Enabling environment for development: its essential components
By Dr Mahnaz Fatima
ENABLING environment for development is a major concern in the country. We, however, need to determine its essential constituents in the absence of which the economy will neither be enabled nor energized. And, a holistic view is imperative to take so that the economy functions as an integrated whole towards the visionary goal of equitous development.
To advocate a piecemeal approach is like saying that a few core or supplementary organs are all that are required initially for the human body to start functioning with and the limbs or other core organs may be added on later.
That humans are born as an assembled whole to grow and develop over time shows that all essential ingredients have to be introduced and emphasized upon simultaneously in a policy mix that will eventually lead to growth and development of the economy and the society.
Driven by conservative economic thought, Pakistan’s development paradigm once again revolves around investment and growth through the medium of private sector encouragement and through reliance on market forces that may be as unfettered as they can possibly be.
Without disputing this repetition of strategic direction that aims more at growth per se than at equitous development, let us take a closer look at whether the environment is conducive enough to realize the stated goal of growth via the delineated route.
Let us also determine what all ingredients are simultaneously required essentially to create a business climate that can be called conducive and enabling for private sector investment.
The question, therefore, is whether water, infrastructure, and energy by themselves specify the growth model fully or whether a fuller specification of the growth model is needed. If the latter holds true, then water, infrastructure, and energy would be classified as necessary but not sufficient conditions to realize the growth potential.
For, other factors that feed directly into the investment climate are business expectations emanating from the country’s law and order situation, quality of governance, corruption, political and social stability to name a few. These factors influence not just domestic but also prospects for foreign investment that the country is keen on attracting in a big way.
How corruption mars the business and investment climate is known common sensically but illuminated professionally in two IMF papers. Corrupt practices requiring ‘facilitation payments’ or ‘success money’ discourage investors as such payments are viewed as a tax on investment thereby serving as a disincentive for investment.
According to empirical evidence, the IMF paper states, “corruption lowers investment and retards economic growth to a significant extent.” The paper further states that rent seeking tendencies lead to misallocation of talent away from productive avenues in the country causing loss of work effort and output.
Aid money is also siphoned away to either personal accounts or unproductive and wasteful government expenditure which has a bias in favour of large infrastructure projects through which bribes and commissions can be extorted as opposed to welfare expenditures on education and health.
A negatively significant correlation is found between corruption and expenditure on education. That is, the higher the corruption, the lower is the education expenditure. For, expenditure on books and teachers’ salaries involves no bribes. Growth prospects are thus adversely affected due to an underdeveloped human resource from grossly inadequate expenditure on education.
On the other hand, the relationship between corruption and infrastructure expenditures is found to be directly proportional. IMF paper is captioned, “Roads to nowhere: how corruption in public investment hurts growth.” The paper says that while the conventional wisdom of large investment projects are a strong temptation for the unscrupulous public servants, the reputable may also succumb if the commissions offered exceed the “temptation price” for the reputed individuals.
Originally low bids can be revised upwards later under the pretext of design modification and quality of the project is usually compromised upon. Taxpayers are then saddled with either a bigger project than needed and/or a poor quality project requiring frequent repairs. The upshot might then be “roads that are pocked with potholes soon after completion, power plants that experience regular blackouts, and sewer systems that don’t work.” All of this sounds like home! And, capital expenditures fail to turn over into the kind of growth they should.
The paper further says, “new projects are undertaken while the existing infrastructure is left to deteriorate” which is even more close to home. Neglect of existing infrastructure creates more need for new projects and yet another spiral of bribes and commissions.
So, it is not public investment that will, by itself, lead to growth. This variable of investment is an interactive one which in interaction with corruption will reduce growth due to either bloated investment whose capacity is not possible to utilize fully or poor quality investment that will require recurrent repair expenditures. Poor infrastructure quality will also increase the cost of doing business leading to lower output and growth.
IMF’s paper draws upon statistical analyses that demonstrate a negative relationship between corruption and investment. The higher the corruption, the lower would the investment be, and the lesser would be the economic growth.
Corruption, therefore, acts in more ways than one to depress investment and growth. Further, countries scoring high on corruption are also prone to tax evasion which lowers the tax revenues creating a pressure on budget deficits. As governments resort to borrowing, their capacity to supplement and complement the market system is further impaired feeding additionally into physical, human, and social underdevelopment.
The question, therefore, is how insulated will the upcoming infrastructure projects be from the corrupt tendencies still rampant. Infrastructure, by itself, cannot induce investment for reasons cited above and for as long as corruption continues to deter investment directly and through poor governance, claims to the contrary notwithstanding.
Poor governance is, in turn, reinforced by a paucity of resources which tendency emanates from a ruptured moral fabric not restricted only to the public sector. Corruption in one sector begets the same elsewhere and in a mutually reinforcing circle which web needs to be taken a jab at. Anyone who finds this pessimistic does not want to see the reality on the ground which, unless seen as it exists, cannot lead to problem resolution.
Another reality that makes the investment climate murky and that we look the other way from is terrorism. Contrary claims made by the highest government functionaries notwithstanding, the recent incidents of terror attacks on a durgah in Jhal Magsi of Balochistan, on a church in Punjab, and in Gilgit indicate that terrorism in the country has not been put an end to as claimed. It is only surface calm that exists by and large due to effective precautionary measures which if breached, can lead to major terror attacks again. This implies that the sentiment is far from having been rooted out and the terrorist tendency will re-emerge in a big way at the slightest possible security lapse. This is a major deterrent to investment that needs to be tackled through the concerted effort of all the stakeholders in the country.
As investment and growth are relied upon again to propel the country on to the growth path, a key variable ignored in the pronouncements of this conventional policy direction is savings. To this extent, even this conventional model is not properly specified. For, the conventional model is the savings-investment model. That is, savings lead to investment and if there is a savings gap, then the country should rely on foreign resources.
The savings gap is likely to persist in a country where individual savings are low because of highly inequitable distribution of assets and incomes, government savings are low due to low revenues and lack of credibility both emanating from a corrupt culture discussed earlier, and private business savings too remaining low for their own lack of confidence in the system all around and a weak tax culture emanating again from a ruptured moral fabric.
Even as for the conventional approach, we get to see an emphasis in Pakistan on only one prong of the model. That is, the emphasis is on investment and not so much on savings.
An emphasis on savings would compel us to think about not only the milieu in which growth can occur on a sustained basis but also about the ends of growth which is equitable distribution.
If we were to think about the other prong of the conventional model, that is, savings, we would not only be coming nearer the conventional model relatively more fully but would begin to also see the importance of the end of equitous development as that would feed back into the savings prong of the savings-investment model enabling it to get nearer to the goal of growth-with-equity and not just growth per se.
It would further enable us to think more holistically so as to come nearer the definition of the enabling environment that would enable not just investment and growth but also growth-with-equity without which growth primarily for the micro segments of the population and mere micro benefits for the population’s macro segment could be explosive. Macro chunks for ourselves and micro pieces for the poor is a proposition not tenable over the long haul.
