KARACHI, May 4: Seven major dilemmas facing policymakers, identified by State Bank Governor Dr. Ishrat Husain, have put conventional wisdom to a critical test.

For the past two years or so, Pakistan has followed “diligently and earnestly” the “recipe” that the amalgam of good policies and foreign capital flow, will accelerate economic growth and reduce poverty.

“But economic growth has eluded us so far,” says Dr. Ishrat Husain, and poses the question “Why is this happening?”

“What is clear is that the usual and more common explanation i.e. the adjustment itself has been partial, incomplete, half-hearted or devoid of domestic ownership, will not apply in this (Pakistan) case.”

In his paper on “Reforming Pakistan’s economy — performance, progress, prospects and problems”, the SBP governor says, “there is need to go beyond this simple explanation and explore the real factors that are hindering rapid growth impulses.”

He has voiced the concern of common citizen by posing the question, “What is the appropriate time lag between good policies and resumption of growth?”

Although not dealt directly by Dr. Ishrat, perhaps, the key issue is: Will the conventional wisdom work in increasing economic growth and reducing poverty in an emerging market, afflicted with growing social exclusion? Is there a need for an alternative strategy for economic growth?

Poverty offers vast potential for economic development, for business and investment provided the right policies and enabling environment is created for a nation’s people to build their economy.

The IMF agenda is to integrate the domestic economy into the global market, irrespective of the heavy social costs. After Sept 11, the high tide of globalization turned into a low ebb and the IMF policies would inevitably be put into a strenuous test. As the political scenario is changing on the eve of October elections, the country is likely to witness a self-assertion of national agenda dictated by public concerns, as was visible in the referendum.

In the past, constitutional civilian governments have not given as much weight to IMF reforms that remained subordinated to a domestic agenda.

Not answerable to the people or their representatives, the military government embraced the IMF agenda wholeheartedly. Yet there is no clear vision as to how to get out of the dilemmas facing policymakers.

Despite “the positive developments”, Dr. Ishrat says, “Pakistan still faces a number of social, financial, political and structural problems that will hamper the full realization of the economic benefits from the reform process or will lag these benefits into the future.”

Dwelling on the social and humanitarian aspects of the reforms, he observes: “In an environment where real incomes of fixed income groups have eroded by almost 75 per cent since 1994, unemployment rates have almost doubled, incidence of poverty has been on the rise, new private sector investment has been declining, the costs imposed by measures such as large depreciation of exchange rate, a hike in the real interest rates, upward movement of public utility prices and withdrawal of subsidies, have created severe financial hardships.”

In his paper, Dr. Ishrat Husain, a noted scholar and economist, has listed the seven dilemmas facing the policymakers.

He says: A constrained public sector and a recession-hit private sector have led to a declining investment to GDP ratio over the last six years.

The conflict between stimulating economic activity through enhanced public expenditures and caps on the level of government borrowing and the fiscal deficit, is taking its toll on the economy.

The second dilemma facing policymakers is that “the disconnection between popular expectations and ground realities has become a major problem.” There is the urgent need for expeditious implementation of policy reforms, programmes and projects, the institutions responsible for implementation have become dysfunctional over time. The reforms would take time to show results and the public expects that these changes take place quickly.

Third, there is a serious tension between the goals of reviving private investment and that of retrenching interest groups of small ruling elite that has traditionally dominated the Pakistan economy.

The investors rooted in the economy find it difficult to carry on business as usual under the changed set of rules. A new class of investors, used to competition and enterprise, has yet to emerge. This will take time.

Fourth, the country suffers from serious deficiency of human, technical and managerial manpower. Those who excel in their fields have been migrating abroad for the past two decades or so. It is paradoxical that the country which is short of highly-skilled professional, cannot attract those who are willing to supply these skills.

Fifth, a major difficulty faced in making relative price adjustments whether they are in exchange or interest rate, agriculture or utility prices or the retrenchment in the public sector, is the timing of these adjustments.

The government wants to ensure these adjustments, though inevitable, insulate fixed income groups from these financial gains.

Sixth, targeted killings, kidnapping and violence in response to the official move to build a moderate, progressive and harmonious society has created an element of uncertainty and fear and also a negative image. Being risk averse, the company executives avoid investing.

Finally, although the production response by farmers to new incentives has been positive, accruing returns and profits have severely fallen. There is an apprehension that surpluses created in recent years may be at risk.

After having dealt with the dilemmas facing Pakistan, Dr. Ishrat Husain offers alternative hypotheses as to why economic growth has eluded us so far. These are: Is it that the excess baggage of the past bad policies and poor governance has not yet been shed off? Are the intensity and impact of external shocks outweighing the benign influence of domestic adjustment? Is deterioration in institutional capacity the main stumbling block? Are the non-economic factors and the negative perceptions about the country relatively more powerful? What is the appropriate time lag between good policies and resumption of growth?