THE government can influence the growth rate primarily by providing an adequate physical and social infrastructure and creating the policy and institutional environment for private-sector investment.
The reasons for the depressed rate of private investment (now the lowest in our chequered history) are missing complementary public-sector investments (especially in energy-related infrastructure). This is because of skewed priorities, and the lack of a supporting policy, institutional setting and a decent milieu for governance.
Public investments in physical and social infrastructure augment the supply side for the private sector. In our case, however, the government has slashed the size of its development programme to accommodate burgeoning expenditures on subsidies and to finance growing losses of public-sector enterprises like the Water and Power Development Authority/Pakistan Electric Power Company, the Steel Mills, PIA and Pakistan Railways.
The effects of the cuts in development expenditure accumulated in recent years are beginning to take their toll; they are reflected in the continuously expensive and unreliable supply of energy and other utilities.
Moreover, the recent lowering of interest rates (whatever the rationale) will not be enough to raise industrial-sector investment. Given a struggling economy the banks have been reluctant to extend credit to the private sector. The banking system has simply become a sophisticated post office for transferring household savings to government even at increasingly lower interest rates.
Furthermore, the institutional reforms required to improve the environment for private investment remain unaddressed. The government has not been able to maintain law and order that will ensure safety and security of life and property and ensure contract enforcement.
Nor have successive governments been able to keep the policy environment consistent or predictable. On several occasions policies have been changed after some players have made investments, i.e. after the initial investment has been locked in. Such behaviour has worked to the disadvantage of the first investor/mover. Thus, after some hiccups and losses there are hardly any investors prepared to become first-movers. Consequently, there is little investment in highly regulated sectors or in those requiring heavy resource commitment and with longer gestation periods.
It also defies logic that official circles should expect the private sector to take a long-term view when formulating its investment plans even when the government, for its own seemingly understandable reasons, takes a short-term view.
The private sector must take the lead from the government and adjust the time horizon of the payback period of its investments to bring them in consonance with the signals emanating from the government. After all, the investor acts under a great deal of uncertainty. Any investment in an asset other than financial is irreversible, as it cannot be undone. When an investment decision cannot be reversed, the opportunity cost of investment is the cost of “waiting”.
In Pakistan, investor risk, and thereby the cost, has been rising sharply in recent years. The reasons behind this are not just the poor law and order situation, political uncertainty and the unpredictability of government policy.
The reasons are more than the manner of implementation of enunciated rules and regulations reflected in the non-uniform application of discretionary powers, the general attitude of the revenue collecting and regulatory agencies, a deficient infrastructure (especially related to energy), proliferating corruption at the decision-making level and the lack of adequately skilled labour. They are also because of recent disturbing developments.
The latter refers to the increase in the number of ill-informed (but pretending to be all-knowing about issues and solutions), seemingly well-intentioned actors, including the more assertive parliamentary committees, important state institutions, civil society organisations and the hyperactive media, any of whom is now able to put a spanner in the works at any time.
Having limited, if any, expertise or training to understand complex economic policy issues does not seem to deter the latter set of players from holding forth on literally any subject.
Regrettably, as also argued by Ishrat Husain, their intrusiveness has not only increased investor risks and the insecurity of investment, thereby weakening investor confidence, it has also made civil servants risk-averse to taking decisions that are badly needed for attracting investments in areas critical to growth. Such developments are further worsening the investment environment and the costs to the economy of postponed investments in areas the government, running up huge budgetary deficits, does not have the resources to finance.
The head of a leading industrial group summed up rather well the dilemma that Pakistani entrepreneurs face. He says that he can handle the increased competition from China and India (whenever we finally grant the latter most-favoured nation status). However, it is Islamabad and the new set of actors that he is infinitely more scared of. He finds them the more formidable, and easily the most unpredictable, opponents.
Given recent developments he wonders if this period of transition, during which each player finally becomes mature enough to understand his respective role, will end anytime soon, so that new players on the scene and Islamabad, through better understanding and coordination with provincial governments, can become enablers.
In his opinion, preventing them from continuing to be disablers in the foreseeable future will become a real challenge in these difficult times for the country.
The writer is a former governor of the State Bank of Pakistan.