International Political Economy
YOUR editorial (‘How critical is American assistance?’, April 22) concludes that “whether one likes or not, the overwhelming financial clout the US wields at present in this globalised world is a fact of life. It would, therefore, be advisable for our economic policy makers to think twice before taking a leap in the dark.”
Nothing could be farther from the reality of the international political economy today. As some one who worked for the world’s biggest bank (an American bank) for nearly 20 years and managed its over $1 billion emerging markets equity portfolio across the developing world, I cannot but strongly disagree with both your conclusion and the merits of the argument you have made. To be brutally frank, the conclusion displays lack of in-depth analysis of Pakistan’s situation and knowledge of the changing dynamics of international political economy.
Let me first address the point of international political economy. In a global context, the greatest change in the dynamics of international capital flows and their importance to the developing countries since the early 1990s is the fact the global private investors (companies, funds, etc.) have replaced the US/other G5 countries, the World Bank and other multilateral institutions as the largest and dominant source of financing their growth and development. Yet, many analysts here, in the government as well as in the media, appear to be living in the 1980s.
The occompanying data illustrates this point (See table).
In summary, while the emerging economies no longer are net recipients of ‘aid’ from multilateral institutions and western governments, they managed to earn a current account surplus of $317 billion in 2006 while receiving $501 billion in investment capital from international private companies, funds and banks. At the same time, they repaid $25.7 billion in the so-called “aid and loans” to the US, western governments and multilateral institutions.
This has been the case across all the developing economies from Asia to Eastern Europe to Latin America. Today, due to massive repayments from the developing world, the IMF (a proxy for the US) loan book has shrunk, with Turkey accounting for nearly 40 per cent of its total loan portfolio as most other countries have got rid of its loans by financing their needs through international private capital markets. Even Ghana and Congo are able to raise private capital today due to a huge change in the nature of the world’s financial flows.
As regards the comments about Pakistan’s current and fiscal deficits, it is simply wrong to look at the absolute numbers as a measure of anything. Both current account and fiscal deficit are not at their highest in terms of their percentage to the GDP. Most of the American assistance goes to the military and its impact on the economic development is highly questionable due to reasons I have articulated in various articles written for Dawn’s EBR weekly during the last couple of months.
Actually, it may even be better for the development and reforms process if we reduce the inflow of ‘aid’ and mobilise domestic and international private capital as many other Latin American and Asian countries have successfully done since the early 1990s. A mere five-point increase in tax-to-GDP ratio from 10 to 15 per cent would eliminate any need for official (US or not) aid, would bolster confidence in our debt repayment capacity (hence credit ratings) and mobilise resources for sorely needed ‘real’ development expenditure (i.e., infrastructure and education) and not military hardware.
YOUSUF NAZAR
Former Head of Emerging Markets, Citigroup
Karachi
Sources of Emerging Market Economies’ External Financing
(billions of U.S. dollars)
2004 2005 2006
Current account balance 150.2 257.8 317.0
External financing, net:
Private flows, net 348.8 509.3 501.8
Foreign Direct investment, net 156.0 198.7 185.3
Portfolio investment, net 39.1 55.8 69.7
Commercial banks, net 60.8 141.8 143.3
Non-banks, net 92.9 112.9 103.4
Multilateral institutions -15.0 -40.4 -25.7
Governments -2.3 -18.1 -22.5
http://www.dawn.com/2007/04/28/letted.htm#1