The second generation of economic reforms
By Ashfak Bokhari
A visiting IMF review mission is holding discussion with officials in Islamabad to have a feel of how its reforms are faring after completion of the Fundââ¬â¢s three-year structural adjustment programme which has, to a large extent, put Pakistanââ¬â¢s economy in the neo-liberal mould.
Although the Fund no more enjoys clout over the policy-making, nor are our financial managers accountable to it for any deviation in the implementation of its prescribed policies, it is not easy, even possible, to wish the IMF away once you have embraced it.
It was more than evident from the tone in which the mission chief talked to the media during his stay here. It was less a review of the progress of the past reforms and more an agenda of policies that Pakistan should pursue in the near future.
The Fund missions visit its member/client countries at least once a yearââ¬âand often much more frequently than that. They discuss in depth the countriesââ¬â¢ policies and performance, their medium-term prospects, and their longer-term problems. Then, they report their findings to the IMF Executive Board.
Although Pakistanââ¬â¢s contract with the IMF has expired, its influence over the economic policies remains. Unless the IMF desires, no credit-rating agency can downgrade a countryââ¬â¢s loan-worthiness.
The IMF plays a key role in co-ordinating a Third World countryââ¬â¢s coherent relationship with other financial institutions like the World Bank, Asian Development Bank, the WTO, leading commercial banks and the credit rating agencies, and above all, good relations with the US treasury department. And this is not possible without religiously adhering to the tenets (policies) of what is popularly called the Washington Consensus.
As the mission chief stated what the IMF now wants is that Pakistan should undertake second generation reforms which as the economists say represent the ââ¬Åextendedââ¬Â Washington Consensus under which a client (state) is required to create an investor-friendly environment (socio-legal order) and open its doors to foreign investment, goods and services without any hesitation, reservations and pre-conditions. But Pakistan has already decided to carry out the second generation reforms.
The first generation reforms that Islamabad undertook related to the areas of financial sector, capital markets, tax and tariff, tax administration, fiscal transparency, privatisation programme, governance with respect to devolution and capacity building only, agriculture in terms of pricing and movement of commodities, introduction of private sector in wheat trade, and passage of the Fiscal Responsibility and Debt Limitation Act 2005 by parliament. This, the IMF mission chief says, was easy to do. The second wave reforms, he says, are ââ¬Åvery difficultââ¬Â and would have to be undertaken very carefully.
Omar Ayub, minister of state for finance, told Pakistan development Forum or aid-giversââ¬â¢ conference held in May in Islamabad that the government was committed to introduce second generation reforms. Pakistan, he said, has immensely benefited from the first generation reforms and ââ¬Åthere is no doubt in our mind that the introduction of second generation of reforms would further strengthen the economy.ââ¬Â
Hence, over the next five years the reform agenda includes institutional capacity building, improving industrial competitiveness, building a robust financial system in an environment of global financial restructuring, further revamping of tax administration, promoting transparency in economic policy-making, further reform in capital markets and developing the physical and human infrastructure, he said.
First generation reforms, generally speaking, include the usual suspects: macro stabilisation, tariff cuts, privatisation, etc. But second generation reforms are a motley crew, encompassing broad reforms of the state, judiciary, civil service, the delivery of public services; of the institutions that create and maintain human capital (schools, health care systems); and the environment in which private firms operate (more competition, better regulation, stronger property rights).
Implementing second-generation reforms is also a major concern for foreign investors. For example, without a favourable and sympathetic judicial system that can safeguard property rights, foreign investors are reluctant to put their money in a big way. When the western investors became sure of receiving a favourable hearing in Chilean courts, their capital began flowing into the country. In many Third World countries, a lack of confidence in the judicial system is often a major deterrent to investment.
According to a study by the Kennedy School of Government at Harvard University, while the first generation reforms (FGRs) are statements about the instruments to be used and the inputs needed, for instance, for reducing inflation by cutting money supply growth and the budget deficit, many second generation reforms (SGRs ) are statements of desired outcomes without a clear sense of policy design as well as ignorance about how to achieve the stated goals.
In most cases, the first and second generation reforms overlap and do not coincide entirely with variations mentioned in John Williamsonââ¬â¢s famous Washington Consensus which contains the original 10 prescribed policies that Pakistan pursues under the IMF directives.
Another 10 policies are added in the second generation reforms to make it what may be described as the ââ¬ÅExtended Washington Consensus.ââ¬Â The extended list contains some reforms which are not new in themselves, but are, in fact, changes that are necessary to make the policies in the original list work, or to prevent some of those original reforms from blowing up.
These reforms include financial codes and standards, prudent capital-account opening and non-intermediate exchange rate regimes. These are all intended to moderate the macro and banking instability brought by the initial round of financial reforms.
Many second generation reforms are outputs and not inputs. For instance, poverty reduction is a lofty goal, but the Washington pundits are silent on how to achieve it. Indeed, a striking feature of SGRs is their sheer technical difficulty.
Differences in the politics between the two stages are equally striking. The ââ¬Åvictimsââ¬Â of the first stage reforms are often too poor to matter politically. But those affected in the next stage belong to organised and vocal groups, the upper sections of the public bureaucracy, state and local governments, owners and managers of private monopolies. The political process required by SGRs is very different from that in FGRs.
The first wave of changes is often carried out in unique emergency situations. Many of the measures such as monetary and exchange rate stabilization do not require parliamentary approval. In the second wave, deep changes in judicial and regulatory systems, for instance, can hardly be carried out without consent of the affected parties.
All of this means that the institutions of democracy first need to be strengthened. But that is not the policy goal. There is much talk in the extended Washington consensus about the importance of institutions. But the question before policy-makers is no longer ââ¬Ëdo institutions matterââ¬â¢; it is which institutions matter?
Ultimately, what matters is a clearly designated system of property rights, a regulatory apparatus curbing the worst forms of fraud, the rule of law and clean government One may view SGRs as desirable goals in themselves because it is obvious that nobody is against less corrupt courts or better hospitals. But recent research reveals that these reforms are no panacea, particularly when it comes to generating long-term growth. More schooling may be desirable, its actual link to the increase in per capita income is uncertain. Not even the relationship between trade and growth is clear.
Earlier, some economists were optimistic about second generation reforms arguing that greater openness means faster growth. But many of them are now sceptical.
Policymakers claim that second-generation reforms are needed to build an institutional foundation that can sustain economic growth and give protection against external shocks. But there are no clear-cut guidelines about how such institutions should be created. Even with a consensus on a policy goal such as reduction in poverty, any consensus on how it can be achieved remains elusive.
Hence, what the second-generation reforms can offer to the economy and average-income population in terms of better living in a developing country has yet to be demonstrated. That it can create further distortions in the economic structure is quite certain.
http://www.dawn.com/2006/09/04/ebr15.htm
By Ashfak Bokhari
A visiting IMF review mission is holding discussion with officials in Islamabad to have a feel of how its reforms are faring after completion of the Fundââ¬â¢s three-year structural adjustment programme which has, to a large extent, put Pakistanââ¬â¢s economy in the neo-liberal mould.
Although the Fund no more enjoys clout over the policy-making, nor are our financial managers accountable to it for any deviation in the implementation of its prescribed policies, it is not easy, even possible, to wish the IMF away once you have embraced it.
It was more than evident from the tone in which the mission chief talked to the media during his stay here. It was less a review of the progress of the past reforms and more an agenda of policies that Pakistan should pursue in the near future.
The Fund missions visit its member/client countries at least once a yearââ¬âand often much more frequently than that. They discuss in depth the countriesââ¬â¢ policies and performance, their medium-term prospects, and their longer-term problems. Then, they report their findings to the IMF Executive Board.
Although Pakistanââ¬â¢s contract with the IMF has expired, its influence over the economic policies remains. Unless the IMF desires, no credit-rating agency can downgrade a countryââ¬â¢s loan-worthiness.
The IMF plays a key role in co-ordinating a Third World countryââ¬â¢s coherent relationship with other financial institutions like the World Bank, Asian Development Bank, the WTO, leading commercial banks and the credit rating agencies, and above all, good relations with the US treasury department. And this is not possible without religiously adhering to the tenets (policies) of what is popularly called the Washington Consensus.
As the mission chief stated what the IMF now wants is that Pakistan should undertake second generation reforms which as the economists say represent the ââ¬Åextendedââ¬Â Washington Consensus under which a client (state) is required to create an investor-friendly environment (socio-legal order) and open its doors to foreign investment, goods and services without any hesitation, reservations and pre-conditions. But Pakistan has already decided to carry out the second generation reforms.
The first generation reforms that Islamabad undertook related to the areas of financial sector, capital markets, tax and tariff, tax administration, fiscal transparency, privatisation programme, governance with respect to devolution and capacity building only, agriculture in terms of pricing and movement of commodities, introduction of private sector in wheat trade, and passage of the Fiscal Responsibility and Debt Limitation Act 2005 by parliament. This, the IMF mission chief says, was easy to do. The second wave reforms, he says, are ââ¬Åvery difficultââ¬Â and would have to be undertaken very carefully.
Omar Ayub, minister of state for finance, told Pakistan development Forum or aid-giversââ¬â¢ conference held in May in Islamabad that the government was committed to introduce second generation reforms. Pakistan, he said, has immensely benefited from the first generation reforms and ââ¬Åthere is no doubt in our mind that the introduction of second generation of reforms would further strengthen the economy.ââ¬Â
Hence, over the next five years the reform agenda includes institutional capacity building, improving industrial competitiveness, building a robust financial system in an environment of global financial restructuring, further revamping of tax administration, promoting transparency in economic policy-making, further reform in capital markets and developing the physical and human infrastructure, he said.
First generation reforms, generally speaking, include the usual suspects: macro stabilisation, tariff cuts, privatisation, etc. But second generation reforms are a motley crew, encompassing broad reforms of the state, judiciary, civil service, the delivery of public services; of the institutions that create and maintain human capital (schools, health care systems); and the environment in which private firms operate (more competition, better regulation, stronger property rights).
Implementing second-generation reforms is also a major concern for foreign investors. For example, without a favourable and sympathetic judicial system that can safeguard property rights, foreign investors are reluctant to put their money in a big way. When the western investors became sure of receiving a favourable hearing in Chilean courts, their capital began flowing into the country. In many Third World countries, a lack of confidence in the judicial system is often a major deterrent to investment.
According to a study by the Kennedy School of Government at Harvard University, while the first generation reforms (FGRs) are statements about the instruments to be used and the inputs needed, for instance, for reducing inflation by cutting money supply growth and the budget deficit, many second generation reforms (SGRs ) are statements of desired outcomes without a clear sense of policy design as well as ignorance about how to achieve the stated goals.
In most cases, the first and second generation reforms overlap and do not coincide entirely with variations mentioned in John Williamsonââ¬â¢s famous Washington Consensus which contains the original 10 prescribed policies that Pakistan pursues under the IMF directives.
Another 10 policies are added in the second generation reforms to make it what may be described as the ââ¬ÅExtended Washington Consensus.ââ¬Â The extended list contains some reforms which are not new in themselves, but are, in fact, changes that are necessary to make the policies in the original list work, or to prevent some of those original reforms from blowing up.
These reforms include financial codes and standards, prudent capital-account opening and non-intermediate exchange rate regimes. These are all intended to moderate the macro and banking instability brought by the initial round of financial reforms.
Many second generation reforms are outputs and not inputs. For instance, poverty reduction is a lofty goal, but the Washington pundits are silent on how to achieve it. Indeed, a striking feature of SGRs is their sheer technical difficulty.
Differences in the politics between the two stages are equally striking. The ââ¬Åvictimsââ¬Â of the first stage reforms are often too poor to matter politically. But those affected in the next stage belong to organised and vocal groups, the upper sections of the public bureaucracy, state and local governments, owners and managers of private monopolies. The political process required by SGRs is very different from that in FGRs.
The first wave of changes is often carried out in unique emergency situations. Many of the measures such as monetary and exchange rate stabilization do not require parliamentary approval. In the second wave, deep changes in judicial and regulatory systems, for instance, can hardly be carried out without consent of the affected parties.
All of this means that the institutions of democracy first need to be strengthened. But that is not the policy goal. There is much talk in the extended Washington consensus about the importance of institutions. But the question before policy-makers is no longer ââ¬Ëdo institutions matterââ¬â¢; it is which institutions matter?
Ultimately, what matters is a clearly designated system of property rights, a regulatory apparatus curbing the worst forms of fraud, the rule of law and clean government One may view SGRs as desirable goals in themselves because it is obvious that nobody is against less corrupt courts or better hospitals. But recent research reveals that these reforms are no panacea, particularly when it comes to generating long-term growth. More schooling may be desirable, its actual link to the increase in per capita income is uncertain. Not even the relationship between trade and growth is clear.
Earlier, some economists were optimistic about second generation reforms arguing that greater openness means faster growth. But many of them are now sceptical.
Policymakers claim that second-generation reforms are needed to build an institutional foundation that can sustain economic growth and give protection against external shocks. But there are no clear-cut guidelines about how such institutions should be created. Even with a consensus on a policy goal such as reduction in poverty, any consensus on how it can be achieved remains elusive.
Hence, what the second-generation reforms can offer to the economy and average-income population in terms of better living in a developing country has yet to be demonstrated. That it can create further distortions in the economic structure is quite certain.
http://www.dawn.com/2006/09/04/ebr15.htm
