Saturday, 27 February 2010

The Importance of Civil Service Reform

I compliment Sania Nishtar (“Civil Service Reform Revisited” in The News February 27 2010) for writing on a subject of immense importance to Pakistan. Unfortunately this is also a subject that is least discussed by our columnists, intellectuals and academics. Like most policy in Pakistan, interest in this subject is also piqued only at the initiative of international thinking. Those of you who follow this blog will see me comment on this dysfunctionality of the Pakistani intellectual and policy process again and again.

Sania Nishtar was inspired by the International Crisis Group’s Report on Civil Service Reform to write a very nice article on the subject. (Needless to say the ICG report was done without reading any of the domestic literatue produced on the subject! So much for valuable research!).

Sania says that

“The denotation of civil service reform in the reform jargon is not an isolated or a defined restructuring measure, but a set of locally-suited interventions centered on restructuring laws, codes of conduct, remuneration norms, institutional devices, and policy frameworks. Given this diversity, priorities for action and a plan for phasing reforms are important. In order to do that, the key problems with Pakistan’s civil service must be appreciated as a starting point. Broadly, these fall into three categories.

First, is the ‘colonial-contemporary lag’. Pakistan’s civil service has been modelled on the colonial system, where the bureaucracy was geared towards command and control. In the district-divisional system, a single person was empowered to collect revenue, dispense justice, exercise administrative control, assume responsibility for delivering services, and allocate land rights—in other words, absolute control. Comparable prerogatives existed at the secretariat/divisional and departmental levels. This model served the purpose of keeping citizens sub-ordinate. The realities of the state are very different today. The government must not ‘rule’ but ‘govern’ in a democratic system; it must reconfigure its capacity to harness the resources of the economy towards the goals of development and learn to engage with the private sector in areas which were previously thought to be in the ‘public domain’. Although successive governments have attempted to make some changes to be responsive to these realities, those measures haven’t borne fruit. The local government system, which was meant to be a departure from the post-colonial style of administration, wasn’t able to deliver on its premise — its current restructuring also offers little hope for reform. Frameworks for public-private partnerships, despite being in existence, have not been functioning because of institutional wrangling. And as for institutional performance, it is ironic that the most important organisation in the country — the government — upon which the functioning of almost everything else hinges, has not learnt from contemporary organisational management and business processes, and remains aligned on antiquated paradigms of ruling, which put the state at a disadvantage with respect to domestic realities and meaningful global existence.

The second problem relates to limited understanding of human resource management. In the public sector, human resource management is generally considered as being synonymous with the creation of posts, placement of staff, and disciplinary action, and is, as such, often used as a lever of power. Human resource management usually does not appear to be a priority and the capacity to plan in this area often does not exist within ministries. The environment is additionally not conducive to fostering improvements in performance. The system does not reward high performers, in general. Rules and regulations governing administrative and financial prerogatives are overtly cumbersome and tend to centralise decision-making. This is particularly relevant to operational decision-making, in relation to domains where strategic decisions have already been made at a higher level. A case in point is the re-seeking of permission for activities stipulated under approved PC 1s, which accounts for unnecessary delays and ingrains inefficiency.

The third problem and one which compounds the other two relates to the space that exists for institutionalised manipulation. Over the last several decades, numerous changes have been made in the structure of civil service in the guise of ‘reforms’. Some, as stated in the International Crisis Group’s report, have “weakened the constitutionally guaranteed protection of employment that had previously shielded the bureaucracy against political interference”. Other ‘reforms’ were aimed at ideologically reorienting the bureaucracy, entrenching military’s presence in the bureaucracy, whilst still others eroded neutrality at all levels of the administration. By-and-large, administrative restructuring was used as a tool by many rulers for personal gains and political patronage in order to consolidate their bases. Over the years, therefore, a culture emerged where civil servants were patronised and promoted, not on merit but on perceived loyalty to their respective unnamed political affiliations. Civil servants have responded to this in many ways. Whilst a majority resents this trend and still tries to operate honestly in a politicised environment, others feel unprotected due to the fear of undue accountability and choose to defer decisions whilst still others — and a growing number — tend to please their superiors rather than being responsive to citizens’ needs. In doing the latter, they become party to politically expedient decisions that have limited grounding in evidence. These institutional behaviours promote a culture where a range of ethical, intellectual, procedural, and financial forms of malpractices are becoming pervasive in the system.

As a result of all these factors, Pakistan’s system of civil service — which has yet to conform to contemporary realities after 63 years of the country’s existence — has fallen prey to exploitation, both from within its ranks as well as from outside as a result of collusive behaviour of non-bona fide entities within the political system and the private sector. And hence malpractices and inefficiencies are getting institutionalised. Poor management and lack of accountability exacerbate malpractices, whereas on the other hand, there may be a disincentive for administrators to strengthen management and mainstream mechanisms that compel accountability. Both these factors complement each other in a vicious cycle.

Civil service reform, therefore, cannot be achieved through isolated technocratic solutions; the latter can only be useful if the broader political determinants are conducive.

Reform of civil service, implicit within which is a set of measures to restructure recruitment, retention, training, career progression, capacity building, remuneration, and accountability frameworks, therefore, cannot be taken in isolation and needs to be framed in the context of this entire structure, which determines how a government functions. The feasibility of these changes additionally has to be locally determined, as there isn’t a cookie-cutter multilateral framework that can make reforms work in any setting. Rather than reinventing the wheel at the cost of the taxpayers’ money, it appears most logical to use the recommendations of the NCGR to develop a multi-partisan consensus on the way forward, and analyse the resource implications of an agreed plan, based on which a phased approach can be adopted.

Pending long-term solutions, the single most important measure is to let merit and performance take over. There are many champions within Pakistan’s bureaucracy whose potential can be harnessed through this approach.

Indeed Sania’s analysis is correct and there is much we can learn from it. However, this is a complex subject and there is much discussion and debate that is necessary. I will come back to Sania's analysis and in particular the ICG report which clearly needs a lot of help.

Thursday, 25 February 2010

Commercial Property Development Not Allowed

Ever wonder why our cities in Pakistan do not have an abundance of commercial, retail, office and dense residential use (flats)? The answer as always lies in poor uninformed governance.

For too long now our planning paradigm has favored the kothis. Even now the planner thinks only of elite housing---single family stand alone construction—one floor plus one. While all over the world—even the old Lahore townhouses have 4 stories---in Pakistan the norm is one plus one. Elsewhere—even in old Lahore density is allowed for in the shape of adjoined row houses—here we continue to plan for stand alone houses with setbacks.

Should you wish to build any thing different from 1+1 kothi, you need to get your plot “commercialized”? Even if you want to build a block of flats, you still need to commercialize your plot. What is this commercialization?

The most important fact that I have been able to learn about commercialization is that it is totally arbitrary varying from locality to locality. It can be especially difficult in cantonment areas which now are a substantial proportion of our cities.

Commercialization happens on a plot by plot basis. Your neighborhood may be entirely commercial, yet your plot has to be commercialized for you to build on it. And there is no guarantee that your plot will be commercialized even though your neighbor’s plot is commercial.

The process can be lengthy. On the way there is a lot of room for extraction of rents and bribes. There is no one window operation here. In cantonments it can involve the GHQ, corps commanders etc.

Commercialization fees are heavy and arbitrary varying all over the country. I have found them to be as much as Rs 3-4 million per Marla. In some cases, they are higher than the value of the land. The reason that is given for such high fees is that the city will build infrastructure for the increased density that is proposed in the new commercialized project.

There are 2 flaws in that argument. First, the money is never used for developing infrastructure; instead it is used for the purposes of the existing bureaucracy. Second, the city does not understand the costs of slow growth; the punitive nature of the large fee slows down commercial development and hence the city’s future revenues.

The process of commercialization also gives your neighbor the right of veto thereby slowing the process further. Why should the neighbor have a right on your property is neither debated nor understood.

When one puts one’s mind to it, the implications of this anti commercialization policy are large.

The result of this strange unthinking policy is that our cities have remained stunted and feudal. There is no good commercial space available anywhere. There is a huge excess demand for space for nonresidential space such as office, education, community, school, leisure, entertainment and retail.

Most importantly mixed use space where office, flats, retail and community mix is not available at all. Even our old cities had large amounts of mixed use space. It is in this space that the middle and the poorer classes thrive. Without a change in this policy these classes will be excluded from our cities.

Without apartment blocks, we will never have manageable and modern cities. In the current Kothi paradigm, even if we could house everybody, urban sprawl would kill much of Punjab’s agriculture. We simply do not have the land or the management capacity to allow that to happen.

The look of our cities as well as the mindset they generate remains feudal and rural. We continue to conduct all our ceremonies –weddings, functions and entertainment-- in a very rural and feudal manner because our cities have not yet developed an urban culture. How can you have an urban culture without an urban mix and density?

Saturday, 20 February 2010

Begging to preserve “Dead capital”?

Budget time is approaching! The usual demands of the government will hit newspapers!

It surprises me that after 64 years of poor economic management, failed policies of bankers and bureaucrats, and failed budgets, we continue to expect wonders from our budget.

I say forget the budget! It is only a speech full of promises that are forgotten the day after the speech has been delivered. In our history no budget has been adhered to for more than a few weeks. The budget document has no sanctity.

But the economy is in a deep recession—percapita income is by all estimates going to decline. Poverty is on the rise. When per capita incomes go down poverty will increase! There is going to be pain among the dispossessed.

What should we do? Well the policymakers--bankers and bureaucrats-- are going to do what they do best---beg some more and follow the master’s (donor) advice.

But for the rest of us we should think some more and raise our voices for change. Those who have the privilege (not the skill) of making policy keep intact the system of rentseeking, privilege and corruption.

Rest of us who are ashamed of our continual begging must look to alternatives. Surely a nation of 200 million with a nuclear bomb can have a little more self respect and be turned off by our policymakers panting for aid in every corner of the world. They even beg from tiny UAE and Qatar!

History and economics (skills considered useless in government) show that we can use our ‘dead capital’ to generate growth, revenues and jobs at home. “Dead capital” can be defined as potentially valuable assets that are currently not being used productively. Some examples:

  • 1. Governor houses (I can count about ten around the country) which are now occupying city center space tax free and at huge budgetary cost. We can convert the governor’s mansions to high end hotels and make some money while using their extensive grounds for commercial development. I can envisage at least 1 billion dollars if we were to allow better utilization of these properties and 3000 jobs.
  • 2. City center government property should be immediately privatized and made available for big time mixed use development ranging from hotels, shopping malls to apartment blocks. Areas such as mayo gardens and the 3 GORs in Lahore (government housing ), parts of F 6/3 and the whole sector above the Marriott in Islamabad could be developed into expensive revenue yielding high class commercial developments. To this should be added the land that army VIPs are enjoying such as their various houses and messes in the middle of the city. Many of the provincial cities too have considerable land the government is occupying for non commercial purposes such as housing bureaucrats both civilian and military. My crude estimate is that sales of these properties could fetch is upwards of 4 billion dollars and 8000 jobs.
  • 3. Then there are large tracts occupied by government training institutions. NDC, Staff College, naval War college, NIPA. Civil service academy in Lahore all come to mind. Why can they not be moved to Quetta or Kohat and this land freed once again for serious development? I can easily see about half a billion dollars from this and 2000 jobs.
  • 4. Then of course there are the stadiums which occupy huge tracts and are not used for entertainment. Instead their walls are being used for shops. Neither a stadium nor a shopping mall, this is a most egregious waste of resources. If we were to merely demolish fortress stadium in Lahore and make a multipurpose facility to include hotels, shopping malls and a convention center, the exchequer could gain by few hundered million dollars and 3000 jobs could be created. Better utilization of our other stadiums as well as the convention center in Islamabad could generate revenues of about 50 million dollars annually and 2000 jobs.
  • 5. A large part of city center land is given over to the elite for their entertainment at subsidized rates. This includes the polo ground, golf courses as well as club such as Sindh club and the Punjab Club. If the peasant’s land can be acquired for DHA, why not take over these rich man facilities for serious commercial development that relieves our debt burden. This could be a large bonanza yielding many jobs. We could even build libraries and community centers on this land.
  • 6. Creative destruction could yield a huge bonanza too. Take Gulberg Market, liberty in Lahore, Jinnah super market in Islamabad! If we merely find a way to turn these relics of another time into modern assets, dead capital can be converted in to gold. For example, liberty is a huge area which could house a beautiful modern multi level shopping mall as well as hotels, apartments, offices and parking. I can easily see about a hundred million dollars increase in our GDP over 2 to 3 years plus and 5000 jobs from this project alone. Use of this concept in other places could mean more output, revenue and jobs.
  • 7. Strangely enough we still have anachronisms like the CSD on the Mall road of Lahore in an age when we have hypermarkets coming into town.
  • 8. Still more creative destruction! Our cities look dated and decrepit because our silly bureaucracy does not allow renewal. Housing stock has normally an average age of 20 to 30 years. Zoning also needs renewal each generation. Yesterday’s suburb or housing could be today’s commercial hub leading to large valuation gains. As I have been arguing for many years, our zoning laws are antiquated and anti development. Allowing our housing stock to be renewed from low slung kothis to high rise flats and commerce in all our cities from Karachi to Kohat could be a big bonanza. I think this could be huge leading to an acceleration of growth of about 2 percent per annum for about 20 years.

There is more but I am limited in space. With so much dead capital lying around, why do we beg with dishonor? My calculations suggest with these simple changes GDP could double in about 15 years or less! Not to mention the growth of construction, hospitality, retail and ancillary industries. Of course our rich and famous would be a little uncomfortable!

Let us be clear to keep the party going for our rich and famous including our policy makers –bankers and bureaucrats—we are forgoing billions of dollars and hundreds of thousands of jobs. Poverty persists because of their failed policies which do not address dead capital.

Indeed not only are we forgoing earnings we are shamelessly begging for more debt! Will someone educate our policymakers –bankers and bureaucrats? Or could it be that we do need some learning and research in policymaking?

The media could give this demand for reform the headline instead of announcements of the alms that we get!

Wednesday, 17 February 2010

The folly of development policy thinkers!

Most Pakistani economists following the lead of the BWI have been singing in a chorus asking for increased taxation. This piece written by 2 lawyers outlines how the many tax policy and administration initiatives that have been adopted at the behest of the BWIs and other wise in a bid to increase the tax to GDP ratio, have been poorly implemented or vitiated by the Federal Bureau of Revenue.

This reinforces the point that I have been making consistently on this blog: without governance reform which has a strong component of civil service reform, a lot of the so called “dream policies” of the BWI are of no value other than to keep their consultants occupied and voluminous reports to be given to the very people who are not interested in change.

Huzaim and Ikram Ul Haq a husband and wife team specialized in tax law make a very good case in this direction.

From Huzaima Bukhari and Dr. Ikramul Haq the News Sunday Feb 14 2010

“The Federal Board of Revenue (FBR) is in for criticism for inefficiency and indiscipline. It has failed on all fronts: collection targets, widening of tax base, countering tax evasion and avoidance, recovery of arrears, voluntary compliance, reform process and what not.

At the end of the five-year Tax Administration Reform Project (TARP), the tax-to-GDP ratio dipped to 8.2 percent from 10.6 percent. The borrowed funds of millions of dollars were ruthlessly wasted. The standing committee of parliament on finance must conduct a thorough probe in the matter and seek the assistance of tax experts to determine the amount of loss caused to national exchequer by the FBR stalwarts during the last two decades.

Despite an expensive media campaign, FBR could not make 25 million potential taxpayers to file tax declarations by the extended date — 25 January 2010. The majority of non-filers are rich and mighty bureaucrats, corrupt politicians, and unscrupulous businessmen. FBR has not only failed to tap the actual tax potential — not less than Rs4 trillion — but is also guilty of shifting tax burden from the rich to the poorer segments of society. According to FBR, on admission, 1,916,300 income tax returns and statements were received from July-January of the current fiscal year (2009-10) as compared with 1,797,000 returns and statements in the same period of last fiscal year (2008-09). Total number of income tax returns received up to 25 January 2010 is only 755,671, the rest are statements under section 115(4) — last year 642,777 returns were received — indicating an increase of 112,849 returns. According to the FBR Press release as of January 25, 2010, FBR has received 16,281 corporate sector income tax returns as against 14,903 returns in the same period of last fiscal year, projecting an increase of 1,378 returns.

Firms — registered and unregistered — filed just 41,863 returns. Salaried persons filed 114,495 returns for tax year 2009 as against 119,759 last year showing a decline of 5,264. Non-salaried individuals filed 583,032 returns compared to 481,961 filed last year. Salary certificates received are 18,828 as against 20,745 filed last year. Number of employees covered in statements under section 115(4) are 1,053,708 this year as compared with 1,055,954 last year. Number of importers who filed their statements is 12,262 whereas some 11,510 importers filed their statements last fiscal year. By January 25, 2010 some 8,473 exporters filed their statements as against 8,050 exporters in the same period of last fiscal year. Some 13,332 retailers having up to Rs5 million annual turnover filed their statements during July-January 2010 period of this fiscal year as compared with 18,272 retailers in the same period of last fiscal year. 581 retailers having over Rs5 million annual turnover filed their statements this year as against 830 such retailers in the last fiscal year. 24,378 contractors and suppliers filed statements during this year as against 24,030 during the last year.

It is admitted by FBR that even after "great efforts" less than 2 million Pakistanis have filed income tax declarations for tax year 2009. FBR has failed to implement law even in Islamabad as out of 43000 commercial and residential rental properties in Islamabad, only 7000 owners are filing returns. In Pakistan, the number of mobile users alone, who pay more than Rs100,000 as annual bill, is about 25 million. Why have they not been compelled to file returns? FBR is taking credit of extra 119,300 declarations filed this year. However, it is completely silent about its failure to expand the tax net — we have at least 25 million persons earning taxable income, but who are not filing tax declarations.

For a long time now, FBR has been apologetic (specifically before the IMF and the World Bank) that total income tax payers (referring to registered only) in Pakistan are just 2 million in a population of 170 million. This is a myth. The reality is that since July 1, 1992 all commercial electricity consumers (including about 3.2. million retail outlets in urban areas), irrespective of whether their income is chargeable to tax or not, are paying minimum income tax of Rs60 per month.

The total number of persons earning interest on bank deposits is not less than 30 million. They pay 10 percent mandatory withholding tax irrespective of their quantum of income. Total number of mobile and land-line telephone users, subjected to withholding tax, in the country, is in excess of 60 million — yet FBR claims that our tax base is narrow. The reality is that FBR is incompetent as a result of which it has failed to book/register a majority of these taxpayers. Had it been done, we could today have boasted of nearly 25 million registered taxpayers. Even a petty village shopkeeper (whose total income is much below the minimum taxable limit of Rs100,000) is paying tax as high as Rs720 per annum. On the contrary, big absentee landlords, earning millions by merely leasing out orchards/lands, are not paying even a single penny as personal income tax.

Out of total population of Pakistan, 43.1 percent are below the age of 15 years. The overwhelming majority of them will not have taxable income. Rural labour of 40 million earns meagre income. Thus, the total income tax paying population having taxable income of Rs100,001 can safely be around 25 million. The FBR is not only taxing all of them but even many of those whose incomes fall below taxable limits. The poor are paying not only indirect taxes but also income tax at source under various provisions of the Income Tax Ordinance, 2001 — section 148 to 156A, sections 234 to 236. Thus in reality the people — except the ruling trio — are over-taxed. In return they get nothing.

It was the duty of FBR to allot National Tax Numbers (NTNs) to all those who paid tax under sections 148,149,150,151,152,153,154,155,156, and 233, 234 and 235 of the Income Ordinance, 2001. Had the FBR just issued notices for filing of return to all commercial electricity consumers, mobile and land-line users (paying bill of Rs100,000 or more) and vehicle owners, today we would have over 25 million registered taxpayers. The FBR did not bother to prepare a database of such persons though millions of rupees were spent (rather wasted) on so-called automation.

FBR is guilty of criminal negligence in not taxing persons having taxable income, but extorting money from many who earn below taxable income. It has been misreporting the figures regarding income taxpayers in Pakistan. Its performance is abysmal in achieving a satisfactory tax-to-GDP ratio. It is just thriving on withholding taxes and voluntary payments — constituting 92 percent of total collection. The contribution of field officers [collection on demand through investigation or audit] is just 8 percent of total collection proving beyond any doubt how unproductive this organisation is.

The small business houses and salaried persons, already heavily taxed through withholding tax mechanism, are victims of highhandedness. It is high time that the FBR should put its own house in order and tax the rich and mighty tax evaders.”

Fountains of paradise – is their investment space?

The following was a keynote address presented at the annual meetings of the Planter’s Association in Sri Lanka—one of the oldest trade associations in Sri Lanka. In order to talk to them I had to learn about and visit the plantations of Sri Lanka. I think there is a worthwhile point to be made on economic policy and our attitudes to entrepreneurship. That is why I share this with you.

Plantations fascinate me because they are the product of visions of daring adventurers. I cannot help but imagine the boldness, initiative and organizational capacity that it took to cut down dense forest, ward off wild animals, build roads, plant coffee and when that failed to switch to an alternative - tea. It is mindboggling to drive through the hills on those narrow winding lanes which in themselves are engineering marvels even today.

They cleared the forest, planted first coffee, waited 6-7 years to harvest it. After a few successful years, disease killed their coffee plantations. They did not run to the government for help. Instead they imported tea from China and started it cultivation to wait another 5-7 years for a harvest. Around this new crop they developed a whole series of innovations that still dot the Sri Lankan landscape in the form of lovely tea factories, plantations and bungalows. a whole tea culture which still pervades Sri Lanka still lives on in the country.

The Early Planters

Hats off to those early planters from Scotland who incurred all this hardship and permanently changed Sri Lankan landscape, economy, and society. I will not bore you with historical details for I am sure you know more than I do about the history of this wonderful episode in your history. Let me tell you what I, as an economist, admire them deeply for;

1. Their boldness of vision. It was not doing the usual. They were not handicapped by conventional wisdom. They did it their way.

2. They were very Darwinian in their outlook. It was survival of the fittest for only the fit could take this enormously challenging task. These pioneers took their own risks, did not seek any government help even when the coffee plant was devastated. They invested their own money and waited for 8-9 years before they saw their first returns.

3. They were true entrepreneurs who took risks, but also were ready to change their plans and strategies. I remember one writer paying tribute to these men: “The first generation of planters in Ceylon were adaptable men who were not resentful of change.”

4. They did not wait for any consultants or advisors to tell them what to do. The functional, intuitively simple and yet ingenious design of the old tea factories that rely on natural forces to help in the maturation of tea, speaks of the self-sufficiency and quiet confidence of the pioneer planter.

5. The plantation was a great training ground for modern industry. It was perhaps the first effort at integrated industrial form of organization in Sri Lanka. Not only is the planting systematic, it is plucked in a well worked out rotational manner too, so that the bush does not grow beyond a certain height. It is graded and processed to a certain taster’s perfection. At all levels, organization and professionalism is required. Timing and management is important. This meant a higher order of discipline and training than would have been found in more traditional agricultural activities.

The more I learn of plantations, the more I begin to wonder: “Would such a visionary adventure be possible today in Sri Lanka?” Please do give me your answer whenever you like.

The Fountains of Paradise

Let me ask a few questions to sharpen the original thought. Let us say you discovered, as Sir Arthur Clarke fictionalized in the fountains of Paradise, that there could be an elevator from Sri Lanka to a satellite in space from which interstellar transportation would take place. Except, let us say that you could build not one but several such elevators. This venture would require a lot of land, energy, and other inputs. Imagine all of us are at a meeting to plan this great new venture. I have prepared my list of basic questions that any investor would ask. Let me run it by you!

· Question 1: To open this whole new sector, would you be able to obtain the land that is necessary for such a venture?

· Question 2: What sort of permissions would be needed to build?

· Question 3: Would the government and various external agencies have to first conduct a sector analysis and spend years planning and preparing a project for such an effort?

· Question 4: Would you then get all manner of credit and advice to set it up, which will also shackle you to bureaucracy that is unproductive?

· Question 5: How much of your time would you spend on your project and how much in meetings and paperwork to please the government?

· Question 6: How much freedom will you be given to experiment with your own approach to the problem rather than externally driven ideas?

· Question 7: Would you have the human capital to manage such a technological enterprise? Like the plantation sector of the 19th century, would you be able to import human capital? Or put it differently, would you allow the John Taylor of this sector to strike roots here and do the pioneer work?

· Question 8: Finally, how long would it be before you were able to hoist one of these elevators? How long would it be before you were able to develop this sector?

· Question 9: Would other countries, like Singapore and Mauritius beat you to it?

· Question 10: Would you rather make an elevator here or in one of those countries?

This may sound strange and funny. But truly, economic growth occurs as bizarre ideas like plantations (and it could be space elevators in the future!) come to fruition through the efforts of pioneers like Taylor.

Imagine yourself in the latter part of the nineteenth century. If someone had told you that some crazy fellow called Edison was developing a light bulb and a movie projector and that we would live with perpetual light as well as watch movies, what would you have said? Furthermore, what if there was a government regulator telling him what lighting should look like and what sort of movies could be made? The world would be very different to what we know today, if that had truly happened.

The need for investment space

Yes! Growing societies need to give individual entrepreneurial spirit a lot of room. There must be space - both physical and regulatory space - for making all manner of investments. Investment cannot be made on command. No one but the driven, like Bill Gates, knows what and how he or she will deliver in the market. New goods like cell phones and new ideas like FedEx and Starbucks generate growth. Do you believe that they happen mainly in the US because the US has some genetic advantage? Or is it because in the US there is space for such ideas to develop? I must answer this first question in the negative when I see Jeronis De Soysa as one of the pioneer planters with no foreign help. He started on 1835 and all his staff was Sri Lankan.

We must review our notion of private sector development and economics. But as my joke on South Asian policymaking goes; “how many economists in poor countries does it take to make economic policy?” The answer is “none, they have all migrated overseas or rigid bureaucracies will not allow them into policymaking!”

We continue to retain a very patronizing attitude towards the private sector in poor countries, where private sector development programs continue to rely on credit provision, some education of the private sector, as well as a considerable buildup of legislation and regulation for the private sector. We target investment through incentives and other fiscal inducements. The sector-picking mentality, where policymakers have in mind the industries that are to be developed, remains virtually intact. We justify our rather narrow approach to private sector development through poorly conceived ideas of stages of growth where a poor country must first produce agricultural goods, then move on to garments, graduating to leather and light machinery and finally climbing up the technology ladder to cars and machinery. It is this kind of reasoning that led all countries to attempt a car industry to a point where there is now a global excess supply.

It is this same reasoning that has so enslaved even the entrepreneur in poor countries that they now display herd behavior and operate under an expectation of a paternal government who will use poor taxpayers’ largesse in their favor. Garment and hotel trade is developed as a result of incentives offered by the government. Few produce branded, quality products that are more than mere commodities. Few have the differentiated product like Aman-resorts. As a result, I would conclude that these ventures are exposed to an excessive risk but they continue to be hopeful of government support. Not really a good way to run a business!

Nowadays, I am amused to hear everyone tell me that IT is the hope for poor countries where there is limited modern education! But those who argue for it want the government to take the lead.

Unfortunately, decades of Keynesianism, socialism, and generally poor thinking have resulted in the three communities - business, thinking, and government - developing a pathological co-dependency. This co-dependency must be exorcised if there is to be investment space and growth. The knee-jerk reaction that government must lead in every area and cover all risks has led to a situation that has stifled true entrepreneurship.

Government must be better defined!

Economics is a much-maligned profession. Even my old aunt thinks she knows all there is to know of development and lectures me on policy. Murphy’s law of economic policy states; “Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.” To this I would add development economists, who prescribe policy that is not based on modern economics. But then a development economist is one who wants the government to flush the toilet after he has created a mess.

Serious economists will not give you pat solutions based on government led growth. Growth is a multifaceted, messy business not amenable to fine-tuning and control of bureaucracies. No planner, no policymaker, no economist can tell you where the next investment opportunity lies. This is not to say there is not a role for government. There is! And it is not defining and directing investment and entrepreneurship!

I repeat, “Growth is a multifaceted, messy business not amenable to fine-tuning and control of bureaucracies.” Growth is fresh ideas! Growth is Taylor planting tea, Edison with his research lab and GE, Disney making cartoons, Graham Bell making a telephone and then AT&T dreaming of an across Atlantic cable, and then setting up National Geographic and so on and so forth.

This is what I find most fascinating about your plantations. Their history shows us how it is the self-willed men driven not only by the profit motive but the ambience and the adventure of plantations that delivered to us this industry that is now so critical to your economy. It is the pursuit of such dreams and visions that delivers to us, economic growth. The modern state needs to recede to allow such initiatives to be taken. It must provide the investment space that self-willed men like Bird, Taylor and Lipton need. And you and I independent analysts and stakeholders in the economy must argue for that space for investment.

Monday, 8 February 2010

Why are Professional appointments not made in Pakistan!

For 5 years the position of the Chief Economist of the Planning Commission has been vacant. The PIDE Director/Vice Chancellor has served in an “acting” capacity! Why "acting?" And how do you keep someone in an "acting" position for years? Is that good governance?

Every few months the government runs expensive ads (the most recent is produced below). They seem to be content with placing the ad! There is no serious effort then made to fill the position.

This is not the only position this has happened with. The SECP position too was left vacant for many months on a number of occasions.

The government seems to find it very hard to find professional economists. Why is this so? I would welcome your views on this subject!

I would like to point out that very few senior positions are filled by the mere placement of an ad! Often this is a matter for a search committee and serious effort by several competent people to seek an ideal candidate and persuade him or her to accept the proposed position. Since the government is unwilling to form such a search committee and seek out serious people, perhaps it should stop wasting tax-payer's money on such ads! (Even when they form a search committee they will pick on the most well known establishment figures who in turn will find a very well known non-professional or a house-broken professional who will not rock the boat.) No wonder the government seems to have no fresh thinking.

Here is the wording of the Advertisement for the Chief Economist with some comments in red!

1. Pakistan Planning Commission is the premier Government institution entrusted with overall development, planning and policy making of the country. Chief Economist plays a pivotal role in devising economic plans, strategies, and to review the overall economic and development situation. He is also Member of the Planning Commission and reports directly to the Chairman of the Planning Commission.

Note the sexist “he should be…”

2. Planning Commission requires the services of a professional (Pakistani National) of International standing for appointment as Chief Economist. The pay package based on qualification and experience will be negotiable. We are looking for a condition with: Ph.D Degree in Economics from a reputed university recognized by the Higher Education Commission of Pakistan.

Note recognized by HEC…not international repute.

3. At least 25 years experience in economic planning and management covering the fields such as macroeconomics, fiscal and monetary policies, trade and finance, poverty and income distribution and economic statistics & forecasting.

25 years…..they want an old man! No fresh thinking. But that has always been the case in Pakistan! We have always had old men in policymaking!

4. Proven track record of research. Publications on socio-economic issues in national and international journals of repute. Expertise to carry out review of economic situation in the country and to formulate appropriate economic policies.

5. Application including CV and major accomplishments may be sent electronically or directly to the address below, within fifteen days of publication of this announcement.

6. Planning Commission will contact the shortlisted candidates for interview.

The Ad also forgets to mention the Chief Economist reports to the Secretary Planning and has no control over the Planning division.

Oil pricing and Markets in Pakistan

On Sunday, February 07, 2010, Dr. Farrukh Saleem gave us an excellent analysis of oil pricing and markeket structure in Pakistan.

“On March 25, 2008, Syed Yusuf Raza Gilani took oath as the 23rd prime minister of Pakistan. That fateful day the maximum ex-depot sales price of premium motor gasoline was Rs62.81 per litre. On Jan 31, 2010, OGRA, in exercise of the powers conferred by Section 6(2)(r) of the Oil and Gas Regulatory Ordinance 2002 and Clauses 4 and 4(A) of Section 2 of the Petroleum Products (Petroleum Levy) Ordinance, 1961, jacked the maximum ex-depot sales price of motor gasoline to Rs71.21.

For the record, on Jan 31, the OPEC Basket Price stood at $71.02 per barrel, having declined from $96.49 per barrel, as of March 25, 2008; a decline of more than 25 percent.

Where is our money really going? On Jan 31, the ex-refinery price was notified to be Rs42.72 per litre, transportation Rs4.42 per litre, dealers' commission Rs2.36 per litre and Oil Marketing Companies' margin Rs1.89 per litre for a total of Rs51.39 per litre. The government then directly takes away Rs10 per litre as petroleum levy plus Rs9.82 per litre as general sales tax. So the government gulps down Rs20 per litre of every litre of gasoline consumed in the country.

And, what does the government do with Rs20 per litre of every litre of gasoline consumed in the country? Budget 2009-10 allocated Rs3.3 million per day for every day of the year for the prime minister's foreign tours. Budget 2009-10 allocated Rs0.6 million per day for every day of the year for the president's foreign tours. Budget 2009-10 allocated Rs1 million per day for every day of the year for the Presidency.

And, once the government is done with 178 million Pakistani taxpayers (yes, there are 178 million taxpayers in Pakistan – remember, Rs9.82 per litre general sales tax?) our oil cartel enters the game. Our oil cartel has nine major members: Pakistan State Oil (PSO), Pak-Arab Refinery (PARCO), Attock Refinery Limited (ARL), Attock Petroleum, National Refinery Limited (NRL), Pakistan Refinery (PRL), Chevron/Caltex, Shell Pakistan and Total-PARCO.

Our oil cartel is extremely incestuous: ARL, Attock Petroleum and NRL are all owned by the Attock Group. PSO, Shell and Caltex own PRL jointly. Our government owns 60 percent of PARCO while Total and PARCO are partners. Individual members of the cartel own each other, sit on each others' boards, own projects jointly and all get together to suck the blood out of 178 million Pakistanis.

Next: refining margins charged by Pakistani refineries are almost twice as high as being charged by refineries outside Pakistan. Furthermore, no refinery in Pakistan is technically capable of producing 0.5 percent sulphur diesel (emission control standards in Europe and North America now require refineries to produce ultra-low sulphur diesel). All that our refineries produce is 1 percent sulphur diesel. As a consequence, Pakistani consumers are being supplied an inferior quality product at the price of a superior product. The average differential in price -- between 0.5 percent sulphur diesel and 1 percent sulphur diesel -- is $18 per ton. Pakistani consumers are being ripped off a hefty Rs4 billion a year.

Next: in 2002, our government allowed refineries to impose a 5 percent to 10 percent "deemed duty" in order to create a special reserve for the purpose of upgrading. The refineries sucked up Rs18 billion from Pakistani consumers but not a rupee was spent on upgrading.

Next: someone is making truckloads of money, because transporting a litre of gasoline should not be costing more than Rs0.50 per litre, as opposed to consumers coughing out Rs4.42 per litre.

Governments around the world break cartels. Ours supports them. Governments around the world support consumers. Ours opposes them.”

Friday, 5 February 2010

Monetize Perks NOW

The Daily Times carried the following today

‘Khusro Pervaiz highest-paid bureaucrat’

LAHORE: The commissioner of Punjab’s capital, Khusro Pervaiz, has become the highest-paid bureaucrat in the city, a private TV channel reported on Thursday.

The channel reported that while Khusro Pervaiz drew a monthly salary of Rs 334,000 as the project director of the Lahore Ring Road project, he was also receiving Rs 50,000 a month for holding the additional charge of the Lahore commissioner’s office. daily times monitor

* * * * *

The civil servant has learnt to game the incentive system that seeks to keep cash salaries low and allows invisible perks to be distributed freely beyond public scrutiny.

Recently, they have given themselves all manner of allowances in the name of development and efficiency. Thus the Commissioner Lahore is now Project Director of Ring Road and a development office and hence draws those hefty salaries.

Let us remind ourselves of the role of Commissioner Lahore.

It is mainly a magisterial function i.e., his/her main task should be the maintenance of law and order.

Why then s he doing development?

The answer is obvious--to collect the allowances.

Will this help law and order? Answer "NO!"

The commissioner also get additional perks that we are not counting. A house in walled estate with a rental value of over Rs 300,000, all utilities paid, domestic servants (number unknown), cars with gas (number unknown), cheap club memberships to at least 2 elite institutions etc. Frequently government will give a civil servant of this rank land at heavily subsidized rates.

In my calculation an enterprising and well connected civil servant could easily cost the tax payer Rs 800,000 to Rs. 10,000,000 a month. Of course none of this is monitorable allowing the myth of a poor underpaid civil servant to be perpetuated.