The 21st point: Overhaul the state

Note: This article was completed on December 31st, 2014, and was originally posted on this Blog in January 2015.

Presently there is happening quite a serious debate on the 20 points envisaged in the National Action Plan. Its thrust is on two points:

i) All these measures should have been in their place since long as a matter of routine, probably from the day first when Pakistan came to exist; and,

ii) Due to the past negligence of the governments, doubts and questions are being raised about the efficacy of these measures.

The argument the present writer aims to make is a bit different; he wants to propose a 21^st point to be added to the NAP, which focuses on overhauling the state. Let’s be precise in judging: It’s the state that played havoc with the society of Pakistan, and now it needs to be back to the basics!

First and foremost: The politicians of Pakistan should stop behaving like Haakim and Ashraaf; they are empowered by the vote of people and are bound to act in accordance with the provisions of the constitution; they are the same citizens albeit with certain responsibilities and duties with which strings of accountability are attached.

The citizens of Pakistan while they participated in the Lawyers’ Movement learnt about: Constitutionalism; Rule of Law; Fundamental Rights; Independence of Judiciary: these must materialize into reality. That amounts to minimizing the role of the politicians which they exert on the society and market through various instruments of the state and government; and that will strengthen and enhance the civil society and its role in the life of the citizens.

There are two domains wherein an urgent overhaul is required: Political and Economic. In the political domain, following practical measures are needed:

i) The role of the state be redefined as a protector of the citizens life, property and their freedoms and not as an institution of welfare, and not as a proprietor of Business; 

ii) Constitutionalism should be the only way to run the affairs of the state; 

iii) Top priority be given to the protection of all the citizens’ life, property and their fundamental rights; especially the right to religious freedom be ensured to every citizens whatever his/her faith is; 

iv) Institutions and agencies responsible to dispense justice and extend protection to the citizens, such as Police, Courts, be made autonomous and accountable to the parliament or the provincial assemblies as the case may be; 

v) Civilian authority be retrieved and restored both in letter and spirit; formulation of defense and foreign policies constitutionally rests with the elected government and parliament, these should go back to them; as in accord with the constitution the Army has nothing to do with any other matters save related to its professional duties, it must confine itself to the role assigned by the constitution; also not only the Army but all the intelligence agencies be made accountable to the parliament; 

vi) Any interference in the matters of the state and its institutions whether it comes from the political or military quarters be not heeded to in the least and violators be brought to the book; 

vii) Judiciary be completely made independent financially and in matters of its appointments especially; 

viii) All the institutions of the state, such as Election Commission, National Accountability Bureau, be made autonomous absolutely impervious to any external influence; 

ix) In the matters of Army’s and Bureaucracy’s appointments, posting, transfers, promotions, Prime Minister’s, or any minister’s prerogatives be done away with, and the principle of merit and seniority strictly be followed; 

x) All the legislation regarding the citizens’ right to information be it at the federal or provincial level is a farce; in fact all the information regarding the affairs of the state and government belongs to the citizens; why should they pay and be asking for it; so it be posted on the respective websites for their examination; 

xi) The role of all the elected representatives be confined to the matters of legislation and they should enjoy no other status or powers; no funds, be it for development or for any other purpose, be given to them; 

xii) Foreign visits of state and government officials be drastically curtailed; no visit be allowed without prior budget sanction; 

xiii) It be legislated that only professional politicians could contest and become elected representatives, and no one doing or having any business interests could join politics and government.

In the domain of Pakistan’s economy, following radical reforms need to be introduced: First and foremost: The state must come back to its original protective function and focus on its regulatory and facilitatory role and be doing no business at all. 

i) All the lands gifted/allotted by the British to anyone be taken back and distributed to landless peasants and homeless citizens under a uniform policy; 

ii) All the monetary privileges and tax exemptions be abolished;

iii) All the discretionary powers, discretionary or secret funds be stopped; 

iv) All the state enterprises be privatized be they incur profit or loss; 

v) As growth is a function of citizens’ entrepreneurial efforts, and state or government creates not a single penny of wealth, this be adopted as a guiding principle while formulating any economic policies; 

vi) As in its role of a taxman, the state by heavily taxing can hamper the economic growth, so it must commit itself to the principle of lower and flat rate taxes; 

vii) As a regulator, the state should commit itself to the principle of regulation for facilitation, not for control; 

viii) All the restrictions on domestic or international trade be lifted; it’s for the producers/traders to see and decide where to export to and where to import from; 

ix) In the spirit of a slim, smart and strong state, unnecessary ministries, departments, etc. be downsized or done away with altogether; 

x) As the state machinery, i.e. departments of the state which collect tax or render various services, such as permissions, licenses, has become an enemy of the people, a complete overhaul of it is long due; with an iron hand it be made citizen-friendly; 

xi) All the accounts of the state be posted on the respective websites and even a single penny be accounted for, i.e. political and economic parasitism must come to an end.

Renaissance for Reforms - Introducing a new book

Here is the Introduction by the authors:

The recipe for growth is well-known. Most economists would agree that lower taxes and less regulation can encourage entrepreneurship and job creation. Yet, many governments are unwilling to introduce such reforms. An important reason is concern over a voter backlash. Jean-Claude Juncker, a likely candidate for the EU-presidency after two decades as Luxemburg’s Prime Minister, famously lamented “We all know what to do, we just don’t know how to get re-elected after we’ve done it.” Based on an analysis of 109 governments in developed countries, we would suggest that Juncker’s view is mistakenly gloomy. Although market-oriented reforms may initially meet fierce resistance, governments that introduce them are more often than not rewarded by voters.

In our new book “Renaissance for Reforms” we look at the pace and direction of reforms in 29 OECD governments between the mid-1990s and the end of 2012. We base our analysis on the Heritage and Wall Street Journal Index of Economic Freedom, which annually ranks nations according to parameters such as freedom from corruption, freedom for investments and respect for property rights.  We ask two simple questions: How did the level of economic freedom in these countries actually change according to the Index of Economic Freedom? And were the governments that reformed more often re-elected or not?  

After controlling for the levels of unemployment during the year of election and the year of possible re-election, we examine if these factors are related. In contrast to Juncker’s views, we find that the government that increased economic freedom most were also most likely to become re-elected. Perhaps even more surprising is that this trend is driven by governments on the left. 

Center-right governments that were re-elected increased economic freedom only marginally more on average compared to center-right parties that lost re-election. Governing parties on the left, which lost their bid for re-election, constitute the least reform-oriented group. Left governments that won however increased economic freedom at a 60 percent higher pace than the average center-right governments. 

For example, during Tony Blair’s first term from 1997 to 2001 the economic freedom score in the UK increased by 1.2 points. True to Tony Blair’s reputation as a champion of New Labour’s moderate policies, the economic freedom score of the country increased by 1.6 points during his second term. Based on this track-record, Labour managed to win a third election, during which Blair handed over power to his more left-leaning rival Gordon Brown. As the leadership changed, so did the direction of reform. Between 2005 and 2010 the United Kingdom’s economic freedom fell by 2.7 points. The next election was won by the conservatives. 

A commonly held view is that parties on the right introduce market reforms in order to boost growth, whilst those on the left mainly reduce economic freedom and aim to spread the wealth through welfare systems. In fact, countries that have successfully increased their levels of competitiveness have seen both sides of politics pulling in the same direction. Bob Hawke, former leader of the Australian Labor Party led his party to four consecutive victories in 1983, 1984, 1987 and 1990 based on wide ranking economic liberalizations. Paul Keating, the reformist treasurer under Hawke, took over party leadership and won a fifth victory in 1993, in an election initially thought to be unwinnable for Labor. Since then both conservative and left governments in Australia have continued on the path of market reform. The end result is more than two decades of consecutive growth. 

Similarly, Canada was in very bad shape when Paul Martin, minister of finance in the newly elected left-liberal government, took office in 1993. The government made the difficult choice of market reforms, focusing on reduced spending through action such as abolishing transport subsidies for farmers as well as market liberalizations and lower taxation. Many interest groups objected to the changes. And yet, the Canadian Liberal party won a second term in 1997. The party campaigned on the promise to continue to cut the federal deficit, thereby creating a budget surplus which would allow tax cuts as well as repayment of Canada’s national debt. After another term of reformist policies, the liberals managed to win the elections again in 2000. In 2003 Paul Martin took over the reins and won yet another re-election. Conservative governments have since built upon the same policies, transforming Canada into North America’s new free market role model. 

Why is it that governments on the left in particular can be rewarded by introducing market reforms? One explanation might be that this attracts centrist or even right-wing voters to the left. Another is that leftist government can couple market reforms with social features. A research survey by the OECD observes that when markets are opened up, competition often leads to higher employment. This tends to increase income equality, since those who would otherwise not work, or work only part-time, will raise their income. The same reforms can also help those with high productivity to raise their income compared to others, which instead will lead to higher income inequality. Hence, market liberalizations can lead to lower or higher equality, depending on which of these two factors come to dominate. There are good reasons to combine market oriented reforms with policies that strengthen the less well-off in society, such as strengthening publicly funded school programs. 

Today many governments are wary of reforms. Change is seen as unwanted in the short term, and politically difficult to implement. This can explain why some governments in particularly Southern Europe are stuck on a path to failure. A common view is that “Juncker’s curse” will doom governments that are bold enough to change the status quo by cutting government handouts or liberalizing the economy. Our analysis of recent history shows that this impression is mistaken. Change is anything but easy to introduce, but can prove popular in the long term by boosting growth and employment.  Of course, policies must always be adjusted to the particular needs of each individual country.  

Pakistan has historically relied much on trade and enterprise for its prosperity. Currently however ranks as the 126^th freest nation on the Index of Economic Freedom. The countries score is both below that of the world average and the regional average. In some areas, such as fiscal policy and government spending, Pakistan already has good conditions for a well-functioning market economy. Also business and monetary policies score high. The hinders to development are mainly found in corruption and lack of protection for private property. By strengthening market economic institutions greater wealth and job opportunities can be created for the broad public, whilst funds are generated for social programs. Such institutional changes will take time and political will to introduce. But once in place, they can influence long term competitiveness and prosperity. 

Nima Sanandaji, PhD at the Royal Institute of Technology and policy analyst.

Stefan Fölster, Professor of economics at the Royal Institute of Technology, and director of the Reform Institute.

The authors have written the new book ”Renaissance for Reforms” which is co-published by Timbro and the Institute of Economic Affairs.

Note: This was originally posted in March 2014.