Economic Governance in Pakistan

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Ishrat Husain[1]


The paper’s main thesis is that the difficulty Pakistan has faced in maintaining macro-economic stability, sustaining economic growth and delivering public services to the poor can be ascribed to weak economic governance and gradual decline in the capacity of key institutions. To strengthen economic governance, a non-partisan long-term strategic approach is required in which narrow political considerations are set aside and a concerted effort is made to strengthen the key institutions that form the essential core of economic governance.  As the capacity of these institutions takes several decades to develop, the temptation by incoming governments to abandon or neglect institutions or policies, projects and programs inherited from the previous regime should be seriously curbed.  The tendency of starting with a clean slate every time a new government is ushered into power is painful and also politically costly.  It is better to build and consolidate on the previous programs and policies, fine-tune and modify them according to the changed circumstances and experiences.  The gains become visible during the incumbency of the incoming government which can then claim credit for the realization of those achievements. Author.

The questions commonly raised today are: Were the economic achievements of the period 2000 – 2007 ephemeral in nature?  Was there fudging of data and facts to depict a rosy picture?  Why has the economy that was supposed to be so robust fallen so sick all of a sudden?

The answer to these questions lies in the quality of economic governance and decision making as well as the capacity of the institutions that are vital for the economy.  Pakistan’s main problem in maintaining macro-economic stability, sustaining economic growth and delivering public services to the poor is weak governance and a gradual, but perceptible, decline in institutional capacity.  Subordinating economic management for short-term political gains exposes the country to unforeseen, but severe, risks. The lack of timely actions and the postponement of critical decisions needed for the adjustment of imbalances led to the derailment of the economy.

The problem was further compounded by adverse exogenous developments both within and outside Pakistan.  Surging terrorism, energy shortages, capital flight, political uncertainty, and lack of clarity about economic direction during the transition to civilian rule intensified the difficulties.  The international environment and the inability to respond to the worsening situation exacerbated matters. Adverse terms of trade caused by rising fuel and food prices resulted in income losses of over 11 percent.  The recent global financial crises had unhealthy spill-over effects such as fear, panic and malfunctioning of money markets.

Had there been a strong and well-functioning structure of economic governance at the federal, provincial and local governments without excessive concentration of powers at the centre, an effective mechanism for coordination among these tiers, a fairer distribution of national financial resources, and agreed modalities for dispute resolution, the impact of the domestic and international shocks could have been less poignant.  These intervening shock absorbers of good governance would have lessened, to an extent, the sudden sharp and full impact on the economy.

The agenda for the improvement of economic governance has not been pursued faithfully in Pakistan as its implementation spans over several decades, while the elected and military governments have short term horizons.  The elected governments, in their pursuit of winning the elections, and the military governments in their attempts to gain legitimacy, get bogged down in ad-hoc, and, at times, populist measures without addressing the root cause, i.e., the building of institutional capacity to deliver improved living standards to the majority of the population and setting up a viable governance superstructure.  Personalized decision making, in accordance with the whims and caprices of those in power, has displaced informed and well-thought-out institutionalized processes.

The changes in political regimes have had deleterious consequences for economic governance in Pakistan. The 1990s witnessed particularly frequent and chaotic transformations.  Narrow political point-scoring by depicting the inherited state of the economy in a much worse shape than it actually was, coupled with knee-jerk discontinuation of the policies, projects and programs of the previous regimes created perverse effects.  As institutions take time to nurture, the implementation of projects is spread over a multi-year period and the impact of policies is consequently felt after a considerable time lag. Premature abandonment of inherited policies, therefore, has caused more harm than good.  In Pakistan, the incoming government had to start all over again and by the time it put in place its own policies, programs and projects, it was either overthrown or had to step down prematurely.  The new government thus begins the cycle again with a fresh set of policies.  As a consequence, the majority of the populace never witnesses any benefits or gains while the national exchequer is constantly depleted due to the unending costs incurred by every successive regime.  There is need to be wary, therefore, of measures that may have a powerful but superficial appeal in the short term, but adverse consequences in the medium to long term.

What is the fallout of this unending cycle of politically-motivated poor economic governance on the majority of the population?  A sense of deprivation and denial of basic economic rights generates cynicism, negativism and frustration.  The credibility of governments in power – any government – is completely eroded.  Distrust of ‘government’ becomes so widespread and credibility so low that unfounded rumours, mudslinging and suspicion about their motives gather a momentum of their own.  In the last six to seven years, the media, taking advantage of this widespread credibility deficit of the government, have taken over the role of the political opposition thereby further accentuating the prevalent negativism.  Markets, on the other hand, function on sentiments. When there is confidence in the government and its institutions the overall result is stability in the markets.  But if there is lack of credibility, an air of uncertainty, and crisis of confidence, the markets become nervous and jittery and. consequently, heightened volatility.  However good and sound the policies may be, under such circumstances, their implementation becomes problematic.  Credibility is fragile and, once lost, takes considerable time to re-establish. Research in modern behavioral economics has shed light on the relationship between psychological effects and the response of economic actors.

A society with a positive attitude gives enterprises far greater freedom to compete than one which perceives businesses as unethical or in cahoots with the government for personal aggrandizement.  Patronage and cronyism as manifested in such forms as the grant of licenses, tariff concessions, tax exemptions to a selected few, or the sale of public assets to favorites, and appointments to key offices not on merit, but on the basis of loyalty, affiliation and friendship, sharpen the negative sentiment.  It is for this reason that Pakistan’s privatization program, though economically desirable and badly needed, has almost been abandoned ever since the perception, right or wrong, gained currency that the  Steel Mills in Karachi was being sold for too low a price to the cronies of the government.

Good economic governance is not only the formulation and announcement of measures such as monetary and fiscal policies but is a much broader concept. Its essential ingredients are participation, transparency, credibility, the rule of law, efficiency and accountability.  These are evaluated, directly or indirectly, through a number of governance indicators which have been developed and refined over time.  The most commonly used indicators are a composite of (a) accountability (b) political stability (c) government effectiveness (d) regulatory burden (e) rule of law and, (f) corruption.

The issue of credibility has already been addressed earlier at some length.  Turning now to participation, the common view is that the centre has assumed excessive powers and authority that have resulted in inefficiency, social fragmentation, and ethnic divisiveness. The devolution of powers to Local Governments, introduced in 2001, was a step in the right direction but has not been fully implemented, either in letter or in spirit.  Worse still, the whole system, which is not yet completely in place as originally intended, is at risk of being derailed by the new government simply because it was the brainchild of its predecessor.  Instead of fine-tuning and removing some of the deficiencies and weaknesses in the system observed during the last seven years, the entire scheme is being dismantled. It will take another five to six years before a new system, in tune with the thinking of the present ruling parties, becomes fully operational. Even worse, there is no guarantee that the next government that replaces the present one may not have different ideas of its own.  In the process, the devolution of powers to local governments will remain in a state of imperfect it may be, has more hazards than is generally realized.  Such faltering will not address the problem of excessive concentration of powers at the centre which, in turn, will intensify discontent among the smaller provinces.

Transparency in the actions of the government can be ensured through a number of means, i.e., hearings of parliamentary committees, question hours in the Senate, National and Provincial Assemblies, the Freedom of Information Act, the removal of several clauses of the Official Secrets Act, the introduction of E-government and investigative reporting by competent and responsible journalists.  Most of these measures exist but more in form than in substance. The usual rituals are repeated ad nauseam without any serious investigative initiatives.  On the other extreme, the excessive liberties exercised by a segment of the media in unsubstantiated character assassination of political leaders or public servants can prove to be detrimental to the cause of disclosure and transparency.

Since March 2007, the rule of law has been in the forefront of debate and discussion in Pakistan.  The lawyers’ movement demonstrated that if a particular community rallies around a legitimate cause, it can make a difference.  However, as the momentum dies down, it is not clear whether the common citizen is any better off today in terms of access to justice, speedy redress of grievances, enforcement of contracts or property rights.  The rhetoric about the rule of law is loud but the reality is far more sobering.

Efficiency, as measured by government effectiveness either in ensuring the security of life or property, the maintenance of law and order, and the delivery of basic services, has rapidly declined over time.  Most institutions entrusted with these responsibilities at the time of independence were relatively well run.  But the opposite is true after 60 years.  It is a rarity that a public institution is found to be functioning smoothly and effectively.  The differential treatment meted out to the well-to-do and influential segments of society, on one hand, and the rest of the population on the other, violates the principle of fairness and good governance. Unfortunately, this has become the norm and not the exception.  With each change of government, a new cast of political elites and well-connected individuals occupy the space.

A number of laws and institutions exist in the name of accountability in Pakistan.  Starting from the Public Accounts Committees at the Federal and the Provincial Assembly level, there is a plethora of committees, bureaus, task forces, departments, and wings that are charged with this responsibility.  National anti-corruption strategies are formulated and vociferously publicized amid fanfare.  The National Accountability Bureau (NAB) got off to a promising start instilling some fear and inducing deterrence but this proved short-lived and petered out within the initial three years of the Musharraf government.  Subsequently, political compulsions gave way to a pragmatic approach whereby the impartiality and neutrality of NAB became questionable.  Thus, despite a strong legal instrument and a well-organized infrastructure of investigation, prosecution and courts, the enforcement of accountability was again compromised.  Accountability has, therefore, lost its true sense and meaning in the vocabulary of governance and instead become associated with retribution, settling political scores and a coercive method of winning over opponents as well as threatening the recalcitrant.


Economic governance thus requires a non-partisan, long-term strategic approach in which narrow political considerations are set aside and a concerted effort is made to strengthen the key institutions that constitutes its essential core.  As developing the capacity of these institutions takes several decades, the temptation by successor governments to abandon or neglect the institutions, policies, projects and programs inherited from their predecessors should be curbed.  The tendency of starting afresh each time a new government takes over without achieving tangible results is both painful and politically costly.  It is better to build and consolidate on the previous programs and policies, fine-tune and modify them according to the changed circumstances, experiences, and preferences.  The gains become visible during the incumbency   of the incoming government for which it can thus claim credit.  While it is true that the ruling party wins the elections on the basis of its manifesto and mandate, the political costs of across-the-board discontinuation of everything initiated by the previous governments in the form of economic dislocations, increased uncertainty and erosion of confidence, far exceed the benefits during the limited life cycle of any incoming regime.

It is time, therefore, that this highly charged rhetorical blame game is replaced by a sober, painstaking effort to strengthen the foundations that can support the superstructure of the key institutions of economic governance in the country.

[1] Ishrat Husain is a former Governor of the State Bank of Pakistan and  former Chairman, National Commission of Government Reforms and is currently Director,  Institute of Business Administration, Karachi.