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

Beyond PRSPs: National and Provincial Growth Strategies

PRSPs are overarching policy documents which cut across a range of mandates including but not limited to purely economic priorities. Key pillars of PRSP in Pakistan focused on macroeconomic stability, private sector development, human resource development, financial sector and SME related reforms, infrastructure development, devolution, and social safety nets. The PRSP is still being used in the Finance Division for monitoring of poverty-related expenditures. In an evaluation of PRSP-II following shortcomings have been identified: [1]

•  Parliament was never fully engaged by the government for consultation and input on PRSPs. There is no reference to the effect of the approval of the PRSP in the parliamentary debates.
• PRSP-I and II do not define any distribution mechanisms for growth. In fact the term land reforms (which is at the core of asset redistribution) finds no mention in these documents.
• Education and health related expenditures under PRSP had met a resource constraint (and cuts) starting 2009. PRSP had also ignored the important problem of health financing for poor.
• Local governments had no role in the delivery and management of health and education sector programs.
• No specific actions were envisaged towards legal and judicial reforms in the country.
• The post-18^th Amendment milieu will require a different socio-economic planning, implementation, monitoring and evaluation regime – which is currently not envisaged under PRSP.

The proposed growth strategy being formulated in Planning Commission takes stock of the shortcomings of Medium Term Development Framework 2005 – 10, PRSP-I & II, and prioritizes governance and institutional reform as a key pre-requisite before any other sectoral action plan is put forward by the government. The draft strategy recognizes that under the prevalent resource constraint, the aid – led public investment model of growth cannot continue any further. The starting point has to be capitalization of idle capacity in the public and private sector. In the former priority may be attached to be: 

a) restructuring loss generating public sector enterprises, 

b) elimination of untargeted subsidies, and 

c) rationalization of public investments. 

The second pillar of proposed growth strategy then focuses on governance for markets i.e. fostering competition across goods and factor markets, lowering barriers to entry and exit (particularly for small entrepreneurs), and exit of government from agricultural markets. The third pillar is about governance for inclusive cities i.e. revisiting zoning and building regulations, land market reforms, and property rights. The fourth pillar proposes governance for improved connectivity i.e. partial privatization of railways in order to revive the freight sector, revisit market dominance of public sector in road and aviation sector, and incentivizing use of ICT services across the board. Finally the last pillar – youth and community engagement ensures that this growth strategy evolves and remains inclusive overtime.

In order to account for 18^th Amendment, Planning Commission sees a new role for itself where it will continuously work with line ministries and provinces in order to have action-oriented tasks sequenced and prioritized. It is envisaged that in order to building strong consensus before moving towards concrete actions following will be the sequence of development planning documentation:

a.    Growth strategy document [Conceptual framework of a new strategy – May 2011]

b.   10^th Five Year Plan [Sectoral plans in collaboration with line ministries – June 2011]

c.    Provincial growth strategies [In collaboration with all provinces]

d.   Urban development strategies [For all cities having population 1 million and above]

  

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[1] SDPD (2009) Poverty Reduction Strategy Papers in Pakistan: An Evaluation. Strenghtening Democracy through Parliamentary Development. http://sdpd.org.pk/

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

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