Devolution is about power, not functions
The Economy
Kaiser Bengali: The ruling military junta and their civilian henchmen appear to be making a considerable amount of noises regarding the unbounded benefits of devolution. While this is in large part true, it needs to be kept in mind that every coin has two sides and there are dangers intrinsic to the very conception of the devolution as well. Ignoring the pitfalls and designing and implementing a devolution programme without regard to them can have disastrous political and economic consequences.
The most recent eulogy for devolution has been sung by Mr. Muhammad Ali Khan, a member of the so called National Reconstruction Bureau. He is reported to have stated that districts will be empowered with economic functions so that they can “vie with each other for local and foreign investment.” If this is a serious statement, it merely reflects the Junta’s ignorance of the basic issues involving decentralization.
The current case of Brazil is instructive, where the pitfalls of decentralizing investment policy is now becoming obvious at a rather high economic and political cost. The 1994 economic reforms in Brazil brought in a surge of foreign direct investment, particularly in the automotive industry.
According to estimates, 16 companies in car manufacturing, 150 in components manufacturing, and 29 in other allied sectors invested over US$ 11 billion between 1995 and 1998. The investment was spread between different provinces, called states, depending on which state offered the investors the best possible deal.
The situation has its genesis in the political reforms of the 1980’s; whereby regional states acquired enhanced powers to design and implement development programmes, including investment policy, I their regions. Resultantly, the states began to engage in a process of territorial competition to promote their respective states as a location for investment. Or, in the words of Mr. Muhammad Ali Khan, began to vie with each other for local and foreign investment.
The measures, in this respect, ranged from simple regional marketing to provision of sites and infrastructure to tax exemptions and other subsidies and incentives. There is nothing wrong with such competition per se. the impact of these measures can increase welfare if they lead to a net increase in local as well as national economic and employment growth. Thus, the inflow of foreign investment was stated to be beneficial for the states and for the Brazilian economy, on account of their assumed positive impacts with regard to creation of direct and indirect employment opportunities and technology transfer.
However, the impact of such competition can also be zero-sum if the welfare in one state is achieved at the expense of welfare in another state. For the country as a whole, it can also be negative. Unfortunately, there are strong indications that the interstate competitive process by which the investment is occurring in Brazil may produce perverse effects and ultimately negate any long-term benefits.
The inter-state competition to attract investment led to states resorting to retaliatory measures against each other and turned into what has been called “bidding wars.” In the process, the states hurt each other and the only beneficiary has been the foreign companies.
Ina bid to outdo each other, some states went as far as to build out of their own budgets, rail lines and port terminals dedicated to the exclusive use of the companies and also ended up financing a significant percentage of the establishment and recurring costs of the plants.
The unfortunate part of the deal is that the perceived benefits, in terms of multiplier effects arising out of backward and forward linkages, technology transfer, and greater employment does not appear to be materializing. The new plants represent and advanced generation of technology and possess at least twice the productivity rate vis-à-vis the earlier plants; which implies that an increase direct employment may not be achieved. Furthermore, given that imports of spare parts and components are tax exempt, these plants may not be based in the country and that these linkages maybe created elsewhere.
Existing plants may even close, causing actual loss of existing employment. The potential for technology transfer also remains limited, given that the plants are largely of the assembly type. Worst of all, the provision of the sites and infrastructure and low cost loans and the virtual exclusion of the companies from the tax net, has placed an enormous strain on the fiscal health of the states.
The emerging scenario is ominous as seven out of twenty seven states in Brazil have had to declare themselves bankrupt. The ensuing fiscal and macroeconomic crisis has halved the value of the Brazilian currency in relation to the US dollar. And apart from the economic cost, the escalation of inter-state conflict implies that Brazil is paying a very high political cost as well.
The Brazilian case does not and cannot e used to pronounce a definitive judgment against provincial and local autonomy. A decentralized political order has been conclusively shown to be superior to a centralized one. However, the decentralization process carried out with mala fie intentions or in ignorance can be seriously destabilizing economically and politically
.
In the context of Pakistan, it is important for any faction in power to first establish their bona fides in the matter. There are three necessary conditions as first steps towards devolution and as first and as a test of their real intentions. They are (1) the abolition of the positions of commissioner, deputy commissioner and assistant commissioner, (2) the abolition of urban development authorities and their merger with the respective metropolitan/municipal corporation and (3) the abolition of the Public Health Engineering Department and the transfer of its functions to the respective District Councils. These three constitute the bastions of local power and patronage and any devolution caravan has to begin with them.
Unfortunately, the junta’s earlier announcement of the creation of district development committees with the deputy commissioner, co-chairman has exposed their real intentions. Devolution is basically about power not functions. Junta, which has seized power rules by decree, cannot but be expected to shift public attention to the secondary issue of distribution
of functions.
