Public Sector and Governance
South Asia’s Commerce Ministers meet in Thimphu on July 24. Getting there would not have been easy for many of them, with no direct flights between Thimphu and four of the seven capitals. In June, when some of us convened for a regional meeting in Kathmandu, our Pakistani colleagues had to take a 20 hour flight from Karachi to Dubai in order to get to Kathmandu! This is symptomatic of the overall state of economic engagement within South Asia—in trade in goods and services, foreign direct investment and tourism.
South Asian countries’ trade policies remain inward-looking compared to other regions, and there are even bigger barriers to trade within the region. Today, South Asia today is less economically integrated than it was 50 years ago. Figure 1 below shows that intra-regional trade in South Asia accounts for less than 5 percent of total trade, lower than any other region.
The standard definition of political instability is the propensity of a government collapse either because of conflicts or rampant competition between various political parties. Also, the occurrence of a government change increases the likelihood of subsequent changes. Political instability tends to be persistent.
Economic growth and political stability are deeply interconnected. On the one hand, the uncertainty associated with an unstable political environment may reduce investment and the pace of economic development. On the other hand, poor economic performance may lead to government collapse and political unrest. However, political stability can be achieved through oppression or through having a political party in place that does not have to compete to be re-elected. In these cases, political stability is a double edged sword. While the peaceful environment that political stability may offer is a desideratum, it could easily become a breeding ground for cronyism with impunity. Such is the dilemma that many countries with a fragile political order have to face.
Political stability is by no means the norm in human history. Democratic regimes, like all political regimes, are fragile. Irrespective of political regimes, if a country does not need to worry about conflicts and radical changes of regimes, the people can concentrate on working, saving, and investing. The recent empirical literature on corruption has identified a long list of variables that correlate significantly with corruption. Among the factors found to reduce corruption are decades-long tradition of democracy and political stability. In today’s world, however, there are many countries that combine one of these two robust determinants of corruption with the opposite of the other: politically stable autocracies or newly formed and unstable democracies.
Some see political stability as a condition that not only precludes any form of change, but also demoralizes the public. Innovation and ingenuity take a backseat. Many seek change in all sectors of life--politics, business, culture--in order to have a brighter future through better opportunities. Of course change is always risky. Yet it is necessary. Political stability can take the form of complacency and stagnation that does not allow competition. The principles of competition do not only apply to business. Competition can be applied in everything – political systems, education, business, innovation, even arts. Political stability in this case refers to the lack of real competition for the governing elite. The ‘politically stable’ system enforces stringent barriers to personal freedoms. Similarly, other freedoms such as freedom of press, freedom of religion, access to the internet, and political dissent are also truncated. This breeds abuse of power and corruption.
Vietnam, for example, is controlled entirely by the ruling party. The economy is one of the most volatile in Asia. What once was thought of being a promising economy has recently been in distress. Vietnam’s macro economy was relatively stable in the 1997-2006 period, with low inflation, a 7 to 9 percent total output expansion annually and a moderate level of trade deficit. But Vietnam could not weather the adverse impact from the 1997-98 Asian financial turmoil, which partly curbed the FDI flow into its economy. Starting in late 2006, both public and private sector firms began to experience structural problems, rising inefficiency, and waste of resources. The daunting problem of inflation recurred, peaking at an annualized 23 percent level for that year.
More than 1.5 billion people today reside in countries affected by violence and conflict, most - if not all - of which also suffer from inadequate and poor access to basic services. By 2030, it is estimated that about 40 percent of the world’s poor will be living in such environments, where each consecutive year of organized violence will continue to slow down poverty reduction by nearly one percentage point.
A large portion of this group presently resides in conflict-affected parts of South Asia, a region that is home to 24 percent of the world’s population and about half the world’s poor.
Despite such challenging circumstances, research shows that in many settings, development aid is indeed working - albeit with frustrating inconsistency.
The 2011 World Development Report recognizes the strong link between security and development outcomes in fragile and conflict-affected contexts. However, what the evidence is yet to show us is how exactly do you get the job done right?
Tax revenue growth in Bangladesh this year has been one of the lowest in recent years. There is now demand for a cut in corporate income tax rate with the forthcoming FY15 budget. Is this a good idea from a fiscal point of view?
Whether or not a tax-cut will increase or lower tax revenues depend on the tax rates and the tax system in place. If tax rates are in the prohibitive range, a tax cut will result in increased tax revenues. Arthur Laffer distinguished between the arithmetic effect and the economic effect of tax cuts. The arithmetic effect means that a lowering of the tax rate will result in lower tax revenues by the amount of the decrease in the rate. The economic effect identifies a positive impact of lower tax rates on work, output and employment which expand the tax base. If tax rates that are currently in the prohibitive range are lowered, the economic effect of a tax cut will outweigh the arithmetic effect and revenue collection will increase with tax cut.
Has foreign aid been helpful for development? What helps and hinders it? What does the evidence say?
The key challenge facing foreign aid globally is its effectiveness.
Research on aid effectiveness has focused on outcomes such as a country’s economic growth or quality of institutions. These studies came to mixed conclusions over whether aid can effectively promote economic development.
Microeconomic evidence paints a reasonably positive picture. The World Bank’s Independent Evaluation Group (IEG) finds that the average rates of return to aid are generally above 20%. Evidence based on randomized program evaluation techniques is also largely positive, indicating that aid-financed interventions can generate substantial benefits for individuals.
After visiting a government office, residents in Punjab may be surprised to find a familiar voice on the phone – their Chief Minister. “You have recently registered property,” the voice of Shahbaz Sharif booms, “Did you face any difficulties? Did you have to pay a bribe?” (Hear the robo-call here!)
It is an uncomfortable question – but one that tackles a stubborn social issue in Pakistan. In a country of 180 million, a culture of bribery and pretty corruption plagues public service delivery.
When visiting a land services official, a staggering 75 percent of households reported paying a bribe, according to Transparency International. Over half of households said they bribed the public utilities or a police officer in the last year. Endemic corruption is not just a drag on economic activity and poverty reduction efforts – it erodes trust between citizens and the state.