Cities as Growth Centres

People in Pakistan are quick to criticize and that too without an effort to understand. Take the Framework for Economic Growth of the Planning Commission which is also known as the New Growth Strategy. Often people say that there is not enough for the poor. Or that it is not a poor friendly policy. Let us examine how true these statements are. 


I would argue that the critics are wrong. I would further argue that the Planning Commission’s growth framework is extremely poor friendly far more than previous plans and policies.  Let me show you why.

We can all agree that there can be no poverty reduction without growth. Whether there is trickle down or not there is certainly the possibility of all boats being lifted up by the rising tide. Rapid increase in the GDP has proved to be a necessary (even if not sufficient) condition in every country that has managed to reduce poverty by a substantial amount. The main thrust of the growth strategy is accelerating economic growth and sustaining it. It is an approach that goes beyond projects and targets public service delivery, productivity, competitive markets, innovation and entrepreneurship.     

        

Our previous plans and policies have all focused on infrastructure and government led growth.  Poverty is eliminated not through government interventions but through opportunities for the poor. The poor are willing to work hard, they migrate to opportunity. But where is the opportunity in Pakistan?  Have we created enough opportunity?

Opportunity exists in dense messy cities.  Planning Commission’s growth strategy for the first time places emphasis on economic geography. International evidence shows that on average, an increase of 10% in a country’s urban population leads to an increase in the country’s per capita output by 30%. Cities are open to people with different backgrounds and offer jobs and self-employment.

Dense cities are the centres for providing opportunities to the poor and promote domestic commerce at all levels. Currently in Pakistan, 78% of the national GDP is contributed by the economic activity in cities. A focus on cities implies an improvement in local markets – including the markets for agricultural produce! It is in cities where much of the rural products are bought and sold and where the major chunk of rural income is generated. Wholesale and retail trade, markets for street-vendors, construction activity, storage and warehousing activity, hotels and restaurants, shopping malls, entertainment – all these activities (and more) create employment for the poor.

As such, through unfriendly zoning and building regulations, Pakistani cities cater only to the rich population, primarily rich housing. To change this trend, zoning and building regulations must become commerce and business friendly. By allowing space for street markets for example, not only will poor entrepreneurs and street vendors get the opportunity for business, cities will become more open to the poor. Through amending building regulations and allowing high rises to be built, cost-effective apartment buildings will be built and large suburban type houses will be pushed outside city limits. Following these recommendations would lead to a construction boom – and jobs for the poor. Construction growth linked with the growth of commerce will allow space for the inclusion of women and youth as well as the demand for many new skills.

Dense urban clusters also promote entrepreneurship and innovation at all levels, if the market is developed. Proximity and density create large markets for goods and services; and in turn, large markets build social capital; allow interactivity; nurture innovation and entrepreneurship. Innovation occurs in dense clusters, where there is intense competition. Also, reforming and strengthening institutions such as the legal and judicial framework, the civil service and the taxation system could provide an impetus to innovation and entrepreneurship – both employment generating growth drivers. As such, the aggregate of the programs suggested could vastly improve the investment climate and reduce the cost of doing business, alongside creating employment.

The ‘Framework for Economic Growth’ presents several new ideas and perspectives that we should take time to consider and reflect upon. Providing opportunities to the poor is at the forefront of this growth strategy. It is estimated that sustained economic growth at over 7% is required to productively absorb the workforce. If we do not think creatively about our cities and how they are the potential hubs of commercial activity and employment, we could be heading towards what the social scientists call a demographic disaster.

A version of this article was published in DAWN on 7/11/11

http://www.dawn.com/2011/11/07/cities-as-growth-centres.html

Latest Draft of the New Growth Strategy

The latest draft of the New Growth Strategy has now been uploaded on the Planning Commission website:
http://pc.gov.pk/nda/index.htm

You can see the full document here:
http://pc.gov.pk/nda/PDFs/growth_editing_14-04-2011.pdf

We look forward to your comments and suggestions as we move this document into its final stages!

Thanks

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. 

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. 

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