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Import tariffs were negligible or zero in Medina economic model

PAKISTAN, 1 October 2018-   With PTI leaders emphasising on Malaysia’s Khazanah model, the Medina economic model and major overhaul in governance, BR Research reached out to Ali Salman, the founder (currently Managing Trustee) of Islamabad-based think tank Policy Research Institute of Market Economy (PRIME). Ali is also the CEO of Institute for Democracy and Economic Affairs, a leading independent think tank in Malaysia.

In 2011, he was among the founding members of Islam and Liberty Network, a group of think tankers from Muslim countries focusing on Islamic economic thought among other themes. Ali has a background in economics, public policy and business administration, and is currently pursuing a doctorate with the University of Bath. In this interview, Ali talks about Khazanah model, Medina economic model and other topical economic affairs.

BR Research: You were largely positive on PML-N government’s 5-year performance. Do you think there is even a need to alter the way things were being dealt with?

Ali Salman: There is no need to change the direction completely. There were many things that saw improvements in the last five years; we saw a lot of emphasis on infrastructural development and there was indeed an increase in electricity production.

We should try to build on that infrastructure-led growth; infrastructure development alone cannot improve the business environment. It can raise GDP growth rate but how can we convert that into trade advantage and raise productivity. That is the main question.

Some of the things which Prime’s scorecard consistently pointed out were the absence of tax reforms, except perhaps in the very last budget which now stands revised. There was an emphasis on protection of industry, whereas in our view we would like to promote the industry without protecting it. That promotion needs to be the next step where the tariff regime needs to be reviewed thoroughly.

BRR: Do you expect a change of direction in policy landscape following the PTI’s coming to power? And are you critical, as are some, of the delay in the announcement of the much-awaited economic plans.

AS: The new government has a lot of emphasis on human development which we welcome of course. They have a new set of priorities in terms of their political agenda. I have positive expectations from the new government in terms of governance and tax reforms that may emerge from new ideas or new ways of thinking. But I think it is too soon to pass a judgment because this is an inexperienced team unlike the previous team. We should definitely give them some time; I would give much more time to come up with a well backed plan.

BRR: We have seen various experiments in governance models in Punjab and KP in the last five years. How would you compare the governance model of the two, and what kind of direction in governance model would you like to see at the federal level in the next five years?

AS: We can learn some lessons from the culture of formation of autonomous government-owned companies for the delivery of public services in Punjab. One important lesson that the Punjab government should learn is that the incentive structure in place for the professional cadre should be compatible with the incentive structure in the government department to make the evaluation more reasonable.

I am appreciative of the fact that the health sector was made more autonomous in the KP; political intervention in police was also reduced there. The beauty of the two approaches in these provinces is that they offer a competition of various models, and I think there was nothing wrong in actually following these special vehicles that Punjab pursued. But the devil lies in the details; so some of those companies like the Lahore Waste Management Company were successful in comparison to the Punjab Saaf Pani company.

In the federal terrain, my understanding is that we can learn from these experiences and we can incorporate these experiences in our governance reform programme of which we hear a lot about these days, rather than simply discarding them because of political considerations.

BRR: You have held the view that government should not be in the business of picking up garbage. So what aspects of that model do you think are worthy of being incorporated in whatever the next governance model might be, if and when a new model is implemented?

AS: These lessons would be applicable whether it is a government department or a government company. One of the key lessons is the autonomy of decision making. Even if you don’t have a corporate structure; let’s say there is a school or college being run, the head master should be responsible for teacher transfer, promotion etc. Currently the structure is such that provincial secretariat makes those decisions.

The beauty of the company model was that there was an autonomous board of directors, which was chaired by the chief minister. But the management was responsible to the board and resources were made available to the management, because of which in some cases the company was able to achieve the results. It will be difficult to convert this governance into a commercial model right away at this stage, because at present, for instance, the people of Pakistan are not used to paying rational charges for water usage.

BRR: Finance Minister Asad Umar is very fond of Malaysia’s Khazanah Model. What’s your understanding of the Khazanah model?

AS: The Khazanah Model is a large holding company wholly owned by the Malaysian government, especially its ministry of finance. It was created in 1994. Under that holding company, the then government parked several government assets or government run companies and handed them over to management.

Although the board was still chaired by the prime minister, the management of those companies was hired from the market, and was given the autonomy to run the business. There was a sense of competition; many of them were open to the market forces in their respective business sectors. One good example of exposing a company to market forces is Petron as that was exposed to international market that forced them to become efficiently managed and stay clear of corporate malpractices.

Later, in 2004-05 there was a major transformation programme in Malaysia, under which they analysed their whole public sector enterprises infrastructure, which is by the way much more complex than how it is in Pakistan.

Pakistan does not have as many PSEs as Malaysia: from health care and telecom to banking and semi-conductors, Malaysia has an unusually large presence of public companies. Most of them had become dysfunctional in Malaysia; most of them had become an instrument of cronyism, and political patronage. That said, Khazanah has a model of state capitalism is an exception which has worked relatively quite well in larger scheme of things.

BRR: Do you think the same can be implemented in Pakistan given the differences in the political and historical realities of the two countries?

AS: Let me give you an example. In 2004, a new CEO was appointed for Khazanah, and that CEO completely turned around the business over the next 12-14 years. They were doing investment acquisition worldwide, corporate restructuring, downsizing, regardless of the size and nature of the entity held by Khazanah without any political intervention. The board itself was run very professionally. Can this be done in Pakistan?

In Pakistan, the layers of accountability are too many. It frightens the public servants, which in Malaysia did not exist for good or bad, and therefore it enabled the public sector decision makers to operate without hurdles or without fear.

It’s not easy to implement that model in Pakistan. Do we have the right kind of people? Unless they fix the accountability model and mechanism, which now includes active courts as well, and bring them in line with the economic policy, the government will not be able to attract good managers and directors to run the Khazanah model. I think the current institutional framework of accountability has become more of a hurdle than a framework of check and balance.

In any case, you cannot have a model transplant from somewhere else, and start working tomorrow. It has to be home-grown; evolved after constant tweaking and trial and error. This means there may be mistakes, for which the current accountability framework does not allow any room for. Malaysia also made some terrible mistakes in economic policy, but they have corrected their course and improved along the way.

BRR: PM Imran Khan talks about the ‘Medina economic model’. Given your background in Islamic economic traditions, what do you think is the Medina economic model? Can you briefly describe where that model sits on (left – right) spectrum both politically and economically?

AS: My understanding of Medina economic model is that prices of goods and services were not controlled; there was price freedom. Second, import tariffs were negligible or zero. Thirdly, there was general openness of trade. Even during the war, trade of goods and services continued except of course of trade of weapons. The early Muslims were fully aware that trade is an important thing.

These three principles are relevant today as well, which means that trade relations should continue regardless of political relationship with our neighbours. Prices must be set free and taxes must be lowered, especially import tariffs.

Fiscal policy of medina model was very limited small government, the taxes ranged from 2.5 percent to 20 percent, depending on the source of income, and how you are producing wealth. Social protection policy was also driven voluntarily, aside from zakat which was enforced on Muslims. There were a lot of ‘waqfs’, allocating their funds for social purposes. There is learning to be done from that aspect as well.

BRR: What about pricing of essentials, such as water?

AS: In the case of water and natural resources, they belong to collective ownership under the Medina economic model. This means that water should be made available to all free of cost. But for example, the filtration, packaging, transportation of water comes at a cost, and that cost plus the cost of maintenance of distribution channels has to be borne by the consumer.

How can you disincentivise wastage in water consumption, if you don’t have rational pricing policy? These are some of the principles that need to be incorporated in new governance models that the new government is thinking about, which will help in performance delivery regardless of the administrative model they chose.

BRR: Are there any contemporary examples to draw in terms of the Medina economic model?

AS: It is difficult to say in the Muslim world. There was some interesting work done by the name of Islamic city Index, which traces different cities or states in terms whether they follow the Islamic economic model. Among Muslim countries, Malaysia is the top, but it is still 32nd from the top; the rest are non-Muslim cities and states.

BRR: Housing seems to be PTI’s agenda. What broad policy contours would you suggest for housing policy?

AS: A lot of promises were made on housing in the last five years but there was zero outcome. Punjab government worked on the Ashiana model but that did not work, because they tried to become everything: the initiator, the provider of the land, and the developer.

Since the 1980s, successive governments have been making flawed housing decisions. They find a piece of land outside the city, and they start building on it. They disregard the fact that jobs are located in the city not outside it. The very poor people, for whom they are building these housing schemes, actually live in the cities, which is why the housing for the poor projects set up outside the city fail.

The problem begins when the government tries to be an initiator, and the sole provider of these projects. Instead the government needs to only provide the land, and change the zoning laws to allow for housing communities within the city, and then invite developers from the private sector that can develop those housing communities under public private partnership.

BRR: How would you compare the economic think-tank scenes in Malaysia and Pakistan and what can Pakistani think tank circles learns from research/advocacy approach of the Malaysia ones?

AS: Malaysia has less number of politically independent think tanks and research institutes compared to Pakistan. They have, however, far more number, and better funded business advocacy and research forums. In Pakistan, private sector business still lags behind in terms of self-funded research and advocacy. However, in Pakistan you see far better competition of policy ideas advocated by various think tanks than in Malaysia. But the trend is changing in Malaysia; we note the government is increasingly approaching think tanks and asking them for policy input. In Pakistan this trend is yet to catch on, currently it is the think tanks that chase the government for improvements in policy.

A key difference in think tank culture between two countries is that media in Malaysia is usually very receptive to think tanks and cover their statements prominently. In Pakistan, it is not the case where think tanks have to pursue media for news placement.

First published in Business Recorder, 1 Oct 2018.

2018-10-02T12:22:26+00:00 2nd October 2018|News|Comments Off on Import tariffs were negligible or zero in Medina economic model