An Uncertain Career Path

FAISAL BARI

ZUBAIR has been working as a salesperson at an upscale cosmetic and general supplies store in Islamabad for the last three years. His monthly salary, at Rs15,000, though above the minimum wage level set by the state, does not, by most recent calculations of living wage, constitute enough to provide even a basic standard of living for a family in an expensive city such as Islamabad.

Zubair manages to survive as he is still single and shares his living space with three other young men. He keeps his expenses at a minimum and sends whatever he saves to his parents who live in a village near Multan.

Zubair did his graduation from Bahauddin Zakariya University in Multan. He could not study more as he needed to support his family. His quest for a job brought him to Islamabad and the only job he has been able to find has been at this store.

I met Zubair at the store. After we had interacted a few times he asked me what I did, and when he found out that I was a teacher he started having longer conversations with me.

Though Zubair is a graduate, is very street-smart, has a keen mind and a good intellect, he has been very poorly educated and trained. His language skills, both Urdu and English, are quite poor and even though he studied economics for his Bachelor’s degree, his understanding of the subject is at best rudimentary. His knowledge is based almost totally on memorisation. Over the last three years since his graduation he has forgotten a lot of what he had memorised.

At one point in our conversations he asked for my help to find a better job. I told him that I, a teacher, was one of the least connected people in this society, but would do whatever was possible. I shared his resumé with many potential employers. I have not been able to find a better job for him thus far.

At some point, Zubair paid Rs40,000 out of his savings to someone who promised to get him a job in the UAE. The guy disappeared with the money. We have been trying to locate the guy and see if we can get the money back. But it does not look as if we will succeed.

Zubair wants to earn more. He wants a more satisfying career path. Eventually, he wants to get married and raise his own family, and wants his children to have a better life than him. These are all things that most of us want. He does not see a path that will allow him to do any of this.

Zubair’s predicament is not unique. Unemployment rates amongst young people in Pakistan are quite high and even higher amongst graduates. Government jobs have all but disappeared as we have liberalised, privatised, decentralised and right-sized enterprises. The pace of job creation has not been very high in the private sector either. Manufacturing has not been doing very well over the last decade or so and though the services sector has seen some expansion, most of the jobs in this sector, such as Zubair’s, do not offer decent wage and opportunities for an attractive career path. What can young people do?

There is a very strong inequity story embedded here too. Had Zubair’s parents been able to send Zubair to an elite, high-fee, private school and a better university here or abroad, had they been richer or more connected, Zubair would be working at a management-level job at a multinational or a local firm.

His education, especially his language skills, would have been much better. So would have been his confidence level. Clearly, intelligence endowment is not enough.

We did a small study earlier this year on career paths and returning to education. The fragmentation of our education system did not surprise us — we knew that already. But what did surprise us were the extent of the fragmentation and the dependence of returning to this fragmented system. The initial salary differential, on average, if one had studied at an elite English-medium school as opposed to a low-fee private or government school was more than 100 per cent. The career trajectories of people from these streams are very different — children from elite schools rise much faster in their respective organisations.

Where there is no doubt that the private provision of education has increased choices for parents and has expanded access as well, it has further fragmented an already fragmented and class-ridden society.

The lack of connections shows up in other ways too. Once when he was going home after work, around midnight, Zubair was stopped at a police picket and then detained. He was roughed up by a couple of police constables and taken to the thana. Luckily, he had his phone with him and he was able to make a call. He still had to spend four hours at the thana.

The state has a role to play in creating a more equitable society. It seems that the state in Pakistan has given up on this role almost completely. Social protection programmes such as BISP can play a role in ameliorating some of the worst forms of poverty; they cannot address or reverse the increasing fragmentation and inequity.

Can we offer any hope to young people in Pakistan? We talk a lot about the ‘demographic dividend’ and how the large number of young people in the country should be seen as an asset and not a liability. But given the right-wing economic ideologies of all political parties and government expenditure priorities, should the majority of young people have any hope? The honest answer seems to be an emphatic ‘no’.

From the Dawn, Pakistan, published Friday 16th December, 2016.

A Flawed Development Model

EACH time we have had a growth spurt in Pakistan, it has been based on investments in physical infrastructure or investments in physical capital. Expansion in the 1960s was based on gains in industrial and agricultural production. There were gains from increased agricultural productivity but these were based on research that had mostly been done elsewhere.

The expansion in the 1980s was again a similar combination. We did get some benefits from opening up the economy in the early 2000s but most of the gains even then were consumption-led. Now we are again hoping investments in the energy sector, roads and other infrastructure projects, through the China-Pakistan Economic Corridor (CPEC) or otherwise, will get us the economic growth we need.

In all previous instances, reasonable or high growth rates vanished fairly quickly. The last years of reasonable growth were almost a decade ago. Recently, we have even been struggling to reach growth rates of five to six per cent. Low growth rates of the economy limit our ability both to tackle poverty and offer good employment opportunities to the millions who join the working-age population every year.

There might be a number of hypotheses that could, quite reasonably, be created to explain why we have not been able to sustain high or reasonable growth rates. Corruption, overregulation, weak institutions, poor infrastructure, state incompetence and institutional inefficiencies could all provide alternative explanations. But I want to focus on another candidate: the poor state of our human capital. I feel this, more than anything else, explains where we stand today.

Many experts have commented on the human development gap in Pakistan over the last two to three decades. They have pointed out that for our growth rates and level of income Pakistan’s achievements in the area of human development has been much lower when we compare them to other countries in similar situations. We could and should have been doing much better in terms of education, health and other human development indicators.

Going further, my contention is that the reason we have not been able to sustain high growth rates, even when various events have afforded us a few years of higher growth is that we just do not have the human capital: we do not have enough creative, educated, trained and healthy people who can sustain growth.

Historically, we have never invested very much in our people. And you can see the difference in countries that have. When East Asian states started to invest in their people they were not very different from where we were at that time. Today, the comparison appears unwarranted and decades of investments have created the difference. But the conditions back in the 1950s were not terribly different.

We have good examples closer to home too. Sri Lanka is an excellent example of a country that invested heavily in its people and that is now reaping the benefits. Despite decades of civil strife, Sri Lanka’s life expectancy today is 77.9 years, its infant mortality rate is 8.5 per 1,000 births and maternal mortality 0.39 per 1,000 births. Its overall literacy rate is 92.5pc, while the youth literacy rate is 98pc. In addition, 87.3pc of the population has access to safe drinking water. All of the above statistics are comparable to developed countries and are several orders of magnitude better than where we stand today.

The numbers mentioned here are indubitable. But some experts have been arguing that Sri Lanka’s higher achievements in the area of human development in that country have been achieved at the cost of GDP growth: by diverting resources to health, education and other human development sectors, Sri Lanka has had to live with lower growth rates of GDP.

There are two responses to this. One, this story might have been a good reading of Sri Lanka until a decade or so ago, but it is no longer the case. Sri Lanka has doubled its per capita income since 2005. Poverty levels stand at 7.6pc only and the current unemployment rate is 4.9pc.

But secondly, and far more importantly, so what? If growth has been a little slower, so what? Is the quality of life of the people there not the metric by which to judge the success or failure of the policies of a country? If the people are educated and healthy, and have a reasonable standard of living, why should it matter if growth rates do not match those of China or East Asia?

Sri Lanka offered free education, for nine years of schooling, for all children, in 1945. Their motorways were built only recently. And even now the motorway they built is a four-lane one (we have a six-lane one). We announced free and compulsory education only six years ago. And we have not been able to implement this responsibility to date.

Visit Sri Lanka. Talk to ordinary Sri Lankans and see the impact education has had on their approach to work and life and their aspirations. You will immediately see the point of having a human development-focused development model or policy.

Will CPEC give us high growth rates? Maybe it will. If the volumes of investment that are being talked about do come through, higher growth rates will be the result. But will we be able to sustain these growth rates given the human development levels we are at currently? It seems impossible. Will CPEC and other infrastructure investments be able to transform us into a developed society and allow our people to be a lot more educated and healthy? Not likely. Our model of growth and development is a deeply flawed one. It might deliver some elections for the government, it is unlikely to lead to sustainable growth and development.

From the Dawn, Pakistan, Friday September 23rd, 2016

Some Critical Questions: Banking Puzzles Galore

BY FAISAL BARI

Provision of efficient banking and financial services can contribute significantly towards achieving development and growth objectives. But has the banking/financial sector done that in Pakistan? Is it contributing, what it could, to Pakistan’s development and growth effort? It is not a bad question to ask at a time when there is talk of revival of growth and a number of industries have started to experience some expansion.

Growth has been slow over the last few years. And the growth we have had has mostly been driven by growth in the services sector and not manufacturing. In particular, growth in large-scale manufacturing has been quite slow. Some experts suggest that other than expansion in the services sector it is the informal economy that has been growing.

A number of questions continue to puzzle. Why is financial inclusion so low in Pakistan? Why are the majority of people in Pakistan unbanked? Why have commercial banks not gone to rural areas in a bigger way and why do they not have more clients in the areas in which they work? Formal-sector financial inclusion in less than 15pc. As many clients seem to be part of the formal sector as there are in the informal financial sector. Even where clients are in the formal financial sector, meaning they have bank accounts, they only have access to saving instruments (bank accounts). Most of them do not have the opportunity to borrow from banks. If these clients have to borrow, they have to request friends and/or relatives, rely on instruments like committees (community based saving and credit instruments) and/ or rely on the very expensive commercial informal market.

Informal finance seems to provide flexibility, even though it costs more, that formal sector has been unable to mimic. Penetration of microfinance banks, though it has expanded over the last decade, at around 1-1.5 million clients total, remains very low.

After nationalisation in the early 1970s, banks were forced to open a large number of branches in rural and far-flung areas. Many of these branches continued to function into the 1990s. When privatisation of the larger banks occurred in the 1990s, they carried fairly large networks with them into the private sector. And though they might have done some rationalisation on the margins, by and large, they have continued with the large branch network they inherited. But there have not been major expansions either.

GDP growth rates have fluctuated a lot over the last decade. We had a couple of strong growth years over 2004-6 period, but since then growth has been slow. It is only now that we seem to be moving towards some revival for growth. When growth rates are high, it is easier to find places where lending can generate good returns for banks. But when growth rates are low, it is harder to find reasonable risk-decent return sectors. Banks tend to lend less in bad times.

One of the fastest growing sectors, in the country over the last couple of decade has been the private, for-profit schooling sector. Today it is estimated that about 35-40pc of enrolled children attend private schools in the country. The proportion of children attending private schools in the larger cities is more than 60-70pc.

Some estimates of the number of private schools across the country put them well above 125,000. But the entire expansion in private schooling has happened through retained earnings, borrowings from friends/family and/or borrowing from the informal sector. Formal financial sector, commercial banks, investment banks and even microfinance banks have had nothing to do with the expansion of the sector.

There is plenty of evidence that the expansion of the sector would have been faster if formal finance had been available to the larger and more successful education-entrepreneurs (edu-preneurs, as they are called) in the sector, but formal banks have chosen not to lend to the sector.

Motorcycles and mobile phones have seen major expansions too. Some 1.7 million motorcycles are sold a year now and there are more than 100 million mobile connections that have been sold in Pakistan. Localisation of motorcycle production as well as its sale has been almost completely funded by informal finance. Similarly, formal finance has not had any role at the retail or distributive stages of the expansion in the mobile market.

It is hard to come up with an example of a sector that has seen expansion because of the formal financial sector. Banks have not taken any risks whatsoever with new sectors in the last couple of decades. Banking has been, to say the least about it, pretty boring and uninteresting.

Why does the banking industry have big and small banks coexisting? If big banks are more efficient, low in risk and high in profit, which they are and have been, and given banking is not a competitive market and has been and is oligopolistic in all societies, why have they not been able to drive the smaller banks out of the market?

There has been some consolidation in the banking industry over the last decade and some is still continuing. But banking-sector profits have been large enough to have allowed even smaller banks to survive, despite higher costs of funds for them, due to niche strategies and by making slightly more risky investments.

But, even smaller banks have not been experimental enough and none of them have tried strategies for banking the poor and/ or going into sectors that have historically been served by informal finance. The cost of funds for the larger banks is quite low. There has been plenty of free float. They make quite a bit of money lending to smaller banks for short-term needs as well. Between lending to government at high rates, not giving much to clients in interest and having a very low cost of funds, it is not surprising that the larger banks continue to show significant profits without taking any risk or developing new sectors and/or markets.

Banks have been making too much money in the last few years by just lending to the government. Treasury bonds, going from a few months’ duration to that of a decade, have given yields up to 13-14pc. If the banks can get this sort of return in risk-free paper, why would they want to go for risky investments, and why would they want to develop new clients and/or new markets?

This is exactly what has been happening. Banks are heavily invested in government papers. They do not need to lend to service providers, small and medium enterprises (SMEs), agriculture or any other sector where there is risk or the credit markets have not developed fully. They can leave all that to either the smaller banks or the government.

Pakistan relies a lot on agriculture and we have done reasonably well in agricultural production historically. But, if it was not for State Bank of Pakistan (SBP) stipulations and/or encouragement for banks to lend to agriculture, banks would not be lending to farmers at all. No commercial bank has ever developed any interesting product for the agriculture sector. The market for agriculture loans is as primitive as it was decades ago.

Pakistan has a shortage of millions of houses (dwellings). Yet our housing loan and mortgage markets are almost non-existent. If it was not for the House Building Finance Corporation (HBFC), even the nascent market in housing would not have developed.

More than 95pc of registered enterprises in Pakistan are micro, small and/or medium enterprises. Report after report has established that SMEs have been and continue to be credit-constrained and non-availability of credit is one of the major constraints that has hampered and is hampering optimal growth paths of enterprises. Yet, the banking sector has never prioritised the development of credit products that could work for SMEs.

There is no point in talking about loans to professionals and/or service providers. The notions of collateral remain archaic in our banking industry. New products, in the area of collateralisation, have not been seen for ages.

Even though the government stepped in with Khushali Bank and Pakistan Poverty Alleviation Fund (PPAF) to develop and deepen the microfinance market, the total number of clients of microfinance, including all private providers, stands barely above a million or so clients.

If banks continue to make effective returns through buying risk-free government papers and have low cost of funds as they do, they will continue to be risk-averse and will not invest in developing sectors for lending that could contribute a lot to overall development and growth of the country: SMEs, housing sector, service sector, microfinance and even consumer finance.

Historically, new sectors and/or clients have only been developed, like banking sector expansion post-nationalisation, when the regulator either forced the banks to enter a sector or underwrote the risk for lending to a sector. Maybe the same strategy should be used by the government and the SBP again.

Should the government form some funds for underwriting part of the risk for developing mortgage products, products for SMEs, venture capital and so on? And, should the government try to create ‘incentives’ for banks to experiment more in these areas/markets and in ‘forcing’ them to expand services to rural areas? We could, potentially, develop links between mobile companies, banks and microfinance providers to keep risk of lending to the poor manageable but at the same time offer services to the poor, like income smoothing, that the poor really need.

The banking sector could contribute a lot more to the development effort. But its contributions so far have been limited. It could extend banking services to a majority of citizens of the country. This can have significant saving enhancement as well as income smoothing possibilities for people. The banking sector could help in developing a much better housing market in the country. And, by serving the services sector as well as SMEs, the banks could contribute a lot of the overall growth and development effort. But, so far, it has not.

Having access to cheap funds and the possibility of making more than reasonable returns through risk-free government paper, the banks have avoided taking risks and/or developing new products and markets. The government, through underwriting some part of the risk and through design of incentives and appropriate regulation, should encourage banks to enter some of the areas mentioned above. This can have significant impact on the overall growth rate of the country and on the pace of development.

From the Dawn Special Report on Banking, Published Friday May 13th, 2016

 

It’s Time for Introspection

By Faisal Bari
A small village only about 1.5 kilometres outside of Sheikupura is connected to the city by a good road, and the 1.5 kilometre distance is not a significant barrier to movement. Or so one would think. When I talked to the young women of the village it was amazing how much of an effect this 1.5 kilometre had had on their lives. Most of the girls had to leave their education post-matric as there was no college in the village and only a few of them could afford a secure, mechanised means of transport to be able to go to college in Sheikupura. None of the girls in the village could enter the workforce for the same reason.

Talking to a bunch of young boys and men there, I found that most of these young men dropped out of schools and colleges before doing their bachelors, though most of them had complete d their matric. Most were unemployed and were waiting for an employment opportunity to come their way. Their choice for employment was a government job `good salary, job security and almost no work` is how one young man described a government job. Most of them knew they had no hope of securing a government job of any sort. They felt they did not have the connections or the money to be able to pay the bribes needed to get such a job.

The area around Sheikhupura is known for the quality of its guavas and there are quite a few guava orchards there. All of these young men seemed to have a lot of knowledge about guavas, their varieties and qualities, and about managing guava orchards. A number of them were involved in the business as well, but none of them saw that as a career choice, and none of them wanted to develop any expertise in the area. They preferred waiting for a government job rather than to develop self-employment options. They also mentioned that eventually if a government job did not work out, they would try going to the Middle East for a few years to earn a better living. They did not see a future for themselves in Pakistan unless they could get a government job.

This is not an atypical situation. Labour force data does show some intriguing trends that confirm and complicate the story.

We are not creating enough jobs in our economy to absorb all the youth that are entering working age. Our manufacturing sector has collapsed and is not creating enough new jobs. Most of the jobs that are being created are in the service sector. A bulk of these jobs are low-skill, low-salary ones, and they are not the ones that can offer lucrative and satisfying career prospects for our youth. We also have evidence, from labour force surveys, that there is increasing casualisation in the job market: casual labour is usually daily-wage, low-skill and with no career development opportunities. A lot of the service sector jobs that we are creatingare ofthe casualnature.

Our data also shows that young men, who have a bachelors or higher degree, tend to enter the job market late. The peak is around 29 years of age. Most people graduate around 24-25 years of age even when they do a masters degree. What then is the reason of 4-5 years` gap between graduation and entry into the job market? The data does not allow us to look into this in more detail but we do have a few hypotheses. Graduates, after finishing their bachelors or masters, have high expectations of good jobs. When their expectations are not met, they choose to sit out and/or wait for the right job to come along. This is in line with the already given factoid that there is increasing casualisation of labour and most new jobs are in the service sector.

Eventually life catches up with these graduates and they have to take up whatever jobs are available. Joint family systems might also lend some support to young people and facilitate their unemployment for longer. It could also be that employers do not find young graduates to have the skills they should have and prefer to hire graduates who are a little older, and/or have had some formal/informal work experience. Whatever the explanation, the late job market entry of young educated people causes a significant loss to the economy/society of the country.

Few women enter the workforce in Pakistan. The percentage of women in our workforce is much lower than even our neigh-bours like Bangladesh and India. Most women work in Pakistan but most of them work at home, in agriculture and/or in areas where their contribution is not documented. We are making a distinction between work and being in the workforce. The low participation is regarding workforce participation. But it is not clear what the reasons for the low participation are. People talk of culture/traditions and/or social practices being a barrier to women`s entry into the workforce, but it is also the case that issues like non-availability of affordable and safe transport, lack of implementation of labour laws and other such issues also discourage women from entering the workforce.

The education gap between boys and girls still continues. At secondary level, especially in urban areas, the gap between boys and girls has all but disappeared. Number of girls in secondary schools has increased and at the same time a lot more boys drop out of education post-primary, making secondary school numbers look more even. But when it comes to entering the job market, very few women enter it compared to boys. And the trends have not changed a lot over the last few decades. For a developing country, allowing almost half of their population to not be economically active has a significant cost.In 2001, the renowned economist William Easterly wrote a paper titled `The Political Economy of Growth Without Development: A Case Study of Pakistan`. In the paper, Easterly argued that Pakistan presented a case in which a country had been able to maintain a high to decent growth rate for sustained periods but had failed to improve its social indicators correspondingly. `Pakistan has had respectable per capita growth over 1950-99, …and has a well-educated and high-achieving elite and diaspora. Yet Pakistan systematically underperforms on most social and political indicators…for its level of income. It systematically underperforms on improvements in these (social and political) indicators for its rate of GDP per capita growth over time.` Easterly called this pattern `growth without development`.

For the 1960s our GDP growth was 5.2 percent per annum, it was about 5.1 percent per annum over the 1970s despite the shocks that we had to bear in the early years of the decade, GDP growth rate increased to 6.4 percent per annum over the 1980s and even over the 1990s and 2000s GDP growth rate, per annum was 4.5 percent and about 4.7 percent per annum respectively. There has been a decline since the 1980s and in 2010 our growth rate was only 0.36 percent. In 2014, our GDP growth rate was 3.7 percent according to government claims.

Throughout the same period our expenditure on education has never touched even three percent of GDP in any given year when the minimum recommended internationally, is four percent of GDP. And we have, only recently, started spending about one percent of GDP on health. In 2014, we ranked 146th out of 187 countries on the Human Development Index (HDI).

HDI is a weighted average of variables that track health, wealth and education outcomes. We ranked 127th out of 162 countries in 2001. We are now 146th in the league of nations.

The argument that Easterly made in 2001, holds today as well.

We continue to perform very poorly on social and political indicators even in years when we have had decent growth.

There is an additional twist to the story. It seems that we have also been slowing down and thus it has been harder for us to have high growth and even harder for us to sustain high levels of growth. Easterly had, in 2001, pointed out the possibility that despite high growth if we were not investing in our social and political areas, one day the low human capital mightcatch up with us and constrain our growth going forward. It seems that that time has come.

Sixty-eight years after gaining independence, almost half of our population is still illiterate. An estimated 20-25 million children between the ages of 5-16 years are out of school. Out of 100 children who enrol in schools, only 6-7 percent or less make it to college-level education. For those who are lucky enough to survive within the education system, the quality of education we provide to almost all of our children is generally quite poor. Annual Status of Education (ASER) data, collected every year for the last few years, has consistently shown that most of our children have very low levels of numeracy and literacy skills: the gap between where a student`s learning should be going by her grade to where she actually is, is quite large. Children going to elite private or public schools have better learning outcomes but they only constitute 3-4 percent of all school-going children in the country. Similar problems continue to plague the entire education system. Quality problems at university level have been very ably documented and commented on by scholars like Dr Hoodbhoy and Dr Daudpota.

On the health side, with only about one percent of GDP going to health from the public sector, how can we provide even a basic healthcare system to all the citizens of the country? The state`s inability to eradicate polio, which almost all countries across the world have been able to do, is not only a comment on the abilities of the state, it is a very telling comment on the viability and functioning of our health system.

Are our low levels of human capital constraining our ability to grow, amongst other things? It would seem to be the case.

Low human capital does not allow high-tech manufacturing as well as advanced level research and/or development.

Employers cannot find potential employees that have the requisite educational quality or slcills (skills mismatch) while job seel
Our economy is not producing the number of jobs that we need to absorb the number of young people who are entering the job market. As we go through the youth bulge, the problem is going to get exacerbated. Most of the young people entering the job market have few or no skills and a relatively poor quality of education. Though they might have highexpectations, they cannot take up technical or high-skill jobs. On the job side, the bulk of the jobs that are being created in our economy are low-skill, service-sector jobs. These do not, usually, offer lucrative or attractive returns and/or career paths. Labour force data does show an increasing casualisation of the labour market reflecting the increasing number of service sector jobs and even in the service sector, increasing number of low-skill, daily-wage based jobs.

Over the same period, our economy has seen significant structural change as well. Manufacturing, especially largescale manufacturing has, at best, been stagnant or declining.

Service sector has been expanding rapidly. Employment growth has mostly happened in the service sector, but manufacturing is the sector that offers the best prospect for highskill, long-term and secure employment opportunities. The collapse of manufacturing has not only restricted growth directly, it has contributed significantly to the move towards casualisation of labour as well.

Entrepreneurship and self-employment are not considered as an active option by most youth entering working-age population. Given economic inequalities, lack of access to finance is also a significant barrier against self-employment. The average enterprise size in Pakistan is close to one. This means that the average firm employs one person (the entrepreneur). The overwhelming bulk of our organisations are microenterprises (not even small or medium enterprises). With increasing focus on service industry and poor quality of human resource coming through, it is not easy to see how the average enterprise size could be increased even if we tried addressing access to finance issues for micro and small enterprises.

Many experts and especially policymakers have been talking of a `demographic dividend` for Pakistan. We are a very young nation and our youth bulge is going to peak by 2035-2040. After which our population will slowly start aging. We do have a lot of young people growing up and entering the workforce. Given that a large proportion of them can barely read and write and the bulk of those who are considered to be educated have had a poor quality education, we should worry about the demographic `dividend` turning out to be a nightmare.

Traditionally, Pakistan has relied on investments in physical assets to get to a higher GDP growth rate and to try and remain there. This was the argument made by growth theorists in the 1960s (see writings of Dr Mahbub ul Haq on the issue) and it is still the same lens that the government is viewing the world through today. New growth theories and the experience of many countries has changed the debate completely in the literature. Amartya Sen has argued that the growth miracle of China is partially at least attributable to the significant investments that China made in human capital in the 1960-80s era. He argues that the same is true of India`s excellent performance over the last three decades. Human resource investments explain a significant portion of the East Asian miracle story too. But in Pakistan, we continue to under invest in human capital and see investments in physical capital and infrastructure as the means of development and sustainable growth.

The most recent and continuing episode is the enthusiasm about the economic corridor and the growth expectations associated with it. But, if the human development story detailed above has any explanatory power, it is likely that even if investments in physical infrastructure and assets provide us a healthy GDP growth rate, the poor human capital of the country will not allow us to take full advantage from the opportunity and it will also not allow us to sustain the high growth rate that we might be able to reach for any appreciable length of time. It will be déjà vu all over again. What is needed is a much stronger focus on investments in quality education, skills and other human development areas. But, for the moment, this does not seem to be where the growth debate of the country is.

From the Independence Day Supplement, Dawn, Pakistan, Friday 14th August, 2015.

Institutions Matter

Faisal Bari
IF there is one lesson that is emerging from the recent literature on development and long-term growth, it is about the importance of institutions and the quality of these institutions. Daron Acemoglu and James Robinson (Why Nations Fail) highlight the role of institutions in ensuring growth, development and progress, while economist Thomas Piketty speaks of the role of various institutions in curbing or limiting the excesses of capitalism effectively.

But this lesson is wasted on Pakistani governments, whose short-term interests almost always trump the need for strengthening institutions and abiding by the constraints laid down by institutional rules and regulations. Some people thought the current government, after the experience of previous dispensations since 1999, would have learnt a lesson. But, one year after this government came to power, we know better.

The latest confirmation, in this regard, has been the appointment of the governor of the State Bank of Pakistan. Other countries find the very best monetary economics and banking area experts, with plenty of experience at the senior level, for such appointments.

Janet Yellen, a famous economist, is chair of the US Federal Reserve. Mark Carney, governor, Bank of England, has a doctorate in economics from Oxford. Raghuram Rajan, governor, Reserve Bank of India, is a very well-published finance professor. Alexandre Tombini, governor, Central Bank of Brazil, has a doctorate in economics. Atiur Rahman, governor, Bangladesh Bank, was a professor and has a doctorate in economics from the University of London. Yuba Khatiwada, governor, Nepal Rastra Bank has a doctorate in monetary economics. Erdem Basci, governor, Central Bank of Turkey, has a doctorate in economics. All of them have extensive experience of monetary economics, policy, banking and/or administration.

How does our latest appointment at the SBP compare? This appointment has come in the wake of many years of poor handling of the autonomy issue at the bank and the resignations of several governors. Instead of addressing concerns relating to autonomy and right leadership at the SBP, the latest appointment has confirmed that the finance minister and his ministry need subservience as a necessary condition for the appointment of any SBP governor.

The PML-N has had many opportunities to learn from history. It had taken on the Supreme Court in its last stint at the centre and, whatever the merits of the issue, had ended up weakening the court and the judicial system of the country. Invasions of the Supreme Court and removal of chief justices under duress are not ways of strengthening the institution. When the PML-N government needed the court to rebuff the military takeover, it was no surprise that it did not find the court able or willing to stand up to the illegal moves by the military.

The issue of the SBP is not an isolated one, and it reflects the PML-N’s general style of governance. The inability to create and strengthen institutions shows up in all spheres of the PML-N’s governance. In Punjab, the decision to create Daanish schools — a poor decision and one that is often only praised by sycophants — was taken without any due process or consultation. Even today, after years of some of these schools being in operation, do we have a single study that justifies or explains the immense expenditure that has been incurred in setting them up and running them? Where the cost incurred on a child in a normal public school in Punjab is Rs2,000 or so per month, each child in a Daanish school costs more than Rs12,000 per month. The capital expenditure for setting up these schools is separate.

The same holds true for the decision to give away 200,000 laptops at the cost of Rs10 billion. The other day, we heard that the Punjab government is going to distribute another 100,000 laptops. What were the gains from the first distribution?

The Punjab chief minister is often praised for his immense energy, zeal and commitment to work. He is shown standing knee-deep in rain/floodwater supervising operations; he is the one who gets the dengue campaigns going; and it was his personal supervision and enthusiasm that got the Lahore Metro service going. These are all worthy pursuits.

But should the chief minister of a province with a population of 90 million be spending time on these issues? Is it not a failure of administration if the chief minister has to stand on top of his health officials to monitor the dengue campaign or if the entire provincial administration has to get involved in the metro service? What happens when the chief minister is not involved? Evidence suggests things stop working as soon as his attention is diverted.

When the Sikandar Hayat fiasco took place on Jinnah Avenue in Islamabad, one of the statements that had come from the interior minister was that people had no idea how limited the capacities of our law enforcement agencies were and how even he had been surprised when after taking over he took a look at the issue in more detail. When institutions are not built and merit is not followed, when institutional cultures are not allowed to develop and governance is not brought under the law, and when governance is supposed to mean that the will of the sovereign reigns supreme, is it any wonder that capacities remain low?

From the Dawn, Pakistan, Friday May 9th, 2014

Misguided Optimism

Faisal Bari
THE GDP growth rate for the last quarter was only about 3.2pc. It was reported to be 5pc for the first quarter of the fiscal year. The government, in its enthusiasm to share only good news, probably overstated the growth rate for the first quarter and had to adjust it in figures for the second quarter. Whatever the reason, the growth numbers are not really portraying any recovery trends.

The Federal Board of Revenue (FBR) is struggling to ensure it is able to achieve its revised targets for revenue collection. It is likely that its efforts will fall short. More importantly, there’s been little effort to work on issues of either broadening the tax base and tax net or removing glaring exemptions/subsidies especially from the income tax system. Agriculturists and traders continue to be under-taxed.

But there have been celebrations for the appreciation of the rupee. Bringing the rupee rate to Rs96-97 to the dollar has been celebrated as an important milestone. What is the increasing value of the rupee supposed to show? Usually appreciation is underpinned by the strength of basic and important variables in the economy. This is why appreciation of a currency is taken to be a signal of the strength of the economy. In this case, the appreciation had nothing to do with the strength of the economy. ‘Gifts’ from ‘friends’ and borrowings from international markets seem to have given us the opportunity to allow the rupee to appreciate. How is this important, and why should this be taken as a sign of the economy’s strength?

Why is the government taking Rs96-97 as a target for the exchange rate? The specific level of the exchange rate is not a policy variable or even a variable of interest. We do want the exchange rate to be relatively stable but a peg, given we are in a flexible rate regime, is not important and definitely not desirable. Does the government really think that Rs96-97 is the equilibrium value of the exchange rate right now? If so, the exchange rate should have stabilised at that value without the need for borrowed and/or gifted inflows. Clearly this is not the case and it does not make sense for the government to try and defend such an exchange rate or to expend energy on maintaining it.

The macroeconomic debate in Pakistan seems to be in a strange place. The government raised $2 billion from international markets through issuing bonds. This is being celebrated. The narrative is that the subscription shows a successful return for Pakistan to international money markets. While this might be a successful ‘return’, why would success at borrowing be seen as either a sign of economic ‘recovery’ or as a success of the policies of the government in power? We are borrowing money from any and every source we can tap: multilaterals, international markets, ‘friends’ and more. This is boosting our foreign reserves and helping us keep the exchange rate stable. But how can borrowing be a sign of good economic policy or of economic recovery?

We just sold the 3G/4G spectrum rights for $ 1.1bn. These inflows will help keep the narrative of stability going for some time. The government has ambitious plans for selling off state entities too. If privatisation of these entities does go ahead as expected, they will also bring in cash. This will allow the government some space to keep the foreign account and exchange rate relatively stable for some time, and also give the government fiscal space. But even privatisation and selling off assets that belong to the people of Pakistan is not a remedy for economic recovery and will not address some of the basic problems the economy faces.

It is in the area of reforms needed at the micro level in the economy where the government is seen to be failing. What has been achieved on the tax reform front? Have the number of taxpayers increased substantially? Have distortions in the income tax and sales tax structures been removed? Has the government been able to remove all the SROs of the FBR or even get rid of the SRO culture within the FBR? Have agriculturists, traders, wholesalers, retailers etc been brought into the tax net? Are people more willing to pay taxes? Has the government been able to convince Pakistanis they need to pay their taxes?

On the trade front, has the government been able to remove some or any of the more glaring distortions we have been living with for decades? Is the auto sector any less protected? More generally, has the government had any success in dealing with problems associated with the property rights regime or contract enforcement? Has the cost of doing business come down? Has the investment climate for domestic investors improved in any way? The answer to these questions appears to be a resounding no. How then can we expect the stability story to continue and how can we take stability on the foreign exchange front to be a sign of economic recovery?

Stability through ‘gifts’ and borrowing is not a macroeconomic policy and nothing to celebrate. If problems — within the economy and at the micro level — that have been dogging us for decades are not addressed, any stability gained through borrowing or even privatisation proceeds will be short-lived.

From the Dawn, Pakistan, Friday 25th April, 2014