How to rectify matters

How to rectify matters

By Zafar Iqbal

OUR famous former Citibank finance cum prime minister made a mess of the economy through liberalisation, deregulation and privatisation i.e. selling the family silver.He was high up in the bank but as it turned out he was no better than his colleagues in New York who have had to be rescued by the US government.Governments in Pakistan have never known how to operate government-owned projects. They are simply regarded as channels for patronage. Appropriate people are rarely appointed, or removed as soon as possible, or their good performance is ignored as meaningless. Therefore, privatisation can be defended in principle. Unfortunately, it also provides scope for corruption on the part of decision-makers.One hopes that the current Citibankers in charge of economic management will try and achieve savings and investment in industry and services, reduce the current account deficit and the fiscal deficit, and at the same time encourage the private sector to invest in projects which will reduce the current account deficit. These include export-promotion as well as import-substitution projects. It is a tough job because the IMF will be breathing down their necks to reduce inflation. The causes of inflation along with their contribution need to be analysed. I have been given to understand that we are using a wrong set of figures.The whole issue of growth is much more complex. It involves education both at the top and the bottom if labour productivity is to be improved. The education policy of creating PhDs out of nothing was hardly sensible. We should produce good graduates and to do so we must improve the quality of our existing universities. At the lower level we also have to improve literacy and provide technical schools to improve the quality of the workforce.Because of lowering the fiscal deficit there will be little or no investment in the public sector. Reduction in current expenditure is normally resisted by all governments. Because of reduction in the rate of growth, tax revenues are not likely to rise. On the other hand, rising interest rates and lack of liquidity will discourage private investment. Interest rates are supposed to reduce inflation.Incidentally, transporters have not reduced prices although petrol and diesel prices have been reduced. Food prices in developing countries are very difficult to handle. Raising interest rates is not likely to have any effect. The depreciation of the Pakistan rupee against the dollar has raised import prices considerably. The price of imports is part of inflation. On the other hand our current account deficit of imports minus exports is still very high. It has to be brought down. Given the general condition of the global economy our exports are not likely to rise much in spite of the depreciation of the Pakistan rupee. It is obvious that in the short run consumer imports have to be reduced by raising import duties and increasing credit restrictions. For the medium term appropriate import-substitution industries have to be encouraged.Export promotion is a much more difficult exercise because commercial banks are not focused on project finance. How are we going to manage future growth? The previous government’s policy for economic growth was not based on projects which would involve the transfer of technology. According to information available it is estimated that 75 per cent of Pakistan’s exports come from only four commodities — leather products, rice, sports goods and textiles and clothing. Approximately 60 per cent of Pakistan’s exports are cotton-based and more than 80 per cent of its manufactured exports consist of low-tech textile and clothing goods. That is where we are stuck. How do we move on?What serious people think should happen is:(a) product diversification such as electrical consumer goods, pharmaceuticals, appropriate agricultural products and suitable services, etc.(b) destination diversification i.e. we should try and find many more countries to which we can export.This means that the Export Promotion Bureau must try working on this. Unfortunately, the officials posted abroad for this purpose report to the commerce ministry. This has always been absurd. They should be part of the Export Promotion Bureau. The commerce ministry should audit the performance of the bureau on a monthly or at least quarterly and annual basis. The bureau is not simply about marketing; it is about recommending new products, improving knowledge of manufacturing or services, improving labour productivity.The government departments involved in this are finance, planning, industries, commerce, agriculture and education. There is also the State Bank. According to my experience the most useless is agriculture. There is no effective agricultural extension service. When I moved from information to finance, we were facing a problem. The farmers refused to use fertiliser to increase the yield per acre for wheat. I was advised not to waste money on fertilisers. On enquiry it was revealed that our wheat was rather tall with thin stalks. When fertilisers made the ears fatter the plants would collapse reducing wheat yields.Subsequently, when Mexipak was introduced the plants were shorter with tougher stalks and fertiliser helped to increase yields. The issue is that the extension service should understand the problem the farmers think they are facing.While dirigeste economic management has been run down by free marketers, there is a problem that if we try and promote some forms of investment, some may succeed and some may fail. We need good quality public service i.e. we must try and recruit some of our brightest people who currently prefer to do something else rather than join the civil service. There has been a steady decline of competence after 1972 caused by our ‘great leader’. All subsequent lesser leaders have been unconcerned. They have all believed in command and control rather than a more open system where people feel free to express their honest opinions without causing serious anger at the top.