PAKISTAN’s first generation regulation related reforms implemented under the watchful eye of the IMF focused on the reduction of import tariffs. Unfortunately, revenue considerations rather than instilling of industrial efficiency drove the exercise.

Resultantly, tariff ceilings on finished goods were lowered quicker than those on inputs of raw materials and intermediate goods. Industry was not given adequate notice to adapt to the change and structure its operations in the most efficient ways through redeployment of resources.

However, this is not the subject of this article, because the necessary adjustments are slowly working their way through the system. In the opinion of this writer it is time to look at the institutional aspect of regulation which has become the bane of private industry, and the main impediment to the growth. Getting the government to be an enabler rather than a disabler is the real challenge.

Since the 1970s the failure of the economic system can be traced to a deficiency of governance at one level or another, the most crucial of which was the desire of the state machinery to regulate every activity, a task that it carried out through the creation of both visible and invisible roadblocks. A survey conducted by the World Bank highlights the huge costs of doing business in Pakistan. It reveals that 12% of the time of entrepreneurs is taken up in dealing with the bureaucracy (with 42% feeling that there were far too many regulators and regulations) compared to 5% in Latin American countries.

Similarly, close to 56% complained about the rising costs of doing business because of the government’s tax policies, while 40% mentioned the contribution of corruption to the growth in costs. Small enterprises, in view of their size and limited managerial resources, reported how they suffered more than the larger enterprises from the cumbersome rules and regulations and the taxation systems, their uncertain application and arbitrary changes in the rules of the game with little, if any, redress.

There is an urgent need to dismantle the over-extended regulatory framework and huge regulatory apparatus strangulating private activity and thereby shackling the economy’s prospects for growth. Just to illustrate this point, there are 27 labour laws. Of the 27, 10 were enacted more than 30 years ago. During this period the structure and pattern of the economy has transformed, the employer-employee contractual relationships have been modified or bypassed through other institutional arrangements like the rapid growth of contract labour.

Moreover, these laws are in conflict with each other. For instance, each legislation carries its own definition of the term ‘wages’; each Act providing a different interpretation of what portion of the payments made to the worker would be covered by the definition of the term ‘wage’ for determining benefits to workers or for assessing contributions to be made to the welfare schemes (EOBI and Social Security) run by parastatals established by the federal and provincial governments.

Moreover, the predatory behaviour of government functionaries enforcing these labour laws prompts many enterprises to choose to remain small. To get around the rigidities of labour laws that become applicable to units with 10 or more workers, employers have resorted to a combination of sub-contracting of production, harnessing of capital intensive production processes, hiring of contract labour and/or fragmentation/legal subdivision of production facilities into smaller enterprises. An adverse outcome of these developments is that they have lowered the incentive of the private sector to invest in the upgrading of skills, thereby affecting productivity and profitability of enterprises.

A large part of the regulatory framework exists because of the lack of clarity on the role of government. In several instances, new products and instruments have become available that are better replacements and more effective mechanisms for achieving the objectives underlying the promulgation of existing laws or institutional and administrative arrangements for their enforcement.

Take, for instance, the provincial Boiler Acts dating to 1923, Grade-11 Boiler Inspectors recruited and trained to enforce a legislation that may have been relevant 80 years ago, are today expected to inspect and certify boilers manufactured by multinationals like Siemens. This regulatory role could easily be outsourced to universities and private firms providing engineering services.

Similarly, the government has Building and Electricity Inspectors to ensure the safety and security of private buildings used for public purposes, for example, cinema houses. These services are not required if such buildings are comprehensively covered by private insurance companies. Through this instrument the cinema owners can be spared the frequent visits of these government functionaries, who would be denied the opportunity for extortion on the basis of the regulatory functions mandated to them. Moreover, the security and safety of the public using these buildings would also be assured, since the private insurance companies would ensure the proper construction and maintenance of the property.

At times the regulations actually block private efforts to improve productivity, efficiency and sustainability of operations. For instance, the viability of the sugar industry today requires its restructuring, involving consolidation, merger and closure of many of the large number of inefficient sugar mills with small capacities. Unfortunately, the policies of provincial governments are irrational and inimical to this overdue consolidation and shakeout in the industry. They prohibit the relocation and consolidation of mills required to achieve economies of scale and maintain competitiveness.

The theological principle to regulate economic activity based on complete distrust of the market and a belief in the state’s omnipotence has restricted the space within which the private sector can operate. The role of markets is underestimated in the belief that the state is much more knowledgeable and objective and that markets are often rigged and imperfect and private behaviour shortsighted.

Even civil society in Pakistan is suspicious of markets and provides the bureaucracy with an excuse to regulate. The bureaucracy opts for direct controls rather than market-friendly fiscal rewards and punishments not only because of rent extraction powers that it gives them but also because they prefer certainty of command and understand little about subtlety of induced behaviour.

A friend, Dr. Nadeem-ul-Haque, argues that flawed misconceptions drive small countries to mimic big countries in constructing governments. Complicated state apparatus are put in place. Unfortunately, donors also provide uniform advice, persuading borrowers to set up the same institutions in all countries regardless of size. The result is that regulators are put in place even before markets begin to function. So, we now have a regulator for each market, in some cases there are two regulating the same market — for example the State Bank and the SECP are simultaneously regulating the financial institutions, and in the case of Modarabas there is the third regulator, the Religious/Shariah Board.

Largely owing to the nature and history of Pakistan’s economic development, whereby even the middle class was not the product of a dynamic independent process of growth but was created through public sector employment, we cannot, as yet, seem to visualize economic growth that is not based on state support and patronage. Thus, civil society continues to view the state as an all-powerful paternal entity that is supposed to protect against all risk and provide for all occasions. It is, therefore, not surprising that governments continue to be large and unaccountable and rule rather than serve.

Major reasons for poor implementation of policy and its effectiveness of policy include the excessive and archaic regulations, administrative systems and practices that are inconsistent with the declared policy and a pervasive lack of motivation and efficiency in making policy work. And even when responsiveness and concern is displayed at senior levels of the bureaucracy it is not matched by prompt action at lower levels.

The responsiveness and impact of senior officers are thus adversely affected, even when they are not neutralized by the incompetence and indifference of lower level officials. At times the official, without any fear of being held accountable by the system or his superiors for his highhanded behaviour, openly violates internally issued interpretations of laws and rules and/or simply refuses to accept rulings of superior courts on the subject.

No official can be held accountable for being absent from duty let alone for failing to meet deadlines for task completion. Senior officers are like managers who are trying to market their products to clients, but with little, if any, control over the actual delivery of products.

Every good organization makes periodical attempts to clean up its own house. All procedures and practices are subject to a fresh review. However, the government hardly ever questions its own mechanisms, processes and practices, except to ensure that the interests of the government and public sector employees are protected, which has resulted in the public sector having one employee for every 40 Pakistanis.

Many agencies in the public sector are moribund with little or no accountability for the quality or quantity of their output and even the actual delivery of services. Not surprisingly, ordinary citizens find it easier to obtain a driving licence or the national identity card through the market rather than a government office. Therefore, to get the government to focus on what it should be doing there is a need to redefine its role and the way it carries out its business, which would involve a major reduction in the areas of its activity.

The demands of a globalized economy require the private sector to adopt internationally recognized technologies and management practices to remain competitive internationally. However, the government, which is supposed to facilitate the operations of the private sector, and expects it to become modern in its outlook, sees nothing wrong with its own skills, procedures and work processes being antiquated. This huge contradiction is obviously unsustainable and can only be addressed through adjustments in the present size and skill base of the bureaucracy, 45% of which comprises illiterates.

CROWN Prince Abdullah of Saudi Arabia has extended the Israelis an olive branch that only the enemies of peace would not take. It is also a prescription to stanch the festering wounds of the Palestinians who have long been exposed to Israel’s barbaric atrocities.

In an exclusive interview last week in Riyadh with New York Time’s pro-Israeli columnist, Thomas L. Friedman, the prince authorized him to tell the world that he is prepared to ask his fellow Arabs in the Arab League, whose foreign ministers are due to congregate in Beirut next March 12, to recognize Israel as a legitimate state in the region in return for its total pullout from all the Palestinian lands occupied since 1967.

There could not have been a more appropriate and bold departure from a facile and irresolute Arab stance than this on the 18-month old Palestinian Intifida. The heroic Palestinians resisting Israeli apartheid and brutality have been as much a victim of Sharon’s lust for their blood as their Arab brothers’ wanton apathy to do anything on their behalf.

Abdullah, de facto ruler of the most influential Arab state, may have concluded that enough was enough and the time to bite the bullet had arrived. After all, admitting the legitimacy of a hectoring and arrogant entity like Israel would be as painful to Abdullah as was the decision to cease fire with an aggressor Iraq a poisoned chalice for the late Imam Khomeini of Iran.

It is unthinkable that the cool and composed Prince Abdullah, known for his aplomb, would have tossed a rabbit out of his hat in an act of theatrical bravado. That is not his style. Quiet and well-deliberated consultations with his fellow Arab rulers must have preceded this ground-breaking announcement. After all it is not only a question of the fate of the Palestinians alone. At stake is also the future of the whole Arab world vis-a-vis not just Israel but the latter’s principal patron, the United States.

No doubt that September 11, and the whole litany of events and developments triggered by it, is the catalyst for this radical move. The Arabs in general and the Saudis in particular have been subjected to an incisive and stinging media denunciation campaign in the US. The House of Saud has been faulted for being deliberately lax with the fundamentalists in order to keep the trouble away from the Saudi shores. Prince Abdullah himself has been targeted for turning a blind eye to seething anti-Americanism amongst his people.

The anti-Saudi media tirade has been spearheaded by the Israeli lobby, overly emboldened by the blank cheque that the Bush administration has granted to the hawks of Ariel Sharon to unleash bloody terror against the Palestinians in the occupied lands.

Thomas Friedman is a blazing gun in the media blitz against the Saudis, finding fault with everything, from a flawed and ‘archaic’ education system (because it is heavily religion-oriented) to a foreign policy devoid of ‘innovation and imagination.’ Friedman has written exclusively on the Arabs and the Saudis in his columns since September 11. He lately descended on Saudi Arabia in person to get a feel of the place in the aftermath of the cataclysmic event and find justifications for his media crusade on behalf of his country and his ideal, Israel.

That Friedman is hopelessly hooked on his advocacy of Israel was borne out from his own admission, in his NY Times column of February 25, that he walked out of an educated discussion in Riyadh when people started criticising the US bias for Israel.

It was, therefore, a brilliant tactical move by Abdullah to choose an Israeli tribune like Friedman to be the messenger of his major policy shift. This should take all the American-Israeli sting out that the Arabs are bankrupt of new options on the Palestinian-Israeli impasse.

Indeed, Abdullah’s outline of a bold new peace plan is, as of now, just that — an outline. However, this trial balloon could become a parachute to land all the parties involved in safety provided there is willingness to take advantage of its wind. In a real sense, his initiative challenges the stereotype assumptions on the basis of which all the players involved have been planning their strategies, so far.

For the Americans, it offers an ideal and welcome face-saving to balance their lop-sided sheltering of Israel under their wings. Bush, by some accounts, is said to be increasingly uncomfortable over Sharon’s excessive zeal to finish off the Palestinians with a lot of covert and overt American help in so many different ways. If he wishes to retain some semblance of concern in the future of Arab-American relations, the Abdullah initiative throws him the life-saving rope to swim back to the shore. But the U.S. will have to curb its pro-Israeli enthusiasm in order to force Israel to consider the plan on its merit.

Israel, initially, has welcomed the spirit of Abdullah’s plan but will, no doubt, go through it with a very fine tooth-comb to find faults with it, and leave enough room in it for itself to wriggle out with convenience at any given time.

Of course, in its present form, the plan should be a stick in Sharon’s craw because it negates his Biblical dream of a Greater Israel gobbling up all the occupied lands. He can be counted upon to conjure up all sorts of spanners to be thrown into the works to thwart the scheme. Rest assured that he will insist on his pound of flesh - real Shylock-like — in return for, if at all, his acquiescence in the plan. His track record of using a shot-gun every time the Palestinians throw a fly at him gives little incentive for optimism.

But the biggest test of all would be of the Arab willingness to distil a consensus on the issue, where none is at present in sight. Unity and fusion of ranks has never been a strong suit with the Arabs. The Arab camp is as divided today as it ever was. Negotiating the inter-Arab trap-doors will be the toughest hurdle of them all.

There should be no two opinions on the central Arab demand on Israel to vacate all the occupied lands and go back to its pre-1967 borders in return for its recognition, en masse, by all the Arabs. There is, practically, no room for division or dissent in it. Even a hard line state like Syria stands to benefit with the perceived return of the Golan Heights.

But what about another, equally central, demand of the Palestinian right — of return to the lands from which they were forcibly expelled? The last Camp David effort foundered on this thorny issue, even though Ehud Barak was said to be generously disposed on all others. Have the Palestinians mellowed, in the period since then, on this focal demand? Has Yasser Arafat been consulted on this prickly point in his virtual incarceration under the Israeli tanks? What about the radical groups, such as Hamas and Hizbollah; have they been consulted, too, to make amends in their positions on the issue?

There is, to be honest, little convincing logic in the demand for the right of return to ancestral homes, especially with the prospect of the Palestinians getting a state of their own on the occupied lands to be vacated by Israel. Israel will never agree to it, because this would give an unfair advantage to the Palestinians. And the toughest nut to crack would still be the future of Jerusalem.

It is not conceivable that Abdullah did not take soundings among the Palestinians, as well as Arabs known to favour a tough line against Israel, before floating his trial balloon. The Saudi style of diplomacy may seem secretive to many but it is cautious in the eyes of all. Abdullah is not one to be accused of reckless disregard of Arab sensitivities on a matter of such dire significance. In any case there is still a few weeks before the Beirut conclave gets under way — time enough for the Arabs to crystallize their positions and get their act together.

If for nothing else, for its sheer timing, Abdullah’s move is, simply, exquisite. It deflates Bush’s rhetoric