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  #11  
Old Wednesday, April 11, 2007
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This business of water




By Shahid Javed Burki


THERE are moments in a nation’s history when those who occupy policymaking positions must have the courage to take difficult decisions. They are difficult since their benefits are not immediately apparent but the cost of postponing them can be very great.

My reference here is to the question of water and how best Pakistan can marshal this resource, conserve it for use over a period of time, make an efficient use of what is currently available and distribute it in a way that no segment of society is deprived of this essential need.

Since the subject of water and its appropriate use is a very complex one and since it is of critical importance for the economic, social and political future of the country, I will write a series of articles to provide an analysis of the approaches taken in the past and to suggest that the policymakers must adopt a somewhat different stance to tackle the problem the country confronts.

In the article today, I will argue that policymakers in Pakistan have traditionally used the technological approach to deal with the business of water. This approach served to solve whatever problem was faced by policy makers over the short term. However, over the long term the approach always left the country with serious long-term consequences.

Let me set the stage for discussing Pakistan’s water problem by what we know about the situation in the world, particularly in the developing countries. Water remains a plentiful resource; it runs through the many rivers that flow all over the world, connecting mountains with oceans, or taking water from lakes into the seas. Water falls as rain; and is available in large underground reservoirs. Vast quantities of it are available in the seas.

The use of sea water for human consumption is expensive since it involves desalination and that, in spite of some major developments in technology in recent years, remains a costly business. It is only done on an extensive scale in the oil rich countries of the Middle East that have a great deal of surplus energy to use for this purpose.

The Aral Sea in Central Asia is the most vivid example of the misuse of an important water resource. It has shrunk by as much as two-thirds of its original size as water was drawn during the Soviet era from the rivers that feed it. The tapped water was used for growing cotton in the area. Since cotton needs a lot of fertiliser, insecticides and pesticides, the chemicals used on the land ran into the rivers that flowed into the Aral Sea. Consequently the water that is left in the sea is over-salinated and polluted.

While the assault on the Aral Sea is the most egregious example of water’s misuse, the wasteful use of this precious resource happens all the time. The amount of water used in agriculture; as an industrial input; for everyday activities such as cooking, bathing, and maintaining lawns would be considerably less if it was properly priced. I will take up the subject of appropriate pricing of water in a later article.

There are many examples of misuse of water in Pakistan as well. The consequence of this is that Pakistan today is considered as one of the “water stressed” countries in the world where the per capita availability of water will outstrip its demand. The situation is likely to worsen quickly as global warming begins to take its toll and as the climate begins to change.

The most serious result of this will be that the amount of snows that fall on the Himalayas and other mountain ranges that feed the country’s many rivers will significantly decline. This will diminish by significant amounts the availability of water in the country’s rivers. Since the supply of water is inelastic — it cannot be increased beyond what nature is prepared to provide – public policy will have to step in with policies to conserve whatever is available.

The use of technology for solving a problem is usually an easier option compared to adopting policies that change the way people look at a particular resource. The most recent example of this is global warming where the American government in particular is very reluctant to use pricing as a way of curtailing the demand for energy. It is relying on the use of technologies. The current favourite is the production of bio-fuels.

However, the most effective way of dealing with this subject is through the pricing mechanism and the use of fiscal policies. This needs political will which Washington at this time does not seem able to muster.

Much of what has happened to Pakistan’s abundant water resource can be traced to the use of technology without reflecting on the secondary effect of this approach. The use of technology to exploit the abundant water resources of what is Pakistan today began during the British rule of India. Britain, having been alarmed by the large toll on human and animal life during recurrent famines in the densely populated provinces in the northeast, decided to bring water from the Indus River system to the uncultivated but potentially rich lands of the Punjab and Sindh.

The idea was to increase the domestic output of food grains to feed the people who faced famines almost every decade. A complicated system of canals was constructed that took stored water from the Indus and its many tributaries to the parched but fertile lands in India’s northwest.

However, land logging and salinity came with irrigation. These developments could have been avoided had the government taught the new farmers the correct use of water for irrigation. This was not done. The British — like all colonial masters — had a short time horizon. They were not concerned with the long-term development of their domain.

As the immediate problem was resolved by bringing virgin land available in Punjab and Sindh under the production of food grains, the British administration was not much concerned with the long term consequences of the investments they had made in developing irrigation.

Developing and applying the science of irrigation would have taken expenditure of resources and expense of time; the British were not prepared to spend either. Pakistan was left with the problem once the British departed.

That the problem had become acute was something Pakistani governments and scientists began to recognise in the 1950s. But the country was too preoccupied with politics to turn its attention to these kinds of issues.

The twin problems of water logging and salinity received government attention only after President Ayub Khan put a development minded administration in office. Deeply concerned about what was happening to the soil cover in many parts of the country, he appealed to the United States for help. During a meeting with President John Kennedy in Washington in 1961, he explained the problem to the American president who offered to help.

The American help came in the form of advice by Roger Ravelle, a Harvard University scientist with considerable repute and a vast amount of experience in the area. Ravelle assembled a team of experts in soil management and irrigation systems to develop a programme for Pakistan.

I will return to this technological solution to a problem created by the misuse of irrigation water a little later. Before returning to it, I will refer to another water problem and another technical solution for resolving it that left a deep mark on the country. This was the problem created by the messy division of Punjab that left the province’s large and integrated irrigation system divided in two parts. India laid claim to some of the waters of the Indus River system, particularly the water that flowed into the irrigation system from the head works that were now on the Indian side of the border. Diversion of this water would have created havoc on the Pakistani side.

There is growing evidence that the British administration headed in New Delhi by Lord Louis Mountbatten went out of its way to draw the Punjab border in favour of India, particularly to make it easier for it to access water from the irrigation works that were in place.

This is one of the themes in Stanley Wolpert’s latest book on the Indian partition. He uses government papers from that period to show how Mountbatten agreed to make last minute changes in the Punjab boundary line proposed by Sir Cyril Radcliffe to accommodate India.

At one point, Prime Minister Liaquat Ali Khan, fully aware that games were being played by the administration of Jawaharlal Nehru to cripple Pakistan economically, threatened to go to war if India tinkered with the irrigation system.

A technical solution was found to the problem during the tenure of President Ayub Khan when the two countries signed the Indus Water Treaty which apportioned three rivers of the system (the Indus, the Jhelum and the Chenab) to Pakistan and the remaining three (the Ravi, the Beas and the Sutlej) to India. In addition a multi-billion dollar scheme for building replacement works in Pakistan was agreed to by the two sides. To be implemented under the supervision of the World Bank, the vast programme envisaged the construction of link canals to transport water from the western to the eastern rivers. This meant cutting across the natural flow of water and contributed to the aggravation of the water-logging problem that was by then already very severe.

Tubewell technology arrived in the country in the early sixties in part to deal with the salinity and water logging problems. In the middle of that decade, Pakistan inaugurated the Salinity Control and Reclamation Project developed by Roger Revelle.The concept behind the project was a simple one. Large-bore tubewells were sunk in the saline areas and water brought out by them was thrown into the canals thus diluting its salinity. This helped to lower the water table and reduced soil-salinity. The farming community eagerly adopted this technology for their own use, augmenting with subsoil water the water that was available through the extensive system of canals. This eased the water constraint in many areas and also helped to place a check on the spread of salinity.

However, before the project could be declared a success, its ill effects began to be noted. Among them was the depletion of the aquifers formed over millions of years. Some of the water is “fossil water” that has accumulated underground for thousands of years, sometimes over half a million years, well before the end of the last ice age. Extracting this water at a rate which is greater than its natural replenishment eventually destroys the aquifers, with unimaginable consequences.

The excessive pumping of water by the use of technology not only did harm in Pakistan’s countryside, it also had negative consequences in the urban areas. By adopting what is essentially an ad hoc approach to meeting the rapidly increasing need for water by the people living in the large cities, governments in various parts of the country may have addressed the immediate problem but they also brought long-term headaches.

The situation in Lahore illustrates this well. Large tubewells were sunk by the authorities in the city to meet the demand for water. These wells lowered the water table to the extent that there is some danger that large sink holes may appear in the city if ameliorative action is not taken.

The problem of water scarcity, therefore, needs to be dealt with comprehensively, not just by the use of technology. What are the various instruments of public policy available to address the issue in a way that in solving one problem new ones don’t get created? I will take up this question in the next article on water in this space.

Source:http://www.dawn.com/2007/04/10/op.htm#1
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Old Friday, April 13, 2007
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Default GDP growth to sustain at 7.5-6.8% in 2007-08: report

GDP growth to sustain at 7.5-6.8% in 2007-08: report



Staff Report

KARACHI: The government in the forthcoming budget 2007-08 is likely to reduce the burden on the corporate sector through reduction in taxes to 32 percent (from 35 percent) for public-listed companies, said Merrill Lynch and Company report on Pakistan’s economy.

The report said the GDP growth would sustain at 7.0-7.5% and 6.8% in 2007-2008, respectively, owing to robust consumption growth, supported by higher remittances from workers (up 21% YoY) and foreign investments (up 147%).
“Unlike the last budget, we expect the next budget (expected to be announced in June 2007), to be pro-market and pro-investments,” the report said.

The report said: “The budget would also make efforts to boost investment in the country. The government’s overwhelming confidence on the corporate sector can be gauged through direct tax collections, which grew 61.9 percent year to date.”
The report said the government would further reduce its public sector holding to promote investments and bring about depth in the stock market. It will continue to reduce its holding in public sector companies through GDRs, these being United Bank Limited, National Bank Limited, Habib Bank Limited and KAPCO. This should set the precedent for the private sector and encourage listings.

The report said despite adversities in domestic politics, foreign private investment has risen 147 percent on a year-on-year and continues to be a dominant feature over the last three months. This reflects investors’ confidence on Pakistan’s future economic growth prospects.The SBP is expected to follow the wait and watch approach over the next few months, so as to sterilize excessive foreign flows but continue to accommodate private credit growth demand, the report said. Through tight monetary policy, the SBP has successfully contained core inflation, private sector credit growth, and money supply.

However, the SBP’s struggle to control monetary base growth is evident in the last few months.

The SBP has released its half-yearly review of 2006-07 and expressed optimism on the Pakistan economy. The SBP has pointed out sustained GDP growth, openness of the economy, and stability in exchange rate, as the three factors that would drive foreign investments. These foreign inflows should help manage macro imbalances and sustain high growth
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  #13  
Old Saturday, April 14, 2007
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Widening Trade Deficit

ACCORDING to trade figures for the first nine months of the current year, the trade imbalance is not only persisting but widening with the policymakers taking care of the current account deficit, so created, by import-oriented foreign investment and by creating foreign debts. With exports at $12.4 billion and imports at $22.4 billion, the trade deficit has shot up to $10 billion, up from the corresponding figure of $8.67 billion last year. Imports continue to outstrip the pace of export rise in spite of rates of growth in both areas slowing down. The yawning trade deficit will also impact on the volume of foreign capital and financial inflows in the medium-to-long-term as these are ultimately determined by the country’s own capacity of foreign exchange earnings. The export growth, slowing since January 2006, has touched a four-year low while the imports are estimated at a record high of $30 billion for this year. It is a wake-up call for both the export-oriented industry and the government.

Partially affected by the withdrawal of Generalised System of Preferences and the 5.8 per cent anti-dumping duty on bed linen, textiles that contribute around 60 per cent of the total export earnings rose by a mere 4.1 per cent in the first seven months of this year. The volume of sales of fabrics and bed wear declined because of the high price of the genetically modified American cotton — a critical input for producing quality goods. The government has so far not been able to persuade the EU to provide an even playing field to the Pakistani exporters. The export of items identified as “other manufactures”, including sports goods, leather manufactures, chemicals, pharmaceuticals and carpets, plummeted by 17.1 per cent as a result of “industry-specific issues”. They are needed to be tackled by joint efforts of the industry and the government. A common complaint is the rising cost of inputs such as a hike in fuel prices, utility charges and interest rates. A high rate of inflation is raising the cost of production and making the exchange rate uncompetitive. Foreign sales of primary commodities have also declined by 9.1 per cent because of lower harvest of rice, cotton and fruits. An impression is gaining ground that exports have reached a saturation point because there are not enough production surpluses for export and the government has not accorded the required priority over the years to the commodity producing sectors, particularly manufacturing. To quote the State Bank of Pakistan, the broad slowing down of exports is puzzling and needs to be investigated in order to evolve concrete measures for reversing the current trend.

The case for a high export-growth cannot be overstated. The government needs to develop special packages for reducing cost of business for products that are unable to stand international competition. The export strategy should also focus on product and quality improvement by upgrading management and workers' skills and opting for the latest international marketing trends, for which the primary responsibility rests with the producers. While boosting exports, an effective policy of import substitution needs to be evolved and implemented in areas of competitive advantage to reduce the trade deficit. The $30 billion imports, the bulk of which are for domestic consumption, offer opportunities for fast-track industrialisation. For example, imports of food products have touched two billion dollars per annum and are rising. They offer a good potential for import substitution.

http://www.dawn.com/2007/04/13/ed.htm#1
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A Rosy Vision for the Poor?
There is widespread corruption. Government revenues and loan amounts are squandered and embezzled. Most of the development funds go into wrong pockets.

The total public debt increased by Rs1.465 trillion to Rs4.411 trillion over the last seven years, showing a rise of almost 50 per cent from Rs2.946 trillion in 1999 (Dawn, March 5). Outstanding foreign debts on June 30 last was $37.26 billion and further new foreign loan contracted during 2006 is over $3 billion (Editorial, March 7).

By the way where have the billions of rupees (loan amounts) gone? Had these sums were sincerely invested/utilised, the ground realities would have been quite different. There would have been no poverty.

The army-feudal (rural + urban) nexus is ruling the country. The people assembled around the general-president to provide a democratic facade to an autocratic rule are mostly opportunists. They are exploiting the poor masses. Cartels and mafias have emerged and have consolidated their power during these seven years of dispensation. They would remain in power for another five years through election–2007.

The poor masses are not in a position to revolt against the system, as did the Nepalese poor who have done away with the monarchy. Pakistan’s poor are mostly illiterate and ignorant Muslims. They know Islam as given them to understand by an equally ignorant maulvi, and other vested interests, who impel them to believe that they are poor because it is God’s will and to question God’s will is a sin. They should always remain thankful to God in all circumstances.

Therefore, the first thing to be done is to destroy all the fortresses of exploitation to achieve the Planning Commission’s vision to make Pakistan an economic power by 2030. This can only be done by a truly democratic government.
http://www.dawn.com/2007/04/16/letted.htm
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Political Economy Model of a Security State
By Yousuf Nazar
The most critical question that merits further and deeper discussion is whether the political economy model of a security state that Pakistan has practiced - and one that can rightly be termed as a failure - can survive in the 21st century. Before one explores that question further, it may be useful to discuss some salient features of that model in the context of Pakistan’s recent history.

The focal point of this security state has been the threat - both real and exaggerated - from India and the stated need for a large standing Army and its need for military hardware and money. The Army governed with the help of two principal alliances until the 1980s. Externally, by aligning its foreign policy with the global and regional interests of the United States and internally by forming partnership with the economic interests of the feudal aristocracy and big business. The external alliance provided weapons and money that benefited the military and provided the ‘aid’ that was used to finance fiscal and current account deficits.

The development issues such as land reforms, the need to broaden the tax net and develop export-oriented industries were put on the back burner. A combination of aid, subsidised loans, protectionist trade policies and a lax tax regime benefited the civil and military bureaucracy, inefficient industries and tax evading business magnets. This bought the military their support at the expense of the vital economic reforms that should have been undertaken to prepare Pakistan for the 21st century.

While China, Korea, Taiwan and the rest of East Asian countries adopted policies for exports-led growth, the trade regime in 1988 [at the end of Zia ul-Haq’s rule], according to a World Bank report, “still seems to be biased in favour of import substituting production. Domestic markets are insulated from foreign competition through non-tariff barriers and high tariffs.”

In 1988, Pakistan’s nominal tariff rates (around 66 per cent) for manufacturing industries were among the highest and Pakistan’s tax-to-GDP (13.6 per cent) was among the lowest in the developing countries. These policies were instrumental in promoting the robber baron culture under a patronage-driven protectionist economy that was incapable of standing on its feet in increasingly competitive international markets where skilled and educated workforce and not the size of its army became a measure of a country’s potential.

The average expenditure on education as a percentage of GNP was criminally low at 0.8 per cent in the 1980s as General Zia and his corrupt cronies (who made fortunes) boasted of defeating the Soviets. While Afghan war, nuclear programme, Islamisation, non-party elections, ethnic and sectarian conflicts and other such issues dominated the headlines, the real ‘political economy’ or the game was mostly about protecting the security state apparatus that provided the maximum benefits to key stake holders, that is, the army, big business and landed elites.

In 1985, Mohammed Khan Junejo appointed Mahbub ul-Haq as finance minister. Haq called for the vigorous collection of revenues through taxation to generate economic growth from domestic resources. His reformist agenda drew loud protests from these vested interests. The protests led to his removal as finance minister in January 1986, after less than a year in office.

Junejo wanted a quick end to the Afghan war, which had provided a steady source of billions in income for the military establishment’s supporters through arms and drugs trafficking. Junejo met the fate of his finance minister and was dismissed in May 1988.

In the backdrop of Zia’s death, the end of Afghan war, and the stoppage of aid from the United States, the economy was in a bad shape with the fiscal deficit reaching seven to eight per cent of the GDP. Zia left Pakistan close to $22 billion in external debt (50 per cent of the GDP) that had climbed from $8.7 billion in 1978.

During his tenure, overall debt, including domestic and external debt, increased to around 80 per cent of the GDP, while defence expenditure rose annually by 9.2 per cent, with public spending on social development a mere 3.2 per cent per annum, or negative in real terms. By the time of his death, the army had become quite unpopular and the establishment decided wisely that it was time to share power with the politicians (although real power stayed with the military) because that was “the need of the hour.”

During the 1980s, the military-business-feudal alliance was expanded to officially co-opt the extremist religious forces. The militants were given a virtual license to carry on all kinds of illicit trade to finance themselves, make illegal encroachments to build mosques and madarassas, to receive money from abroad, etc.

The Afghan war involved the biggest covert operation ever undertaken by the American CIA, which provided nearly $700 million in secret funds to the military [during 1982-1987] to finance the jihadis. This gave birth to a Frankenstein that was going to do irreparable damage to the rule of law, criminalise the society and haunt the masters of the political economy of aid and patronage for decades to come.

The Afghan war ended but the political economy of a security state needed another conflict to sustain itself. Abandoned by the United States and eager to flex its muscle like a spoiled brat, the establishment decided to start the jihad in Kashmir forgetting conveniently that it had all but officially abandoned that ‘cause’. The establishment clashed with both Benazir Bhutto and Nawaz Sharif, who wanted to make peace with India and disengage from Pakistan from adventurous and costly pursuits. The jihadis’ cross-border operations reached to a point that Pakistan came quite close to being declared a terrorist state.

The adventures culminated in Pakistan exploding the nuclear device in 1998 although the wisdom of doing so was highly questionable because as long as Pakistan had the nuclear weapons capability, it did not really matter whether it announced this with a bang or not.

This led to the first ever default of its foreign currency deposits’ obligations and sanctions from the United States. The 9/11 provided a godsend opportunity to end Pakistan’s international isolation and repair historically close relations with the United States.

Since then, the economy has done well by traditional measures (so it did in GDP growth terms during Zia’s regime) following an injection of large doze of US aid and $22 billion in remittances. But more crucially, the biggest casualty of “easy money’ has been the reforms agenda that General Musharraf undertook to implement when he took power.

The economy remains largely undocumented, the tax-to-GDP ratio has fallen to a level even below that of 1988, stories of mega corruption abound, and no land reforms have been introduced although the establishment and its supporters have never stopped criticising Bhutto even 28 years after his death for not doing enough.

The underground economy continues to flourish with tax and money laundering havens in real estate and stock trading while Pakistan’s external debt-to-GDP ratio remains worse than even that of Sub-Saharan African countries. Yet, some Pakistanis mistake the presence of BMWs on roads as a sign of progress.

If a nuclear-armed Pakistan, with claims of one of the fastest growing economies in Asia, is as strong as the government leaders would have us believe, why it is that just some articles in the New York Times and press briefings of the US state department can cause tremors in the corridors of powers in Islamabad?

Until and unless Pakistan’s establishment and the political parties are prepared to undertake critical economic reforms to mobilise domestic resources to produce economic growth and reduce dependence on sporadic flows of ‘aid money’, it would be naive to expect any real change.

Pakistan does not need “aid money” any way if the military wants to make peace with India as most of the aid goes to buy military hardware that may never be used. Unless of course, the establishment has found a new nemesis in Afghanistan’s Karzai or a bogeyman in Lal Masjid to continue to justify its insatiable appetite for aid and arms to keep its hold on power at the expense of a stable, democratic and well-governed Pakistan.

http://www.dawn.com/2007/04/16/ebr13.htm
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Sale of National Assets
By Masood H. Kizilbash
THERE is an obsession with governments to use indicators of growth in the national income as their success story. This is precisely what our government keeps on trumpeting.

But nobody tells us whether or not, this growth is sustainable in the long run when privatisation of our national assets to foreign private investors is in progress, in a typical global economic order.

• In a national economy, assets consist of agricultural produce from land resources beneath or over the land, fauna and flora, industries, infrastructure, financial institutions, dwellings/buildings, human capital etc. These assets when put to use produce goods and services which when valued in money terms are called `gross domestic income’. Any addition from year to year to this income is called growth. This growth accrues from either more efficient use of existing assets or through creation of new assets during the year. The effort of a state is to create more assets either from domestic resources or from foreign resources.

• The indicators of growth rate in the GDP/GNI in the new economic global order has become less significant on account of unleashing of market forces not only at the domestic but also at the international level, allowing unencumbered flow of trade and capital across the borders and shrinking of the role of the government in production, distribution and management of the economy.

The global model working under the framework, is well defined by Joseph Stiglitz in his book, "Making Globalization Work". "There was a large set of dos and don'ts: do privatise everything from factories to social security; don't have the government involved in promoting particular industries; do strengthen property rights; don't be corrupt. Minimising government meant lowering taxes but keeping budgets in balance."

• The havoc the model of development has caused in the developing world in the shape of growing poverty and unemployment is already subject to world wide discourse, aimed at reversing or drastically modifying it. This discourse, besides other features of the model, seriously questions the soundness of across the board privatisation, ranging from publicly owned enterprises in the production sector to financial sector. Yet, we in Pakistan continue to offer at top speed our domestic assets not only to domestic private investors but also to foreign investors.

• The privatisation of public enterprises started in the year 1990-91 in Pakistan. According to the Report of the Privatisation Commission, 2005, total sale proceeds realised from these assets aggregate Rs534.2 billion between 1990 91 and 2005 06 (July- December) as per table.

• As will be seen from the Table, the share of foreign investors/ companies stands at Rs236.9 billion or 44.4 per cent. From 1990 -91 to 1999 2000, the assets privatised fetched Rs74.8 billion in which the share of foreign private investors/companies was just Rs1.9 billion or 2.5 per cent. This compared with assets privatised of the value of Rs459.4 billion and the share of foreign private investors/companies as high as Rs235 billion or 51.2 per cent.

• A spurt in foreign direct investment would have been beneficial for our economy had it been creating new assets. However, the data shows that as against an aggregate foreign direct investment of Rs432.5 billion most of it to the tune of Rs234.6 billion or 54.2 per cent went in acquisition of existing national assets by foreign investors between 2001- 2002 and 2005- 2006.

• The question is, whether under the circumstances when we are transferring ownership of our national assets, the growth in the GDP has any significance. For, as the foreign investors acquire more and more national assets, most profits accruing from them would be transferred overseas, thereby reducing the net domestic income of those within the country.

It is for this reason that Joseph Stiglitz poignantly remarks that "a country with a high GDP may actually be getting poorer and poorer" and goes on to suggest that "countries need to create capital accounts that look at both assets and liabilities and make especial note of situations where asset sales (including sales of natural resources and privatisations) are misleadingly being used to make deficits look lower than they otherwise would be.

Countries can reduce their deficits by cutting down forests, selling national assets, giving away their natural resources at a fraction of the full value." Unfortunately, this is precisely what we are doing and this is leading to a situation where we would have GDP growth in the economy with most income from the assets going overseas and a little left from the income for those who live in the country and no assets left to sell for meeting the deficit. Cannot we be more prudent as some other countries have come to be?
http://www.dawn.com/2007/04/16/ebr9.htm
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How Critical is US Assistance?
By Dr Ishrat Husain
A SPATE of editorials, articles, columns and reports emanating from the United States in the last few months have argued that the US assistance to Pakistan should be made conditional upon the progress in the achievement of US’s strategic goals in the region. These assertions echoed in the national media and the popular discourse in the country. This article tests the validity of these assertions with the help of empirical evidence and attempts to disentangle the myths from the reality.

The US economic and military assistance to Pakistan since September 11, 2001 has come in four main forms (a) debt relief (b) military assistance (c) economic assistance (d) emergency relief assistance. In addition, the US . has been reimbursing in dollars the expenditures incurred by Pakistan in supplying logistics services to US troops in Afghanistan.

Although normally this reimbursement should not be considered part of any aid package, it has been so included in this analysis for the sake of comprehensiveness. If this broader definition of US assistance is accepted, then the next step is to calculate the quantum of this assistance.

In FY 2002, the US provided debt relief of $600 million and in FY 2003 used Economic Support Fund of $186 million to retire bilateral US debt of $1 billion. Between FY 2004-2007, the US has provided budgetary support of $800 million under Economic Support Fund. In addition it also funded (a) development assistance (b) Child Survival and Health Programme and (c) PL 480 Title II in the amount of $530 million. The US is committed to further $600 million in FY 08 and FY 09 under economic assistance.

Under Earthquake relief and reconstruction the US has provided $105 million and has committed to allocate an additional amount of $200 million for reconstruction in the AJK and NWFP.

The military assistance that has been received so far is approximately $900 million with further commitment of$600 million in the coming two years. Finally, the US has been reimbursing Pakistan at $80 million a month for the logistic services provided to the US troops in Afghanistan since 2002. This amount aggregates to $4.8 billion in all and is shown under the services account in the current account balance. This amount is in actual fact, payment for expenditures that Pakistan has been incurring out of its own resources in rupees and is not included in any standard definition of “aid”. But we have included the reimbursements as aid in order to address the arguments raised by the proponents of “Pakistan dependent upon US” theory.

Table-1 presents an aggregate total picture of all these four types of US assistance since September 2001. The annual inflows during the last six years amount to approximately $1.75 billion from all types of US assistance - military, economic, and reimbursements for logistics support. Of these flows, the aid – military and economic accounts for $ 787 million etc annuallyIn order to examine the importance of these flows to Pakistan’s economy and evaluate the dependence of our economy on US four key indicators are selected (a) US assistance as per cent total budgetary expenditure (b) US assistance as per cent of total foreign exchange receipts (c) US assistance as per cent of total current account receipts and (d) US assistance as per cent of total value of imports.. These indicators have been carefully chosen to see as to how much damage will accrue to our balance of payments and fiscal accounts if the US for one reason or the other abruptly decides to withdraw its assistance of all types.

The results of this analysis shown in Table II indicate that even under the worst case scenario of zero aid flows and no reimbursements for logistics services rendered to the US troops, the diminution in foreign exchange receipts or budgetary resources would be insignificant — varying between 4.5 per cent of total foreign exchange receipts to 7.2 per cent of total budgetary expenditures. The other two indicators i.e. the proportions of total value of imports and current account receipts financed by U.S. assistance account for 6.4 per cent and 5.8 per cent respectively — not worrisome amounts.

Some observers would argue that the World Bank and ADB assistance to Pakistan would also be reduced if the US takes action to suspend its financial aid. Although this assumption is open to question and debate but even if it is accepted at its face value, the total gross flows of foreign aid from all official bilateral and multilateral sources (excluding reimbursement for services) amount to 8.5 per cent of the country’s foreign exchange receipts. in 2006-07 and 10.8 per cent if the re-imbursement for services is included.

As a proportion of GDP, these gross flows from all sources work out to only three per cent. Using a more appropriate indicator i.e. net transfers on

account of all foreign assistance, the impact is even more negligible — only 1.1 per cent of GDP. Should these amounts raise any alarm bells when the country has already weathered much worse shocks of greater magnitudes in the past seven years.

This worst possible case scenario ,although possible but not probable, will have a consequence in form of immediate drawdown of our foreign exchange reserves from $13.5 billion to $9.5 billion assuming that all current expenditures in foreign exchange are protected. In case this scenario materializes the policy makers will have to make necessary adjustment in our imports and other foreign exchange expenditures, take measures to attract larger volume of remittances and foreign direct investment and will access the international capital markets. We can be assured on the basis of the above “What if:” kind of analysis that under the highly improbable worst case scenario where the US along with all multilateral development banks withdraw its assistance of all types in one go, Pakistan’s economy is unlikely to face any serious risk.

It is also less well known that the U.K Government provides much larger volume of economic assistance to Pakistan than the U.S does. The Department for International Development (DFID) of UK has raised its annual grant aid to Pakistan from £240 million ($480 million) to £480 million ($960 million). Most of this aid is targeted at education, health, social development i.e largely on the development of the people.

Despite such hefty amounts involved - more than the entire U.S economic and military assistance - there are very little noises from the British Parliament or think tanks or even the influential media that Pakistan should be penalised “as it is not doing enough to help meet the British objectives in Afghanistan”. There is a sense of maturity in the U.K that recognises that these kinds of tactics in fact end up alienating and antagonising public opinion in the recipient countries rather than alter their behaviour. Ill will rather than goodwill is created against the donors if they continue to flaunt the stick they possess. A better way is to engage in dialogue, listen to and understand the perspectives and limitations of the recipient countries as to why there is divergence in the views of the two sides and what can be done to set things right.

There is no doubt that the government and the people of Pakistan do very much appreciate the financial and moral support demonstrated by the US government at the critical moment of Pakistan’s economy. Several other collateral benefits accrued to the economy as a result of the U.S bilateral debt forgiveness, strict scrutiny of remittances through informal channels, the US EXIM Bank and OPIC’s highly positive initiatives and the withdrawal of all different types of economic sanctions. U.S Administration played a helpful role in ensuring larger volume of concessional assistance to Pakistan through the IMF, World Bank and Asian Development Bank. The prompt and generous response to the Earthquake of October 2005 by the US government, private sector and non-governmental organisations left a very favorable impressions in the minds of Pakistanis.

US is an important trading and investment partner of Pakistan and we should continue to remain friends with this superpower. The purpose of this analysis is not to show that we care little for our friendly relations or do not cherish friendship with the government or the people of the United States. As a matter of fact we should expand our relations with the United States in the areas of higher education, science and technology transfer, trade, investment and labour flows. We should also seek duty free market access for the products exported from the Reconstruction opportunity Zones (ROZs) in the tribal areas as part of our joint strategy to provide economic benefits to the three million population living on the porous border with Afghanistan. But the main argument of this analysis is that the pundits in the US who believe that they can use the leverage of US official aid to paralyze Pakistan’s economy are sadly mistaken as they have an exaggerated sense of the importance of these official flows. Any attempt to impose conditions that impinge upon the sovereignty of Pakistan or conflict with our own national interests can be resisted without creating a serious dislocation to our macro economic stability or growth prospects.

This analysis explodes the popularly held myth that Pakistan is so dependent on foreign assistance for its economic survival that pulling the plug would force it to yield under this pressure. These sages and their followers in Pakistan are well advised to seriously reconsider their basic premise. Successive governments in Pakistan since 1974 – whether military, democratically elected or interim- had successfully resisted all kinds of pressures placed upon them for discontinuing the nuclear programme under worse economic conditions than prevail today. The present and the future governments of any political persuasion would be able to meet the highly unlikely event i.e abrupt withdrawal of U.S economic and military assistance of all types and forms with courage and fortitude because the capacity of the country to respond to this and other exogenous shocks has become much resilient in the recent years. During the last seven years Pakistan has successfully withstood the internal and external shocks of severe and prolonged drought, mobilization of Indian troops on the borders, terrorist attacks on foreign nationals, the war against terrorism in Afghanistan, and the oil price hike. None of these shocks, some of which are more severe than $750 million provided by the US has hurt the macroeconomic stability or growth. Oil import bill that went up by almost $2 billion in a single year was more devastating in nature but the economy grew at 6.6 per cent despite this shock.
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Fixing the Price of Water
By Shahid Javed Burki

For some time now economists as well as water management experts have believed that they had fairly definitive answers to the questions I posed above. For instance, in 1995, Ismail Seragelddin, then my colleague at the World Bank and then considered to be one of the most informed authorities on the subject of water, worked strenuously to get the institution both of us worked for to focus on water. He wanted some of the World Bank’s formidable financial and analytical resources to be committed to developing water resources and to increasing the understanding about its efficient use.

In order to draw the attention of the Bank’s senior management towards the issue of water, he made a dour prediction that “the wars of the next century will be about water”.

That prediction mercifully did not come true. Research shows that most conflicts about water happened within countries, not between them. The World Business Council for Sustainable Development in its recently released report, ‘Business in the World of Water,’ says that in the past half century only 37 disputes concerning water involved violence. Of these 30 were between Israel and one of its several Arab neighbours. However, there were several serious disputes within countries. Among these the disputes involving Pakistan’s provinces figure prominently.

Inter-provincial quarrels about the distribution of water have kept serious state investments from taking place in Pakistan. They have also made it difficult for the country’s political masters to make provinces somewhat more autonomous in the areas that are their responsibility under the Constitution. Water disputes, in other words, have not only prevented the policymakers from addressing the problem with the analytical clarity it deserves, they have affected the quality of relations among governments at different levels.

Most experts agree that Pakistan needs a well thought-out strategy to save itself from a serious water crisis. This strategy must have several elements that nicely complement one another. It should deal not only with the important question of storing water that currently runs into the sea unused. It must also devise policies aimed at the better utilisation of water that is available from the current storage. Such a comprehensive approach has been endorsed by a number of multinational agencies now occupied with the question of water.

In its second ‘Water Development Report,’ the United Nations says that insufficiency in the availability of water is primarily caused by inefficient supply – mismanagement, prevalence of corruption, lack of institutions, bureaucratic inertia, inappropriate pricing policies or low investment – rather than actual shortages. The problem would not be solved by simply making large investments in dealing with the issue of supply.

For a decade or so – from the mid-eighties to the late nineties – the favoured approach towards managing the water crisis in developing countries was to place trust in private institutions. This approach was tried extensively in Latin America when, following the decision to privatise the assets owned by the state, a number of water utilities were acquired by European companies.

I visited one of these companies in the Spanish city of Barcelona in 1996 where I saw an impressive display of management tools that could be used to cut down on waste and thus increase the amount of water available in large municipal systems. The company had developed a business model that relied more on management than on new investments to make it possible for even the poorest segments of the population to gain access to good quality water. I saw a computer programme that could detect leakages in any part of the system thus preventing a great deal of waste.

The company believed that it could save the Latin American cities a great deal of financial burden that would result from large investments in increasing supply by introducing such modern management practices. The company put this belief into practice by successfully bidding for some public utilities when they became available under the various programmes of privatisation launched in the continent in the 1980s.

It soon discovered that what worked in the cities of the developed world could not be easily implemented in developing nations. This was mostly because of the unwillingness on the part of political authorities to put appropriate pricing policies in place. As a recent review of this experience puts it, “faced with significant political and economic risks, multinationals such as Suez, Thames Water and Veolia pulled back from big investments in Asia, Africa and Latin America in recent years.”

If the expertise needed for better management of water supplies cannot be imported through privatisation, what other options are available to policymakers in the developing world? I don’t believe developing countries’ societies are quite ready to entrust the supply of water to private companies who have to keep the bottom line in front of them in managing any part of their business.

In the case of water, as the experience in Latin America shows, making water a profitable business for the private sector means increasing tariffs to the point where it becomes a serious public issue.

If the full price of water cannot be charged then there must be some element of subsidy included in the structure of tariffs. However, that imposes a burden on cash-strapped governments such as those in Pakistan. To keep subsidies within limits, it is important to first educate the public about the important issue of pricing of water. Water is seldom priced as a scarce resource; it is usually treated as an infinitely available commodity. Like all free or cheap commodities, it is used mercilessly and wastefully. For a long time people thought that this resource could not possibly get exhausted. But then the evidence of misuse began to become visible.

As one observer puts it: “But the paradox is that poor people in slums pay much more for their water than the rich in the spacious air-conditioned villas of the same cities. The water sellers of Nairobi can charge between two and 20 Kenyan shillings for up to 20 litres of water. Rich people in developing countries, by contrast, have water services subsidised by the government.”

Nairobi is not unique in this respect. Exactly the same situation exists in Karachi where the poor pay multiple times more for water purchased from vendors compared to what is charged from the rich by the public utility company. The most effective way of dealing with this situation is to entrust the accountability of public utility to the people’s elected representatives. This should be done by the local governments who should then let the question of prices and subsidies be decided by commissions set up for this purpose that have citizens represented on them.

The question of pricing of water and appropriate subsidies extends beyond the urban areas and should include the countryside. It should also take into consideration the use of water that goes beyond drinking to other uses. Water scarcity also results in increasing social costs, paid by the most vulnerable segments of the population. In most rural societies, women are responsible for fetching water; as it becomes scarce, the distance they must cover and the time they must spend increase.

This has an effect on their health and the well-being of their families. In more difficult situations, women fetching water take their daughters with them thus keeping them out of school. Bringing the supply of water closer to the points of consumption saves women time they can spend on improving the welfare of their families.

“Water accounting” for deciding on the pattern of agricultural production as well as the products produced by the manufacturing sector is a relatively new undertaking. It reveals some surprising findings. For instance, some analysts argue that the pattern of exports from many developing to developed countries is, in effect, the export of water from water-short countries to those that have an abundant supply of water.

A few examples will help to underscore this important point. About 13 litres of water go into the production of a tomato, 70 litres into the growing of an apple. Cotton requires vast amounts of water – according to one estimate “about 11,000 litres of water go into making a single pair of jeans”. This kind of analysis leads to some obvious questions for a water-stressed country such as Pakistan. What should it produce and what should it export in order not to strain the situation of water?

That state should not mandate. It should leave the choices of production to individual producers after correcting the price of water. With the farmers and manufacturers charged appropriately to reflect the scarcity value of water – not the full price, perhaps, but one that is sufficiently high to make the producers think seriously about water as an input and not as a free good – we will see a dramatic change in the pattern of production in both agriculture and industry. The shift by the producers towards less water-intensive lines of production will help enormously in saving a great deal of investment that must otherwise be made.

As with so many other areas of public policy, the record of performance by the Pakistan government – not just by the one that is currently in office but also those that preceded it – shows that it is not well equipped to handle the water problem in a comprehensive way. One possible solution may be to appoint a “blue ribbon” commission that has the representatives of the people from the four provinces as well as experts to come up with a long-term strategy for the country to follow to save it from a serious water crisis.
http://www.dawn.com/2007/04/17/op.htm#1
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Coping with Record Trade Deficit

By Sultan Ahmad

PAKISTAN has incurred a deficit of $10 billion in its external trade in the first nine months of the financial year — an average deficit of over a billion dollars a month.

That has happened as imports during the period rose to $22.42 billion while exports just increased to $12.345 billion -- a nominal increase of 3.5 per cent against the federal budget projection of 12 to 14 per cent rise.

The situation began deteriorating from September last after the year began well and improved marginally last month, but there is no assurance of improvement being sustained during the last quarter of the financial year. After the first nine months exports recorded a deficit of $9.985 billion. The fear is that the total deficit for the year may reach $12 to $13 billion by June, close to the foreign reserve.

Commerce minister Humayun Akhtar says the situation is not that bad as the exports this year are still larger than last year, but the fact is that the deficit has increased by 15.1 per cent from $8.687 billion this time last year.

The export performance is far less than what the country desperately needs. The scope for exports is far larger if approached the right way. Anyway Pakistan cannot afford to lose its markets to China, India and Bangladesh.

The large trade deficit which has also created a record current account deficit is now covered by the inflow of home remittances from Pakistanis overseas, foreign investment and privatisation funds. But this year the grace period extended by the group of 26 Paris Consortium after 9/11 comes to an end and the lenders expect us to resume the scheduled repayments. That will exercise pressure on the balance of payments of the country and the World Bank has reminded Pakistan of that now.

Meanwhile, the rise in trade deficit is caused by the high price of oil, which may cost $7 billion this year and the rising international prices of many essential imports, including all metals led by steel and major food items like powder milk and vegetable oil, particularly palm oil.

In the area of exports, after the European Union has cancelled fish imports from Pakistan due to unhygienic conditions at the fish harbour and diverting its fish imports to India and Bangladesh, we are losing poultry exports as well because of bird flu. Already 47,500 birds have been culled in Karachi alone to avoid bird flu.

Now while Pakistan is seeking FTA agreements with China, US and other countries, we are thinking only of the larger opportunities for exports to their markets and not of the possibility of tax-free or reduced tariff goods from those countries flooding our markets. That is happening already in respect of Chinese goods in Pakistan and Pakistan has been forced to levy heavy anti-dumping duties against two kinds of very cheaply sold tiles.

We have to be ready for protective measures against cheap imports as well and have to reduce our cost of production and sale of goods so that we can withstand imported competition as well while competing with foreign goods abroad successfully. Our businessmen have to learn to accept moderate rates of profits instead of opting for high profits all the time.

Meanwhile, there are rejoicings in Malaysia over the non-conclusion of negotiations for the FTA before the US deadline for reaching the agreement expired. And there are widespread protests in South Korea over the FTA agreement which has concluded by its powerful trade unions for fear of massive loss of jobs. The agreement is concluded but is not ratified by the parliament of the two countries.

In Pakistan there is utter complacency or lack of understanding over the full implications of FTA agreements with developed countries. The FTA is a sharp double- edged sword. It offers as many opportunities for larger exports as it offers to the other parties for exporting tax-free or reduced tariff items to Pakistan in plenty.

At the same time, we have made a mess of our fish exports risking $80 million export earnings because of our cussedness and the belief that anything can pass despite stern earnings from the European Union. We have now placed the responsibility for managing the fisheries on the provinces. Let us hope they will do better than under the divided management.

We are also hoping to export wheat to India after an interval of 50 years. Our wheat production is expected to rise to 23 million tones with two million tones surplus while the Indian deficit is five million tones. It is hoped that a good use of the situation would be made. We are also trying to export cement to India after the first consignment ran in to some difficulties.

If we have to achieve our export target of $18.6 billion we have to try far harder and rationally than we have been doing and try to limit our imports to the ceiling of $28 billion.

We do not know at the moment how far the Chinese industrial estates, which are to come up in Pakistan in collaboration with Pakistani businessmen, will be helpful in increasing our exports particularly to China. It depends on the kind of industries on which the Chinese invest and develop competitively.

While the import budget at $28 billion is very large, the government does not want to reduce it as apart from oil, it consists of industrial machinery, electrical equipment, raw material for industries and automobiles which bring large revenues to the state. Reducing imports would also mean a drop in the revenues which the government does not like but also the reduction in the import of machinery and raw materials will affect economic growth and increase unemployment which the government cannot risk.

But it is wrong to say that the key players in the government do not know the reasons for the small exports and its creeping increase and the commerce officials have kept the government in the dark regarding the real reasons. The newspapers are full of the reasons why the exports are poor. And the top officials are told the reasons at numerous seminars workshops they attend which include the high cost of production in Pakistan and the heavy price of doing business.

The international financial institutions have spot lighted the reasons for the poor exports and have offered financial help to implement the necessary reforms. The fact is that while there is so much talk about reforms, first generation reforms and second generation reforms, there is a reluctance to change, to break away from old habits and bureaucratic traditions. There is a reluctance to trust non-officials despite massive privatisation programme of the government and the new public-private partnership.

A report on the state of commerce in Pakistan, largely in respect of the private sector, has been on the table of the commerce minister for two years he says, but since decisions have not been taken on the report, it has been gathering dust although it may be the first official study of the domestic commerce which needs detailed scrutiny now.

Radical changes are essential in the commercial sector, both on the part of the government and the private sector. The earlier such changes occur the better, in a highly competitive international market world where the weak and the vacillating are left far behind.
http://www.dawn.com/2007/04/16/ebr11.htm
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Sale of National Assets

By Masood H. Kizilbash

THERE is an obsession with governments to use indicators of growth in the national income as their success story. This is precisely what our government keeps on trumpeting.

But nobody tells us whether or not, this growth is sustainable in the long run when privatisation of our national assets to foreign private investors is in progress, in a typical global economic order.

• In a national economy, assets consist of agricultural produce from land resources beneath or over the land, fauna and flora, industries, infrastructure, financial institutions, dwellings/buildings, human capital etc. These assets when put to use produce goods and services which when valued in money terms are called `gross domestic income’. Any addition from year to year to this income is called growth. This growth accrues from either more efficient use of existing assets or through creation of new assets during the year. The effort of a state is to create more assets either from domestic resources or from foreign resources.

• The indicators of growth rate in the GDP/GNI in the new economic global order has become less significant on account of unleashing of market forces not only at the domestic but also at the international level, allowing unencumbered flow of trade and capital across the borders and shrinking of the role of the government in production, distribution and management of the economy.

The global model working under the framework, is well defined by Joseph Stiglitz in his book, "Making Globalization Work". "There was a large set of dos and don'ts: do privatise everything from factories to social security; don't have the government involved in promoting particular industries; do strengthen property rights; don't be corrupt. Minimising government meant lowering taxes but keeping budgets in balance."

• The havoc the model of development has caused in the developing world in the shape of growing poverty and unemployment is already subject to world wide discourse, aimed at reversing or drastically modifying it. This discourse, besides other features of the model, seriously questions the soundness of across the board privatisation, ranging from publicly owned enterprises in the production sector to financial sector. Yet, we in Pakistan continue to offer at top speed our domestic assets not only to domestic private investors but also to foreign investors.

• The privatisation of public enterprises started in the year 1990-91 in Pakistan. According to the Report of the Privatisation Commission, 2005, total sale proceeds realised from these assets aggregate Rs534.2 billion between 1990 91 and 2005 06 (July- December) as per table.

• As will be seen from the Table, the share of foreign investors/ companies stands at Rs236.9 billion or 44.4 per cent. From 1990 -91 to 1999 2000, the assets privatised fetched Rs74.8 billion in which the share of foreign private investors/companies was just Rs1.9 billion or 2.5 per cent. This compared with assets privatised of the value of Rs459.4 billion and the share of foreign private investors/companies as high as Rs235 billion or 51.2 per cent.

• A spurt in foreign direct investment would have been beneficial for our economy had it been creating new assets. However, the data shows that as against an aggregate foreign direct investment of Rs432.5 billion most of it to the tune of Rs234.6 billion or 54.2 per cent went in acquisition of existing national assets by foreign investors between 2001- 2002 and 2005- 2006.

• The question is, whether under the circumstances when we are transferring ownership of our national assets, the growth in the GDP has any significance. For, as the foreign investors acquire more and more national assets, most profits accruing from them would be transferred overseas, thereby reducing the net domestic income of those within the country.

It is for this reason that Joseph Stiglitz poignantly remarks that "a country with a high GDP may actually be getting poorer and poorer" and goes on to suggest that "countries need to create capital accounts that look at both assets and liabilities and make especial note of situations where asset sales (including sales of natural resources and privatisations) are misleadingly being used to make deficits look lower than they otherwise would be.

Countries can reduce their deficits by cutting down forests, selling national assets, giving away their natural resources at a fraction of the full value." Unfortunately, this is precisely what we are doing and this is leading to a situation where we would have GDP growth in the economy with most income from the assets going overseas and a little left from the income for those who live in the country and no assets left to sell for meeting the deficit. Cannot we be more prudent as some other countries have come to be?
http://www.dawn.com/2007/04/16/ebr9.htm
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