The Economic Policies of the first Nawaz Sharif Government 1990-93
by Dr. Abdus Samad
(written at the time of the fall of the first Nawaz Sharif Government)
Author of "Governance, Economic Policy and Reform in Pakistan"
This article will only discuss the economic initiatives of the Sharif government, without the usual emotion that is associated with matters of government. Consequently, the article will not attempt to develop a historical record of the period or analyze the development of politics during the tenure of the government. No attempt will be made to look at the period through the usual kaleidoscope of permutations and combinations of the military, bureaucratic, feudal, and capitalist shifting alliances. Nor will there be any speculation of ulterior motives, or inner thoughts or conversations behind closed doors, sums of money that were secretly exchanged, since the author lacks any personal knowledge of such transactions. This is a very simple economic analysis of the economic policy initiatives of the Nawaz Sharif government by an economist who has no axe to grind, nor any government positions to expect, and that is all.
I. The Vision
Nawaz Sharif is perhaps the first political leader since Ayub Khan to have given economic development a priority in policy. Perhaps spurred on by his business background and the business lobby, Mr. Sharif's biggest contribution was his moving somewhat (though not enough) away from the Islamic rhetoric that has so dominated our politics for the last few years and taking on the mandate of growth with some impatience. However, Mr. Sharif, having accepted the mandate of economic development, lacked the vision to develop a comprehensive economic program that could have achieved his stated end. In fact, because of the lack of such a complete vision, the initiatives that had been taken were beginning to show signs of weak implementation and inefficient administration. In fact the seeds of Mr. Sharif's downfall may lie in his lack of a vision without which reform and growth-oriented initiatives could not take root.
All governments since the socialist government of Zulfiqar Ali Bhutto had paid lip-service to privatization, deregulation and the need to open out the economy. Zia ul haq announced that as an objective and then became involved with Islam and Afghanistan. His Finance ministers such as the current president and Dr. Mahboob ul Haq had all signed international agreements committing themselves to these economic policies. However, progress was extremely slow with no privatization having taken place, deregulation proceeding at a very slow pace and the government finding every excuse to avoid the opening out of the economy. In his roughly 30 months of power, Mr. Nawaz Sharif pushed forward on his announced objectives of "privatization, deregulation and unleashing the potential of the private sector" and "turning Pakistan into a Korea by encouraging greater private saving and investment to accelerate economic growth". Mr. Sharif actually implemented some of the economic liberalization and privatization measures that previous governments merely talked about. Many of the members of previous regimes now are seen arguing vociferously from the unfortunate position of, "we were going to do that too".
Privatization has firmly entrenched itself in economic thinking as well as policy the world over especially after the demise of the communist bloc. However, despite its wide acceptance, no method of privatization has been evolved that will allow the assets of the public sector to be transferred to the private sector and achieve objectives such as a) obtain fair market value, b) ensure perfect transparency and no malfeasance by the agents of privatization, c) widely distribute the ownership, d) ensure that the newly privatized firms will be well run, e) ensure that the newly privatized firms will not increase prices, and f) that the proceeds of privatization be not utilized for budgetary purposes but bearing in mind that capital assets have been sold be used for growth that will benefit all including future generations. Given these diverse objectives it is easy to blame governments that take the bold step of privatization. Most far-seeing politicians and statesmen recognize that they will be criticized and refuse to wait for the perfect method. The retaining of industry on the books of the public sector is considered a drain on the exchequer as well as a source of inefficiency in the economy. Achievement of privatization is, therefore, an important end which they want to achieve quickly.
The Privatization Commission which was set up 2 months after the Sharif government took over in January 1991, has been successful in privatizing over 50 of the 115 units of the public sector. These included the privatization of two nationalized banks as well. This was an important achievement and Mr. Sharif can hold that up as an achievement indeed.
Mr. Sharif has been severely criticized for the method of privatization that he adopted. Indeed the privatization commission's absolute refusal to use the stock market for privatization needs some explanation. It is not enough to say that a diversified ownership of a company does not ensure good management in an environment where absolute control of the entire company has not prevented mismanagement. Why could for example mutual funds not have and institutional investors at home and overseas not have acted as shareholder block powerful enough to monitor management.
The privatization that has been achieved thus far will only result in improved economic efficiency if competitive markets are encouraged in the markets in which newly privatized firms are operating. In this case the government should move early to ensure the newly privatized firms are not protected by tariff barriers and are subject to external competition.
It is certainly hoped that the momentum on privatization will not be lost after the departure of Mr. Sharif. The slight movement of the political pendulum in the direction of the democrats in the US with the emergence of Mr. Clinton, should in no way be interpreted to suggest that the earlier role of the governments based on overgrown public sectors has returned. Privatization remains an urgent necessity. However, in the pursuit of this policy a greater role of the domestic and international stock markets should be made. This would be especially important when it comes to privatizing large public utilities such as telephones and electricity. Mr. Nawaz Sharif's momentum on the objectives of privatization of WAPDA and PTC should be maintained.
To promote private investment, the Sharif government took the long-overdue step of removing the requirement of government approval. Several other restrictions on the private sector were removed such as the need to register technical and foreign loan agreements, the issue of shares at par value, and obtain work permits for foreign technical personnel.
Several important steps were taken to promote a better-functioning financial markets. The most important of these was the development of competition in the financial markets by means of allowing several new entrants to enter the market. The government allowed ten private commercial banks to enter the market and several additional investment banks including some foreign banks to enter the domestic financial market. In addition, the number of financial institutions like modarabas, leasing companies, investment banks and commercial banks in the private sector almost doubled.
The Sharif government also opened out many new areas to the private sector. These include power generation, telecommunications, airlines, shipping, road construction, and port operations. A private airline in the private sector has already started working. Privatization of Pakistan Telecommunication Corporation was being actively pursued although large and perhaps quite unnecessary international consulting fees had been paid. Meanwhile two cellular mobile telephone companies have been established in the private sector and have greatly enhanced domestic communication.
Responding to this policy, some buoyancy was witnessed in the financial and stock markets. Three foreign funds worth $58 million were set up for investment in the equities of the companies. The stock market was very bullish in early 1992 with the State Bank general index of share prices increasing from 393.47 at the end of June 1991 to 764.24 by the end of June 1992. This represented an increase of about 93.2% as compared to an increase of 38.2% in 1990-91.
Unfortunately, rising stock market proved to be a bubble primarily because of the inability of the government to regulate and monitor the market. Insider trading remains strong, trading continues to take place off the trading floor at prices other than market prices, and firms refuse to pay dividends or allow shareholder monitoring. Most importantly, the government has not indicted a single individual for any of these illegal activities. All financial laws and regulations are, thus, meaningless. Like his predecessors Mr. Sharif could not do anything in this area. Like them, he too did not understand that economic growth and reforms have to be founded on a strong institutional base.
3. Opening the Economy
In the beginning of the year 1991, another important long-awaited step towards increased economic efficiency was taken with the liberalization of foreign exchange controls. Restrictions on the free movement of foreign currency were removed and resident Pakistanis, including firms and companies, were allowed to maintain foreign currency accounts in Pakistan on the same basis as non-residents. This was followed up by the opening of the green channel which allowed personal baggage to be brought into the country free of customs declaration or search.
For years we lived under the paranoia of the inferiority of the rupee, thinking that if restrictions were removed, people would instantly fly to foreign currencies. We were also told that if we did not control our imports, all manner of luxury items will be imported and our foreign exchange reserves would be lost very quickly. Non of this happened. In fact to the contrary, the impact of the reforms has been positive as foreign inflows and the country's reserve position have both increased since the introduction of these reforms. And the markets are not flooded by expensive imports. The reforms have only served to reduce the costs of rentseeking and corruption on the people of the country.
The reform, however, was half-hearted as it exposed the State Bank to teh foreign exchange risk. Banks should have been allowed to lend the foreign exchange domestically and take their oen foriegn exchange risk. This measure will lead to futher specualtion and expose teh country to excessive foreign exchange proessures.
The government also adopted the policy of attracting foreign investment. Foreigners were allowed to make new investments without any prior approval of the government. Foreign investors could own upto 100% of equity in a venture. In addition a new investment board to market Pakistan was launched. Vigorous marketing efforts have been made during the last 18 months to attract foreign investors. Various conferences and seminars in collaboration with international agencies were arranged in order to speed up the process. In December 1991, an international conference on investment promotion was organized by the government of Pakistan with the assistance of MIGA, IFC and ADB. The Prime Minister's visits to Japan, Germany and other developed countries were also arranged for this purpose.
The new investment board organized at least three major conferences for promoting Pakistan as a attractive center for foreign investment despite the state of our other policies such as our large fiscal deficit, the confused state of riba and the US perception of Pakistan as a terrorist state. The policies had some positive effect with foreign investment increasing by 26% in 1990-1992 even though the bulk of it was portfolio investment which is more volatile and mobile than foreign direct investment. However, Pakistan continues to lag behind other regions of the developing world in terms of attracting foreign investment. This suggests that policies for inducing foreign investment need further reforms. In particular, an improved fiscal stance, policies that are in harmony with the rest of the world though not in consonance with all segments of the clergy, and perhaps a more modernized image of the country and its institutions might help attract the foreign investor.
4. Infrastructural Development
The government of Nawaz Sharif may well be remembered for its strong resolve in rushing through a package on the development of communications network especially roads of the country. The prime minister despite all the criticism hurled at him was well aware of the importance of road communication in the development process. The most important project in this connection is the controversial motorway. It is a 340 km long road from Lahore to Islamabad being built at the cost Rs.24b. This exorbitant cost has invited scathing criticism from various quarters although till now there has been no comparison of the cost of this highway with other highway projects internationally and in Pakistan. Another project is that of dualization of the national highway N-5 which caters for about 70% of the country's total traffic. The national highway N-55 (Indus highways) is also being upgraded which would form a vital north-south link on the west bank of river Indus.
One major development in the field of communications is the conversion of telegraph and telephone department into Pakistan Telecommunication Corporation. A massive program, which remains unparalleled in the history of telecommunication in Pakistan, of expansion of the facilities has been embarked upon by the corporation. The plan is to more than double the number of lines within two years i.e. by June 1993. The next step in the plan is the privatization of PTC. Two mobile cellular telephone companies have also been established in the private sector. The optic fiber system, which has recently been introduced in Pakistan is expected to be expanded.
5. Federal Issues
Mr. Sharif is also to be credited with having taken some important steps towards dealing with federal issues. Two significant accords were signed by the provinces in March/April of 1991: the Water Apportionment Accord and the award of the National Finance Commission. The first settled the issue of distribution of water resources among the four provinces. This issue had remained unresolved since independence, resulting in uncertainty, wastage of water resources and federal tensions.
The other significant development is the award of the National Finance Commission. The NFC award settled the issue of distribution of revenues between the center and the provinces from the divisible pool. According to the provisions of the 1973 constitution, an award has to be decided upon every five years. The first award, under the present constitution was given in 1975. It was only in 1991, after a lapse of 16 years, that the new award was given. According to this award, the center would retain 20% of the revenues from the divisible pool while the provinces would share the rest.
The important point to note with regard to these federal issues is that for the first time, these federal issues had been raised and agreed to in a constitutional framework. There remain implementation problems as well as differences between the federal and provincial governments, perhaps even necessitating the Council of Common Concerns. The important point to note in this regard is that the democratic institutions of the state begin to be used for the purposes of the resolution of problems. With these accords on federal matters, we began to see the beginnings of some measure of provincial autonomy and the emergence of a federation. Perhaps encouraged by this newfound autonomy, NWFP objected to the privatization of WAPDA. This matter was to be brought to the Council of Common Interests had the government remained in power-- and we hope still will for it remains in the interests of the country to remove the inefficiencies in WAPDA. 6. Measures to Deal with Unemployment
Mr. Sharif also made a contribution in terms of adopting a refreshing and perhaps more thoughtful approach to dealing with unemployment. Departing from the traditional policy of using government employment as an unemployment insurance scheme, the Sharif government started various schemes whereby people, instead of relying on the government, could be motivated to earn their livelihood by involving themselves in small level businesses. The most important of these "self-employment schemes", was the "Prime Minister's public transport scheme", which provided soft loans to buy taxis.
The scheme has been quite popular and extremely visible. Indeed it was not only economically astute means of addressing the urban educated unemployment problem, but also quite politically advantageous to Mr. Sharif, winning him support as well as high visibility. Though very popular, this scheme may have resulted in an over-supply of cabs thus threatening the financial viability of the scheme. Clearly there was a need to tie these small loans to other forms of collateral and means of business. Given more time, the Sharif government might have thought up an alternative to the taxi scheme. Meanwhile, the supply of cars was diverted totally towards the taxis leaving a long queue of car-buyers who had paid a large deposit several months ago at zero interest rate. Pak-Suzuki continues to earn a substantial interest on the huge float (some estimate it to be in billions of rupees) that it has collected from people who await their cars. No government agency takes note of this irregularity which in other countries would be culpable.
II. Economic Performance
One curious facet of the Pakistan economy is its imperviousness to any changes of government or other shocks. During much the Sharif period, economic growth remained at the traditional level of about 6%. Inflation too remained as before--within about 10 percent. Similarly current account deficit remained close to its historical value-- about 3 percent of GDP. For this economic performance, the Sharif government can take no credit as this is what are economy is used to and will probably continue to develop at. For a government to claim progress on the economic front, it really has to show faster growth while retaining control on the rate of inflation and the current account during its tenure.
The Nawaz Sharif government was in power for 30 months and undertook several policy initiatives that have been described above. Although it is too early to expect an impact on economic performance of reforms of the kind discussed above. However, there may not be much of an impact given the remaining weaknesses that are discussed below. Unfortunately, there may actually be an unfavorable impact on the economy, if the current state of uncertainty is not ended soon.
III. The Blind Spots
1. Uncontrollable Fiscal Deficits
Like its predecessors, the Sharif government was unable to address the key policy challenge of our country-- the reduction of the fiscal deficit. For the last twenty years successive governments have been struggling with the need to reduce the fiscal deficit with little success. As the debt is expanded to finance these growing deficits, the possibility of an acceleration in the rate of inflation increases. Because of the structural rigidities in expenditures, arising mainly from defense expenditures and debt-servicing, expenditure reduction is a difficult choice. At the same time, the urgent need to reform the tax system as well as tax administration continues to be regarded as a politically less desirable option by all governments.
After an initial attempt to control the fiscal situation, the Sharif government lost control and now we are expecting a deficit of well over 7 % of GDP in 1992/3. The expanding fiscal deficit and the buildup of the debt stocks, are now threatening to ignite inflationary pressures in the economy. At the same time the economic growth appears to be decelerating because of a weak world textile market and problems of pests in the cotton crop. Because of past fiscal excesses and the inability to control the current fiscal deficits, the Sharif government appeared to be totally helpless in dealing with the emerging crisis of stagflation. This is the main challenge for the succeeding government.
2. No Attempt at Systemic Reform
Perhaps the biggest failure of Nawaz Sharif-- and in fairness to him of all our governments-- is their inability to grasp the need for a reform of our political and economic system. We live with a system that was defined for another time and era. On that we have superimposed nationalistic and religious imperatives in a patchwork fashion. In addition, the government has taken on the roles of the benefactor, the employer alongside several other such roles. The result is an overburdened state that is totally unable to function other than looking after the interests of the ruler.
The cooperatives scandal happened in Mr. Sharif's time and we saw depositors lose large amounts of money while the government stood by helplessly unable to indict, seize assets-- do all that would enable depositors to obtain redress. This is the third time such an event happened-- the first was in 1977 and the second in 1987. On both occasions finance companies collapsed without depositors any compensation. To date no money has been returned nor has any individual indicted leave alone convicted.
In 1991, Mr. Sharif's government wished to sell Foreign Currency Bearer Certificates in the US. Such is the management of the government that advertisements were placed in the Wall Street Journal without permission from the US government. Worse still, the advertisements were worded in manner that they implied that GOP was encouraging money laundering. Meanwhile government functionaries were actually making statements confirming that GOP was engaged in laundering dirty money. The US government took us to task and GOP had to apologize. The episode must have affected our credit-rating and hence cost us money in terms of higher interest rates. Despite these real costs, the government found itself unable to discipline any of the individuals who were responsible for this perfectly avoidable fiasco.
What Mr. Sharif and all his political counterparts refuse to see is that they will be able to achieve only that which their delivery machinery will allow. The attempts of our leaders to personalize bureaucracies and insulate themselves with little known sycophants, lacking vision and competence is amusing but self-defeating. If they wish to truly transform the country with their vision as well as leave their names in history, they have to have the best available help and properly organized. A team of experts must be found in government and close to the centers of policy and decisionmaking. Consequently, without a full-fledged reform that ensures that government is better managed at every level by the best-available talent, nothing will be achieved. Moreover, unless the management of government is organized such that efficiency is given priority, wastage cannot be controlled. Looked at from this standpoint, key elements of a growth oriented strategy will have to be reforms such as judicial independence, effective decentralization, reducing the size of the government, removing uniform national pay scales and automatic promotions, making government service more competitive by opening it out.
Many of Mr. Sharif's efforts at economic progress were being laid on extremely poor foundations. He lacked the institutional basis for ensuring success in his avowed objective of development. He did not realize that institutional reform directed towards modernization and efficiency could have strengthened his own political base. His opposition relied on the ossified structures of the past that needed reform to block his path and eventually to unseat him. His attempts to personalize the bureaucracy were bound to fail for the bureaucracy is already a force organized and pitted against politics, politicians and reform. The only way out for him was to reform it such that efficiency was given priority. In that manner, he could rely on his constituency being created by the effective implementation of his ideas and policies.
3. Surprising Lack of Interest in Education
Finally, for a Prime Minister who wished make the country into a Korea rapidly, it is curious indeed that Mr. Sharif lacked any interest in education whatsoever. It seems that Mr. Sharif did not at all appreciate that probably the single most important causative factor of economic growth is education, and in particular the quality of education. Studies have shown that the economies of Europe, America and the Asian tigers grew rapidly, and continue to show growth impetus, primarily because of their education and research facilities.
An important ingredient in any policy design for the improvement of education would be the quality improvement in the institutions of research and higher learning. Mr. Sharif showed some signs of improving discipline at Punjab University when he faced a traffic problem near Punjab University. However, apart from a few police raids, he was totally uninterested. Apart from some lip service to a new education policy which played the traditional numbers game of promising to increase the numbers of schools colleges and universities, the government had nothing to say about the appalling state of education in the country.
Lip service was paid to the privatization of some of the public sector owned educational institutions. No serious steps in this much needed direction were taken. The education bureaucracy, the main beneficiary of the education system ensured that the idea never even got off first base. The fact that exams were not held on time, curricula were outdated, teachers disinterested and the education czars such as the vice chancellors and principals virtually plundering education funds, the Sharif government was not interested in touching the truly forgotten, and yet perhaps the most vital sector, of our economy-- education.
Mr. Sharif has hit on some of the right chords. In his next round, if he has one, he would be well advised to try to underpin his policies for rapid economic development by means of reforms that develop a strong institutional base. An improved government machinery is needed to help implement the policies that are needed. It is only with an institutional base as well as a lean and efficient government that any of our leaders can hope to deliver the Korea that he/she might want to deliver to us. However, in doing so, he must truly step into the role of a reformer and emphasize educational reform that seeks to improve the utilization of existing facilities for a quality education. Mr. Sharif, or any other leader who chooses this path may find that if he does take on this truly modernizing role he/she will also have to take a stand on the role of clergy in politics. No state can go into the twenty-first century with obscurantists idealogues as leaders of thought and polity. Our leaders will have to decide on issue such as the use of Islamic rhetoric. Whether interest rate is riba or not? Whether parallel judicial systems such as the Federal Shariat Court and the supreme court are all without economic cost? Mr. Sharif as well as all our other leaders have still to reveal to us how far they are prepared to depart from political expediency in order to make us into a Korea before we are well into the twenty-first century.