Agenda for reform: Shahid Kardar on resigning from SBP

[muse]

Friends:

We have all discussed and have lamented the state of the economy, below is a piece by the Shahid Kardar, who recently resigned his post as the Chief of the State Bank - His resignation was to protest the interference of politicians into what should be an independent institution -- I encourage all readers to read critically, this important piece and consider the prescription Mr. Kardar offers:




Agenda for reform
By Shahid Kardar | From the Newspaper
(18 hours ago) Today

WITHOUT belittling the political economy challenges that face reform in Pakistan, I believe that the time just may have come for long-overdue fundamental reforms, and not just because of the urgency of effecting these changes.

In this writer’s view, there is a discernible shift in the public narrative (being admirably piloted by the media) which is demanding better quality governance (the core issue) and leadership.

With little sympathy shown by our external partners, there is a growing realisation that we have to solve our own problems and live within our means. There is a need for a just and fair society in which different income groups contribute to the restructuring of the socioeconomic order based on their capacity to bear this burden. There is certainly a degree of exaggeration about the deep-seatedness of these sentiments among the voting population but an inspired political leadership with ‘greyish’ credentials of principles and probity could snatch the baton and carry the populace with it in, say, five to seven years from now.

Most of the prescriptions for our economic travails are now well-known and do not require repetition. This article refers to what would be the minimum agenda while arguing for a change in the sequencing and some modification of content.

To begin with, I would privatise anything and everything in the public sector starting with government-owned banks, simply to protect public money (including depositors’) and ensure the safety, soundness and stability of the financial system.

Just three public-sector enterprises like PIA, Steel Mills and Railways are together losing a crore rupees a minute. The country cannot afford the continued haemorrhaging of public finances and the banking system. There is no option other than privatising these organisations or some of their services. Even when it comes to social services like education, poor households are voting with their feet and sending their children to low-fee-charging private schools, although government schools are free. The lessons from initiatives like the Punjab Education Foundation that private schools provide better quality education at one-seventh the cost in government-managed schools, are clear enough. The state should ensure that children get free education without being in the business of actually providing the service, unless we can change the incentive structure in the public schooling system, thereby making it a ‘game changer’ in terms of societal thinking. This is all doable. However, it is not the purpose of this article to elaborate on the necessary measures to be undertaken to that end.

We need to liberalise trade further to induce greater competition in the economy, thereby also preventing hoarding and cartel formation.
The fiscal deficit at the federal level after the recent NFC Award has become structural in nature, as a) all major expenditures, defence, debt servicing (including loans that financed physical infrastructure in provincial use), subsidies (especially for energy — the discussion follows) and administering the state require in excess of Rs2tr against the projected tax revenues of Rs1,952bn for next year, of which more than Rs1,150tr will be earmarked for the provinces; b) most tax bases that remain to be fully exploited like agricultural incomes, properties and economic services now lie in the provincial domain. Islamabad can only coax provincial governments into raising revenues from these sources through moral suasion.

Can one realistically dream of a reform-minded provincial government (challenging the rhetoric of some political parties on reform) to, say, take measures like taxing large farmers and property owners and passing legislation that declares all benami ownerships and transactions illegal (enabling, for tax purposes, the creation of databases of real owners’ property)? Through such reforms they could then shame others on their failure to mobilise revenues from such potentially lucrative bases.

To attend to the mother of all issues, the fiscal deficit, requires a structure that taxes all earnings, irrespective of source, equally. It’s not just large farmers in legislatures resisting taxation of their incomes, even bureaucrats renting out their properties in Islamabad to the diplomatic community are paying a tax that is 50 per cent less than those earning the same level of income from other sources.

However, in my view, the expenditure side in the fiscal equation demands closer attention. To this end we need to first abandon the contorted view of our importance (‘the world cannot ignore us’) because of our strategic location and also dump the old, failed policies, frameworks and concepts of a security state and strategic depth, since these are now costing us more than Rs830bn per annum. Thereafter, there is a need to reassess security-related funding requirements.

Next, we need to quickly phase out untargeted subsidies, especially for the farming community in the shape of direct and indirect subsidies on fertiliser (the latter through the under-pricing of gas) and for its wheat purchased at prices higher than in the international market. In fact, I would argue that it would be cheaper for public finances if we were to eliminate both subsidies as against levying GST on fertiliser and pesticides.

As part of the same effort, all subsidies on energy should be withdrawn for those consuming above lifeline rates. The concession of free provision of electricity to Wapda employees which is costing us taxpayers Rs35-40bn per annum, also needs to be withdrawn immediately. All this needs to be followed up by addressing the critical issue of electricity theft and non-collection of billings without disconnecting non-payers, the combined cost of which is in excess of Rs4 crore a minute. Pilferage, however, can only be tackled through privatisation of the management (with agreed targets), if not ownership, of electricity distribution companies. The purported plan of the government to restructure their boards, their membership and authority is not the solution.

Next, we need a right-sizing of government, especially at the federal level following the 18th Amendment. Merely surrendering posts as incumbents retire through natural attrition will be too slow a process. The golden handshakes and skill-enhancement efforts to enable this can always be financed.

Finally, apart from greater austerity (surrendering of all VIP planes, stopping the provision of bullet-proof cars to all and sundry, etc) there is a need to reorder our expenditure commitments. It is naïve to think that governments should do everything. Even the richest country in the world has to prioritise its spending to avoid waste of scarce resources by spreading them thinly. And, of course, such reordering is driven by political considerations. But the fact that we have to choose is unavoidable. For instance, it is a no-brainer that availability of reliable power is more important than roads for transportation. Road networks are needed to transport goods but only after they have been produced, which requires power.

To conclude, the time just may have come to initiate the process of deep structural reforms. Admittedly, however, for this the course of action to commence depends on the extent to which our political and dominant economic elite is not totally blind to changing realities that confront us as a nation and is willing to make some sacrifices in its own enlightened self-interest.

The writer was until recently governor, State Bank of Pakistan.

 

[muse]

Mr. Kardar, it seems to me, is simply stating some general truths -- When Pakistan was highlighted as a model of economic progress, Pakistan had in effect, a private economy -- by the nationalizations effected by the PPP saw to it that the PPP punished Pakistanis for imagining that they could be masters of their own economic destiny.

The criticisms of famous economist Mahboob ul Haq, of uneven economic growth, also played a part in the socialization of the Pakistan economy - it seemed as if Pakistan threw out the baby with the bath water.

Mr. Kardar points to the loss generating state enterprises, which since the PPP nationalizations have become venues for political patronage and loss making - similarly he points to the loss generation by the Pakistan state in their effort to organize public education, and the relative success (at a significantly lower cost) of private education - of course this doe snot mean that public education be abandoned, however, we have multiple other options to pursue in this regard other than making public losses.

I would also bring to the attention of readers Mr. Kardar's proposal that ALL pay taxes, "on their capacity to bear this burden" -- Will the political elite tolerate such proposals?? Not without a challenge, they won't.

And finally, note Mr. Kardar's point about power production -- It must by now be clear to readers that the problem of power generation in Pakistan is a basically a political problem - the current capacity is not producing optimally because the PPP are focused on a different economic paradigm, one which deprives power producers of the economic incentive to generate power.

 

[VCheng]

I think Mr. Kardar, for all the sense he makes, is a "master of conjecture" too!

I could easily write a more eloquent piece too, with the same effect: ZERO.

WHY should the Pakistani kleptocracy give it up? Human nature and history tell us that the solution will be likely enforced from without rather than within.

 

[muse]

WHY should the Pakistani kleptocracy give it up? Human nature and history tell us that the solution will be likely enforced from without rather than within.

That's rather broad - and while it's true that the political elite have found it more palatable (politically expedient) for them to secure foreign capital instead of raising the capital from taxes, what I think Mr. Kardar is pointing to is the fact that given the kinds ofd relations between Pakistan and US, IFI may not be as forth coming or accommodating as they have been in times when relations between Pakistan and the US have been better.

I believe that the time just may have come for long-overdue fundamental reforms, and not just because of the urgency of effecting these changes.

 

[VCheng]

That's rather broad - and while it's true that the political elite have found it more palatable (politically expedient) for them to secure foreign capital instead of raising the capital from taxes, what I think Mr. Kardar is pointing to is the fact that given the kinds ofd relations between Pakistan and US, IFI may not be as forth coming or accommodating as they have been in times when relations between Pakistan and the US have been better.

The statement is broad because there is ample proof that human nature is exactly as how I have described it.

Words like Mr. Kardar's have been printed for decades in Pakistan, and no doubt will continue to be, while the "realities on the ground" and "complexities of the situation" are allowed to persist.

Now let me go and cuddle something or other!

 

[muse]

The economic journey
By Salman Shah

ACCORDING to a top secret memorandum of the British chiefs of staff dated July 1947: “The area of [West] Pakistan is strategically the most important in the continent of India and the majority of our [British] strategic requirements could be met by an agreement with Pakistan alone.”

In a related British memorandum dated May 1948 it was stated: “The Indus valley, western Punjab and Balochistan are vital to any strategic plans for the defence of the all-important Muslim belt … the oil supplies of the Middle East.” It also stated that Pakistan was the “keystone of the strategic arch of the wide and vulnerable waters of the Indian Ocean”.

Going further back in our history after the first war of independence in 1857, Sir Syed Ahmed Khan showed the defeated and demoralised Muslims the way forward, on a path based on adopting modern knowledge and practices. His Anglo-Muslim University at Aligarh produced our founding fathers and leadership, leading to the birth of Pakistan. The Quaid, a product of British legal training, also envisaged a modern Pakistan firmly anchored as a strategic partner in the contemporary western global system.

Yet today, we find ourselves strategically isolated and mistrusted in the western world. In our alliances with the West we have had mixed results. Whereas, for example, South Korea through its alliances has been able to achieve unparalleled economic and social development, we have not.

For the first decade of our existence, we were literally trying to learn how to govern a new country suffering from birth pangs.

With the advent of military rule in 1958, we started cementing western alliances and also became a role model for private sector-led economic growth and development.

However the first shock to the system came from the 1965 war with India that shook the foundations of our western alliances.

The economic miracle of the 1960s evaporated in the 1970s when the PPP went on a nationalisation spree, badly damaging the private sector which had hitherto been the engine of growth. As a result, the commanding heights of the economy were captured by the state at the expense of the markets. In 2011, huge loss-making white elephants are still a millstone around our budget.

The 1980s bought us cash bounties as well as the scourge of the Afghan jihad, religious extremism, drugs, Kalashnikovs, money laundering and black wealth while the masses continued to suffer. The public sector continued to rule the roost. The Soviet Union collapsed and the market economy spread across the world.

However, in Pakistan, the 1990s was characterised as the lost decade. The alliances of the Afghan war were broken. The reforms needed to usher in the market economy were patchy, and by the time Nawaz Sharif was overthrown in a military coup in 1999, the country was under sanctions, foreign currency accounts had been frozen, interest rates were over 20 per cent, public debt was over 100 per cent of GDP and foreign exchange reserves held less than a few weeks of imports.

The country’s economy had been shattered. Investors had lost their shirts. With Pakistan’s credit rating of selective default the stock market was at its all-time low of around 1,000 points (compared to its peak of around 16,000 in March 2008).

Gen Musharraf took over and 9/11 happened. Alliances were restored, sanctions were lifted, market reforms were implemented and the economy prospered. Privatisation, liberalisation and deregulation propelled the $60bn GDP in 1998 to over $175bn in 2008. Investment reached an all-time high, currency was stable, the stock market was a leader of the emerging markets, public debt dropped to around 53 per cent of GDP. Credit ratings improved three notches and employment generation dramatically reduced poverty.

The new democratic dispensation turned the economic management upside down, politics took ascendancy over economics, capital flight was engineered and foreign investment transactions were cancelled, privatisation was abandoned in an era of escalating oil prices.

Now we are victims of stagflation, high unemployment rising poverty, dropping investment, weakening currency, worsening law and order, rising terrorism, growing corruption and endemic misgovernance. The size of the state is increasing and the private sector is shrinking. The relationship with the West is in disarray and the nation seems to be turning inward, angry and isolationist. So where do we go from here?

We are still one of the most strategically placed countries in the most important part of the world. We have the sixth largest and perhaps the youngest population in the world. Location-wise, there are many opportunities. To the northwest, post-war Afghanistan can be a big boost for us. Second, the entire resource-rich Central Asia region is overcoming its teething problems and looking for trade, oil and gas exports and logistic connections. Beyond it, a reasserting, friendly Russia can be a big plus.

Third, in the west, Iran and Arab competition needs to be managed as a source for economic and social development. Fourth, the Arab awakening needs a peaceful transition to a democratic and prosperous future. Fifth, the vast Indian Ocean rim from the African coast, the Persian Gulf, the Arabian Sea to the straits of Malacca can be an area for explosive rivalries as well as economic growth and trade in which Pakistan has a key role to play.

Sixth, neighbouring China is fast becoming the second-largest economy in the world with huge possibilities for us. Seventh, our colossal neighbour to the east has a dynamic economy but has yet to give us economic or political space. When it realises the need to engage us meaningfully the dividends can be enormous.

Thus, exploiting Pakistan’s geography and demography would be a big advantage for us and inter alia must form the cornerstone of our future alliances, market-based economic vision and governance strategies. One thing is apparent that whenever we had functioning alliances, ascendancy of the markets and better governance, the economy functioned better than otherwise.

It is also clear that South Korea through its alliances, markets and governance took its economy from $8bn in 1970 to over $1,000bn in 2010 whereas over the same time period we took our $10bn economy in 1970 to a minuscule $175bn in 2010.

Going forward, the questions facing us are: can we build an internationally integrated vibrant market economy that doubles every 10 years? Can we wipe out poverty in our lifetime? The answers to these questions are a cautious ‘yes’ provided we put a game plan in place to achieve all this and much more.

The writer is a former caretaker finance minister.

 

[Meengla]

Not an economist myself but when Kardar stoops the argument to the level of 'removing bullet proof cars' etc then he has a very narrow vision, and yes, 'broad', as VCheng says.
Politicians come to power to take advantage of their position in power. That is, again as VCheng says, 'human nature'. You want austerity? Then look for someone like Mullah Omar of Taliban. It is not the VIPs of the current parliament who are destroying Pakistani economy. It is not the democratic govt. which has made the economy to collapse. Much of what Musharraf accomplished he did when the world economy was good and there was relative peace in Pakistan.
I think Pakistani economy will bounce back once there is peace inside Pakistan. That's not to say that some of what Kardar says is not valid. But peace is must first.
PS. @Muse: You are harsh on PPP's nationalization. The party, like much else in the world in late 60's, was left leaning and could not have found the support to support its 'socialist' platform had there not been a need for the population to revolt against the Ayub's policies. At least PPP had the mandate of the people then.

 

[muse]

Meengla


Left leaning has never meant "criminal enterprise" which is what the PPP morphed into - See, socializing private property is a crime, socializing losses, while the political elite, primarily PPP types acrue profits, that's a crime, regardless of left leaning or right leaning.

Both Karadar and Shah point to a problem that the PPP makes Pakistan suffer from, that is to say, they (PPP) politicize the economy at the expense of market fundamentals -- making decisions that will pay dividends in the near future are put off, because they are politically unpalatable, the politicians make out like bandits, while ordinary Pakistanis continue to lose hope and the economy does not perform to it's potential.

Both Kardar and Shah point out that privatization and liberalization are the way forward - but such an endeavor would rob the politicians and the bureaucrats - the politicians would lose the venue for patronage and the bureaucrat, a venue to create public losses.

 

[indushek]

Shocking to see that while in India till our economic collapse we had these govt organizations and nationalization of banks etc we made away with them in late 90's but in Pakistan at first u had free market economy and then made away with that !!!!!!!!!!!

 

[el secular los kanjares]

el secular los kanjares agenda de enlighten moderation fantastica est supremo

 

[Patriot]

Meengla


Left leaning has never meant "criminal enterprise" which is what the PPP morphed into - See, socializing private property is a crime, socializing losses, while the political elite, primarily PPP types acrue profits, that's a crime, regardless of left leaning or right leaning.

.

PPP Leaders are not leftist at all - In fact calling them leftist would be a disgrace.They switch to either side whenever it suits them.They don't give a rat a$$ about left or right or center.

 

[el secular los kanjares]

Gen Musharraf took over and 9/11 happened. Alliances were restored, sanctions were lifted, market reforms were implemented and the economy prospered. Privatisation, liberalisation and deregulation propelled the $60bn GDP in 1998 to over $175bn in 2008. Investment reached an all-time high, currency was stable, the stock market was a leader of the emerging markets, public debt dropped to around 53 per cent of GDP. Credit ratings improved three notches and employment generation dramatically reduced poverty..

sir it was only atiqa odho and aqeel kareem dedhi and that other guy who runs a bank and shortcut aziz who benefited from the figures u presented...the layman was being blown apart on the street...no suicide blast before your mentor musharaf...musharaf comes gives black cheque to US of A...sells Pakistan airbase to US of A....thousands of suicide blasts in Pakistan...100 billion dollar loss to our economy and 42000 civilians and soldiers dead....musharaf imported that bast*rd shaukat aziz who left country after "lagaing dihari"...now he is working for some indian company in UK....KINDLYdont distort the facts....if you role model musharaf was so righteous and visionary then there wouldnt have been 16 hours of loadshedding at this point in time...he was a dictator who invited all other corrupt leaders with him to prolong his rule....zia was thousands times better than musharaf...atleast he saved your arse from red army and communism.

 

[muse]

Shocking to see that while in India till our economic collapse we had these govt organizations and nationalization of banks etc we made away with them in late 90's but in Pakistan at first u had free market economy and then made away with that !!!!!!!!!!!

Indeed - what we continue to point out is that there was once something called a "Hindu rate of growth" fueled or rather constrained by a state that imagined itself as the totality of economic activity -- whereas in Pakistan it was a criminal act of theft, nationalization, that robbed the private property of citizens and made the politician and the bureaucrat into mega criminals, it has resulted in criminalizing governance itself --- and of course Pakistani business has responded to this by moving capital to places where it is not just respected but protected.

Messrs kardar and Shah, highlight basic ideas, known to work worldwide and especially in Pakistan -- but it must be admitted that Pakistani business has failed to win the army to it's side -- that's key in this situation - the politicians are opting for short time gain or long term national economic health.

PPP Leaders are not leftist at all - In fact calling them leftist would be a disgrace.They switch to either side whenever it suits them.They don't give a rat a$$ about left or right or center.

Yes, it applies to some but it would be a mistake to imagine that they are not motivated by political.economic philosophies.

 

[Meengla]

Meengla
Left leaning has never meant "criminal enterprise" which is what the PPP morphed into - See, socializing private property is a crime, socializing losses, while the political elite, primarily PPP types acrue profits, that's a crime, regardless of left leaning or right leaning.

Both Karadar and Shah point to a problem that the PPP makes Pakistan suffer from, that is to say, they (PPP) politicize the economy at the expense of market fundamentals -- making decisions that will pay dividends in the near future are put off, because they are politically unpalatable, the politicians make out like bandits, while ordinary Pakistanis continue to lose hope and the economy does not perform to it's potential.

@Muse,
"Criminal' is a very strong word to use here. Surely, many industries were 'nationalized' as part of the PPP Manifesto from the late 60's but, by and large, Pakistan retained a very large private enterprises. I can tell you this from first hand account: I come from an extended community of 'Chipas'. The world 'Chipa' comes from 'Printers'. And that's what they did: Owned or operated many textile mills which continued in private hands all their lives and still do. It is true labor policies did give rights to labors and that hurt businesses. But that was a reaction to the very few families owning most of the assets in Pakistan.
I cannot compliment or condemn PPP for their policies of the 70s. I know too little. I have read that industries were greatly affected--especially those which were privatized. But Pakistan was not like Cuba or NKR at all. On the other hand, there were benefits for the 'common' poor Pakistanis. Labors rights were better.
Whatever PPP did it had the mandate for that. Not 'criminal. May be wrong in some cases due to economic re-purcussions.

PPP quit being a leftist party from 1988 on. But it is still the most liberal of all Pakistani political parties. More tolerant of social freedoms. Less likely to appease the mullah-brigade. More tolerant of minority rights--and that's why the religious minorities of Pakistan largely flock to PPP. It is now a center of the left party. A prototype of Pakistan's 'Democratic' Party while the PMLN is the Republican Party.