It’s time to rethink economic governance | Political economics



Bfrom a road point of view, economic governance is a decision-making process that affects economic activities. In many studies, it refers to the ability of government to achieve stable economic conditions. Evidence, in general, suggests that economic governance has a positive impact on economic performance and development through improved economic efficiency and macroeconomic stabilization. Poor economic governance, on the other hand, leads to inefficiencies and instability.

Pakistan is trapped in political uncertainty and serious macroeconomic challenges, including, but not limited to, volatile economic growth, balance of payments crises, erosion of external competitiveness and low investment inflows.

While many solutions have been proposed to escape the trap, the debate on overhauling and restructuring economic governance has been relatively limited.

The first and most important challenge in Pakistan is the very concept of economic governance. Economic governance in Pakistan begins and ends primarily with the announcement of policy changes. Governance reforms therefore focus largely on the end product and ignore improving the process of choosing and implementing these reforms.

Recent examples include the reform program agreed under the current IMF program and the 2021 SBP amending law. The new economic management team withdrew from the former and the latter encountered much resistance. because she was a surprise.

Transparency and broad stakeholder participation in the formulation of the IMF reform program and the formulation of the SBP amending law would have avoided many of the problems and most of the resistance.

In addition, a disproportionate focus on fiscal policy – as the exclusive tool of economic management – has led to the neglect of necessary supportive reforms in other sectors of the economy. This has created a bifurcation in macroeconomic policy on the one hand and compromised the effectiveness of reforms on the other.

Pakistan needs to learn that a better understanding of economic governance after the global financial crisis in the past and more recently Covid-19 involves coherent fiscal, monetary and trade policies formulated and implemented with participation, transparency and accountability. improved accountability.

Pakistan’s treasury-only model of economic governance has a backdrop. First, Pakistan followed an introverted growth policy and relied on import substitution. Customs duties, tax exemptions and tax exemptions have been the main tool for managing imports.

Second, there is a misplaced focus on revenue collection – instead call it revenue extraction – as the single major criterion for success in economic management has added additional weight to fiscal policy as it has become a major factor in economic management. substitute for economic governance.

Third, the country, as expected in an inward-looking growth model, has generated a consumption-based economy with a trivial focus on investment. Consumption, including public spending, has become the main policy for stimulating the economy.

These factors, and many more, have led to the neglect of the importance of trade policy in general and monetary policy in particular. The role of monetary policy was limited to financing deficits and keeping the rupee overvalued to artificially stimulate consumption.

Fiscal policy, in particular fiscal policy, has therefore emerged as the only major tool for economic management. Research from academia and civil society has largely been limited to tax policy. The annual budget, setting high income targets and changes in tax policy, has become the most important tool of economic management. Overall, the Treasury, benefiting from fiscal dominance supported by a structure of economic policies, has become the sole face of economic governance.

The Covid-19 crisis and the growing role of financial markets in shaping policy outcomes have strained the approach to economic governance focused solely on fiscal policy.

Now that Pakistan is recovering from Covid-19 and heading towards export-led growth, the idea of ​​economic governance needs to be rethought. A coherent and efficient economic governance structure is needed.

The current model of economic governance in Pakistan has failed to account for price divergence, stagnant productivity, negligible wage growth and external imbalances. Macroeconomic crises, growing trade imbalances, balance of payments crises and escalating public debt have occurred regularly over the past 70 years. In addition, each new crisis beats the previous one in magnitude and severity.

Treasury-led governance has focused exclusively on the gap between domestic revenue and expenditure. To properly manage and focus on external imbalances, monetary and trade policies must have better coordination with the Treasury without superimposing fiscal dominance.

At the same time, the SBP needs to be redesigned on at least two fronts. A global financial crisis has already challenged the traditional idea that monetary policy has only a short-term goal. Experts agree that Covid-19 has demonstrated that monetary policies pursuing short-term fine-tuning have created monetary and financial imbalances.

Monetary policy decisions affect medium and long term outcomes, such as inequality and climate action. These and similar concerns give central banks a key position in economic decision-making and governance. The SBP must align with modern thinking on the conduct and scope of monetary policy.

In addition, decision-making on monetary policy in general and the establishment of a transformation agenda, such as the SBP amending law, must be more open and broad in seeking opinions. Public opinion must have greater weight in setting the agenda.

Finally, communicating monetary policy must go beyond announcing decisions, such as declaring monetary policy. It must provide information on these decisions and conclusions. Many central banks now publish the minutes of meetings of monetary policy committees. Such a practice can help the SBP to improve the effectiveness of its policy and to create an audience for monetary policy.

The transparency of public accounts and the transparency of the economic and regulatory environment for private sector activity are fundamental ingredients of good economic governance. Reforms must therefore also be put in place to ensure independent economic and budgetary analysis with standard quality and increased transparency of economic statistics. Steps should also be taken to standardize reporting on economic statistics in all provinces.

The author directs the Policy Solutions Lab. He tweets @sajidaminjaved

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