Pakistan, the heart of a global crisis

[Faryal Shah]

Pakistan, the heart of a global crisis
From oil to gold, the outlook is darkening

General Musharraf has declared martial law in Pakistan. Chuck Prince is being pressed to resign as chief executive of Citigroup, the world’s largest bank, apparently because of losses on sub-prime mortgages. The oil price has risen to $96 a barrel; the gold price has risen above $800 an ounce. That is the world in a nutshell, an international crisis, a credit crisis, an energy crisis and a dollar crisis.

On Saturday, as well as watching Arsenal’s enthralling match against Manchester United, I listened with care to General Musharraf’s justification of his decision to impose a state of emergency. In the past, I have always been impressed by his soldierly calm in a crisis. On this occasion he obviously wanted to scare his audience, particularly his English-speaking audience. He certainly scared me, because I thought that he had scared himself.

The President’s argument is that Pakistan is descending into chaos, that militant extremists are everywhere, ready to take over, that only the Army can stop them, and only he can hold the Army together. He professes to be a democrat in principle, but does not believe that democracy can resolve the immediate situation. He thinks an early change of his regime would be national suicide.

The general international view, supported both by the United States and our own Government, is that the problems of Pakistan can be solved only inside a constitutional framework, which should move towards democracy. However, this opens up a dilemma. If one accepts that Musharraf himself cannot overcome Pakistan’s crisis, then one is left with the need to find a sufficiently powerful alternative. Can any of the democratic leaders, such as Benazir Bhutto, succeed where Musharraf is failing? Has Pakistan reached the stage of being ungovernable?

Pakistan remains an important, pivotal country. It is an essential bastion of the American position in the Middle East. Without Pakistan as an ally, it is hard to see how the US could maintain its position in Afghanistan. General Musharraf is pro-Western. One of the worst possible alternatives would be an antiWestern Islamic regime. The alliance with Pakistan has enabled the US to protect the southern flank of the oil-rich countries of the Gulf. The West depends upon a stable regime in Pakistan.

There are arguments about the causes of the rise in the oil price. There is the conventional view, which serves some political purposes, that the high oil price is speculative, partly caused by fear of an extension of the war in the Middle East.

This is a relatively optimistic view, since the oil price could be expected to drop if the threat of war, including war with Iran, became more remote.

The pessimistic view is that the oil price increase has been caused by a real shortage, because of the growth in demand from China. In that case the oil shortage is likely to become more acute; a further rise could cause a global recession. In either case, it would be a disaster if the United States lost a position of influence with the Arab oil-producing countries. Trouble in Pakistan means trouble for the oil market.

In the 1970s the Opec countries were in a position to control the oil price; they used their power to raise the price to levels that caused significant recession in the West. The Arab oil countries were the main beneficiaries; money flowed to them, resulting in a global shortage of funds that proved particularly damaging to Third World countries.

Undoubtedly, the big Western banks have made some very unwise banking decisions in recent years. The sub-prime crisis has made leading bankers look stupid or, at best, reckless. Quite suddenly, in August, there was an unforeseen credit crunch, apparently caused by the low quality of mortgage loans and the reluctance of banks to lend to each other.

If one looks back to the 1970s one can see that unexpected rises in the oil price caused more than one similar credit crunch. Perhaps that is happening again; if so, the banks not only have to cope with falling housing markets and the liquidation of sub-prime mortgages, but also with recycling oil dollars.

If the political situation in the Middle East were to get worse, the oil price would go higher and the global shortage of funds would become more serious. The same pressures that have threatened Musharraf’s position have undermined Chuck Prince’s position in Citigroup. We are not in a local Pakistan crisis, but in a global crisis that happens to include Pakistan.

At the same time, the dollar has been devalued against most currencies, and against gold. The Bush Administration has been responsible for the large US deficits on external account. The dollar price of gold has approximately trebled since President Bush came to office.

That is partly a reflection of the rise in the oil price, but it is also a vote of no confidence in the dollar, in the policies of the Administration, and in the policies of Alan Greenspan as Chairman of the Federal Reserve Board. One can never trust a central banker who would not rather face a recession than fund an inflation. Compared with his predecessor, Paul Volcker, Greenspan is an inflationist, and the devaluation of the dollar is his legacy.

In analysing a crisis of this kind, one should always bear in mind that nothing difficult happens unless there is a real pressure for it to happen. General Musharraf would not have instituted the state of emergency if there had been no Islamic militants.

Chuck Prince would not contemplate resignation unless the bank had lost a great deal of money. The oil price would not be more than $90 a barrel if there were no shortage and no threat of war. Gold would not be above $800 an ounce if people trusted the dollar. Real events force painful decisions to be made.