Interview with Dr. Ayub Mehar — an eminent economist
PAGE: Tell me something about yourself, please:
Dr. Ayub Mehar: Currently, I am serving as Professor at Iqra University Karachi and also associated as an Economic Advisor with the Employers’ Federation of Pakistan. I have been serving as an Economic Advisor of the Economic Cooperation Organization (ECO) Chamber of Commerce for three years and also as Director General in the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) for 7 years.
I have completed and worked on various research assignments for Asian Development Bank Institute Tokyo, including Covid-19, digital transactions, and economic activities: The puzzling nexus of wealth enhancement, trade, and financial technology, jointly published by the University of Cambridge (Judge Business School) and Asian Development Bank, Measuring impacts and financing infrastructure development, Economic integration among CAREC member countries, and Environmental, social, and governance investment: Opportunities and risks for Asia. Development Financing, Macroeconomic Policies, International Trade and Finance are areas of my interest.
I have completed several policy research studies on strategic issues including, Bridge financing and fiscal policies during the Covid-19 pandemic crisis, Ineffectiveness of ESG policies and incentives: Impact of GSP plus on Central and South Asian countries, Infrastructure development and public private partnership: Measuring impacts of fiscal policy in Pakistan, Economic integration in CAREC member countries: Financing economic corridors and sovereign bonds market, Infrastructure development by liberalizing economic policies: The straight path of economic prosperity, Financial cooperation in South Asia: Recent development and challenges, and FDI, infrastructure development and CPEC: Is there a connection? for various national and international institutions including the World Bank, Asian Development Bank Institute, Friedrich Naumann Stiftung (Fur Die Freiheit), SAARC Chamber of Commerce and Industry, and ECO Chamber of Commerce and Industry.
The Technology Policy and Assessment Center at Georgia Institute of Technology acknowledged my membership in the distinguished panel of international experts for Indicators of Technology-based Competitiveness, which is a project of the US National Science Foundation, United States Government.
I am also alumni of the IAL Gummerbach Germany, where I got training in Public Finance. Recently, I completed a study on the Nexus of debt financing, investment and policy intervention for International Business in Times of Crisis (16th volume in the PIBR series) in tribute to Prof. Geoffrey Jones, the Harvard Business School.
PAGE: Pakistan ranks 122 in the Logistics Performance Index which is the lowest in South Asia. What is your take on it?
Dr Ayub Mehar: First of all, it is notable that the last two decades indicate a fast deterioration in the overall development ranking of Pakistan in economic and social development indicators. Currently, Pakistan is facing the lowest development ranking in the region. According to World Economic Forum (WEF), Pakistan was ranked below 110th in the overall infrastructure ranking of 137 countries in 2018. Now, it is being further deteriorated year by year.
For ranking purposes, infrastructure is classified into five components: logistics, communication, administration, markets, and innovations. While, rapid transportation, cutting-edge infrastructure, simplified documentation and frictionless procedural requirements are the components of logistic performance. The fall in ranking has been observed in all components of infrastructure development including logistic performance. Certainly, this deterioration has badly damaged the country’s economic competitiveness. The logistic system covers all channels from the place of production to the point of consumption: from agriculture farms to processing industries and retail markets, and from ports to retail markets. Middlemen, transporters, insurance companies, processing and packaging industries, roads infrastructure and safety, wholesalers, customs authorities and regulating agencies are part of this system.
Pakistan is currently suffering a severe collapse of infrastructure, particularly serious deterioration in shipping lines, railways, highways, supply of electricity, and its national carrier – Pakistan International Airlines (PIA). Lack of appropriate infrastructure, restrictive and over-regulated economic environment, declining business competitiveness, lower rate of growth and economic miseries are the interconnected variables. A repaid rebuilding of the logistics infrastructure is required not only for economic growth but also for the survival of the country.
PAGE: How could the cost of logistics be reduced in Pakistan?
Dr Ayub Mehar: I think discussing the elements of logistic cost and measures to reduce it without considering its benefits will not show a complete picture. A cost-benefit analysis is required to explain the cost of logistics. The role of logistics infrastructure in economic growth is strongly supported by economic theory. The logistics performance can directly generate several economic activities in transportation, construction, utility services, chemical, cement, steel, energy, agriculture, tourism, banking, insurance and other services sectors, however, its main role is to provide a catalyst for the development of other sectors.
There are several examples in the literature to explain that the development of various kinds of logistic facilities improves households’ income, employment and living standards of the people. It was assessed in a study carried out by a public sector think tank that spending one billion rupees on the improvement of road quality in Pakistan can increase per capita income by Rs.371 on a permanent basis. Spending on infrastructure can bring out people from absolute poverty. This mechanism is much more powerful than subsidies and transfer payments because it provides a sustainable solution to poverty. So, it is a crystal-clear relation between spending on the improvement of logistic performance and growth in national income.
Obviously, the growth in national income will provide additional tax revenue to the national exchequer. It will accelerate investment and financial activities in the capital market. It will provide employment and betterment in the living standards of households. So, to achieve these desirable goals, the government can incur some expenditures.
In the contemporary world, the development of infrastructure and logistics facilities is not the sole responsibility of the government. The private sector invests in these facilities. However, it is a usual international practice that government supports the private sector in the development of these infrastructure facilities. The exemption from taxes on the required materials for the development of logistic facilities, exemption from taxes on the income of logistic infrastructure providers to create business viability, guarantees for financing infrastructure projects, subsidized interest rate, subsidized or free land for physical infrastructure and assurance for the collection of user charges from the users of logistic services are including in the government supports. In this way, the government can reduce the cost of logistic services. Another important way to reduce the cost of logistic services is to provide safety and security to the transporters.
PAGE: What kind of modernization has taken place in the logistics and transportation sector of Pakistan over the period of the preceding two decades?
Dr. Ayub Mehar: Despite the badly required logistic infrastructure, the spending on this sector in Pakistan is negligible compared to the spending on non-development expenditures. Even the investment in infrastructure with private participation is not up to the required level. The lack of appropriate infrastructure can be observed in public places, civic facilities in metropolitan cities, the supply of utility services, electricity, railways, highways, shipping, and its national carrier airline ‒ Pakistan International Airlines (PIA).
Information Technology and Communication (ITC) is the only component of logistic-related services, where significant improvement can be observed. But its credit goes to the advancement in technology. The improvement in this sector is a worldwide phenomenon.
Covid-19 has accelerated further development in this sector by promoting online activities and work-from-home practices. Attracting foreign and local investment and discouraging the outflow of domestic capital are natural requirements for rapid industrialization and economic development in Pakistan. It is obvious that inducing private sector investment – both foreign and domestic ‒ requires a significant and visible improvement in logistic facilities and infrastructure. Historically, such facilities and infrastructure development in Pakistan has been associated with development finance institutions (DFIs) and the provision of developing expenditures in the annual budget. It is the present practice in Pakistan that all infrastructure-related development projects in the public sector are controlled and financed through a centralized bureaucratic mechanism. Under this mechanism, the Planning Commission in Islamabad approves the feasibility reports of infrastructure-related projects.
Pakistan has a three-tier government system (federal, provincial, and local governments). However, a centralized Public Sector Development Program (PSDP) is controlled by the Planning Commission. Some projects under this program are directly launched and managed by the federal government. The construction of railways, motorways, national highways, a communication network, energy distribution, distribution of water for irrigation and power generation, and construction of ports are included in the federal projects, while 50% matching grants are transferred to the provinces for the development of those projects that are launched by the provincial governments after approval by the Planning Commission.
There were several development finance institutions (DFIs) in the public sector and the government has been providing equities for the establishment of those development finance institutions (DFIs) before 1993. The National Development Finance Corporation (NFFC), the Industrial Development Bank of Pakistan (IDBP), the Agriculture Development Bank of Pakistan (ADBP), the Pakistan Industrial Credit and Investment Corporation (PICIC), the Pakistan Industrial Development Corporation (PIDC), and many such other institutions were responsible for providing funds for big infrastructural projects in public and private sectors.
Now, these institutions have either been dissolved because of bad governance and a lack of funding or play an ineffective role in the economy. In 2014, the government again announced the establishment of a new DFI (Pakistan Investment Fund) by inducting an initial equity of Rs500 billion. But it is still inactive. Large commercial banks also provide financing facilities to public sector projects. The monetary policy of the State Bank of Pakistan plays an important role in allocating credit facilities to different sectors and determining the rate of interest. All these policy measures indicate the over-dependency on infrastructure development in the public sector.
In the absence of these DFIs and lack of funding, the logistic infrastructure has badly faced a severe deterioration. Because of this, now the economy is facing a crisis in the supply of energy, a shortage of water, a badly damaged sanitation system, and outdated means of transportation. This deterioration has led to a lower ranking in business competitiveness, which has created a situation in which industries cannot utilize their available production capacity because of poor logistic facilities and outdated transport infrastructure. The badly deteriorated infrastructure in Pakistan does not support economic progress and industrialization.
PAGE: What is your perspective on logistics policies?
Dr. Ayub Mehar: In fact, logistic policies are part of the overall economic policies. A major change in economic policies was observed in Pakistan in 1993 when the then-caretaker government decided to limit the role of the public sector in infrastructure development. Some public sector responsibilities and activities have been shifted to the private sector. The participation of the private sector in infrastructure development was realized and it was planned to involve the private sector in transport, communication, and logistic infrastructure. After three months of the caretaker government, the then newly elected parliament endorsed the continuity of those policy reforms that were introduced by the caretaker government. Consequently, the share of development expenditures in the total public expenditures of the federal government was reduced significantly. The declining development expenditures by the public sector without ensuring substitution from the private sector have damaged the economic growth of Pakistan.
However, no significant contribution from the private sector has been noted in infrastructure-related projects. This change was not a success story of fiscal reforms. This was a policy failure that lowered the long-term economic growth of Pakistan. The negligible share of the private sector in logistic infrastructure development and the declining development expenditures by the government in this sector reflects the causes of the fall in global ranking in logistic performance. The deterioration in infrastructure was the obvious outcome of this policy which led to the declining rate of GDP growth and its spinoffs: exports, tax revenue, investment, savings, employment, etc.
Later on, the government established a policy and regulatory framework for public–private partnership (PPP) in the telecom and power sectors. But the government introduced a public-private partnership (PPP) policy for infrastructure development in its Medium-term Development Framework (MTDF) 2005‒2010. While the public-private partnership act was legislated by the parliament in 2017. This long story explains the cause of the fall in logistic performance.
The deterioration in transport-related logistic services is the biggest barrier to the economic integration of Pakistan with landlocked Central Asian countries. In the present context, the China-Pakistan Economic Corridor (CPEC) provides a doable mode to develop the required infrastructure. The CPEC starts from the seaport city of Gwadar in Pakistan and runs all the way to the historic western Chinese city of Kashgar near the Tajikistan and Kyrgyz Republic borders. High-speed trains, linking the adjacent major cities, 9 specialized economic zones in various cities of Pakistan, various power plants and dry ports are included in this project. This project will provide connectivity to Central Asian landlocked countries and no doubt it will lead to a very significant advancement in logistic performance.