Indonesia and Pakistan (Daily Times)

Let there be an 18th Amendment style consensus on economic reforms

By Babar Ayaz

“Economy no good, democracy good” quipped an Indonesian taxi driver in Jakarta last week when I asked what difference he finds between Suharto’s rule and the present democratic government. Many hotel employees and some of the Indonesian
journalists gave a similar, but a more eloquent, feedback.

My friend James Castle, who is a consultant, has lived in Indonesia for over 30
years and closely follows its political and economic developments says that
there is no reason “our economy should not grow at 7 to 9% if infrastructure
and governance is improved.” Yes, Jim uses words like “ours” and “us” as an
Indonesian would do though he is an American by birth. I can say because of his
long association with this country he is ‘an Indonesian by option.’

As a concerned Pakistani I cannot help but co-relate the economy, politics and
social life of the countries I get to visit, with those of my wretched country.
With GDP growing at an average of 5.7% for the last five years, the Indonesians
are still unhappy about the economic progress. And here we are who can only
report less than 3% average growth in this period.

The Indonesian economy according to Nomura has the potential to grow over 7% in the next five years provided it follows ‘six key investment opportunities and 10
signposts’ prescriptions suggested by the investment bank. The prescription is
long to be listed here but at the face of it looks like not all the pills can
be taken by Indonesia. However, even without this, looking at the present trends
one can safely say it would be able maintain its 5% growth rate. One major
reason for this is that Indonesia’s economy is based on commodity export like
gas, coal, palm oil and coffee. And the commodity prices are not expected to
lose their climb to the North.

But coming back home the official economy which is in shambles has little chance of
even getting to a 4.5% growth rate during the current fiscal year. However,
together with the growth in the parallel economy it may surpass this target.
Reports that cotton crop is expected to be 15 million bales this year and the
wheat crop has also been good will push up agriculture growth rate. But the
real dampener is the industrial production. It is not picking up in terms of
volumes. However, because of inflationary pressure the rise in value may give a
different picture.

The country is lucky that its current account deficit has slimmed to US$0.8 billion
thanks to the US$11 billion remittances. The bulk of it is remitted by over 2.5
million Pakistani diasopra from abroad. The improvement in current account
balance has kept reserves hovering around 17 to 18 billion dollars and rupee dollar
parity reasonably stable.

So what is wrong with our economy that worries the people? Primarily the most
oppressive is the high inflation which is obstinately sticking over 13% and
inadequate infrastructure facilities such as power shortage. What worries the
government most is the low tax to GDP ratio and thus higher budget deficit.

The government should also be worried that in the last three years it has not been
able to put together a stable and efficient economic management team. The
recent resignation of the State Bank Governor Shahid Kardar over differences on
economic policies is another blow to the government. The business community also
took it as a sign of poor economic management by the government. It was evident
from day one that Shahid Kardar, who is known for his independent thinking,
would not last long in the present set up. He had also resigned from the
position of Punjab Finance Minister — he is one of the few people in the
country whose conscience speaks louder than opportunism.

Initially the present government collected a galaxy of economists and leading businessmen team to draw an economic agenda and implement the reforms. They did their job fairly well as it was not difficult to diagnose many economic diseases this
country is suffering from. But the difficult part was following the prescription
prescribed by the experts. In the background interviews most of the economic experts
and leading businessmen who had joined the economic advisory committee in the
early days of this government expressed frustration over lack of seriousness at
the top. The ruling party is seriously short of economic experts which forced
it to rely on technocrat finance ministers who do not belong to any party of
the coalition. That shows how intellectually under-nourished our political
parties are because of frequent military interventions.

What holds the government back from implementing the economic reforms is obvious. Though it has completed over three years it has been fighting for its existence hence is focused more on dealing with political crises on a day-to-day basis. The uninterrupted terrorism and wanton killings in the commercial hub Karachi have
also slowed down investment in the country to trickles.  Instable governments are always bad for the economy. There is also lack of political will to implement the tough reforms because of vested interest in the government and rampant corruption.

 Commenting on Indonesian economy Nomura economists have made a pertinent observation which perhaps applies to Pakistan also. Nomura report says: “Those calling for faster progress should keep in mind that Indonesia remains a young democracy and a very diverse nation where a more evolutionary approach to reform, based on consensus building … may be the more judicious and sustainable methodology with which to build on past gains.”

In Pakistan we need to take a similar approach to reach a consensus on the economic agenda which was shown by the politicians in giving the country the 18th Amendment – a great leap forward to federalism.  We need similar accommodation which provinces had shown to agree to change the financial resources formula for giving more autonomy to the provinces. As the country needs tough economic reforms and the elections are near the apprehensions are that the government may shy away from reforms.

So the only course left is that there should be an agreement between the ruling coalition and the opposition on carrying out these reforms. The politicians should realize that if reforms like widening the “tax club membership” (I think the term widening the tax net is negative), privatisation of the loss making public sector giants which are guzzling our taxes, cut in subsidies are better taken by this government. Life would then be easier for whoever may win the next election to be held in 2012 or 2013. Otherwise we would remain to be the country that will continue to limp far behind other Asian colleagues in economic progress and the people’s belief may change to “democracy no good for economy.” (

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