79556 Pakistan Policy Notes—Rethinking development policy choices Synthesis Pakistan Policy Notes Rachid Benmessaoud, Uzma Basim, Anthony Cholst, and Jose R. Lopez-Calix 1 Rethinking Development J une 2 0 1 3 Policy Choices: Contributions to the Emerging Agenda In recent years, the World Bank has had the honor tariffs. And it calls for opening markets and and privilege of welcoming incoming administrations encouraging regional trade. It seeks to place with a series of diagnostics studies and policy recom- Pakistan on a sound fiscal path with increased mendations. Building on this tradition, the Bank tax revenues, by reducing subsidies and losses team has put together a Country Economic in state-owned enterprises (SOEs) and limit- Memorandum (CEM) focused on job-enhanc- ing government borrowing. And it seeks to ing growth and 16 sector-specific policy notes substantially increase investments in human for the incoming Pakistan government. This capital—health, education, and social protec- effort is meant to facilitate a dialogue around tion. These are admirable goals, and the policy a menu of policy options and be informative notes and CEM aim to provide the government in the spirit of knowledge exchange. The top- with options to meet these objectives. ics were selected from ongoing or completed analytical work and where the World Bank Challenges are formidable, and a bold approach is has local and international expertise. This needed, focused on growth as well as stabilization. synthesis note aims to provide an overall guid- The past five years represent a historic political THE WORLD BANK GROUP SOUTH ASIA REGION ing framework to highlight and bring together achievement with a democratically elected gov- some of the critical reform priorities identified ernment completing its full term. On the eco- in the policy notes and CEM (see Box 1). nomic front, however, gains have been limited. Economic growth has been modest at best, The policy notes and CEM aim to help the incom- inflation has been in the double-digits most ing government achieve its ambitious economic goals. of the time, and formal unemployment has The Pakistan Muslim League Nawaz mani- risen. There is no doubt that Pakistan has had festo—“Strong Economy, Strong Pakistan�— to manage through several exogenous shocks, establishes the overarching goal of breaking such as natural disasters and the ongoing con- out of the trajectory of low growth to reach a flict in neighboring Afghanistan. Nevertheless, GDP growth rate of more than 6 percent. To there has also been marked deterioration in get there, it calls for increasing investment, many structural areas under government con- with particular attention to energy, agricul- trol, such as revenue collection, energy sector, ture, transport, and cities. It calls for plac- social indicators, governance, and the overall ing the energy sector on a solid footing by environment for private investment. Moreover, reducing losses, corporatizing and privatizing the current level of reserves and the fiscal defi- energy companies, and rationalizing power cit are unsustainable. They not only constrain Pakistan Policy Notes—Rethinking development policy choices the fiscal space for financing development food and mining exporter; its strategic loca- needs, but also place the economy on the brink tion neighboring some of the fastest growing of a balance of payment crisis for the second emerging economies worldwide; and the rapid time in less than five years. These macro con- growth of women in the labor force every year. ditions make solving the structural challenges Pakistan also has a large informal sector serv- even more pressing. Simultaneous action on ing a sizable domestic market concentrated various fronts and a break with the past eco- in rapidly growing large and mid-size cities— nomic trends will be crucial to putting Paki- and significant untapped potential for export 2 stan back on the path to prosperity. growth in new markets, both regional and global. Strong leadership with clear vision, and sustained implementation, will be critical for bringing about These positives can be unlocked in three ways: economic reforms that have eluded Pakistan. Essen- • Message 1. Pakistan must aim to achieve tial ingredients missing in past episodes of higher growth linked to more and better reform have been a strong political will and a jobs—especially among women and youths. consensus to implement difficult policy deci- Perhaps the most powerful and dramatic sions. Unfortunately, “stop and go� policies reason for Pakistan to change course is are the rule rather than the exception in Paki- demographic. With the sixth highest fertil- stan’s experience with structural reform. The ity rate in the world, the country’s popula- first few months of the political transition pro- tion is projected to double by 2025. The vide a unique window of opportunity. Making youth labor force is rising fast, and Paki- a bold start and appointing a competent team stan needs to create about 1.5 million new responsible for following through with solid jobs a year—about twice its present rate— and steady implementation will be essential. to prevent rising formal unemployment. Growth and employment, inextricably Three Central Messages linked, can feed off each other in a mutu- ally reinforcing manner. But unless growth Accelerating growth in Pakistan has been possible accelerates, employment required to absorb in the past, and it can be again. The country a demographic bulge will not materialize has already enjoyed two previous episodes of and inequality will increase—aggravat- sustained rapid growth averaging 7 percent a ing the risk of conflict and social divisions. year (fiscal 1963–67 and fiscal 2004–07). Paki- While the country is already creating low-­ stan needs to come back to that trajectory. At productive jobs, formal and informal, they that rate, the economy doubles in size every are not enough to sustain growth in the six to seven years, creating enough jobs for its medium term. To sustain growth, Pakistan expanding labor force, but also higher skilled needs to create more productive jobs. and more productive private sector jobs. There • Message 2. Pakistan must strive for inclusion could still be exogenous shocks that can, if and improving human capital as a corner- unaddressed, derail efforts. But experience stone of rebuilding productivity. Pakistan has shown that Pakistan’s economy can also be is making progress in reducing poverty and very resilient in preserving growth and poverty improving social indicators, but not as fast reduction despite civil conflicts, natural disas- as other countries in the region. Sustainable ters, and complex political transitions. growth can best be achieved by pulling peo- ple out of poverty and into a growing mid- Pakistan has many “positives� that can help support dle class. In this sense, inclusiveness is not accelerated growth and revive the economy. They merely about fairness—it is about creating a include the legitimacy of many of its institu- more educated and healthy middle class that tions; its capacity to implement national proj- is employable and more productive and that, ects when there is a will; the impressive growth as consumers, can drive economic growth. of remittances from abroad in the 2000s; its Inclusiveness should therefore be a central natural resource base and huge potential as a objective—reaching marginalized groups and promoting equal access to economic collection has deteriorated and shrunk the opportunities and government services. Spe- already small fiscal space to finance develop- cial focus is needed for the conflict-­ a ffected ment needs. A significant reversal of these regions of Khyber Pakhtunkhwa, Federally downward trends is essential, as are improv- Administered Tribal Areas, and Baloch- ing the quality of public administration and istan, where strengthening human capital is completing the decentralization process to harder but, if achieved, can yield transfor- promote a more accountable and efficient mational results. system of service delivery. • Message 3. Pakistan can sustain its growth, 3 jobs, and inclusion agenda only by enhanc- It is important to emphasize that implementing these ing governance and accountability. Good reforms ad hoc and piecemeal will not yield results. governance is fundamental to accelerat- The CEM and 16 policy notes can be grouped ing growth and attracting private invest- under these three main messages (Figure  1). ment—by setting simple minimum rules Each area of reform will reinforce the o ­ thers— and regulations that can govern key eco- but, if not pursued, will undermine the others. nomic activities with greater accountability For example, the current approach to taxes and transparency. It can also increase the and subsidies not only distorts business activi- efficiency of service delivery, particularly ties and creates avenues for corruption—it also for the poorest people, especially if equity reduces the government’s ability to supply elec- is a major goal. In the last decade, indica- tricity. A lack of energy in turn reduces busi- tors of many dimensions of governance have ness competitiveness, reduces trade, and slows deteriorated, with weaknesses in the rule of growth and job productivity. Similarly, gover- law and control of corruption—and with few nance issues cross sectors, from education and gains in government effectiveness and regu- health to trade policy. Partial implementation latory quality. Even with some improvements will therefore undermine desired results. For in public financial management, revenue instance, if prompt solutions are not found to Figure Three central messages 1 Jobs and growth • Building an ef cient energy sector • Reinvigorating the agenda for open trade • Enhancing the business environment • Reforming state-owned enterprises • Revitalizing manufacturing • Increasing agricultural productivity • Enhancing labor market conditions for vulnerable groups Inclusion and human capital development Policy notes • Recovering strong positive trends in poverty grouped by and opportunity the three • Expanding access to quality education key messages • Expanding quality health, population, and nutrition services • Consolidating social protection • Managing natural disasters Governance and accountability • Revamping governance • Improving nancial management • Promoting ef cient service delivery with decentralization • Mobilizing revenue Pakistan Policy Notes—Rethinking development policy choices reduce SOE losses, they will continue to con- a reliable and efficient source of energy, busi- strain the fiscal space and keep jobs unpro- nesses simply cannot be competitive. And ductive. Or if a solution is not found to reduce many businesses have either to invest in cap- corruption in tax collection, overcoming tax- tive power generation capacity or face closure payer unwillingness to register and file will and possible bankruptcy. But just as significant remain an uphill battle. And unless social pro- is the inverse—the importance of the business tection builds effective insurance mechanisms environment in resolving the energy sector to protect vulnerable populations against natu- governance dysfunctions. An important goal is 4 ral events, households that climb out of poverty to develop lower cost sources. But the amount will likely fall back following the next natural of investment needed suggests that—without disaster. In this sense, the whole would be far private financing and a strengthened overall greater than the sum of the parts. macro, business, and trade environment—this will not be an easy task. The Overall Agenda: Why a Piecemeal Approach Will Not Work An efficient energy sector is necessary to achieve fiscal consolidation and improve human capital. It clearly For details in each area of reform, readers are directed is not possible to make the fiscal situation sus- to the CEM and individual policy notes of most rele- tainable without a dramatic reduction in power vance to their concern. Each note provides a short subsidies. This then feeds into strengthening analysis of a few key issues, a menu of priority human capital in two ways. First, without reduc- actions, and their potential sequencing in the ing power subsidies, Pakistan will not have the short to medium term. But it is also critical to fiscal space to make the increased investments look at the benefits of implementing reforms in education, health, and social protection it so as a whole and see how they interrelate. desperately needs. Second, targeted protection Simultaneous and persistent efforts will have to the most vulnerable low-power consumers is higher probabilities of changing the dynamics in turn critical to creating the political space to required on most fronts. reduce subsidies—most power subsidies go to the well off. Jobs and growth Fiscal consolidation will help improve access to To accelerate growth, Pakistan needs to address its finance by SMEs. The large and rising fiscal defi- interrelated binding constraints. The key con- cits of the past four years have to be financed. straints are for the most part well known, and This financing adds to a public debt burden addressing them is indeed at the core of the that exceeds the 60  percent of GDP ceiling Pakistan Muslim League Nawaz manifesto. allowed by the country’s Fiscal Responsibility They include poor access to steady electric- Bill. More important, the skyrocketing domes- ity, macro fiscal vulnerabilities, low access to tic financing of the deficit has contributed to finance and credit (especially for small and a private sector credit crunch—severely crowd- medium-size enterprises, or SMEs), trade ing out the private sector. Heavy SOE losses restrictions, business-­u nfriendly cities to ser- and guarantees for about 2.5 percent of GDP vice growth and green manufacturing, exces- are also worsening the fiscal situation. While sive business regulations, poorly performing large businesses can often obtain nonbank SOEs, and gaps in infrastructure financing. financing, the most vulnerable are the SMEs, Some of the main interlinkages are as follows. ironically the most dynamic and job-creating portion of the business community. Bank Reliable energy is the cornerstone of a strong busi- lending to SMEs is only 6.6  percent of total ness environment. It is not an understatement to advances. But just as important is the reverse say that energy is the top constraint to growth flow. The growth of businesses and SMEs is and jobs. If the country had solved the power critical not just for growth and jobs, it is also load-shedding crisis, GDP growth would have necessary for the government to increase the been 1.5–2.0 percentage points faster. Without tax revenues needed to bring down the deficit. Fiscal consolidation is necessary to improve the per- there are myriad tariff slabs. Simplifying the ception of reduced country risk and raise private tariff and trade regulation regime and reduc- investment. A clear sign of this linkage is the ing SROs would help reduce Pakistan’s anti- Emerging Markets Bond Index, which rose export bias and create a level playing field for above 1,000 basis points in March 2013 (later competition—without which Pakistan busi- falling, following the election). Coupled with nesses will fall behind. While some businesses a downgrade of Pakistan’s sovereign bond rat- would surely face stronger competition, the ings in 2012, this has made external finance sooner Pakistan integrates into the regional extremely expensive for Pakistan, resulting in market, the faster its businesses will become 5 a sudden stop in external flows and requiring competitive overall and benefit from the high excessive government borrowing domestically. growth rates of its large neighbors. Businesses Bringing the macro stance into greater sustain- would also benefit from the greater availabil- ability would help improve the perception of an ity of trade finance. Trade logistics businesses investment-friendly country with much lower such as trucking, rail, roads, ports, trade risk—and to bring down interest rates and finance, warehousing, and storage would also inflation for businesses. benefit. And farmers would gain greater access to advanced technology and new markets. But To unlock the manufacturing potential, attention just as important, increased trade and a simpli- needs to be devoted to urban development, green fied tariff regime should increase government manufacturing, and infrastructure financing. Cur- revenue, enabling the government to invest rent urban development strategies and zoning in further trade-enhancing improvements, regulations do not foster productive or com- and contribute to expanding agricultural mercial activity. As a result, there is a lack of productivity. multifunction urban areas that emphasize density and commerce. Manufacturing con- In all these efforts, it is important to focus on youths tinues to be heavily concentrated in low value- and women. Overall economic growth and even added consumer products that attract little high levels of education have not translated investment. To take advantage of the impor- into high levels of employment for these two tant benefits that agglomerations produce for vulnerable groups. Similarly, skills training job generation, cities should become growth- and temporary jobs are not widespread enough friendly clusters that foster both competition to transition them into the workforce. Provid- and learning. This should in turn help intro- ing incentives for greater involvement of the duce new more competitive technologies, private sector in program design, on-the-job including those that meet basic environmen- training, and temporary initial placements is tal and social standards increasingly required critical for achieving the required expansion for exports. Equally important is that cities rates in high-quality jobs. Self-employment be linked to each other to get the most out and entrepreneurship programs would also be of agglomeration, connecting industrial clus- important. ters. This requires upgrading, extending, and rehabilitating transport infrastructure to build Inclusion and human capital trade corridors (within Pakistan and between Pakistan and its neighbors). Poverty diagnostics, an important tool for decision making on improving inclusion and human capital, Improved trade policy is necessary to foster export needs to be strengthened. Outdated data and inac- (and rural) diversification, business competitiveness, curacies make it difficult to diagnose poverty, and revenue. The trade regime is plagued with and it is critical that the capacity and autonomy privileges: 9 out of 10 manufactured products of the Pakistan Bureau of Statistics (PBS) be granted statutory regulatory order (SRO)– assured, with its findings made public. In the based tariff exemptions benefit a single local meantime, the Human Opportunity Index pro- monopoly producer. And contrary to the most- vides a useful way to identify whether there has favored nation (MFN) declared tariff rates, been progress in both the coverage and quality Pakistan Policy Notes—Rethinking development policy choices of service provision. Inclusion policies should Consolidating progress on social protection will make ensure equal opportunity for the vulnerable a huge difference not only for the targeted poor but segments of population including women, also for the government to reduce nontargeted subsi- underserved pockets in Punjab and Sindh, dies. Whereas Pakistan spends about 3 percent and conflict-affected regions of Khyber Pakh- of GDP in untargeted subsidies, the pro-poor– tunkhwa, Federally Administered Tribal Areas, targeted Benazir Income Support Programme and Balochistan where outreach and service (BISP) spends barely a 10th of that figure, delivery has become increasingly challenging. with more inclusive results. The BISP has an One promising option to expand coverage is efficient and modern system for targeted cash 6 to contract nongovernmental organizations or transfers to the poor, and its database can be private providers on a low-cost basis to reach expanded to integrate other social programs out to population in difficult areas. under a targeted approach. However, efforts are also needed to consolidate these gains Accelerated progress in basic education and health through a coherent social protection frame- services will enable Pakistan to make faster prog- work across provinces, while replacing expen- ress in growth and jobs. Businesses need more sive universal subsidies (power, wheat) with productive, healthy, and educated workers to more targeted interventions. This will require grow. But while human development indica- an increase in social protection spending but tors have improved in the last decade, they still be far less expensive than the current nontar- lag countries at a similar income and many of geted programs. Pakistan’s neighbors. Pakistan ranks 145 of 187 countries in the United Nations Development Better management of natural disasters is a prereq- Programme’s Human Development Index. It uisite for sustained growth. Pakistan is a disaster- has the world’s second highest out-of-school prone country that is extraordinarily exposed population (7  million), of which two-thirds to earthquakes, floods, droughts, and cyclones. are girls. Enrollment and completion rates The country has had 2 floods in the last 3 years, for primary education are among the world’s 14 cyclones in the last 40 years, 2 droughts in lowest. Health coverage is also dismal, with the last 12 years, and 2 earthquakes in the last under-five malnutrition rates as some of the 15 years. This hazard profile, when combined world’s worst. And the country is also one of with rapid population growth and urbaniza- the lowest spenders on education (1.9 percent tion, greatly increases the vulnerability of of GDP) and health (0.9 percent of GDP); less human and physical capital. The major chal- than a third of the minimum average for coun- lenges in managing natural disasters are three- tries at similar incomes per capita. As noted, fold: preparedness, well-­ executed emergency it will be critical to make progress on reduc- response, and strong dedicated institutions ing nontargeted power subsidies and increas- and data systems to oversee mid- to long-term ing tax revenues in order to have the fiscal rehabilitation. It will also be critical to main- space to increase education and health spend- stream disaster risk reduction in urban plan- ing. Reform initiatives in Punjab and Sindh ning, factory design, and other infrastructure. have delivered on some counts, but the chal- lenges continue to be huge as these provinces Governance and accountability are overspending on staff salaries rather than on nonsalary priority social investment. With Strengthening governance and accountability is the the management and financing of social ser- glue that will accelerate growth and improve social vices decentralized to the provinces, national service delivery. The governance indicators of and provincial standards need to be coordi- the Global Competitiveness Report 2012–2013 nated, and their achievements monitored to ranks Pakistan as follows: 109 in transparency address inequities. Developing a system to set of government, 116 in property rights, 119 in standards in hiring, track performance, and irregular payments and bribes, 127 in reliabil- monitor learning outcomes should be the cor- ity of police, 129 in favoritism in decisions of nerstone of quality service delivery. public officials, 132 in business cost of crime, and 143 in business costs of terrorism. But not to the international community to make all news is bad. Recent positive developments progress visible and widely supported and include the growing entrenchment of demo- appreciated. cratic processes, the transfer of greater respon- sibility for service delivery to the provinces, and Stronger public financial management can be a the exponential growth in electronic media foundation for improving service delivery and mak- (enhancing transparency and accountability). ing public expenditures more transparent. The The governance agenda is multidimensional public financial management system is fairly and includes four priority areas: well developed but is not consolidated. The 7 • Improved public administration and service most notable initiatives have been adopting a delivery. Improvements can be achieved by uniform International Monetary Fund–Gov- reforming the civil service, building sub- ernment Finance Statistics compliant chart national and local capacity to monitor and of accounts for budgeting and accounting, ensure effective implementation, allowing separating accounting and auditing functions, citizen’s voice and participation in local introducing a pilot medium-term budgetary planning, monitoring, and accountability, framework at the federal level, implement- and establishing a local government system ing a governmentwide financial management that has the requisite administrative and information system, enabling automated bud- financial autonomy. get compilation, and establishing procurement • Transparency. Pakistan needs to consolidate regulatory authorities for Punjab and Sindh. its public financial management system Beyond keeping pace with these achievements, and establish effective right to information the next priorities are to develop an effective regimes at the federal and provincial levels. decentralized budget management system, The former revamps budget and cash man- improve cash management, and strengthen agement, strengthens the complaint mech- the capacity of the regulatory authorities for anisms at public procurement regulatory procurement. authorities with data publicly available, and conducts performance audits of key public Decentralization can promote efficient service transactions. The latter requires passage of delivery. The 18th A mendment requires right to information legislation, followed greater accountability by provincial govern- by proper implementation and enforce- ments, which is a strong incentive for them ment and awareness-raising campaigns for to improve the outreach and quality of ser- citizens. vices. Although a wide range of central min- • Accountability. Setting goals and contracts istries were abolished, a large number of up front and holding officials accountable ad hoc functions seem to have simply been should enable the government to regularly assigned to new federal ministries. Further report on progress and then reduce exces- accountability at the provincial level could sive control or political interference. For be devolved toward the local and community example, in revenue mobilization, this could levels. And given the fiscal imbalances in the make a difference in designing a tax system federal budget, the level of budgetary trans- that is broad, simple, and equitable and that fers may need to be rebalanced to ensure facilitates tax registration and compliance consistency with the devolution of responsibil- through transparent information technol- ities—or new revenues will have to be gener- ogy systems. ated both at the provincial and federal levels. • Anticorruption. Pakistan should undertake In this regard, the roles and functions of each a thorough systemic diagnosis, focusing level of government should be further clari- on key institutions (such as the police, tax fied. Beyond service delivery and account- administration, and the like), devising ability, decentralization holds the promise of carefully deliberated strategies to address stronger revenue mobilization, but provincial the issues, ensuring proper implementa- rules on expenditures and debt management tion of the strategies, and reaching out may need to be revisited. Pakistan Policy Notes—Rethinking development policy choices Mobilizing more revenue fairly and effectively is criti- Within the power sector, action is needed on cal not only for growth and macroeconomic stabil- several fronts simultaneously. First, a single- ity but also for governance. If Pakistan wants to point power authority should be established— create the fiscal space required for its devel- and managerial autonomy, performance opment needs—both for infrastructure and standards, and accountability should be intro- social service—it has no choice but to imple- duced for power utility firms, while considering ment a comprehensive tax reform agenda that some for privatization. This approach should is perceived as equitable in its policy design and provide clear incentives to reduce theft and 8 effective and free of corruption in its admin- losses and to increase collections. Second, a istration. At less than 10 percent of GDP and clear schedule of power tariff increases must decreasing, the tax ratio is among the lowest be established to bring average notified tariffs worldwide. The focus needs to be on making closer to determined tariffs alongside visible taxation simple, on broadening the tax base, enhancements on power reliability. The goal on ensuring compliance, and on modernizing would be to enable distribution companies to the tax administration—with steady tenure achieve full cost-recovery and perform basic and professional hiring policies in the Federal operations and maintenance (life-line below- Board of Revenue (FBR), and enhanced trans- cost tariffs on the basic block could be main- parency and accountability about its results. tained for the poorest). This can be combined On tax policy, the elimination of SROs, exemp- with a schedule to improve power reliability for tions, and zero rates that make compliance low paying customers and reduce subsidies. Third, should enable authorities to raise more rev- while the circular debt is a symptom and can enue with equity. Lowering personal and cor- be unwound over time once the system is put porate income taxes to international averages on better footing, consideration can be given could also be considered once revenues start to for taking it off the books of the energy compa- pick up. Customs tariffs should be simplified to nies and parking it for now. Fourth, a medium- a maximum of three slabs. Here again, gover- term plan for sequenced priority investment nance is critical. Creating a more autonomous, in both domestic gas and hydropower should performance-based, and modernized FBR and be initiated, including opening domestic gas a joint Finance-FBR Tax Policy Commission to private sector investment. The Water and would be two important steps toward more Power Development Authority’s financial and effective revenue mobilization. As tax revenue planning capacity should be strengthened to relies too heavily on federal taxation (about enable it to raise investment funds more easily 95 percent), while paying too little attention to from the private sector. provincial governments collection potential, provincial revenue administrations should also The second most important reform to initiate early follow such a results-oriented model. on is revenue mobilization. This, combined with a reduction of power subsidies, is a precondition A Menu of the Most Urgent Actions to creating the fiscal space for increased invest- ments in infrastructure and human develop- A solid start by the government to move forward com- ment. First, ad hoc tax and tariff reductions prehensively across many areas in the first 100 days and SROs (except priority medicines and food will be essential. What has derailed past reforms items for the poor) should be eliminated. Sec- is hesitant and fragmented reform efforts. A ond, the tax base should be broadened by using carefully chosen set of front-loaded measures existing information technology systems to would, by contrast, earn the government the identify and register taxpayers and businesses political capital to make further (and earlier) that have not yet been included. This can be medium-term advances on the reform agenda. combined with enhanced electronic filing of taxes to facilitate compliance. Third, customs The most important reform to initiate is in the power tariffs should be simplified to a maximum of sector, as progress in all other areas, including fiscal three slabs; corporate and personal income management and the private sector, depends on it. tax can also be streamlined. Fourth, the FBR should be made more autonomous with greater (including financial and tourism), integrated enforcement capacity. Finally, incentives may value chains in manufacturing, and power be considered to allow provinces to raise projects. A power transmission link with India, own-generated resources, perhaps starting by under a power tariff arrangement benefiting broadening the coverage of services taxed by both countries, could be implemented in the the general sales tax, upgrading the urban next 6–12 months with a potential capacity of property tax (combined with an agricultural 1,000 megawatts. And over the medium term, income tax), and replacing the one-time reg- bringing electricity and natural gas from Cen- istration tax on motor vehicles with an annual tral Asia could have similar potential. Trade 9 license tax and fixed fuel levy. Excise taxes on reform should be done in combination with discretionary and luxury items could also be improving trade logistics, including upgrad- considered. ing border management, with a focus on the Wagha border. Special economic zones in bor- The third most important action is to reinvigorate der areas could also be considered. SOE reform and the business environment. Deploy- ing the private sector as the engine of develop- The fifth priority should be to improve human devel- ment is long overdue, and many actions could opment. With the management and financ- be done quickly. To create a level playing field ing of education and health decentralized to and improve services, the government should the provinces, there is a need to strengthen prepare a roadmap to privatize or restruc- national and provincial standards and provide ture loss-making SOEs in a short time-frame. transparent mechanisms for increased budget To reduce red tape, it should also prepare transfers linked to performance. In education, fairly quickly the ground for a one-stop shop building on the programs already under way for new investors. On the financial sector, the in Punjab and Sindh, there is room to increase State Bank of Pakistan (SBP) could monitor support for low-cost private provision of educa- and make private SME expansion a priority tion, particularly in areas underserved by the for banks. Streamlining construction permits state, as well as to strengthen accountability would also be important. Improving the regis- and learning assessments to provide incentives tration base for land and housing, and allow- to improve education and reduce absenteeism. ing movable collateral, would increase the In health, the most pressing need is to increase number of firms and individuals using more spending on nonsalary activities. To fight staff collateral to borrow funds. Special programs absenteeism and strengthen outreach, the gov- should be considered for youths and women ernment could consider contracting out man- to ensure they can participate in this growth, agement or greater use of nongovernmental through targeted on-the-job training pro- and community organizations. Expanding grams and greater microfinance for potential the Lady Health Workers Program is neces- entrepreneurs. sary since the regions not covered are the most disadvantaged. For social protection, the BISP The fourth priority should be the regional agenda, database provides a golden opportunity to con- focused not only on India but on all regional coun- tain untargeted subsides and redirect more tries. Completing the trade normalization resources to the poor to help them manage the process with India and granting it MFN sta- aftereffects of reductions in nontargeted sub- tus would help Pakistan benefit quickly from sidies. Pilot BISP programs for primary educa- the fast growth and large markets. Conser- tion and health insurance should be assessed vative estimates suggest that bilateral trade and scaled up, with a contingency fund for nat- f lows could multiply at least three times, ural disasters considered. and most observers agree that the growth- enhancing dynamics that this process would The sixth priority for making all these efforts more unleash would be even more significant for effective is to strengthen governance and account- foreign direct investment (especially informa- ability. A key first step in reforming the energy tion technology and manufacturing), services sector is to commercialize or privatize energy Pakistan Policy Notes—Rethinking development policy choices companies to strengthen their accountability hanging fruit) for change. And early gains (low-­ to consumers and their ability to make cost-­ can provide momentum for further progress. recovery decisions. For decentralized service delivery, a critical element will be to set goals, Achieving success will also take competent and skilled collect data on them, and hold service providers managers and expert designs. Political leadership responsible for meeting them. Greater use of at the top is essential for commitment and contracting out service delivery in some areas of credibility. But vision and political decision education and health can help deliver. It is also need to be complemented by skilled managers 10 recommended that three critical ­ institutions— and persuasive negotiating capacity to cham- the FBR, SBP, and PBS—be made more autono- pion and design reforms through the complex mous, with greater capacity and enforcement political and social milieu. All successful past authority. Beyond these steps, greater use of reforms in Pakistan featured strong support e-services throughout the government can from top leaders, essential for reaching politi- facilitate service delivery with feedback mecha- cal support, and from highly respected profes- nisms. Financial management can be enhanced sionals, both for their academic credentials by improving the capacity of the regulatory and deal-making skills. Solid technical design authorities for procurement to monitor the per- also makes the acceptance of reform more formance of public entities and switch to e-pro- likely, especially if it rightly identifies winners curement. The right to information laws and and losers and provides for proper contingency regulations should be approved. On devolution, actions to minimize opposition. Financial sup- there is a need to clarify roles and responsibili- port from donors is secondary, and not deter- ties (including budgeting, financial reporting, minant; if it forces reform with no ownership, and taxation powers) between national and it can even be counterproductive. But it can provincial authorities to strengthen account- prove useful when complemented by solid insti- ability. Finally, civil service reform should be tutional ownership and timely advice and tech- initiated to reduce turnover, to attract solid and nical assistance. specialized professionals, and to rationalize pay scales and make them transparent. A bold start, with a properly sequenced rollout, will enhance the likelihood of success. A carefully cho- Implementing to Succeed sen set of front-loaded measures would earn the government the political capital to make Far-reaching reforms will take both leadership further (and earlier) medium-term advances. A and building consensus. The suggested actions possible sequence would be for the government included here should be considered as a menu to begin with measures that consolidate fiscal of options, to be selected and guided by the sustainability, set new growth dynamics into new administration’s goals and ambitions— motion, and address the most pressing social and by political realities. But the challenge commitments. Phasing out expensive subsidies, for the government is that incremental (piece- initiating energy and tax reform, and taking meal) actions will not be enough to change key actions in social protection—like consoli- the dynamic. For comprehensive reform, dating and expanding the BISP—should also implementation will require strong political not be delayed. These steps might be followed will, expert design, and persuasive negotia- by a thorough exercise reviewing spending pri- tion. Powerful individuals and well-organized orities, consolidating ongoing sectoral reforms groups with vested interests will continue to (especially for education, energy, and agricul- avoid changes, as in taxation, agriculture, and ture), and introducing institutional reforms trade reform. Thus, a broad consensus with a (especially those for public financial manage- solid communication effort is needed as part of ment, trade, and vocational training). These the change management process to overcome reforms would stimulate exports, strengthen these interests. The near-­ c risis situation in governance, and give the new government Pakistan can also become a positive motivator an image of commitment, participation, and Box A possible list of the 12 most urgent transformational reforms to initiate 1 • Strengthen power sector governance. Establish a single point power authority and appoint professional management in the boards of power distribution companies, bring average notified power tariffs close to determined tariffs along with visible reduction in power outages, and create incentives for private investment in gas fields. • Attract private investment. Restructure and privatize selected power distribution companies and other loss-making SOEs, and expand commercial credit to SMEs. • Manage fiscal crisis. Eliminate tax exemptions and zero rates (and related SROs); identify and register 1 million new taxpayers using information technology systems and databases, and increase fuel taxes and special excise duties. • Reorient public spending. Phase down untargeted subsidies to power and SOEs, and reassign funds to key infrastructure spending 11 and maintenance (power, water irrigation, and roads) and targeted social spending. • Reinvigorate trade liberalization and competitiveness. Eliminate trade-related SROs and simplify customs tariffs to a maximum of three slabs. • Strengthen economic governance. Strengthen the autonomy and enforcement capacity of the FBR, SBP, and PBS, and ensure stabil- ity of tenure and accountability of key government positions. • Enhance business environment. Establish a one-stop shop for investors in obtaining licenses and registration, and streamline construction permits and property registration procedures. • Tap regional potential. Complete normalization process with India granting it MFN status, and sign a power transmission connec- tion and trade agreement. • Improve social service delivery. Double funding for education, health, and nutrition nonsalary budgets, set a system for tracking teachers’ professional recruitment and performance, and use low-cost private outsourcing mechanisms. • Protect the poor and vulnerable. Consolidate gains under the BISP through a coherent social protection framework across prov- inces, increase the BISP budget and extend pilot programs on education, child labor prevention, and health insurance, use the BISP scorecard to redirect expensive power subsidies to poor households, create contingency fund and micro-insurance programs against the risk of natural disasters, and make poverty data available to the public. • Address corruption. Approve right to information law, set e-procurement to make public biddings transparent, perform audits of major procurements, and establish public procurement regulatory authority two-tier complaint redressal mechanisms. • Complete devolution. Establish financial and administrative autonomous local governments, and clarify roles and responsibilities among national, provincial, and local authorities (budgeting rules, financial reporting, and taxation incentives). transparency—which would help it win support decisions. But the key to success will be imple- for further reforms. mentation, implementation, and implementa- tion. It does no good, and probably some harm, Special attention should be given to the most vulner- to take half-hearted steps that are then partly able people or areas. Many of the reforms noted reversed when facing obstacles. Most reforms, here are most likely to benefit those already because they are complex and intertwined, well integrated into Pakistan’s economy. Large will need concerted actions by multiple official groups of people—particularly the poor, entities across several years. A cross-sectoral youths, and women—will need special mea- reading of the policy notes would facilitate sures to ensure that they too can participate collective thinking on the complexity of the in and benefit from these reforms. So, too, issues—and highlight the need for strong and will special measures be needed to ensure that coherent collective and comprehensive govern- the most conflict-affected areas are not left ment action. To facilitate reform implementa- out. This will require a deeper understanding tion and coordination across multiple entities, of the drivers of conflict, so that they can be the government could consider creating small addressed. monitoring cells or performance management units at the Prime Minister and Chief Minister Above all, sustained implementation matters. There offices to follow up and manage the overall is no substitute for political will to make bold progress on targets. © 2013 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street NW Washington, DC 20433 USA All rights reserved This report was prepared by the staff of the South Asia Region. The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank’s Board of Executive Directors or the countries they represent. The report was designed, edited, and typeset by Communications Development Incorporated, Washington, DC.