Working with Washington Consensus
It is now generally understood that the country is in deep crises. There is a crisis not just in politics and in economics but in the way the entire society works.
Not dealing with this state of affairs would mean that the trend will accelerate and the situation will continue to deteriorate. Pakistan may soon find itself in a position from which it will be difficult to raise itself.
If the country has to be rescued, the operation will have to touch many fronts. There will have to be reforms in the way the country is working at this time: in politics, in economics, and as a society.
Among the important areas that need reform is the role of the state and how the government should govern. In a globalised world, there are many influences on policymakers. Some of them work directly as is the case when the IMF imposes conditions on the countries that go to it for help which Pakistan has done on many occasions, most recently in 2008. In some other cases the influence is exercised indirectly and less obviously. In this context it is useful to explore the policy environment within which Pakistan will need to work if it wishes to improve the working of its economy. Even if the country returns to the Fund which it may have to do before too long, it will find that that institution will be reading from a very different playbook.
The state in Pakistan is currently functioning in the sphere of economics which reflects to some considerable extent an approach that was developed by policy thinkers working in several development and financial institutions based in Washington.
Called the Washington Consensus, this policy package touches ten areas of policymaking. One of the more important of these is fiscal discipline, ensuring that the governments account remain in reasonable balance. A developing economy could have a deficit, spending more than it raises in taxes. Generally a deficit of three per cent of GDP is regarded as within acceptable levels. Larger than this deficit could ignite inflation if it was financed by the central bank printing money.
Financing the deficit by borrowing from the banking system crowds out private investors by raising the rate interest. Pakistan has done poorly in this area; it keeps clocking up deficits well above the comfort zone. It was the government’s inability to keep the deficit in check that led to its withdrawal from the IMF programme late last year.
The second element in the Washington consensus concerns changing the form of public spending from indiscriminate outlays on up-keeping in luxury a large official establishment or providing large subsidies to favored constituencies. The preferred outlays by the government should include those on education, health and infrastructure. Pakistan is doing little of these, spending instead unjustifiably large amounts on activities that do little for public good.
Reforming the tax system was included within the consensus. It entails raising the tax-to-GDP ratio to the point where the government could undertake significant programs for the creation of public goods. These include improving the county’s human resource, improve the quality of governance, improving security, and providing a regulatory system that forces good behavior on the private sector.
Financial liberalisation was another aspect of the consensus. It allowed considerable space to the banking system, insurance companies, and other financial houses to operate but certain minimum rules of prudence had to be observed. The consensus also required a unified and competitive exchange rate. This could be only achieved by allowing the market to set it. But the markets would be influenced by many public policies in particular those pertaining to controls on the flows of capital across the borders. Initially was this freedom concerning entry and exit of capital that caused the Asian financial crisis of 1996-97 when large amounts of money flowed out from the banking systems of these countries as well as from their capital markets.
The Consensus also promoted privatisation by suggesting that the state is not a good manager of economic enterprises. In fact, the World Bank wrote a scathing report titled Bureaucrats as Managers, powerfully suggesting that the bureaucracies could not be entrusted with the management of industrial enterprises, the banking system, insurance companies, utilities and trading houses. The bureaucracies had done all that in Pakistan following the nationalisation spree in the early 1970s putting untrained bureaucrats in charge of the enterprises about which they knew little and cared even less. The result has been loss-making enterprises that have put a large burden on an already stretched government. Not only should economic entities be generally in the hands of private entrepreneurs, the Washington Consensus suggested putting in place a regulatory system that allowed free entry and exit to private enterprises. The only constraints that should be imposed was that in the areas where the health of the public was concerned, the products to be produced and the serves to be provided met the standards laid down by the regulatory system. In allowing the established enterprises to exit there was need to ensure that the capital of those who had invested in the failing companies had some protection related to the expectations at the time investments were made. The Washington Consensus focused a considerable amount of its attention on trade, advocating its free flow across international borders and creating a level playing field between different players in the trading system. Pakistan’s record in this area was fairly good – at one point it was the most open economy in all of South Asia. That has changed as the country has imposed levies on trade to improve the fiscal account.
The Consensus also advised the governments to facilitate foreign direct investment, or FDI. But FDI flows have declined precipitously in recent years as the security situation has deteriorated sharply.
The final part of the Washington Consensus relates to the establishment of a regime that ensures the security of property rights. Pakistan has fallen way behind in creating an environment which is considered acceptable by all those who hold property in the country or would wish to acquire it. Land holding rights are based on antiquated systems that date back to the Mughal and early British periods. They allow enormous discretion to those responsible for protecting these rights. The land record system is one of the more corrupt ones in the developing world contributing to the level of overall corruption considered to be much higher than expected for the countries at Pakistan’s level of development.
What this brief overview of the Washington Consensus policies shows is that much of the package as originally formulated remains valid for Pakistan and offers a menu of options that the policymakers should look at if there is a real interest in addressing the county’s economic malaise.