"Time to Formulate a National Reforms Agenda"

In this interview, published in the Daily Star on January 29, 1999, Prof Rehman Sobhan talks to Sabir Mustafa about the need to formulate a national development agenda and launch an assault on corruption through comprehensive institutional reforms

Professor Rehman Sobhan needs little introduction. As advisor for planning to the caretaker government of 1990-91, he supervised a comprehensive study on the state of the national economy, which sought to identify a home-grown policy agenda for the development of Bangladesh. As executive chairman of the Centre for Policy Dialogue, Prof Sobhan has been instrumental in initiating and sustaining a national debate on economic policy, governance issues, the reform agenda and dependence on foreign aid.

For the past several years, Prof Sobhan has been a relentless campaigner for drawing up a national reform agenda. His views on reforms, particularly privatisation and tariff liberalisation have not conformed to the dominant establishment position of the 1990s. He finds the reform agenda being dictated by the country's foreign partners, and propounds an approach that could best be summed up as "reforms with a national, human face".

Prof Sobhan has been highly critical of the government's dependence on foreign partners for policy inputs as well as financial aid. But, in an interview given to the Daily Star, Prof Sobhan said that this no longer need be the case. He said that there is an enormous wealth of professional talent in Bangladesh for the government to draw upon, and if a government designed its own policies and ensured political support for such policies within the country, then donors would be obliged to accept such policies.

During the interview, Prof Sobhan answered a range of questions on economic policy and management, foreign aid and governance issues including institutional reforms. Excerpts from the interview follow:

Economic Policy and Management

DAILY STAR (DS): Looking back over the 1990s, how would you rate the country's economic performance? Do you feel the '90s have been another decade of "lost opportunities"? Or do you think there were positive steps to set the priorities right in terms of resource allocation?

REHMAN SOBHAN (RS): In the 1990's there were considerable opportunities for an economic breakthrough, defined as realising a sustainable growth rate of six to seven per cent. Macro-economic fundamentals were sound, inflation was moderate -- defined as below double digits, export growth was impressive even by East Asian standards, the share of domestic financing for development expenditure was rising, the balance of payments gap was falling, rate of savings had risen, micro-credit had expanded significantly. However, the economy never did pick up momentum.

We began the 1990s with a four per cent-plus growth rate, we are leaving it with a 4.5 per cent growth rate. Poverty levels remained around 50 per cent through the 1990's. Human development index (HDI) indicators showed only modest improvement. Certainly public expenditure priorities could be improved with a much more decisive shift to investing in enhancing the capabilities of the poorer segments of the population. This should be done both on grounds of democracy and social justice, which are enshrined in our constitution, but also because the poor segment are both more efficient and creditworthy, compared to the better off segments of the population.

DS: Macro economic management has been a major headache, and successive governments in recent years have claimed credit for maintaining stability in this front. Do you feel economic management is sound enough to sustain this stability?

RS: Macro-economic management in Bangladesh is not autonomous and derives from agendas laid down by the World Bank -- which have been embraced by successive governments in the 1990's who have adhered to World Bank-IMF demands to maintain macro-economic stability. There is nothing wrong with establishing macro-economic stability. Unfortunately macro-economic stability is a means not an end to development. Where economic management has failed to deliver lies in its inability to stimulate investment both in the public and private sector. We mean raising investment/GDP ratios to above 20 per cent, growth rates to 6 per cent-plus and poverty levels to be brought down dramatically. Macro-economic stability, in such circumstances may be the symptoms of a low-performing economy rather than a measure of sound economic management.

DS: There is a lot of debate about speeding up reforms of the economy, particularly tariff liberalisation and privatisation. Do you think there is such a thing as a "national reform agenda"? Which areas do you feel need to be reformed first, and which areas should be tackled more gradually? Do you think Bangladesh is moving at the right pace?

RS: Bangladesh has clearly liberalised its economy too fast - well ahead of schedules set for it by the World Trade Organisation (WTO). The acceleration of liberalisation at the beginning of the 1990's was done entirely at the behest of the World Bank against the best judgement of the policy makers of that time and in the face of strong domestic criticism from the political opposition, business community, economics profession, workers and civil society. The present government, again under World Bank pressure, has persisted with liberalisation, with the same coalition lined-up against it. It seems that, in Bangladesh the World Bank remains a stronger influence on two elected governments than the force of democratic opinion.

The consequences of premature liberalisation, particularly compared to our neighbour, India, has been to endanger our domestic industrialisation process. The explosive growth of Bangladesh's trade deficit with India at the beginning of the 1990's, with the BNP in office, was a direct consequence of our premature import liberalisation. Today, apart from readymade garments, and a few other sector including, particularly urban construction which is booming because it faces no competition from imports, industry remains stagnant with little signs of dynamism or diversification. This owes to perceptions on the part of private investors of the lack of a level playing field to compete with imports.

The privatisation agenda in Bangladesh is again driven by donors, who persist with this inspite of 15 years of evidence that half of the post-privatised enterprises are closed. Many of those that are open are in poor shape and remain large defaulters, so no burden has been lifted from the government. Meanwhile the remaining state owned industries have virtually collapsed and their losses have multiplied, particularly in the 1990's. What we have asked for is not a reversal of privatisation policy - it is most likely now irreversible - but a pause to take stock of why privatised enterprises have fared so badly and what should be done about this. This requires a policy to decide what will remain under the state sector, what will be privatised, how fast and under what terms, including who will be the beneficiaries of privatisation. There is no law which says that a large number of the poor should not be given shares in privatised enterprises, since most of the purchase of these privatised units is being done through credit from the nationalised commercial banks.

It is evident that import liberalisation, or privatisation as well as other reforms command a national mandate. Under the circumstances, it is clear that today, as such, we have no such thing as a national reform agenda in Bangladesh. Such an agenda needs to be formulated, debated in parliament, debated within civil society and an election has to be fought to support it. No political party in Bangladesh has put such a reform agenda before the people or sought to defend it. What passes for a so called reform agenda in Bangladesh is an agenda of our aid donors put in place during the Ershad regime and carried on by two successive regimes.

The top priority in Bangladesh's agenda has to be a time bound, target specific agenda to eliminate poverty and realise human development indicators at least to the level of fellow South Asian country, Sri Lanka. These commitments have to move beyond rhetoric and be translated into a holistic agenda to eliminate poverty, within a given time period-say 2010, for which expenditure allocations, to underwrite concrete programmes, backed by specific policies have to be put in place. Capacity to implement these policies has to be put in place through reforms of public institutions towards servicing the poor.

Foreign Aid

DS: Do you feel the donors' aid programme reflects the national priorities of Bangla-desh? If not, what makes it possible for donors to pursue their own agenda?

RS: Donors have for may years been setting their own priorities for Bangladesh. They have set these priorities through a Martial Law regime and beyond to two elected regimes. This is a period of close to 18 years. Today donors recognise that this was wrong. The World Bank has very recently published a landmark document on Assessing Aid which has given empirical evidence to show that if reforms are not domestically owned i.e. domestically designed, debated and politically supported, they do not work. Donors have driven Bangladesh's reform agenda for nearly two decades because no government has chosen to design its own reforms and to mobilise political support for such reforms. We cannot blame the donors. They have filled the vacuum created by our own bankruptcy in designing a national reform agenda.

DS: Given the current level of dependence on foreign aid, how do you think it might be possible for the government to set its own development agenda and persuade donors to channel aid into the desired sectors?

RS: Today Aid finances less than 50 per cent of the development budget compared to nearly 100 per cent through the 1980's. As a result, any government has much more flexibility to take more independent positions with the donors. Unfortunately our bureaucracy has got into the habit of agreeing with the donors and to accept the policy advise of every donor. The willingness to accept all such advice never fails to surprise the donors since Bangladesh today is no longer as dependent on aid as they used to be. I am confident that if a government were to design their own policy and to do so drawing upon the enormous wealth of professional talent available in Bangladesh and they were to build political support for such policies within the country, donors would be obliged to accept such policies, even if they do not fully agree with particular aspects of the policy. Today all donors state that policy ownership is the dominant basis of successful policy reforms, that donors have to let a country take charge of its own affairs and accept policy reforms originating from such a democratic mandate. This new message does not appear to have been fully registered by policymakers in Bangladesh and other Third World countries where business with donors continues as usual.

The present government is to be credited with making some effort to design their own policies. At least a dozen national commissions have been set up for reforming policy covering such key areas as education, healthcare, industry, policy, water, media, local government and administrative reform. Some of these reports been released, but no public debate has been held to project the findings, seek public support and to project the commitment of the government to implement the acceptable aspects of these Commission reports. The Commissions are a strong plus point for the Awami League government and reflect a great improvement over the previous elected government which designed few policies of their own and blindly accepted the donor's agenda. But then this government should take advantage of this asset by projecting the work of the Commissions through a series of national dialogues. Public and parliamentary debate behind the Commission report will establish what is doable and politically saleable in these reports. The government must then implement those policies which emerge out of a process of public consultation around the Commission reports.

DS: What kind of impact do you think conditionalities attached to foreign aid have had on Bangladesh? Do you think foreign aid is used as a political tool to dictate the pace and direction of economic policies, rather than respond to socio-economic needs of recipient countries?

RS: Aid conditionalities in Bangladesh have had some positive impact but mostly tend to be counterproductive. The most positive effect is to initiate a process of deregulation and liberation from Amla raj. Some of this has worked. Unfortunately, inspite of such donor-driven reforms amla raj still remains pervasive and rent seeking is the rule of the day. Aid conditionalities are thus wrong in principle because it uses aid as a bribe to a government to carry out reforms. The prospect of a cash foreign exchange loan of $100 million if a government carries out financial sector reforms has made successive governments agree to donor conditionalities even when both donor and government bureaucrats know that the government of Bangladesh will not be able to carry out these reforms. Such reforms are doomed to failure from the beginning. No donor can compel a government to do something if it is not politically advantageous for them to do it, particularly an elected government. Such conditional aid is thus both dishonest and ineffective-a double wrong.

There is enormous evidence to point to the fruitlessness of such loans and their impact on reform not just in Bangladesh but around he world. Fortunately this point, made by me and many others for at least 15 years, has been accepted by the World Bank in their report on Assessing Aid and in the pronouncements of their President James Wolfensohn. I unfortunately get the impression this message has not been absorbed by some of the officials of the World Bank at the operational level or by all our officials and even some ministers, who still believe that arguing with the donors is politically hazardous. The wheel is now turning. Democratic governments not only need to take their future in their own hands but are being invited by donors to do so. Let us take the donors at their word and assume ownership over our policies in Bangladesh.

Some donors do use aid as a political tool. The United States is at the vanguard in using aid as a strategic weapon. However since it is no longer the major bilateral aid donor except to Israel and Egypt, it now uses its power on the Boards of the multilateral financing agencies such as World Bank, IMF and Asian Development Bank, to influence their aid policy. A case in point is their blocking of loans to Pakistan and India after the nuclear tests and the pressure on IMF to arrange a financial bailout for Mexico when its economy went into financial crisis in 1995. They are doing the same again today in South Korea and Brazil. Few other donors use aid so conspicuously as a political weapon.

However most donors in Bangladesh have their own political agendas, such as improving human rights, ending child labour etc. They now tend to use their aid, through attaching these reforms as conditionalities to aid. Many of these non-economic concerns promoted by donors may be quite desirable, if they promote democracy and human rights or improve the rule of law. Unfortunately donors use this form of politicised aid inconsistently and non-transparently, influenced by commercial and political opportunism. This lack of consistency behind the use of politics in aid policy has eroded the credibility of such a policy approach and persuaded recipients to enhance their commercial and political acceptability to the donors to benefit from their political double-standards.

Donors no less than governments such as in Bangladesh need to expose themselves to the same process of democracy, accountability and transparency which they preach to aid recipients. Aid agencies, particularly the multilaterals have for many years been deficient in all the above areas and operate within a semi-feudal culture within the organisation and as a colonial administration in their dealings with aid recipients. This culture is changing but such agencies need to reform themselves whilst they preach reform to the Third World.

Governance Issues

DS: How critical is the need for institutional reform in Bangladesh? Do you think economic progress is at all possible without improvement in governance?

RS: Institutional reform in Bangladesh is a top priority. This ranges from such institutions as land administration, to the management of our education and health care system, to the regulation of our banking system, to the functioning of the bureaucracy, to the workings of parliament and the judiciary. Wherever you look we are facing not so much a crisis of policy but a crisis of governance which makes us unable to implement any policy. Today political patronage, force, fraud and money dominate virtually every institution in Bangla-desh. We therefore need to reform institutions to rescue them from such forces, to make them transparent and accountable and to reach out to the least privileged to empower them to influence the governance of the country.

DS: From where do you think the biggest obstacles to economic reforms and social development come - the political establishment, the bureaucracy or the business community? All of them?

RS: We are all responsible for resisting reforms because each of the three institutions, the political establishment, bureaucracy and business community, and often the professional classes, may have to pay some price for such reforms. Too many people in Bangladesh, in positions of influence, believe that they can use their personal connections to get round the malfunctioning of the systems of governance. However the use of the bypass route is getting difficult because, like our roads, these are also getting blocked up with too many people seeking discretionary intervention. Sooner or later everyone becomes the victim of a malfunctioning system - even ministers and senior bureaucrats who cannot expect to hold high office for ever and must eventually descend into the ranks of ordinary citizens where they will have to pay electricity bills, pass through immigration, buy or sell some land, or even take a bank loan. The constituency against reform is not numerically large but it is powerful and more to the point, well-organised. When such constituencies are diffused as is the case of the victims of fertiliser price reforms such reforms go though in the short run but face resistance in the long run when the victims organise themselves and then find political backing from parties seeking political gain from mobilising such victims. This suggests that all reforms are a political task where people have to be educated and given a clear stake in the outcome of the reform process. If reforms mean that some people became conspicuously rich, not always by hard or efficient work but by their wits or their connection, and many people live in poverty, this is not a good advertisement for reforms.

DS: If you were to list priority areas for institutional reforms, which five would top the list? How would you suggest Bangladesh goes about achieving reforms in these key areas in, say, over the next five to ten years?

RS: I would find it difficult to prioritise reforms since every sector in Bangladesh cries out for reform. A rough list would include: administrative reform particularly land administration, with a top priority to launch an assault on corruption in every sector, financial sector reforms to deal with debt default and to reach credit to the poorest people, reform of the judiciary to expedite due process and ensure that we are ruled by a uniform law applicable to the rich and the poor.

I would like to see both the administration and the private sector, particular those who depend on loans from public financial institution, to be fully accountable for all public moneys they receive and to make all their transactions transparent.

Finally I would prioritise a system of electoral reform and public financing of elections which means that our democratic institutions need not remain a hunting ground for people with money and muscle but is open to ordinary people, particularly the poor and women.

Other institutional reforms remain which are no less important than the five issues listed above. None of these above reforms can be realised by the government acting alone. The government must first recognise the need for such reforms. This government has indeed recognised the need in its public utterances. But if it is to proceed to improve governance it has to be persuaded that there is some political advantage in carrying out such reforms. Here citizen's coalitions need to be developed, reaching out to the grass roots, which articulate the need and design for reforms and demonstrate their support for such reform process. Once reforms are enacted through a process of political and democratic consultation, their implementation must be carefully monitored both by the government and parliament well as by citizens groups. Unless the citizens of Bangladesh want reforms, are willing to work for it and even bear some risks in carrying this through, we will end up getting the governance we deserve.