May 5, 2003	Monday	Rabi-ul-Awwal 2, 1424

In recent years, many developed and developing countries have begun to re-evaluate the role of governments and the political-administrative relationship has been re-defined which has given birth to the concept of good governance which ensures greater accountability and transparency.

The good governance is “the manner by which power is exercised in the management of economic and social resources for development”. For the World Bank, it is synonymous with sound development management. The bank has shifted towards development side because it realized that projects financed by it, although technically sound, fail to deliver the expected results due to bad governance. Now the good governance is considered as an essential complement to sound economic policies.

Mature institutional frameworks take a great deal of time to develop but that is no guarantee that arrangements that are supportive of economic growth and poverty alleviation will, in fact, emerge. Why do some states behave differently from others? What are the conditions that permit success? Economists argue that institutions defined as the rules of the game in a society which determine the performance of economies.

The absence of good governance has proven to be particularly damaging to the “corrective intervention” role of government. Programmes for poverty alleviation and environment protection, can be undermined by lack of public accountability, corruption, lack of adequate information and controlling of public services by elite class.

Mainly, a market economy should achieve three transitional targets: high output to allow high level of consumption, an adequate amount of public goods assured by the government and maintenance of existing real capital. These transitional targets need good governance and flow of information. The following four dimensions of good governance, are crucial in transformation of economy:

: public sector management; accountability; predictability and the legal framework for development; information and transparency

Management: Pakistan’s economic revival needs a faster growth which requires an attractive investment climate. This in turn requires a stable macro-economic environment, good governance, provided by efficient governance. A government plays a key role in the provision of public goods, attracting foreign investment, promoting private sector and facing strategic challenges resulting from globalization places a large demand from the government in delivering efficient public goods. It is also responsible for security, foreign policy, defence, police, education, basic infrastructure, and social security; and strong legal framework for enforceability of contracts and agreements which is indispensable for promotion of investment and growth.

Even in societies, which are highly market-oriented, only government can provide two sorts of public goods: rules to make markets work efficiently and corrective interventions. Without strong institutions and supportive framework of the state to create and enforce the rule, to establish law and order and to ensure property right, production and investment will be deterred and development hindered, because of high “transaction costs”.

Economic history shows that only economic and political freedom in combination with stable institutions allows the achievement of suitable prosperity. As in the 70’s, government relied on and rush into unwise policies and interventions which often were responsible for market failure and investment did not yield adequate returns. In the modern conception of a market economy whereas the poor countries like Pakistan have unstable, highly corrupt and ineffective public sector with few functional institutions, often distort market transaction (via high inflation, high budget deficit, and biased public procurement) and ultimately deter fair competition.

Governments now increasingly recognize the need for more restraint and for taking “market friendly” steps, particularly to influence the allocation of resource which means making decisions about how to employ given resource for competing ends.

Though, governments now increasingly recognize the need for more restraint and for taking “market friendly” steps, particularly to influence the allocation of resource, which means making decisions about how to employ given resource for competing ends. There is an important international dimension of government and markets, when such services are directed to the poor and are not forthcoming from the private sector. Essential goods and services ensured by governments like skilled labour and adequate infrastructure are fundamental to the quality of investment and development.

While these activities involve the use of resources, and agents for collection of revenues, a government has to put tax and regulations to avoid market failure. The public sector in developing counties has been characterized by uneven revenue collection, poor expenditure control and manage, underpaid, civil service, large parastatal sector, etc. The measure of good governance is heavily concentrated on public expenditure management, civil services, decentralization and tax reform. Taxes are main source for revenue for delivering public goods. On the other hand it is a source of important constrains. People will aggressively avoid paying taxes and obeying rules and regulation if government does not clarify the reason that why these taxes and regulations are required. Moreover. there is no denial of the fact that income distribution, which builds up in the marketplace, is not in line with the political goals.

In redistribution of the income, caution is to be taken that high and progressive taxes are likely to contribute to capital outflows and reduced economic growth. This will therefore, reduce motivation to work and to save. Pakistan’s tax system is suffering typically with such type of problems. Our tax administration had been lagging behind, though recently started to re-pick which includes setting the large tax payers unit measure for improvement of services for tax payers and development of tax payers friendly administration.

In addition to that, keeping the challenges of the market economy in view, the public perception of the state of governance is being improved. Reforms in the key public institutions such as the State Bank have been initiated. Establishing and strengthening the regulatory bodies, such as for power sector, Nepra, Pemra, the PTA and the OGRA is the outcome of these reforms to build and promote the trust of investors in Pakistan. Implementation of such reforms will improve the public’s perception of the state of governance, though Pakistan still ranks in the low in field.

Predictability: The “rule of law” is a comprehensive concept. In the context of economy the most important element of the rule of law is the provision of an efficient system for the enforcement of contracts.

Transactions in markets take place via contract between the demand side and supply side, and relations of the firms also based on the contracts. To ensure effective communications with stakeholders, the information of contracting, partnership arrangement and how to become involved should be clear and prompt.

The effectiveness of the legal system is inevitable to assess economic opportunities, risks to make investments of capital and labour, to transact business with two parties, and have a reasonable assurance against arbitrary interference or expropriations.

Information and transparency: Governments, however, don’t operate in an information vacuum either. They have to know what their citizen’s and the private sector’s “needs and wants” are. In the same vein, the latter parties need to know what their governments are planning and implementing, and what impact these decision have on their ordinary lives, livelihood and business.

Beyond the internal demands of information, governments as well need to be informed on events and policies in the global arena. Thus ‘they’ need to be apprised of the opportunities and /or threats offered by trading companies, donor counties, political associations, international agreements, treaties and other instruments to enable them participate productively and timely in global events, and if needed, make the necessary adjustments in the government structure.

On the contrary, international actors, i.e. private investors, bilateral/regional partners, donor agencies need information on the internal conditions of the state to reach on an decision which could be crucial for investment, loans and development projects.They would need to know if government could enforce contracts and provide the necessary protection for private property right prior to making any economic decision. The good governance demands the main task to establish a clear and consistent framework for individual economic freedom and responsibility of all actors.

Openness and transparency, is more than the structure, and is a part of attitude and belief among key players is, politicians, public servants, and other stakeholders that information is to be shared among people and it is not the sole property of any individual. It is public resource, like public money. Clear information about rules, regulation, economic policies, property rights will make easier for every body to form consistent exceptions.

A competitive market economy requires that economic actors have access to relevant, timely and reliable information. The less available or credible the information, the greater the uncertainty and risk and therefore the costs of committing capital or labour. There are three areas in which improved information and greater transparency are beneficial: economic efficiency, means of preventing corruption and the importance of information in the analysis, articulation and acceptance of policy choice. Economic efficiency requires that information about government decision, policies and action be available, the major processes of economic policy-making (the budget) be reasonably transparent, and public should have some opportunity to influence the decision-making process.

“Decision-making is worst in Pakistan”, the donor agencies observed. Economic decision-making need certain behavioural consideration. Should there be some opportunity for the public to affect policy-making and the government should respect the policy choices? In a market economy, individuals achieve benefits relying on competitive market and individual has a choice, this works a disciplinary force on the side of producers.

The typical behaviour of individuals is to be considered, normally the emotional aspect of economic decision-making is disregarded. The individuals particularly with reference to investment also care about developments of certain social groups and particularly poor strata of society. Individuals do not make decisions in one period of context, rather they have a long time horizon, but the government and public entities often have a short time horizon which implies the risk that many long term effect of decision is neglected. There is a need of strong political commitment, to ensure reforms. Tensions between economic benefits and political costs are typical of reforms in this area.

The accurate information about decision-making process ensures an appropriate balance between freedom to manage accountability and legitimate interests of the different stakeholders. It means that decisions taken and their enforcement are done in a manner where rules and regulations are followed, information is freely available, accessible to those whom such decisions and their enforcement and enough information will affect, is provided easily and in understandable forms.

Accountability: Accountability means holding public officials responsible for their actions. The economic objective of the accountability is to ensure congruence between public policy and actual implementation. Not only this, but government capacity and willingness to monitor the overall economic performance, which creates efficiency in investment, in production and delivery of goods and services in public sector.

Predictability in economics is the most important aspect of accountability. From the perspective of taxpayers, civil society, and investors, an efficient system of accountability is needed. With respect to the economy the main task is to establish a clear and consistent framework to fix responsibility of all actors. Regular reports of governments outside analysis by experts and media coverage can decisively contribute to efficient and good government. For the system of financial accountability to run effectively, an adequate and reliable flow of information is essential. Without it, the rules are not known, accountability is low and transactions’ cost is high, uncertainties are excessive and transparency is narrow.

Conclusion: Without any doubt, transformation policy towards a market economy is difficult, as it starts with typical initial distortion. A market economy has its own problems such as unemployment, unstable stock market and high inflation, but with the adequate policy strategy, it is possible to cope with these problems successfully. These strategies cannot be imposed from the outside but must be developed on basis of theoretical reasoning, which will in the long run give achievements.

The aim of society is to protect the people, to create equal opportunities and to contribute to economic prosperity for all individuals. Therefore, the government in power and management is expected to have the authority to frame the economic policies leading to market economy and they should have the capabilities to grasp the issue. Good governance depends on appropriate economic framework, which encourages investment and trade, and by which investors and stakeholders can be motivated to exercise their rights by providing essential services, maintaining good governance, and providing information timely and accurately and by reducing the transaction cost.

Admitting that the poor governance deters foreign investment, complicated regulations, arbitrary decisions disrupt the economic performance, therefore, openness and transparency and information are essential conditions for ensuring that stakeholders are able to continuously evaluate and relate their gains and could have a constructive interaction.