By Azam Amjad Chaudhry
Lahore School of Economics: Rediscovering Government
As the world is in the throes of a global crisis, most of the attention has been rightly focused on limiting the spread of the coronavirus and saving lives. But as soon as the situation stabilizes, attention will turn to how to combat the socioeconomic impact of the devastation caused by the pandemic. What we are likely to see is a significant change in the role of the public sector.
As already being observed globally, the public sector is taking center stage as countries tackle the repercussions of the pandemic. What makes this remarkable is that in many countries, and Pakistan is no exception, the public sector has been characterized as corrupt, inefficient and a drag on growth. This has led to a dismantling of the public sector with developing countries like Pakistan leading the way. But now as economies across the world grind to a halt, all eyes have turned to the public sector to save individuals, corporations and economies. While many people are saying that this may be temporary, there is a good chance that many of these government-led interventions may last for quite some time.
In order to understand why the public sector is failing in developing countries like Pakistan, one has to understand the way that the public sector has been systematically dismantled. This dismantling has not occurred naturally but has rather been the result of a coordinated effort by policy makers, entrenched elites and international institutions over the last few decades. These groups started by neglecting critical programs in key areas like public sector health with the hope that they will die a natural death. Then these groups promote the hope that the private sector will step in and provide better, cheaper and equitable services like private hospitals. But what we actually get are private sector entities unchallenged by the public sector that may provide better services but are happy to charge higher prices (just look at private hospital costs) and provide restricted choices.
But if Pakistan wants to survive the crisis, it needs to immediately strengthen the role of the public sector in a way that supports growth in tandem with the private sector. The most immediate step is to renegotiate the current IMF agreement. Budgetary restrictions in an era of a global pandemic are not reasonable and the idea that only coronavirus related expenses should not count towards the budget deficit needs to be relaxed. All of the stakeholders will have to accept that now almost all public sector investment, like developing public sector healthcare, are coronavirus related expenditures.
Next, we have to quickly accept the fact that simple transfers to poor households are not enough. The impending economic downturn will not only make the rural poor worse off, it will plunge most semi-skilled workers (many of whom work in the informal sector, like plumbers or electricians) into poverty. This means that the current cash transfer program that the government wants to ramp up will only be a partial solution to the economic downturn that has already begun. So the government must immediately increase spending to prop up consumption (which makes up the majority of GDP in Pakistan) with wage related support to low income groups as well as more direct transfers to consumers. Many other governments are increasing expenditures and promoting domestic consumption through significant transfers but Pakistan has so far failed to act.
Also, the monetary authorities need to act immediately and decisively to spur investment. Central banks globally have taken interests down to zero and though Pakistan may feel that it is constrained because of its bailout package, the time to act is now. Single digit interest rates should nudge the private sector back to borrowing and investing which will lead to higher productivity, greater employment and higher exports. And though everyone understands that high interest rates inhibit private sector borrowing, everyone forgets that the government is also borrowing at the same high rates. So single digit interest rates are immediately needed to spur both public and private sector investment.
Finally, the government must develop a plan for transformational investments made by the public sector that focus on people. It is easy to forget that almost all historical examples of private sector led growth have been accompanied by huge public sector investments in health, education and human capital development.Public sector investment in health and education is especially important now since the current global pandemic will change the entire structure of health and education. Public sector hospitals in developing countries will bear the brunt of the coronavirus patients while students in public sector schools and universities will be unable to access digital learning, which will exacerbate income-related inequalities. It is time to consider how private sector models of education and health can be translated into a public sector setting.
While a global pandemic rages, policy makers have to focus on protecting their citizens. But at the same time, they have to keep an eye on how to aid recovery when the situation stabilizes. It is interesting to see how quickly critics of the public sector have embraced government-led rescue plans. Presently, governments across the globe are spending amounts which have not been seen since the world wars and these expenditures will be the foundations on which private sector growth is eventually rekindled. And central banks are supporting these policies by lowering interest rates to unprecedented levels and combining this with massive infusions of cash.
The risk is that when this all settles and governments have helped to salvage economies, the powers that be (usually those benefiting from the massive income disparities that naturally arise in private sector driven economies) will again start to demonize and deconstruct the public sector. Though this will be more difficult in large developed economies, it will be far easier in developing economies like Pakistan. If Pakistani history has taught us one lesson, it is that we are incredibly efficient in taking apart the public sector and then wondering how it struggles whenever a crisis occurs.