Provincial budgets fall in line – Shahid Javed Burki

Following is a cross-blog post from Express Tribune. The writer is a former caretaker finance minister and served as vice-president at the World Bank

Does the new government which took over the reins of power in Islamabad in early June know what to do to revive the economy? Does it have an economic model it is likely to follow? What should the new administrations in the four provinces do now that they have a great deal of authority in economic matters? Will they follow the lead provided by the federal government? We can find some answers to these questions by analysing the content of the five budgets, all presented in the middle of June.

Finance Minister Ishaq Dar told the National Assembly and the nation that the share of investment in national income had to increase to rebuild the nearly shattered economy. The country was saving only 12 per cent of its domestic income and investing it in an economy that was increasingly inefficient. Whether deliberately or not, the Finance Minister Ishaq Dar took a leaf out of the old book of development economics: that for the rate of growth to increase, the amount invested in the economy must continuously grow. That is what various economists had concluded when they began to build their understanding of the process of growth.

This approach leaves a number of questions unanswered but not the ones that were raised in most of the commentary following the June 12 presentation of the national budget. Among them, several are to be found lying on the border where economics meets politics. For instance, why has the rate of investment fallen to its lowest level in six decades? There are many answers but two of them are of particular importance. One, the country does not save enough and, therefore, invests little. Two, having become dependent on external savings that came mostly in the form of development assistance, the decline in this flow pulled down the rate of investment. These two answers beg some more questions. Why do the Pakistanis save so little while the Indians and the Chinese — both communities just across the border — save so much? This is where political economy enters the domains of anthropology and sociology. Almost a century ago, Malcolm Darling, a British bureaucrat turned academic, came to the conclusion that the Muslim culture in Punjab favoured consumption over investment while the Hindu preferences were exactly the opposite. Darling based this finding on the work he had done investigating the reasons for the increasing debt of the Punjabi Muslim peasantry.

That the provincial budgets, announced after the national budget, reflected the same approach to economic revival is a good indication of where the national economic discourse has arrived. The provinces also focused on investment but with one important difference. Their budgets said quite a bit more on how the increased amount of investments would be allocated among different activities. That was perhaps to be expected given the redefinition of government responsibilities occasioned by the passage of the Eighteenth Amendment to the Constitution three years ago. The provinces now have much greater authority in the area of social development. Very little has been left with the federal government in the social sectors. Most of the provincial finance ministers identified education as the priority sector. None of them, however, said anything about the partnership between the public and private sectors for improving the level of social development. I will have more to say about this subject later in this series of articles.

The other feature common in all provincial budgets is the reliance on ‘external’ savings. For them, ‘external’ means the federal government. There are differences in implied dependence since the National Finance Commission Award of 2009 promised the provinces a much larger share in the national resource pie. Larger shares were given to less developed provinces of Khyber-Pakhtunkhawa and Balochistan. But defining the share in the resource pie is only one part of the problem. The other is increasing the size of the pie and that brings us back to the interface between economics and politics. Why do the people of Pakistan save so little compared with the people of the countries with much better economic records? Economists have begun to suggest that causality runs in both directions: investment increases the rate of economic growth, high growth encourages people to save more. The main task before the policymakers, therefore, is to pull the economy out of the recession into which it plunged during the rule of the PPP-led coalition. According to the five finance ministers, this can only be done by increasing the share of investment in national and provincial incomes.

But before that happens, potential investors have to be convinced that the economy has a future; that today’s policymakers have a clear idea on how to grow the economy. As economists emphasise over and over again, confidence is an important part of the effort to restore the health of the economy. Confidence was lost during the rule of the PPP-led coalition. It needs to be revived.

What is needed is a clearly articulated strategy that goes beyond simply increasing the amount of public sector investment. It must also include at least two other aspects of development — a clearly defined role of the state and a clear definition of how the public and private sectors could work together to advance the economy. Now that budgets have been presented, the new policymakers must indicate how they will manage the economy.

Published in The Express Tribune, July 1^st, 2013.