Societies leaning towards capitalism have small governments that provide essential public goods to the people, formulate policy and leave the rest to the imagination and executing capabilities of the private sector.
Governments in most developing countries, on the other hand, continue to be large. Investment in these countries is low, and the loss in the investment share of the GDP is either picked up by government spending or higher levels of consumption.
Government revenues in many of these countries, India, Pakistan and, to some extent, Bangladesh, which has successfully implemented many fiscal consolidation measures, are low, and so are their fiscal capacities to undertake public welfare programmes.
Governments are large with idle administrative capacities, often leading them to imagine and perform unnecessary regulatory functions. Many of the regulations stifle the private sector, thereby seriously limiting its growth potential.
Any policy, plan or strategy that makes a case for private sector-led growth and public-private partnership is a deception and nothing but that
On the other side, the same idle administrative capacity of the government leads it to plan long gestation and high-cost mega-development projects, which are politically expedient and administratively possible but financially unfeasible and unaffordable for the government with embarrassingly low levels of fiscal resources.
The federal government planned a Public Sector Development Programme (PSDP) of Rs727 billion for FY23 out of a total federal budget of Rs9.5 trillion. This excludes the generous annual development plans that provinces have begun to afford due to fiscal decentralisation under the 18th amendment and larger fiscal allocations under the 7th National Finance Commission award.
Despite having a large throw forward which is the amount committed to projects planned in the previous years but not spent, the government continues to allocate resources to new projects of the same public sector agencies and departments.
In many such cases, administrative approvals are provided even when there is no room to accommodate a certain project under the PSDP. In most of these cases, the planners are inclined to consider looping in the private sector to fill the financing gap and bridge the shortfall of fiscal resources.
The government has created public-private partnerships authorities to facilitate such transactions at the federal or provincial levels that have developed different modes and arrangements of partnering with the private sector. The private sector is also called in to financially sustain government projects that have exceeded their period of implementation.
However, what is ironic is the government’s inclination to rope in the private sector even if, as has happened in many cases, the private sector partners do not find projects to be financially attractive. Government agencies use their regulatory arms and influences to coerce them to implement projects that have political expedience and advance the interests of certain lobby groups.
The same government that implements strangulation policies and twists the arm of the private sector also relies heavily on it for projects that it wishes to do but cannot do so with its own indigenous resources. A large government that survives on the promise of public welfare, which it thinks it can ensure by regulating the private sector, requires the fiscal resources of the private sector to scale up and sustain projects that will deliver welfare.
Pakistan’s private sector hasn’t grown. Many studies have documented that excessive government spending, which is also a great contributor to economic growth, does not have the same multiplier effect that investment has on economic growth.
Pakistan’s investment to GDP is trapped in the 10-15 per cent bracket vacillating in this range, depending on the industrial and small- and medium-enterprises policy regimes of various governments.
According to CEIC data, Pakistan’s investment to GDP is at 15.1pc now, which trails India’s at around 28pc and Bangladesh’s at 32pc. Government spending is about 11pc of GDP, while the rest of the GDP is attributed to net exports and consumption.
There are several reasons why investment continues to stay low and why the private sector hasn’t grown. Amongst them are excessive regulations and unease in doing business. But what is interesting in all of this is that every policy document, report on the economy and sector plan and strategy mentions the criticality of the private sector and how they would be achieved with the support of the private sector.
Without analysing the strengths and capacity of the private sector, we continue to base policy objectives in several sectors on the interventions of the private sector.
Who will finance Sustainable Development Goals? Through the development budget augmented by private sector financing. How will the government rebuild infrastructure lost to floods? With support from the private sector and international donors? How will the government provide unemployment to the youth bulge? It only provides a conducive environment, but the jobs will be provided by the private sector.
How will out-of-school children be brought back to the school? By scaling up education service delivery through integrating information and communication technology and distance learning tools developed by the private sector. How will sustainable economic growth take place? Through sustainable investment in the private sector.
The important question is, which private sector? The private sector, which the government did not allow to develop, is now so heavily dependent on subsidies that it cannot compete in the international market without significant policy and financial support from the government.
The reality is that the private sector cannot support any policy or plan of the government, it is itself dependent on the support of the government because that is how it was raised, and that is how it will continue to be unless a comprehensive regulatory reform agenda is applied across the board. Any policy, plan or strategy that makes a case for private sector-led growth and public-private partnership is a deception and nothing but that.
The writer is an economist based in Islamabad.
He tweets @asadaijaz
Published in Dawn, The Business and Finance Weekly, May 29th, 2023