Policy analysis: A practitioner's musings

| Updated: January 18, 2018 21:22:44

Policy analysis: A practitioner's musings

Public policy analysis is inextricably connected with the role of the government in an economy. A standard textbook on economics notes that "markets produce the most efficient bundle of outputs using the most efficient techniques and the minimum of inputs". This result is predicated on the assumption that markets are perfectly competitive. This assumption is evidently unrealistic.

In consequence, public policies are needed to address diverse market failures in order to achieve development objectives of a country. This article seeks to identify some of the most important market failures which impinge on development objectives as well as selected sustainable development goals, indicate a few policy options to deal with them, suggest steps needed for choice of appropriate policy instruments and implementation challenges faced in Bangladesh in this regard.

THE RATIONALE FOR POLICY ANALYSIS: All developing countries seek to accelerate economic growth in order to improve the living standards of their populations. At the same time it is also considered desirable that fruits of growth should be equitably distributed among various regions and different sections of populations. Markets do not guarantee these outcomes.

Markets are often prone to monopoly or monopolistic abuse to the detriment of general welfare. In any economy there are public goods characterised by non-rivalry in consumption, non-excludability and positive externalities. These goods cannot be provided by the market.  Market-based production often generates negative externalities and price instability. Investment in the provision of merit goods and services, such as physical infrastructure, energy, health and education is likely to be at a much lower level than socially desirable if left entirely to the market forces. The unbridled operation of the market may lead to unsustainable deficit in the balance of payments. All these deficiencies require public policy actions.

Bangladesh is a signatory to the sustainable development goals (SDGs) adopted by the United Nations in 2015. Among the most important goals are the end of poverty in all its forms, achieving gender equality and empowering of all women and girls, and ensuring access of all men and women, in particular, the poor and the vulnerable, to financial services. It is obvious that these goals cannot be realised without appropriate policies.

POLICY OPTIONS: Many policy options can be chosen to achieve diverse objectives noted above. These include fiscal policy components of which are the level and the structure of government revenues, the size and allocation of government expenditure among alternative uses and the amount as well as the methods of financing deficit; monetary policy which deals with money and credit and the interest rate, the level and changes in the exchange rate (both nominal and real) and a wide variety of sector-specific policies. Some examples of sector-specific policies are the laws and regulations relating to location of industries, pollution, adulteration of food, competition, etc.

STEPS IN POLICY ANALYSIS: First, a particular goal or objective sought to be achieved is to be identified.

Second, ex-ante arguments in favour of particular policy instruments or a combination of these should be reviewed.

Third, empirical evidence regarding the efficacy of the instruments available within or outside the country should be analysed.

Fourth, policy makers then have to choose the instrument(s) in light of assessment of ex-ante arguments and empirical evidence. In making the choice it should be borne in mind that a particular policy instrument may have positive impact on a particular goal but an adverse impact on another goal. For example, a depreciation of the exchange rate may promote export and discourage import leading to an improvement in the balance of trade, but it may cause inflationary pressures.

Fifth, once the choice of a particular instrument or a combination of different instruments is made, the institutional arrangements for monitoring the impact on desired goals have to be put in place. In doing so one has to ensure that government failures in implementation which are not infrequent are minimised.

Sixth, based on the evaluation of the findings from monitoring, polices may be continued, amended or even replaced. Here an important issue that is frequently raised is that stakeholders are generally interested in the predictability of policies.

CHALLENGES IN BANGLADESH: There are many challenges which render policy making in Bangladesh suboptimal and sometimes even irrational. In many areas there is lack of adequate empirical evidence. For example, Bangladesh has been implementing generous tax holiday since a long time.

As an Adviser to the Caretaker Government in charge of the Ministry of Finance I could not find any empirical evidence regarding the impact of this policy on private sector investment. However, the government was losing revenue. Based on my familiarity with evidence from other countries while working with the United Nations I was convinced that tax holiday does not play a major role in promoting private investment. I decided to reduce the tax holiday period from seven years to five years and reduce tax concessions within the five-year period. 

Similarly, though various governments in Bangladesh have been implementing some programmes for employment generation, I did not come across any systematic evaluation of the impact of these programmes. Again, while working with the United Nations I had some exposure to employment guarantee scheme of India. Evidence showed that there was some misuse of the scheme in that some people, who could get employment elsewhere, chose the easy option of being enrolled under the scheme. In the wake of two successive severe floods and the devastating cyclone called "Sidr" I felt that the country needed a major expansion of employment programme. In addition, the rural areas of Bangladesh typically experience notable increases in unemployment during two lean seasons. I, therefore, decided to introduce a 100-days employment programme but fixed the wage rate at a level lower than the prevailing market rate to ensure that someone, who can get employment elsewhere at the market rate, will not seek employment under this programme. 

In some cases evidence may be available, but the quality of evidence is questionable. For example the government announced 7.28 per cent of gross domestic product (GDP) growth rate for FY 2017. This number is not consistent with underlying determinants of growth such as investment/GDP ratio, growth of exports and remittances, flow of credit to the private sector, import of industrial raw materials, etc. This sort of situation raises concerns about the autonomy of the government statistical agency.

The above paragraphs give an indication of the problems on the supply side of information for appropriate policy analysis. There are also problems on the demand side in that policy makers adopt policies which are not desirable in spite of evidence to the contrary. One recent example is the government's decision to give license to establish three new banks despite the fact that there are already too many banks in Bangladesh and performance of many of them leaves a lot to be desired.

CONCLUDING OBSERVATIONS: Policy analysis is an essential pre-requisite for achieving diverse development objectives. As of now this pre-requisite is at best partially met in Bangladesh.

The policy makers should pay greater attention to adoption of policies in various areas on the basis of objective analysis. Towards that end efforts should be made to fill data gaps wherever necessary, ensure that data generated meet high quality standards and cultivate a spirit of non-interference in collection of relevant data.

Dr. Mirza Azizul Islam, a former Adviser to the Caretaker Government, Ministries of Finance and Planning, is a Professor at BRAC University.

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