AT a recent seminar on `How to Fix Pakistan`, one of the many conducted over the past one month or so which have provided a combination of sound bite and photo opportunity for their political sponsors, I spoke about the macroeconomic situation, what ails Pakistan`s economy, how we got here and what we need to do to get out.
The thrust of the presentation was that any plan to `fix` Pakistan`s economy would have to be via a `back to basics` approach and anchored around two essential pillars: the pursuit of macroeconomic stabilisation as an immediate goal, and wide-ranging institutional reform to reverse the economy`s chronic and secular long-run decline.
At its core, stabilising the economic situation involves placing Pakistan`s public finances on a sustainable foundation. Widening the tax base, not by any arbitrary measures but by following basic principles of fairness, equity and progressivity, will need to be complemented by making the tax administration more honest so that discretionary powers are curtailed, are not arbitrarily used and the huge leakages on account of maladministration and corruption at the Federal Board of Revenue are plugged. These measures, if implemented honestly, have the potential to raise Pakistan`s abysmal tax to GDP ratio by over three per cent in the medium term.
On the expenditure front, a combination of lack of prioritisation, `pork barrelling` for political patronage, unprofessional management of Public Sector Enterprises (PSEs), and outright corruption in the public sector, cause a loss of hundreds of billions of rupees each year. Bringing greater professionalism, transparency, accountability and targeting in the allocation and use of public monies will not only save hard-earned money of taxpayers, but will free up precious resources for public service delivery. In addition, a visible improvement in the collection and spending of public money will induce greater confidence amongst citizens, leading to better tax enforcement.
On both fronts, resource mobilisation and better expenditure management, the onus is on the provinces to step up to the plate and deliver, especially after the seventh NFC award and the passage of the 18th Amendment. Without curbing the fiscal deficit, which has been out of control for the past several years (barring 2008-09), the government will continue to crowd out private investment, interest rates will remain high and taming inflation will remain an elusive goal.
In addition, servicing the growing public debt will eventually choke all other expenditures, with the collapse of delivery of essential social sector services ensuing as a result. The public sector will find it hard to pay its wage bill, let alone pay for import of petroleum products, or essential food items, or life-saving medicines for government hospitals. PIA and Railways will grind to a halt (as they have virtually already done), while the same fate will befall the other state-owned behemoths. This is exactly what is being played out in Greece — an advanced version of Pakistan`s fiscal and governance predicament.
As is clear from the foregoing, a large part of the macroeconomic stabilisation agenda is contingent on better governance and a stronger institutional framework. This is Pakistan`s weakest area — by design and not by default, as I have argued earlier. Pakistan`s global standing in terms of the strength of its institutional framework is abysmal. According to the latest Worldwide Governance Indicators compiled by the World Bank, as of 2009 Pakistan had slipped to the 13th percentile in terms of `Control of Corruption` (i.e. it ranked better than 13 per cent of the countries in the world on this indicator), while it maintained its 19th percentile in `Government Effectiveness` and `Rule of Law ` . For the `control of corruption` indicator, Pakistan`s peer group included Afghanistan, Zimbabwe, Burundi, Haiti, Togo and Nigeria. By comparison, Sri Lanka was at the 45th percentile and India at 47.
For `rule of law`, countries in Pakistan`s vicinity include Togo (one notch higher) and Papua New Guinea (two notches lower). Once again, Pakistan is the lowest-ranked South Asian country barring Nepal. By comparison, Sri Lanka comes in at 53 while India is at a respectable 56. While Pakistan`s standing in at least one indicator in this data set has deteriorated sharply over the past two years (relating to corruption), falling from 26 in 2007 to 13 in 2009, it has steadily languished in the bottom 20 in `rule of law` since 2004.
On the other hand, India and Brazil, two high-growth economies becoming ever more influential on the world stage, have consistently ranked around 55-60 and 45-50 respectively since the inception of the indices in 1996.
Hence, while Pakistan`s `basics` need to be fixed and addressed, many in Pakistan continue to be fixated with the search for some magical silver bullet — Saudi oil, American money, Chinese grants, the Malaysian model, reneging on external debt etc — which entails no pain and sacrifice that comes with paying taxes or utility bills honestly, or returning bank loans in full, or running businesses without state subsidies, or subjecting powerful individuals and groups to institutional rules and oversight.