference in route allocation? In energy sector, we have been trying to resolve circular debt for last three years. How is it even possible to achieve that when the sector is not being allowed to charge enough to cover its cost? Similarly, why shouldn’t our refineries decide the price themselves? Can our government determine the prices more efficiently than the markets? Looking at our history, governments have always been quite determined to outsmart the market. So far the results have been a bit disappointing for the public but perhaps stock brokers can learn a trick or few.

These are some of the important issues which NDA tries to resolve. It offers private sector led growth through well functioning deregulated markets, software development, rezoning cities, community participation and useful connectivity. But before we move towards implementation, we really need to make our mind if this is what we want or are we better off sticking with the old model?

http://jang.com.pk/thenews/jan2011-weekly/busrev-31-01-2011/p10.htm

Formulating a New Growth Strategy

Khaliq Kiani (Dawn News)

SHELVING the 10th five-year plan (2010-15) even before its launch, the Planning Commission led by Dr Nadeem ul Haq has come up with a fresh growth strategy draft.

The paradigm shift focuses on economic growth led by the private sector, prioritising investments in software ( efficiency, innovation and entrepreneurship) and capitalising on demographic dividends rather than spending on hardware (infrastructure, roads, bridges and buildings).

The draft New Growth Framework is seen critical in changing the Planning Commission’s historic role in formulation of perspective, medium-term and annual plans based on saving-driven approach, where growth rates were arbitrarily set and incremental capital to output ratios were used to generate requirements in key sectors of economy.

Under that approach, it was assumed that Public Sector Development Programme (PSDP) will crowd-in private investment.

Such plans, the framework draft argues, did not work because markets were not well developed; take off did not materialise into sustained growth due to inferior quality of investments and inadequate resource mobilisation.

There was a continuous reliance on foreign resources and existing framework did not endogenise elements such as innovation, creativity and learning.

The new growth strategy argues that most of the five-year plans were shelved due to regime changes. The successive plans could not yield envisaged results not necessarily because of planning failures but because of frequent policy changes and non-implementation.

The new strategy focuses on the need to apply modern theory to promote sustained high growth rates. The growth should be market-led and not government-led and the private sector should be the main driver of growth. If allowed to, the market will generate innovations, entrepreneurship, transformation of cities and youth employment.

The government should move away from activities that compete with the private sector. It should provide public goods – wherever the social rate of return is higher than the private rate of return— and it should administer a well- designed and transparent set of rules governing private economic activities.

The old growth model with its emphasis on public investment has not yielded the level of economic growth the country needs. Second, with the public finances ina binding constraint, government simply cannot undertake large-scale capital expenditure.The PSDP will continue to decline while foreign financing is not assured.

The new approach represents a shift of emphasis in several dimensions. The new regime should develop the software of economic growth, increase competitiveness everywhere, redefine government’s role in markets, promote investments on the basis of innovation and entrepreneurship, exploit the huge potential of a large domestic market, make cities and regional clusters the locomotives of growth, improve governance and better public service delivery, and enhance connectivity.

It projects that the country’s population to reach over 351 million by 2050. Number of those aged 0-14 years would start to stagnate after 2035 (due to fertility decline), but the numbers of working age group (15-64 years) and the elderly (65 and above) would continue to increase.

It is the increasing numbers in the working age group that provides an economic opportunity to the country.

By 2050, more than 236 million people would be in the working ages, a huge increase from 110 million in 2010. Demography started providing this opportunity to Pakistan in the early 1990s.

How would all these huge numbers be provided employment? With the current level of human capital, it may be a looming disaster. Ageing of the labour force is another factor.

The number of new entrants or younger workers would start to stagnate by 2040, while the number of older workers would continue to increase.

In order to counter this trend, strong reforms are required not only to put the existing unemployed back to work but also to absorb the new comers in the labour market. The long-run labour force growth is being estimated at 3.6 per cent annually.

With an employment elasticity of 0.45 per cent, it will take a GDP growth in excess of eight per cent annually to absorb the incremental changes in labour. If not, the coming demographic changes will imply rising unemployment, shortage of assets and difficulties in competing with neighbours.

The new growth strategy deviates from the old planning regime on six dimensions:

First, hardware versus software of economic growth: Although the gap between the two competitors has narrowed considerably, current approach focuses on building physical infrastructure. We continue to fare poorly against our competitors on the software aspects/inputs critical to growth. We need to learn from global experience and generate sustained productivity and efficiency by emphasising the quality of investments in physical and human capital productivity, and performance has to be measured in both the public and private sectors.

Second, dominant role of public investment versus markets: Public investment has for a long time been incorrectly viewed as the main source of economic growth. Policymakers have emphasised policies that crowd out private investments. Government should not be involved in markets, except to regulate misbehaviour, reduce transaction costs and promote competition.

Third, exogenous versus endogenous competitiveness: Our past and present growth strategies view global indicators that measure competitiveness and cost of doing business as beyond our control. By minimising government intervention and making productivity endogenous, Pakistan will be able to look beyond labour and capital accumulation to accelerate growth and improve risk-adjusted returns. To this end, Pakistan needs to identify reforms needed to develop competitive, innovative and efficient markets.

Fourth, government incentives versus entrepreneurship: Government policy favours specific sectors or sub-sectors through protection and subsidies. It also emphasises the importance of commodity producing sectors and continues to support non-competitive industries. The enabling environment for investment should maximise gains from new ideas and open up opportunities for entrepreneurs. A new approach should incentivise innovation and entrepreneurship, which, in turn, will make growth more inclusive.

Fifth, new role for cities: Current development strategy views cities mainly as suburban clusters with an appended industrial park.

Re-zoning cities so that they become dense centres of diverse and creative activity to facilitate commerce and economic activity in several areas but especially in retail, distribution, transport, leisure and entertainment.

Construction will increase quickly in cities with new zoning laws that enable repressed but productive activities. More construction will create jobs for the poor and become an essential mode of inclusive growth.

Sixth, quantity versus quality of service delivery: Increasingly, public service delivery has become costly and lacks in quality partly because governance has been found wanting in several areas. Efficient public service delivery with coordination between various government institutions and service providers is much needed. Asking for consumer feedback will provide an ongoing mechanism for assessing the impact of reforms.

Published in Dawn, January 31, 2011

http://www.dawn.com/2011/01/31/formulating-a-new-growth-strategy.html