CHAPTER 4 However, these studies show that this capture is the outcome of weak and ad-hoc planning mechanisms, in particular the practice of dividing development schemes among local politicians. It is also because of the absence of institutions for bottom-up participatory planning and development planning at the provincial, district and tehsil level. Actionable 4: The degree of elite capture can be reduced by: (a) formulating district and tehsil planning on the basis of objective information mapped at the union council level; (b) by enforcing the requirement that district legislatures or indeed the provincial assemblies establish principles of development planning and the district legislature provides oversight over the proposed development plan prepared by the executive; and (c) members of district legislatures are no longer protagonists in individual scheme selection. Provincial governments can use objective information on performance combined with performance grants to incentivize local governments to allocate resources in a way that achieves desired development outcomes Proposal 3: Strengthen citizen-centric aspects of the reform Actionable 5: The reform has a number of citizen-centric institutions that have not been enacted and these should be enacted with immediate effect, in particular the village/neighbourhood councils, public safety commissions etc. Proposal 4: Strengthening Revenue Bases of Local Governments Rule-based PFCs need to be awarded and the capacity of the PFC secretariat needs to be strengthened in all four provinces. Part of the work of the PFC secretariat is to undertake analysis for the Provincial Government on the degree of sub-provincial or regional backwardness and inputs into strategies for inclusive growth and development in the region. Actionable 6: Rule-based PFC awards to be awarded by the PFC secretariats in all four provinces. Institutional linkages need to be created between the provincial Planning and Development departments and the provincial PFC secretariats for the purposes of regional planning and development. Actionable 7: The full amount of the UPIT net of actual collection costs should be transferred to TMAs and monies ought not to be withheld in lieu of contingent payments of utilities etc. Duplication and overlap between different governments and agencies in the provision of municipal services to urban areas need to be removed. Local governments should be encouraged to enhance local rates in rural areas in lieu of the agricultural income tax and explore the possibility of levying service related taxes. Actionable 8: There is a need for provinces to create conditional transfers to tehsil administrations based on local fiscal-effort. INSTITUTIONS, EXPORT GROWTH AND EXPORT STRUCTURE Pakistan's slow export growth and the consequent perennial pressures on the balance of payments constitute a structural constraint to sustaining high GDP growth. The evidence shows that in sharp contrast to the export performance of other developing countries, Pakistan's share in world trade has historically been at a low level (0.15 percent) but has declined since the 1970s. In recent years inspite of trade liberalization in Pakistan, the country's share in manufactured exports has not increased over the last four decades as a whole. The most important reason for this, is the failure to diversify Pakistan's export structure beyond textiles in a situation where world trade in textiles is growing at a much slower rate than non-traditional manufactured exports. Institutional Imperatives for Faster Export Growth and Export Diversification Textiles and Garments. In the short term faster export growth in textiles and garments can be induced by providing better access over US markets through economic diplomacy. At the same time incentives can be provided to the textile industry to invest in introducing new technologies for achieving export competitiveness and linking up with private sector marketing companies in key export markets to obtain large orders on a regular basis and provide feed back in terms of design and quality to domestic Pakistani manufacturers. Institutional Constraints to Export Diversification. The current structure of rules discriminates towards non traditional sectors such as high value added manufacturing, agricultural product processing, light engineering, and small scale enterprises including both manufactured and cottage industry items. The discrimination occurs in a number of ways including: (i) Absence of standard concessions such as duty draw backs and meaningful rebates. (ii) Lengthy and complicated procedures for exports. (iii) Inadequate working capital support e.g. low interest export refinance. (iv) Under provision of public goods such as marketing support and international lobbying for market access. (v) Export documentation regulations which limit the scope of international, outsourced trading. (vi) Bureaucratic red tape, graft in governmental departments, weak contract enforcement and lack of protection of private property rights (such as protection of export consignments from bandits during road transportation to the port) raises the costs of business across sectors and limits the development of new markets overseas9. An Institutional Framework for Export Diversification10.   In view of the above a number of changes in the institutional structure can be suggested which can lower the costs of business and facilitate export growth and diversification. These include: Targeted Development. Selecting sectors and sub-sectors for targeted development over the next 5 years through rebates, tax relief, establishment of a one window export documentation board, infrastructure development, marketing and R and D support, and removal of import restrictions. Rebates. Rebates should be between 10-15% of invoice value. Furthermore the duties on imported raw materials and semi finished goods for these sectors should be eliminated. This policy intervention is inline with the one pursued successfully by the Chinese over the last decade. Marketing Support Framework. Marketing support for the selected sectors. The support framework could have the following elements: (i) Subsidized warehousing facilities. (ii) Appointment of effective commercial consular officers and free product road shows and sourcing of new buyers. Alternatively, private sector marketing companies could be hired in key export markets to perform these functions. Private sector link up for outsourced production for exports to new markets. Of particular importance here is facilitating private sector link up with sourcing agents based in India who represent large importers in North America, Latin America and Europe. Rising costs and a stronger currency are inducing many of the sourcing agents to look out side of India to supply orders in Western markets. Facilitation of a private sector link up with India for increased Pakistani exports, includes easing the visa regime for such companies and individuals and allowing them to open offices in major cities in Pakistan. Infrastructure support for export production. This includes provision of warehousing facilities; facilitating access over export markets and product road shows; interrupted provision of essential utilities at subsidized rates, and packaging solutions through public private partnership. Import of Raw Materials from India. Import of raw material from India (which is unavailable locally) should be allowed by expanding the negative list. The current DTRE scheme whereby quotas are fixed for raw material imports from India meant specifically for exports suffers from red-tapism and graft. A better solution is to open up raw material imports across the board. Capturing China's Export Markets. Finally Pakistan can quickly make use of the opportunities offered by international trading in the current global policy environment. The current policy especially in the Americas and increasingly in Europe is toward anti-dumping duties on Chinese products. This combined with the rising Yuan means that countries like Pakistan with a port and cheap, plentiful labor can pick up some of the business that has being routed out of China. This can be done by the following policy action. Allow the tax and duty free import of semi finished goods into special Free Zones for value addition and then export. (For operational details of the Free Zones see Report). MILK, LIVESTOCK, MARINE FISHERIES AND HIGH VALUE ADDED AGRICULTURE PRODUCTS: THE INSTITUTIONAL IMPERATIVES11. Milk and Livestock. Demonstrable experience in the field has shown that the milk yields per animal in Pakistan can be doubled within two years through scientific feeding, breeding, and marketing. If the institutional framework could be established for training the farmers in scientific feeding and breeding. Together with this, if the logistics could be set up to collect milk from the farm door by means of refrigerated transport, milk output in Pakistan could be doubled. Cold storages at airports could facilitate milk exports to the milk deficit countries in West Asia, Central Asia and South East Asia. There is also considerable potential in expanding production and exporting meat and meat products, through the development of livestock farming particularly in the provinces of Balochistan and NWFP. This would have a significant impact not only on the incomes of the poor peasants, but also on exports and overall GDP growth12. Marine Fisheries. Marine Fisheries also provide a significant potential for improving foreign exchange earnings although not as large as the potential for milk. Here again, what is required is improved institutional support and better management rather than huge investments by the Government. The expansion in the export of marine fisheries is constrained because the storage facilities for transportation do not match the international quality standards. Fruits and Mineral Products in Balochistan and NWFP. There is considerable potential for income generation for the people in Balochistan and NWFP through the development of orchards and minerals for domestic and export marketing of fruits and mineral products. The development of farmers organizations and marketing companies could help develop this potential. Mainstreaming the Poor through Equity Stakes13. An institutional change that could bring the poor into the mainstream of the market economy could be to establish professionally managed public limited companies in which the poor have a substantial equity stake14. In the Pakistan case there may be considerable potential for developing livestock and milk production by the rural poor and providing these products to large private sector corporations for the manufacture and export of milk and meat products. These private sector corporations which would be buying their inputs from the poor could also be owned substantially by the poor. The equity stake to the poor could be initially achieved through the provision of loans which could be paid back from the dividends of the corporations. Similar public limited companies owned by the poor and run by high quality professionals could also be established in key main stream sectors of the economy such as energy, telecommunications and electronics. Common Facilities Centers for SMEs. A large number of small scale enterprises (SMEs) in the Punjab and the North Western Frontier Province (NWFP) have a considerable potential for growth and high value added production such as components for engineering goods or components of high quality farm implements for the large scale manufacturing sector.15 Yet they are in many cases producing low value added items like steel shutters or car exhaust pipes resulting in low profitability, low savings and slow growth. The establishment of Common Facilities Centers could help SMEs to accelerate growth of higher value added products by overcoming constraints such as specialized fabrication facilities in the field of forging, heat treatment and surface treatment; quality control; skill and product development; acquisition of vending contracts from the LSM sector and acquisition of high quality raw materials which require bulk ordering. (For details see the Report). PANEL OF ECONOMISTS 1.    Dr. Hafiz A. Pasha (Chairman) Dr. Pasha did his Tripos in Economics, University of Cambridge, Doctorate from Stanford University, USA.  Former Advisor on Finance to the Prime Minister, Commerce Minister, Deputy Chairman Planning Commission, and till recently Assistant Secretary General at the UN and Administrator UNDP.  Currently Dean Social Sciences, Beaconhouse National University Lahore. 2.    Dr. Rashid Amjad (Convener) Dr. Amjad did his Tripos in Economics and PhD from Cambridge University.  Former Director Policy Planning at the International Labour Organization Geneva and Director South East Asia and Pacific Manila.  Also Member National Manpower Commission and Panel of Economists to frame Fifth Five Year Plan.  Founder member, Board of Governors of Lahore School of Economics.  Currently VC Pakistan Institute of Development Economics. 3.    Dr. Akmal Hussain (Member) Dr. Akmal did his Tripos in Economics from University of Cambridge and Doctorate from the University of Sussex, UK.  Former Member on the Prime Minister's Task Force on Poverty Eradication and Employment Generation.  Principal Author Pakistan National Human Development Report (UNDP), Member Economic Advisory Board. Member, Governing Board, South Asia Center for Policy Studies (SACEPS). Has authored three books and co-authored/contributed chapters to 15 other internationally published books on development policy. Currently Distinguished Professor Beaconhouse National University Lahore. 4.    Dr. Akhtar Hassan Khan (Member) Dr. Khan did his Doctorate in Economics from Tufts University, USA and visiting Professor at Quaid-e-Azam University.  Was former Secretary Planning & Development Division. 5.    Dr. Naved Hamid (Member) Dr. Hamid did his Tripos in Economic from University of Cambridge, PhD from Stanford University, USA.  Worked for 20 years with Asian Development Bank. Currently Director, Center for Research in Economics and Business, Lahore School of Economics. 6.    Mr. Riaz Riazuddin (Member) Mr. Riazuddin did his Masters in Economic Policy from Boston University, USA.  Specialist on macro and monetary policy and currently Economic Advisor, State Bank of Pakistan. 7.    Dr. Kaisar Bengali (Member) Dr. Bengali did his PhD from AERC, Karachi.  Former Director Social Policy Development Centre Karachi and Currently National Coordinator of Benazir Income Support Programme Government of Pakistan. 8.    Dr. Ali Cheema (Member) Dr. Cheema did his B.A. Hon. Oxford and PhD from Cambridge.  Was Rhodes Scholar 1989-92.  Worked and published widely on development issues and is currently Associate Professor Lahore University of Management Sciences (LUMS) Lahore. 9.    Mr. Haris Gazdar (Member) Mr. Gazdar did his B.Sc and M.Sc Economics from London School of Economics. Working on social policy issues.  He worked as lecturer and researcher in UK before returning to Pakistan.  Consultant to the World Bank on Poverty and currently Executive Director Collective for Social Science Research Karachi. 10.    Dr. Asad Sayeed (Member) Dr. Asad did his PhD from Cambridge University.  Worked on Industrial Growth, Macro Policies, Poverty Alleviation, Employment & Labour Policies and Social Protection.  Worked as consultant to the ILO and other international agencies and currently Senior Researcher at Collective for Social Science Research Karachi. 11. Prof. Muhammad Tousif Akhtar (Member) Prof. Tousif did his MA from Karachi University and Master of Applied Economics (MAS) from Applied Economics Research Centre.  Worked on Development issues related to Pakistan special reference to Baluchistan and also completed task with Government of Baluchistan in different capacities and is currently Chairman, Department of Economics, University of Baluchistan, Quetta, Pakistan. 12.    Dr. Aisha Ghaus Pasha (Member) Dr. Ghaus did her Doctorate in Economics from Leeds University with specialization in Public Finance.  Former Deputy/Acting Managing Director of the Social Policy Development Centre. Member of several Task Forces on Public Finance, Social Sectors and Poverty Alleviation.  Worked as consultant to World Bank, UNDP, ADB.  Currently Director Research, Institute of Public Policy, Beaconhouse National University, collective for Social Science Research, Lahore. 13.    Dr. Naseer Ali Khan (Member) Dr. Khan did his Masters in Economics from Free University Brussles and PhD from Peshawar University. He has published 18 research papers.  Development Specialist, is working with the NWFP Government on capacity building and human resource management with WB, UNDP and USAID.  He is currently Director Institute of Management Sciences Hayatabad, Peshawar. 14.    Mr. Saqib Sherani (Member) Mr. Saqib Sherani did his MBA from IBA Karachi.  Over the last several years, he has worked closely with government on macroeconomic issues.  He heads the Economics Unit of Royal Bank of Scotland Ltd's Pakistan operations, which regarded as among the leading independent economic analysis and research unit in the country. He is currently a member of the Prime Minister's Economic Advisory Council. Prior to this, he was member of the Prime Minister's special group on formulation of economic policy, member of the Task Force on Economic Policy and member of the working group on preparation of the macroeconomic framework 2005-2010 for the Planning Commission, Government of Pakistan. He has also advised the managing boards of some of the world's largest transnational corporations on investment strategy for Pakistan. 15.    Dr. Rehana Siddiqui (Member) Dr. Rehana did her doctorate from Columbia University.  Specialist on growth, human resource development issues with special reference to women as well as working on energy and environment concerns.  Currently Dean Research, PIDE Islamabad. 16.    Dr. Ijaz Nabi (Member) Dr. Ijaz did his B.Sc Hons. from London School of Economics and PhD from Warwick University.  Worked in the World Bank for 22 years on Latin America and East Asia. Last appointment was Manager Economic Policy South Asia.  Currently, Dean Social Studies, LUMS, Lahore. 17.    Dr. Faisal Bari (Member) Specialist on development issues especially local area development and devolution. He is Currently Associate Professor at the Lahore University of Management Sciences (LUMS) Lahore. 18.    Dr. Qazi Masood Ahmed (Member) Dr. Qazi, Specialist on Fiscal Policy and Macroeconomics did his PhD from Centre for Fiscal Studies, Bath University, England. He is currently Professor of Economics and Director Research at the Institute of Business Administration (IBA), Karachi. Co-opted Members of the Group 1.     Dr. Azam Chaudhry         Dr. Chaudhry did his BSc(Hons) from the London School of Economics and his PhD from Brown University, USA.  Dr. Chaudhry worked as an economist at the World Bank for 6 years and worked on issues of country macroeconomic risk and project evaluation.  Currently Associate Professor of Economics and Dean, Department of Economics, Lahore School of Economics, Lahore.   2.     Dr. Ather Maqsood House No. 8 Shalimar Road Block 'G' Sawan Garden Islamabad Zone 5, Islamabad 3.     Syed Kalim Hyder Bukhari Joint Director Monetary Policy Department State Bank of Pakistan Karachi 4.     Mr. Muhammad Sabir Social Policy Development Centre (SPDC) Karachi 5.     Mr. Savail Hussain Chief Manager Exports, Sayyed Engineers (Private) Limited Lahore 1. In tracing the macro effects, the Panel has combined the Planning Commission Consistency Macro Model with behavioral equations estimated from the SPDC growth model. We believe that the resulting model is robust and values of estimated key elasticities are realistic. 2. In a meeting with the sub-group on social protection, Ms. Shahnaz Wazir Ali, the Special Assistant to the Prime Minister on Social Sectors, endorsed this suggestion. 3.     Akmal Hussain, Power Dynamics, Institutional Instability and Economic Growth: The Case of Pakistan, The Asia Foundation, Islamabad, 14th April 2008. 4.     Douglass C. North, John Joseph Wallis, Barry R. Weingast, A Conceptual Framework for Interpreting Recorded Human History, National Bureau of Economic Research, Working Paper Series, Cambridge (Mimeo), 2006. 5.     The term economic democracy has been developed in the book: Ponna Wignaraja, Susil Sirivardana and Akmal Hussain: Economic Democracy through Pro Poor Growth, SAGE Press (Forthcoming). 6.     This section is drawn from Akmal Hussain Pakistan: Poverty, Power and Economic Growth, South Asia Center for Policy Studies (Mimeo), 25th September 2008. 7.     This sub-section is based on a policy note contributed by Dr. Akmal Hussain to the Ministry of Local Government and Rural Development: Akmal Hussain, Overcoming Poverty Through Providing Land to the Landless, Note submitted to the Ministry of Local Government and Rural Development (Mimeo), April 30, 2001. 8.     This sub-section is based on a study just completed by Dr. Akmal Hussain as part of the South Asia country studies on poverty, which is a Research Programme of the South Asia Center for Policy Studies (SACEPS), being coordinated by Professor Rehman Sobhan. 9.     This sub-section IV.3 has been researched by Mr. Savail Hussain, Research Associate to the Working Group on Institutional Framework for Development.   10.     This sub-section IV.5 has been contributed by Mr. Savail Hussain, Research Associate to the Working Group on Institutional Framework for Development. 11.     This section has been drawn from Akmal Hussain, A Policy for Pro Poor Growth, chapter in Towards Pro Poor Growth Policies in Pakistan, UNDP-PIDE, Islamabad, 2003. 12.     Akmal Hussain, op.cit., page 72. 13.     This section has been drawn from Akmal Hussain, Institutional Imperatives of Poverty Reduction, Institute of Public Policy, Beaconhouse National University, Lahore, 17th April 2008. 14.     This concept was first propounded by Professor Rehman Sobhan and successfully tried out in the diversification process of the Grameen Bank in Bangladesh. It was also tried out in India by Dr. Kurien who set up the Amul (originally a cooperative) which is entirely owned by the poor and is now one of the largest manufacturers of milk products in the corporate sector in South Asia. 15.     Akmal Hussain: Labour Absorption in Pakistan's Rural Sector, Final Report, ILO/ARTEP (Mimeo), 20th September 1989, Pages 21 to 23.