Good governance and free market economy

[Pk_Thunder]

Good governance and free market economy​

By Aftab Ahmad Khan

In the current wave of liberalisation, de-regulation and privatisation, greater stress than ever before is being placed on the central role of markets and private sector as engines of growth. All governments we have been blessed with since the mid 1980s have loudly and persistently proclaimed their faith in a free market economy and with this end in view have introduced a number of significant changes aimed at broadening the scope of individual and corporate initiatives and enhancing Pakistan’s links with the world economy.

These measures include privatisation of state owned enterprises; easing of state control over many of the activities of the private sector enterprise (such as entry into production, expansion in size and output decisions), lowering of corporate and personal income tax; virtual abolition of exchange controls; easing of trade barriers; reduction of tariffs; assurances to business groups regarding future patterns of taxation; generous concessions to foreign investors; abolition of credit ceilings and credit-deposit ratio; attractive fiscal and monetary incentives for exports and opening up of sectors hitherto exclusively reserved for the government like telecommunications, power and airlines to private sector participation.

The present trend in favour of free market and privatisation has no doubt received a considerable fillip on account of the lacklustre performance of state owned enterprises and public agencies as well as the perception of widespread corruption in the state sector. Unfortunately, the exercise of the instruments of intervention in the economy often in a discretionary and non-transparent manner aside from corrupting the leadership created incentives for their avoidance and evasion if they conflicted with private interests; worst of all, resources came to be diverted from productive activities towards influencing those in leadership or bureaucracy who could dispense privileges and rents created by the interventions.

Free market policies in recent years have also received powerful support from the International Monetary Fund (IMF) and the World Bank (WB).

Countries who are receiving assistance under Poverty Reduction and Growth Facility from the IMF or Sectoral Adjustment Loans from the WB have to abide by the conditionality of pulling back the interventionist state.

It has, however, to be appreciated that a liberal market oriented economy can yield positive results only in a milieu characterised by good governance. Governance may be taken as denoting how people are ruled, and how the affairs of the state are administered. It encompasses the state’s institutional and structural arrangements, decision making process and implementation capacity.

It implies that public authorities play an indispensable and creative role in establishing an environment conducive to growth and in determining the equitable distribution of assets and benefits.

Conversely, it also implies the possibility that the government may be captured by self-seeking elite bent on plundering the national wealth. Good governance depends on the extent to which a government is perceived and accepted as legitimate, committed to improving the public welfare and responsive to the needs of its citizens. An essential feature of good governance is the maintenance of law and order without violation of human rights. In this behalf a fundamental pre-requisite is an independent, reliable and efficient judicial system as well as honest law enforcing agencies that effectively carry out court decisions.

History tells us that a society prone to excessive corruption, maladministration and legal breakdown is not only characterised by economic stagnation but is also “without nobility, without morality and without intellect.”

In Pakistan, it is crystal clear that for ensuring economic growth with social equity, the government has to play a crucial role in creating and maintaining an appropriate legal, institutional and policy framework.

The government needs to ensure the provision of basic social services including infrastructure (such as energy, roads, water supply and sewerage); anti-poverty programmes, basic education; access to health care; environmental protection and public security. The government does not have to provide all these services itself to ensure their provision. In some cases such as education and health care, it may by more appropriate on efficiency grounds for the government to foster private competition.

The government’s role is particularly crucial in managing economic policy, anticipating and adjusting to economic shocks, facilitating transitions in economic policy and designing and implementing economic reforms.

Our past economic and development inadequacies can be attributed largely to the absence of a mechanism for designing timely and well coordinated responses that could take maximum advantage of the country’s potential in a rapidly changing international economic environment; again our planners and economic managers have not always succeeded in convincing the political leadership of the grave consequences of ignoring serious economic problems and making major economic mistakes. In recent years, mismanagement of the economy has been responsible for the downfall of many governments across the globe.

We can no longer afford the luxury of functioning on the basis of ad-hoc policies without sound analysis and frequently influenced by considerations of political patronage and power profiteering.

Aside from managing economic policy, the government has also a crucial role in ensuring the provision of a suitable regulatory framework particularly for the financial sector, wherein fraud and unsound management can have profoundly de-stabilising consequences for the economy. It is heartening to know that as a result of the promulgation of elaborate prudential regulations for banks, we have now a regulatory and supervisory framework for banks which should ensure their honest functioning without impairing their efficiency and dynamism.

The State Bank governor, however, is of the view that all deposit taking non-bank financial institutions like investment banks, leasing and housing finance companies should be subject to SBP’s regulatory authority. This would lead to greater supervisory efficiency.

Furthermore, government intervention is desirable for addressing market failures such as those posed by the presence of externalities (e.g. pollution and congestion).

Finally, notwithstanding the present accent on privatisation, it is important to be aware of the over-all feasibility and consequences of embarking on it on an extensive scale. The state in Pakistan, as in many other developing countries has to play a crucial role in filling gaps in the economy, ensuring adequate supplies of essential goods and services, preventing excessive concentration of income and wealth in a few hands, facilitating balanced regional development, ensuring adequate supply of credit to priority sectors, preventing environ mental degradation and generating adequate employment opportunities.