Evidence from across the world shows that a weak institutional environment is a major impediment to growth. A vast body of literature has documented the power of strong and effective institutions in bringing about transformative economic progress (Acemoglu and Robinson, 2012; Rodrik, Subramanian and Trebbi, 2004). Governance affects growth through various channels. Strong institutions enable governments to implement policies that create incentives for private investment and productive economic activity by securing property rights and ensuring that investors can benefit from the returns generated by their assets. Poor governance can undermine service delivery when elites and patronage networks manage to divert resources to themselves. This can, for example, affect growth through reduced provision of basic services such as health and education, and consequently lower human capital accumulation.

The adverse effects of poor governance for growth are manifested in Pakistan. Governance factors feature prominently among the obstacles to investment in Pakistan documented in the 2018 Global Competitiveness Report: businesses cite corruption, taxes, government instability, crime and theft, and inefficient bureaucracy as major constraints to investing in Pakistan. Weak institutional quality has eroded market efficiency, leading Pakistan to be ranked last among its peers in indicators relating to labor market efficiency and goods market efficiency, and only marginally ahead of Bangladesh regarding financial market development. Furthermore, recent evidence suggests that patronage networks between political leaders and public officials have distorted incentives for service delivery, leading, for example, to inadequate provision of health services and undermining students’ learning outcomes in schools (World Bank, 2017; Callen et al., 2014).

Pakistan’s weak governance environment is a major constraint to implementing reforms. Evidence from across the world shows that weak governance gives elites the opportunity to successfully oppose institutional reforms that threaten their political power and influence policy formulation, which can lead to the persistence of inefficient and low-quality institutions (Acemoglu and Robinson, 2012; Khalid, 2016; Khalid, 2017). This mechanism has been at play in Pakistan, where a status quo with inefficient policies and institutions persists because it benefits influential elites (Hussain, 2012 and 2018).

Poor governance also threatens macroeconomic stability and thus Pakistan’s ability to generate sustainable growth. Pakistan’s frequent fiscal challenges are partly the result of weak governance. Three factors underlie Pakistan’s high debt and deficit levels. First, while tax receipts have increased in recent years (from 10 percent of GDP in FY13 to 13 percent in FY18), a failure to fully implement tax reform and low institutional capacity to collect revenue means that Pakistan continues to suffer from relatively low revenus. Second, the division of responsibility for expenditure on services and macro-fiscal stability between the center and the provinces following the 18th Constitutional Amendment and the 7th NFC Award has resulted in a misalignment of institutional responsibility, as the mandate to drive fiscal consolidation rests with the central government, while only provinces have the fiscal space to achieve this fiscal consolidation. Third, ineffective institutional controls and accountability for fiscal expenditure, especially with regards to the enforcement of fiscal responsibility legislation, has contributed to fiscal slippage.

Why Is Governance Poor in Pakistan?

A conducive governance environment is one in which citizens have access to the information and mechanisms necessary to hold political leaders accountable, and where political leaders have access to the tools, and the right incentives, to effectively manage service delivery. As discussed in Chapter 2, a functioning political system requires a triangular relationship between citizens, political leaders, and those tasked with delivering public services and implementing policy. This means that the origins of weak governance—as documented for Pakistan—can lie on two levels. On the one hand, the link between citizens and policymakers can break, for example because citizens lack access to information about the action of their leaders, or because they are unable to sanction behavior that is against their interest. Thus, transparency about leaders’ performance and the accountability of leaders to citizens are key for effective governance (Khemani et al., 2016). On the other hand, governance failure can also occur when political leaders are no longer able to ensure policy implementation and service delivery. In Pakistan, investigating this level requires thinking about the management of the public sector and governance of non-public entities that are tasked with fulfilling service delivery functions. This also includes the private sector, which has increasingly taken over service delivery functions that fall into the public good domain, such as health and education. The next sections investigate each of these facets in turn.

a. Transparency

Pakistan has taken important steps toward improving transparency in service delivery and empowering citizens, but it needs to mainstream initiatives and ensure that existing data are used to hold service providers accountable. Transparency with regards to the actions undertaken by political leaders and public officials is an important element of good governance. Pakistan’s provinces have taken some important steps toward improving the monitoring of service delivery and developing new avenues for citizens to provide feedback on service delivery. For example, the District Performance Monitoring Cell in the Chief Secretary’s office in KP has greatly improved the quality of service delivery at the local level through ICT-based, real-time monitoring of several key services of relevance to citizens. Completing the existing efforts requires operationalizing such efforts across service delivery functions, and ensuring that citizen feedback and performance data become a key metric in evaluating and rewarding service providers.

Pakistan’s citizens have only limited access to information on public financial management. While federal and provincial budgets are published annually, supplemental budgets are only disclosed at the end of the fiscal year, and only Sindh publishes in-year budget execution reports. Likewise, there is no provision for recording new commitments, cash management, or internal audits; these functions are not performed, except in some provinces on a pilot basis. While Pakistan declared its intent to join the Open Government Initiative and embrace its commitments on fiscal transparency in 2016, it has yet to submit a National Action Plan for implementation.

b. Accountability of Political Leadership

Elite capture in Pakistan has affected policymaking, as in certain circumstances political leaders lack incentives to formulate policies in response to citizens’ demands, or to work toward effective policy implementation. A unique feature of Pakistan’s history is that economic, social and security policies gave rise to various elite factions that could sustain economic and political power until today. Husain (1999) argues that there exist at least four influential groups that gained power through historic events and continue to leverage their influence on the political system for personal gain:

• Civil Servants: A powerful class of civil servants emerged from an inherited colonial bureaucratic system, which gained political influence during times of unstable political leadership shortly after independence and has retained this influence until today.
• Landowners: An increasingly unequal distribution of land holdings after the evacuation of Hindus following independence and a failure to reform a land tenure and agricultural system that significantly favored large landholders gave rise to a politically influential landholding class in the agriculture sector.
• Industrialists: An economic boom in the 1950s and protectionist economic policies generated high profits for merchants, who used their economic power to influence policies that facilitated their development into a politically connected industrialist class.
• Military: A security-centric approach to policy following the martial law regime of Ayub Khan during the late 1950s and 1960s gave rise to a powerful military class, which has since expanded its influence on civilian life through the accumulation of assets and businesses.

These elite factions have often leveraged their influence to prevent reforms against their interests and maintain the status quo. Elite factions can influence the formulation and implementation of policy. For example, the civil service can directly affect reforms by influencing the ways in which policies are implemented, and indirectly influence the policy formulation process through its interaction with political leaders. Similarly, landowners and industrialists can leverage their influence over tenant farmers and workers to gain political support, and thus enter the policy process (Beg, 2017; Daniyal and Bakhtian, 2012). There is evidence that Pakistan’s elites have used this power in the past to undermine reforms that would have reduced their influence. For instance, landowners and industrialists have leveraged their political representation to oppose reforms that would have enhanced tax-revenue collection from agriculture and the private sector (Ahmad, 2010; Khan, 2017). The influential military class favors a security-centric policy framework to maintain its influence (Dwyer, 2016; Haqqani, 2018). While each group affects development differently, they share the common trait of having gained and retained influence throughout Pakistan’s history. The shortcomings of Pakistan’s institutional framework that have enabled elites to retain power persist today and are precisely those factors that prevent effective reform implementation.

Incomplete devolution that has so far not created independent and elected local governments means that a key mechanism for holding political leaders accountable has not been fully developed. Successive regimes have attempted to shape the nature of local-level governance in Pakistan. Pakistan’s military governments have viewed them strategically, relying on them for legitimacy and using them as a countervailing force against provincial- and federal-level politicians who were associated with democratic regimes. Democratic governments, on the other hand, have viewed local-level politicians as a threat to the power of their provincial and federal elected officials (Afzal, 2018). As a result, power has been recentralized at the provincial level (other than in KP to some degree), with provincial governments retaining power of appointment of local officials and provincial supervision over budgets, which constrains fiscal autonomy. This has undermined the full operation of local governments, leaving them without the authority to direct service delivery, assess local needs, or monitor and enforce environmental standards, limiting accountability through better monitoring by voters.

Instability in Pakistan’s political system has reduced accountability and skewed leaders’ incentives away from long-term reforms. The characteristics of Pakistan’s political system have weakened the link between citizens and political leaders that is so crucial to sustain the triangular relationship. First, frequent regime changes from civilian to military governments have highlighted the power of the military to sanction political leaders, competing with the sanctioning power of voters. Second, Pakistan’s political system is characterized by an incumbency disadvantage, which means that incumbent politicians have a reduced likelihood of being re-elected. As a result, the direct accountability between citizens and political leaders is undermined, as politicians face the risk of being sanctioned even if they implement citizens’ demands, simply because they are incumbents. This shortens leaders’ incentives and time horizon, leading them to prioritize short-term projects and making them more likely to engage in extractive behavior.

Campaign financing regulations in Pakistan provide a key channel for elites to gain political influence. Pakistan lacks a transparent and public mechanism to fund political campaigns, and instead requires candidates and parties to privately finance campaigns. As a result, in many instances parties must rely on wealthy patrons to fund their campaigns. This means that it is not just electoral support from citizens that matters for the selection of politicians, but also who provides financial support. To obtain this financial support, parties tailor their programs explicitly or implicitly to the demands of financiers, which in many instances involves safeguarding preferential legislation and slowing down reforms. At the same time, campaign financing regulations provide a barrier to entry for political alternatives, further limiting political competition and reducing political leaders’ accountability to citizens.

c. Management of Public Officials and State Capacity

Even if political leaders have the right incentives, policy implementation can fail if public officials are not effectively managed, or do not have the necessary skills. In 2014, Pakistan’s federal government and departments had more than 444,000 employees, and public employment figures for Punjab suggest that employment at the provincial level was of a similar magnitude. Ensuring that this labor force has the ability, capacity and the incentives to implement policies, for example through effective human resource management, training and necessary independence from politics, is key.

Human resource management for public officials in Pakistan does not provide high-powered incentives for staff, and faces constraints to effective allocation and coordination of responsibilities. Effective human resource management faces four overarching constraints in Pakistan (for a detailed discussion of the constraints, see the Pakistan@100 policy note on governance ‘Nurturing People, Policies and Institutions for Economic Development in Pakistan. A Policy Note on Governance and Institutions’). First, most departments in Pakistan do not have dedicated human resource units, and access to centralized and digitized staff records. This has created inefficiencies and a lack of transparency in personnel management as, for example, a lack of information means that matching the skills of staff to business needs is challenging. Second, performance management is not designed to provide high-powered incentives for staff. Instead, performance reviews are rare and incentives reward adherence to the rules rather than good operational performance. Third, promotions are largely based on seniority and informal networks, and do not ensure that those most qualified for leadership end up in senior positions. Fourth, a lack of coordination and collaboration within and across departments hampers effectiveness and results in ‘turf’ issues. For example, responsibility for anticorruption enforcement is divided between various agencies, leading to a duplication of the work and disputes over competencies that reduce effectiveness in enforcing the law. The existing recruitment and training practices in Pakistan’s civil service neither attract nor build the necessary skills to effectively implement policy. Recruitment to the All-Pakistan Service and the 11 occupational groups of the federal service is through a nationally held competitive examination. The selection examination does not prioritize technical qualification, but rather places a premium on subjects of a generalized nature so that successful candidates do not necessarily excel in public sector management skills. At the same time, there is no structured and targeted training program that works toward tailor-made improvements in technical capacities among various cadres and work streams of the civil services. The skill shortage resulting from the selection and training processes thus reduces civil service effectiveness.

Examples from the preceding sections suggest that in some instances a lack of capacity and coordination has reduced policy effectiveness. A lack of information and institutional mechanisms can limit state capacity, even if the public officials have the right incentives and skills. The preceding sections have highlighted this, including in, for instance, environmental protection, where limited monitoring of environmental quality standards constrains the enforcement of environmental protection legislation. Similarly, policy interventions in areas as diverse as taxation, environmental protection and DRM require a coordinated policy response and effective cooperation between provincial and federal administrations that is currently absent. Increased adoption of e-governance—an approach that holds promise in enhancing transparency and accountability while reducing costs—has been slow in Pakistan: despite the implementation of technology-driven projects, such as NADRA’s identification and voting platforms, and the digital government-to-person payment platform to promote financial inclusion, Pakistan only ranked 148 out of 193 countries on the UN’s 2018 e-Government index.

d. Regulation of the Private Sector

The private sector is assuming an increasingly important role in service delivery, especially in the education and health sectors. Increasing population, inefficient service delivery by the public sector, and a weak devolution regime at the district level mean that the public sector has been unable to meet the demand for public services of a growing population. As a result, vast numbers of privately run schools and private health-care facilities have spread throughout Pakistan in urban and rural areas. For instance, between 2000 and 2008, the number of private educational facilities increased by 98 and 137 percent at a middle- and high-school level, respectively, whereas the corresponding figures for the public sector were only 32 and 17 percent. While private providers have thus filled a gap left by the public sector, and private market discipline holds great promise as an incentive to deliver effective services, a lack of oversight risks exacerbating existing inequalities. For example, a lack of oversight could mean that the poor do not receive adequate levels of services, or rising prices risk excluding a significant share of the population.

The proliferation of private providers of education and health services requires stronger quality control and standardization of the delivery of services. If the state decides, as in the case of Pakistan, to cede responsibility for service delivery to private actors, it must ensure that the private sector complies with quality standards. However, despite innovative attempts by provinces to monitor and regulate select service providers (Hasanain et al., 2017), Pakistan currently has not established comprehensive service delivery standards for key public services. In addition, it has not yet set up independent and professional regulatory and quality monitoring systems and institutions to oversee compliance with these standards in the private sector. Thus, to ensure effective private service provision, the public sector will need to perform its role as a regulator in minimizing the vulnerability of poor segments of the population, and to ensure the affordability and quality of private sector service providers.

RECOMMENDATIONS

Addressing the constraints discussed requires providing the public with information to ensure transparency, establishing effective accountability mechanisms, reforming the management of public sector employees, and regulating privately supplied social services. This can be achieved by following four pathways: (i) increasing transparency in public financial management and service delivery; (ii) deepening devolution to ensure that performance in key service delivery functions becomes a metric for accountability; (iii) revamping the public administration system to make it more effective and efficient; and (iv) setting and enforcing quality standards for private service provision. Among these, improving transparency and accountability is a priority in providing an enabling environment for cross-cutting reforms. Efforts to deepen devolution and improve the current decentralization effort should continue both in the short and medium term. As the process evolves, accountability would be significantly improved through locally elected officials, supported by capacity building and an improved civil service, and systems that promote citizen involvement in the monitoring of services delivery.

This section outlines the rationale that reforms in each area should take. A more detailed discussion of reforms can be found in the Pakistan@100 policy note ‘Nurturing People, Policies, and Institutions for Economic Development in Pakistan’.

a. Increasing Transparency and Empowering Citizens

Enhance transparency in public financial management. To enhance transparency of public financial flows, Pakistan should pass legislation that includes minimum transparency standards. Potential measures include: (i) passing a federal Right to Information Act that would provide for mandatory disclosure of key financial information; (ii) ensuring timely disclosure of budget documentation, including quarterly budget execution reports, annual financial statements (including data on public debt and contingent liabilities from sovereign guarantees), and external audit reports by the Auditor General of Pakistan; and (iii) publicizing audited financial statements of SOEs. In addition to publicizing information, leveraging modern information technology also offers a promising pathway to enhancing transparency. For example, eprocurement can increase transparency and competition, achieve cost savings and reduce corruption.

Citizen voice and agency is critical in improving service delivery. Mechanisms to strengthen the voice of citizens to hold the state, politicians and policymakers accountable can complement and further expand existing monitoring efforts at the state level to improve service delivery. This requires three steps. First, strong compacts with clear roles and responsibilities against which service providers are held accountable should be established. Second, a comprehensive monitoring of service quality, a comparison of service quality to service standards, and a publication of performance metrics is needed. Third, citizens require an avenue to provide feedback and be able to sanction service providers if they are unsatisfied. Technology holds significant potential in facilitating these steps. For example, information on service delivery performance can be easily collected and disseminated via SMS. Similarly, citizen feedback can be provided through easy-to-navigate web-based applications for smart phones and by SMS responses for regular phones, which have proved to be effective in improving service delivery (World Bank, 2018). Mainstreaming and expanding initiatives that leverage such technology, such as SMS-based citizen feedback in Punjab, an initiative that has already been expanded to cover 27 services throughout the province’s 36 districts, is a promising way to improve service delivery. Improved information can also help harness the power of public pressure to increase demand for certain reforms. For example, the disclosure of pollution data and the engagement of local stakeholders will be key elements of reforms to improve environmental management.

b. Enhancing Accountability by Deepening Devolution

Strengthen local level governments. Completing Pakistan’s decentralization process by establishing elected local government authorities (LGAs) and devolving administrative autonomy, finances and expenditure responsibilities to them is necessary to enhance accountability. For this to be successful, multiple steps must be taken. First, the legal framework that establishes LGAs and defines their functions needs to be developed. Second, provincial finance commissions must be strengthened to empower LGAs in matters of finance, resource allocation and revenue collection to ensure greater fiscal autonomy of LGAs.

Third, efforts must be made to ensure effective coordination (across all tiers of government) on key areas such as taxation, the regulatory environment and strengthening the role of LGAs as the primary agent for service delivery. Fourth, mechanisms to enhance local-level accountability must be established, for example by creating opportunities for local-level deliberation to promote community-based consultations, deliberations and participation in decision-making.

Improve coordination between distinct horizontal and vertical levels of government. Effective responses to some of Pakistan’s development challenges require improved coordination between federal, provincial and district governments, and across governmental agencies. For example, environmental challenges such as air or water pollution require a subnational approach to policymaking and implementation, which calls for strengthening provincial environmental protection agencies (EPAs) and empowering cities to play a key role in environmental management. Similar coordination is needed in other areas, such as taxation, disaster risk management or the business environment. Pakistan has yet to develop the institutional coordination arrangements across horizontal and vertical government levels to address these challenges. To improve coordination, the central level could formulate national policies, provide strategic guidance, link provincial-level initiatives to a broader national vision, and provide incentives for cooperative behavior. A formal dispute resolution mechanism could facilitate the overall process. Coordination platforms such as the Council of Common Interest could be used as a forum to address interjurisdictional issues.

c. Improving Public Sector Management and the Capacity of the Public Sector

Improve human resource management and technology. Pakistan’s human resource management apparatus, including recruitment, in-service training, career progression, remuneration systems, performance management, and accountability needs to be transformed. This will entail strengthening the ability of the Public Service Commissions at the federal and provincial levels to select those candidates who are best suited for specific jobs. To improve performance management, the government could consider revising the system of annual confidential performance evaluation reporting by introducing a modern, ITbased performance assessment and appraisal system for civil servants, with the possibility of introducing performance contracts. At the same time, expanding the use of technology to improve the performance of civil servants and engage citizens is a priority. This can, for example, entail collecting and curating data on citizens’ behavior and needs, and leveraging technology to facilitate accounting, performance management, outcome measurement, knowledge management and communication with citizens.

Building skills. Developing the capacity of civil servants is needed to align the demands of the economy with the skill sets of government employees. This can be achieved through two pathways. First, skills can be built through in-service training and capacity-building programs, for example by strengthening the federal civil services specialized training institutes to offer domain-related training that enhances technical knowledge and skills. This includes the provision of qualified trainers and the development of domainrelated, demand-based training courses and making the completion of some courses mandatory requirements for promotion. Second, skills can be acquired through improved recruitment methods. As such, the government could consider reskilling the civil service by focusing on closing skill gaps in the areas of technology, economic transformation and people-centric service delivery. Taken together, these three systemic capacity gaps are largely to blame for below-par performance among public sector functionaries.

Enhance monitoring and implementation capacity. Policy implementation in select areas is constrained by a lack of state capacity, either arising from a lack of information or an absence of institutional mechanisms. Necessary improvements include a system that periodically monitors the accumulation of regulatory burdens on firms. Similarly, improving the measurement and monitoring of air and water quality can help enhance capacity to enforce environmental regulations.

d. Regulating the Private Sector

Encouraging private sector participation. As the public sector defines its boundaries, it opens up space for private sector participation. Ensuring that the private sector provides social services to a satisfactory level requires the government to provide and enforce a strong legal and regulatory framework within which the private sector can perform. Creating an enabling environment for effective private sector participation would require the enforcement of property law and contractual rights, the control of corruption, and the development of an appropriate regulatory framework. In the long term, a well-designed consultation program should be set up with the private sector based on a sound policy on public-private partnerships (PPPs).

Setting and monitoring service delivery standards. Minimum service delivery standards (at least for key sectors) need to be established. Following the development of service delivery standards, a body to monitor compliance with service delivery standards should be established, making use of the publicized statistics generated based on the transparency recommendations. Monitoring of performance vis-à-vis agreed targets can act as an incentive to improve quality by supporting competition. This can be done by a council consisting of technical experts who monitor outcomes vis-à-vis the agreed goals and bring bi-annual monitoring reports into the public domain, for example through presentations to parliament.