Hybrid Governance Model – Economy Next?

By Dr. Kamal Monnoo

civil militaryA strange governance equation seems to have taken root in Pakistan where the military has assumed the proactive leadership role of nudging the political government to perform in areas where ironically it should have been performing in any case. Given that the establishment in Pakistan over the years has inherently suffered from perhaps a delusionary sense of being the singular custodian of national well being, it comes as no big surprise that it has yet again taken upon itself to resurrect a dwindling national situation – existential in many aspects – albeit, this time strictly from back-stage. Early days and early success in this new governance formula where the politicians are happy to take a rear seat in domains where military holds the expertise, the army top brass satisfied on acting in accordance with its perceived institutional obligations, and the public relieved to finally see some meaningful action – A relief quite apparent in somewhat higher popularity ratings for Mr. Nawaz Sharif, but interestingly in an unprecedented high national liking for the present army chief, Mr. Raheel Sharif. The trouble is, much that one would like to wish continued success to this rather artificial management arrangement, such non-organic executive models tend to be short lived and generally akin to playing with fire; likely to bring more harm in the long-run than good! To start with, a model such as this principally negates the very structure of an effective governance organogram, second, assuming the purpose is improved executive management, it does precious little to upgrade a weak existing team, third, it excessively relies on the management expertise of a single institution (which in our case, we know, has its limitations in economic management), and fourth, such partnerships last only till the going is good. The moment crises befall, the blame game starts, in the process eroding the effectiveness and popularity of both the partnering parties. And since Pakistan is indeed fighting an existential battle in many respects, even the possibility of erosion in its ‘institution of last resort’ comes with high risk and can cost the country dearly.

While direct tackling of terrorism is surely a mandatory step in our fight to save Pakistan, the real battle will be won on the economic front. Unless the economic team or policymakers can deliver on the economy and meaningfully touch the lives of 180 million Pakistanis, the fight will remain a losing battle. And for this reason alone, the litmus test of this new evolving governance model will come when it is next extended to the sphere of national economic management. However, even before this move happens, the big question that still remains is that in spite of army’s prodding, is the present economic team capable of delivering? Its results thus far have not been very encouraging, and this to say the least. Debt has been rising and appearing unsustainable with each passing day, both investments and spending have been disproportionate to the real requirements and exports have been falling thereby worsening an already precarious external account position; all this ironically in an external environment that in fact should have produced the very opposite effects. So what should the powers (that be) do?

Guide or pressurize the present lot to perform better? But to take work you need to know work and unlike in the security, law and order or foreign affairs matters, over here, they themselves do not possess the required economic management expertise. So, the best thing for them to do would be to keep things simple and focus their efforts by selecting only a few key areas of the Pakistani economy and placing them under professional hands. The rest will automatically fall into place. And this sectors’ selection process fortunately should not be very difficult. While admittedly there are a number of different economic challenges facing the Pakistani economy today, the good news is that the basic structure of our economy happens to be narrow and fairly un-complicated – take a professional grip on 4 key aspects – Debt Management, CPEC (China Pakistan Economic Corridor) where the bulk of economic activity is likely to be generated in the coming years, Trade Management and PSE (Public Sector Enterprises), and one is in business.

Debt piling over the last two and half years has been scary. Violating all norms (including constitutional) of permissible level of debt in an economy, Pakistan seems headed towards a debt trap. From poorly negotiated terms with the IMF that decelerate economic activity and negate employment creation in home markets, the story is endless: crowding out the of the private sector (more than 85% loan portfolios of the commercial banks in the last 3 years are directed towards the government); compromising the very concept of sovereign debt – cost of governmental borrowing, which in-turn can have far reaching implications not only on the structure of debt but also on the sheer long-term
ability of future governments to reduce the debt ratio; the interest rate conundrum and compromising on the option of using national savings to reduce national debt; raising expensive debt to retire cheaper borrowings; and the whole business of questionable bond issues. Pakistan’s total external liabilities at commercial rates today stand at about 36% of our total debt, our principal and interest payment alone tend to be as much as 20% of our total export earnings and the total debt as high as nearly two and a half times of total annual export receipts. The situation is especially dangerous because economic fundamentals are consistently flouted by a government completely clueless on the real equilibrium of debt in our economy – Unless the policymakers have a prudent understanding of the equilibrium or equilibria of debt in the economy they mange, they will only be flirting with disaster. ~ Kenneth Rogoff.

Trade vision and strategy has been the Achilles heel of this government. National ‘Competitiveness’ has been declining resulting in diminishing jobs and employment opportunities in a country with a very high mix of young employables. Pakistan’s economic leadership needs to realize that modern day global trade is changing course. Gone are the days where countries single mindedly focused on expansion of multilateral trade or had blind faith to slip into the prescribed WTO straight jacket to become a part of the global trade order. The push to boost industry, spur growth and generate employment always needs to be articulated by a country’s economic leadership. Both, the 2008 Financial Crisis and a Noodle Bowl effect of Free Trade Agreements, Regional Trade Agreements, Preferential Trade Agreements, etc have slowly but surely undermined the once unquestioned wisdom of multilateral functioning.

Modern day thinking being that while expanding global markets is a worthy goal, history offers lessons that only fair and ‘constructive trade’ is what nations should be seeking – ‘Constructive’ referring to a realization that only such trade is welcome which tangibly adds value to the home economy and ensures a gradual but clear development of its core national industries. This has clearly not happened in Pakistan. On the contrary this government – once thought to be business friendly – now with their misguided policies seems to be slowly but surely dismantling home industry.

CPEC, we must realize is foremost a business proposition that requires understanding, home resources, foreign investment mostly in shape of debt underwritten by the Government of Pakistan, and expert oversight. The early signs indicate that we have already started to falter and this has happened within six months after its announcement with much fanfare during the visit of Chinese President Xi Jinping. 29 industrial parks and 21 special economic zones were initially identified along the corridor, but the government still remains clueless on how these estates will be made attractive for investors. Who will invest here, what will they make and who will they sell to? Precisely, the very predicaments that ail our competitiveness in most of our other potentially productive industrial sectors! Little wonder, why so many existing industrial estates in the country remain under utilized. If we are not careful, in CPEC, we could yet have the biggest under-performer on hand costing us a massive $46 billion!

The Privatization saga under the political government, including this latest stint of PML(N), presents a troubling account: basic vision, defining of specific goals, clarity on the desired overall mix of PSE in key sectors of economy, have all been missing. Irreplaceable AAA assets have been sold cheaply, non-transparently, and with total disregard to the element of conflict-of-interest. While we have ‘modern examples’ of China/India/Brazil/Russia/UAE and others using state power combined with private sector entrepreneurial juices to provide service and also secure a significant footprint on the global corporate map, Pakistan on the other is contemplating selling even its flagship concerns like the PSO, the only Pakistani company to ever be in the Fortune 500. Further, the recent report on the potential of the Pakistan Steel Mills compiled by the China Development Banks, tells yet another embarrassing story on unethical management history of our successive political governments.

Today’s glaring issues on governance relate to transparency, corruption, lack of merit and competence. The solution lies in establishing independent and autonomous policy making and oversight bodies, based on technocrats and management executives drawn both from government and private sectors, to oversee all four of the above mentioned areas. We will certainly not be the first ones to do so, as there are numerous examples today where countries have already formed such independent institutions to directly oversee specific areas critical to sustainability of their respective economies.