Ishrat Husain: Effectiveness of policies and reforms - a country perspective
Remarks by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the World Bank OED
Conference on Effectiveness of Policies and Reforms, Washington DC, 4 October 2004.
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The OED has done all of us a great service by carrying out evaluations of Bank Country Programmes
in a systematic manner using a common framework. The findings of these studies should be of value
not only to the Bank's own operational staff but also to the economic managers of the client countries.
As someone who has had the good fortune of working on both sides of the table, I would like to share
some of my thoughts with you on the findings of these studies.
First, let me begin by saying that I find myself in agreement with some of the conclusions of this report
and there are at least three such broad areas:
(a) I believe, just like the OED Report, that Aid is neither necessary nor sufficient for good
policy. Aid can complement and catalyze the political and administrative processes by
fostering and reinforcing the development of ownership but aid per se is no substitute for
ownership.
(b) I also think that conditionality per se is ineffective in linking aid with reform because the
incentive structure makes it difficult for donors to disengage when conditions are not met.
The donors should avoid micromanagement and focus on results.
(c) I am more emphatic, than the OED is, on the relationship between policy reform and growth.
There is strong empirical evidence at country level (not clearly sorted out in cross-country
regressions) that this relationship is indeed robust. The experience of Pakistan since 2000
exemplifies that prudent fiscal balances, appropriate exchange rate, open trade regime, etc.
do lead towards good growth outcomes and absence of these policies in the 1990s had
decelerated growth and raised poverty level.
Having agreed with these broad findings let me elaborate on some other nuances and lessons which
should be taken seriously at the time of formulation of policy reforms.
(i) Policy reform process is not always linear and we should expect slippages, setbacks
and reversals during implementation. This should not throw donors off and they decide
to disengage, withdraw or reduce planned assistance. The donors should stay on the
course if the long-term direction, framework for action and overall strategy pursued by
the country is clearly defined, followed and shared by them.
(ii) Donors, including the World Bank have a vast array of instruments at their disposal
and they should use the appropriate instruments judiciously and imaginatively at
different stages to support the strategy. For example, if it is determined by the World
Bank AAA work that a particular institution is not ready for lending because it is in bad
shape, the appropriate response is not to wait until there is a turnaround in the
institution but to deploy technical assistance, capacity building, advice, best practice
dissemination and dialogue to prepare the institution so that it is ready to become
eligible for lending.
(iii) There is a convergence of interest between the sectoral ministries in the country and
their counterpart sectoral departments of the Bank. So they form a lobby group and
agitate for higher allocation of resources for their respective sectors and projects in an
additive mode. There is little effort to explore trade-offs in a constrained resource
situation and assign weights to the outcomes which can contribute towards the
achievement of the strategy and desired results. On the other hand,
complementarities and linkages between different sectoral programmes and
interventions are not fully exploited and the planning and sequencing of different forms
of reforms do not always reflect the synergies arising from such complementarities.
For example, those who design the education policy interact with those responsible for
labour policy only at a superficial level but not in an integrative manner.
(iv) The behaviour, response and advice extended by the donors to the countries should
be counter-cyclical in nature. When there are good days and booms, they should not
be carried away by excessive affection for the country manifest in form of higher
lending, AAA work and all kinds of assistance. The donor staff should desist from the
temptation to shine in the glory of their countries. I would suggest that it is during
these times that the donors should render advice of caution to the country and
exercise prudence in their assistance. But when the country faces bad days or
difficulties it is incumbent upon donors to continue engagement and not pull the plug.
They should not sound tough at those moments but work with the country's reformers
to get the country out of the difficult patch. The trust and goodwill generated during
these times will foster closer relationship between the Bank, or the donors, and the
authorities of the country on a long-term sustained basis.
Let me conclude by thanking the organizers of this Conference who have provided this opportunity to
share my views with such an august gathering of practitioners, policy makers and donors.