Catch-up time for dynamic nations

By Shahid Javed Burki
Monday, 01 Mar, 2010

THERE have been catch-up periods before in world economic history when a country that had lagged behind caught up with the leader, sometimes even overtaking it. This is exactly what we are seeing in East Asia.

There is a consensus among the experts who keep track of the relative economic performance of states across the globe that sometime soon – perhaps very soon – the Chinese economy, when measured at the prevailing rate of exchange, will overtake that of Japan and thus become the second largest in the world.

What will be the implication of this for the rest of Asia in particular for the countries that border on China?

In this context three things are worthy of note. The speed with which China has caught up with Japan was without historical precedence. It could happen given the large differences in the structural rates of growth of the two countries

What quickened the pace was Beijing’s response to the economic slowdown produced by what the economists now call the Great Recession of 2007-09. Beijing decided to invest huge amounts of public and bank money in the economy to stop it from slumping. The state provided $585 billion from the budget and encouraged the banks it controls to loosen the purse strings. The banks consequently gave $1,200 billon loans to industries, state and municipal governments and to consumers for purchasing cars and appliances. The result was that the economy bounced back growing at 8.7 per cent in 2009. A double digit rate of growth is expected in 2010.

Second, a significant amount of investment was made in improving physical infrastructure, in particular in the areas that were distant from the east coasts. In other words, the Chinese were using the opportunity created by the need to stimulate the economy to bring about more balanced growth in the country.

Third, from the perspective of a country such as Pakistan that borders on China, a considerable amount of public money went into improving physical connections between it and the neighboring countries. While investments are being made to improve the Karakoram Highway ( KKH), and improve China’s access to the port of Gwadar, the Chinese for the moment are focusing on improving their links with Southeast Asia.

For instance, the construction of a bridge has completed a road link between Kunming, the capital of Yunan province in the south, with Bangkok in Thailand. Another bridge linking Yunan with northern Vietnam is nearly complete. The airport at Kunming is being upgraded with an investment of $3.4 billion. All this activity is one province; other border province, including Xinxiang that is next to Pakistan is also receiving considerable attention.

What this demonstrates is that the authorities in Beijing are not simply throwing stimulus money where it can be absorbed easily and wherever jobs can be created – the Americans call this the “shovel” ready approach. In fact they are turning the need to stimulate into a geo-political opportunity. This is the major difference between their approach and the one followed by Japan. Largely because of the destruction the Japanese brought upon themselves as a result of the activist path pursued in the period leading up to the Second World War, Tokyo has very deliberately followed an insular approach.

A defeated nation tends to become passive and that is what happened to Japan once it signed the armistice treaty with the United States. Also, the Japanese were much more interested in creating markets for their products in the West, in particular in the United States. If the penetration of the western markets produced problems and it appeared that retaliatory action may be taken, Tokyo encouraged the private sector to locate factories where the markets were located. Japan thus became a major automobile manufacturer in the United States.

The Japanese kept an arms-length relationship with the developing world, including the countries in East Asia. The only way they engaged with developing countries was providing aid – an area in which they were more generous than most of the western states. Even here they let the lead to be taken by western aid givers.

When I looked after the World Bank’s China operations in 1987-94, they were happy to leave a great deal of policy advice to us. Also the Japanese were not interested in financing flashy projects with which the country’s name would be associated in the minds of the recipients. China, on the other hand, is happy to be identified with high profile projects. It is well known in Pakistan, for instance, that the Chasma nuclear plant was financed and built by China. China was also deeply involved in the construction of the port at Gwadar and the KKH. One of its companies has won the tender to build the extension of the motorway system to Multan.

In China, we have a very different player arriving at the scene. Having reached the international scene as a victor, it has vigorously pursued its regional and global interests. Some of what it is likely to do and has begun to do to is irking the United States and other western powers but Beijing is not likely to relent. That said, the Chinese are more likely to accommodate the interests of other countries than was sometimes the case with the United States and other major nations when western powers held unchallenged sway.

As China continues to grow its economy at very high rates, it is also restructuring it. Some of what is being done will have great meaning for a country such as Pakistan with which it has had warm and uninterrupted relations for over half a century.

The country is now engaged in a process of managed urbanisation that has no precedence in human history. It is planning to move hundreds of millions of people from the countryside to towns and cities. A large number of these will go to the already crowded urban belt that stretches from Dalian in the country’s north to Guangzhou in the south. They will live and work in high rise building. Since China is short of livable space it makes sense to go vertical. This is something that Singapore has done with great success.

People work in high rise buildings assembling imported components into finished products for export to foreign markets. The suppliers of these parts are all over Asia, particularly in the continent’s eastern part. This is where a country such as Pakistan has an opportunity. It could develop strategic alliances with manufacturers in China, supplying the parts and components they need. Even in the rapidly expanding automobile industry – last year the largest number of cars was sold in China – while the factories cannot go vertical, the manufacturers will rely on foreign suppliers for the parts that need a lot of space to produce.

China is also moving rapidly towards developing a knowledge-based economy, moving its workers from manual labour to the kind of labour that needs highly developed skills. However, this is being done by pursuing a strategy that is different from the one the Indians followed. The Indians went for the low hanging fruit concentrating on meeting the West’s need for back-office support. The Chinese on the other hand are moving simultaneously in developing and linking software development with the manufacture of hardware. This is one other area where a rising China could help Pakistan in developing a sector in which the country has the potential but has ignored it until recently.

Ties based on economics

By Shahid Javed Burki
Tuesday, 02 Mar, 2010

DURING my recent visit to Pakistan and in discussions with senior political leaders, civil servants and prominent business people I emphasised that it was important to use economics as the basis of renewed relations between Afghanistan, India and Pakistan. This was also the subject of an earlier article in this space.

With January’s London conference on Afghanistan and the recommencement of talks with India, we have an opportunity to construct the structure of South Asian ties on economics. Most of what has made it so difficult for Afghanistan, India and Pakistan to work together is rooted in the circumstances that led to the partition of British India.

As is documented, Jawaharlal Nehru, India’s first prime minister, attempted to undo the act of partition by economically crippling Pakistan. In this effort he had Afghanistan on his side. Afghanistan refused to recognise Pakistan’s independence. Kabul was the only capital to vote against Pakistan’s admission to the United Nations. The reason for recalling that bit of history is not to endorse the current tension that continues to define ties among these three South Asian nations. It is simply to stress that this historical baggage has been difficult to cast off.

One way of moving forward is to estimate the economic costs and benefits of the various policies the three countries have pursued vis-à-vis one another in the past. We could begin with the example of Pakistan’s refusal to grant transit rights to India for trade with Afghanistan and Central Asia. The benefits that would accrue to India are obvious; I have made the case on several occasions that Pakistan would also gain considerably. It would, for instance, charge transit fees from the buses and trucks using Pakistani space.

The country would also benefit by servicing Afghan and Indian operators on the transit route. There would be several other advantages including the development of warehousing at certain points; Lahore and some designated places on Sindh’s border with Rajasthan on the one side and in Quetta and Peshawar on the other.

Serious economic analyses of the benefits of this new economic relationship should take stock of the pros and cons of such an initiative. If even in light of the potential benefits, policymakers are reluctant to open Pakistan for transit trade then they would know the economic costs of their approach.

Only once in their troubled history have India and Pakistan taken a particularly difficult decision on purely economic grounds. This was the Indus Water Treaty signed by President Ayub Khan and Prime Minister Jawaharlal Nehru at the urging of a group of experts assembled by the World Bank. The treaty divided the Indus system between Pakistan and India. Pakistan was given access to the three western rivers, the Indus, Jhelum and Chenab. India could use the water in the eastern rivers of the Ravi, Beas and Sutlej.

The treaty also established an elaborate system of dispute resolution which has been used only once even though the two countries have fought two bitter wars since the signing of the treaty. The popular and not terribly well-informed nationalist press on both sides continues to rage against the treaty. A section of the Indian media continues to condemn Nehru for having given away too much; as an upper riparian, it says, New Delhi could have gotten a better deal.

Similar charges continue to be levelled against Ayub Khan on the Pakistani side of the border. This issue could be settled if a careful economic analysis is done to estimate the benefits that have accrued to the two sides as a result of the treaty. These have been substantial for both.

There are other areas of cooperation that could be explored such as the easing of the movement of people across the borders, special facilities aimed at facilitating religious tourism and across-the-border investments by entrepreneurs in the three countries. There has been little progress in making the South Asia Free Trade Area a success largely because of India and Pakistan’s mutual suspicions.

Pakistan now recognises that it could become the centre of regional commerce if it allowed regional trade to flow unhindered through its territory. It is foolish not to realise this potential. India has a policy of looking east for developing regional trade, Pakistan favours trade with China on the east and the Middle East in the west.

It needs to be recognised by policymakers on both sides that the two countries are each other’s natural trading partners. At the time of partition India was Pakistan’s largest trading partner. It was dislodged from that position as a result of the trade war between the countries in 1949 when Pakistan refused to follow India in devaluing its currency with respect to the American dollar.

An approach based on economics may provide enough ammunition to those who argue that it is in the best interest of both sides to work together. As Islamabad and New Delhi sat down at the conference table and renewed their dialogue, hostile voices were raised on both sides. India Today published a report under the caption of ‘The Karachi project’. It was claimed that intelligence agencies were using Karachi to train and launch disgruntled elements within the Indian Muslim community to commit acts of terrorism in India.

Serious reservations have also been expressed by some on the Pakistani side that the country, perhaps under the pressure of the Americans, was preparing to give up its claim on Kashmir. These kinds of claims and counter-claims will continue for as long as we don’t base relations between these two countries on economics. The same is true for Pakistan’s relations with Afghanistan.

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"pattering your life around others opinion is nothing more than slavery"

Asian nations in the ‘catch-up game’

By Shahid Javed Burki
Monday, 08 Mar, 2010

AS the Planning Commission continues to work on preparing the Five Year Plan 2010-15, it would do well to carefully study the changes in the global economy, in particular how the chairs are being rearranged on the Asian economic deck.

Two developments are particularly worthy of note: one, the reemergence of the state as an important economic player and, two, the emergence of China as the most significant Asian economy. The planners must reflect on both in designing Pakistan’s economic future.

Two developments, the first decades old and the second very recent, have reshaped – and are reshaping – the global economic landscape. The first is the process of globalisation that reduced the distance among different economies in the world, not in the physical sense, but in the sense of the easy flow of capital, trade, information and technology.

Globalisation has produced a global economy the like of which the world has never known and the process will continue to move forward with enormous consequences. The second development is what economists and people of finance call the Great Recession of 2007-09 to distinguish it from the Great Depression that took such a heavy toll in the 1930s.

What was “great” about this particular downturn in economic activity was that its origins did not lie in the normal working of the large economies that produce trade cycles with some frequency. The slow down that seems to be winding down was great for three reasons. The ferocity with which it struck; it took the form of an economic tsunami not many had predicted. It was caused not by the normal ups and downs in economic activity but by misplaced faith in the rationality of the markets. And it is likely to change dramatically the structure of the global economy. It is the third aspect of the Great Recession that I will explore.

Going back to the analysis of “catch-up” offered by Alexander Gerschenkron, the premier economic historian of the 20th century, the role the state plays in the process acquires special significance. There is the need to put considerable stress on what governments can do to better the lives of their citizens. The government’s role as an economic player was relegated to the back benches in the 1980s by the economic philosophy that accompanied Ronald Reagan to the White House.

Called The Washington Consensus, this view left the private sector to its own devices, even to regulate itself. Forced on the back-bench, that’s where the state remained until it was called upon to act again to save the world economy from collapsing in 2008. Summoned back, the state acted impressively in both developed and developing countries. China was at the forefront of this move closely followed by the United States.

It is interesting that even the Chinese had succumbed for a while to a weaker version of the Washington Consensus. Pakistan during the period of President Musharraf adopted this approach as well. With the state having roared back to life, what will it do to shape the economies of the developing world? In this context what role should be assigned to the state by the planners? One answer to the second question is to be found by looking at the reshaping of the global economy that is currently under way.

Taking cue from those who have studied various episodes of “catch up” in economic history when some of the economies that had lagged behind caught up with the leader, it is hard to escape the fact that China is currently involved in this process. China, which some time in 2010 will become the second largest economy in the world, overtaking Japan that held that position for several decades, will have enormous influence on the developing world, particularly countries such as Pakistan that it borders. This is a particularly relevant occurrence for Asia not because one Asian economy is replacing another. What makes it significant is that the structure of the Chinese economy and the way that structure is changing will matter enormously for the rest of Asia.

While Japan is from Asia, when its economy became “developed” it joined the ranks of those that were similarly placed. Japan’s linkages with Asia were weak; those of China are becoming strong. One good indication of this is the inauguration of the China-Asean Free Trade Area in January 2010 that will have profound consequences for the economies on its periphery.

Unlike some of the earlier catch up incidents, China, having almost overtaken Japan and may in the next several decades bypass the United States as well, will remain a relatively poor country dependent on the rich for markets and technology. This introduces an entirely new dimension in the “catch up” game.

For many decades to come, the global economy will be dominated by two economies that will not compete as much – as Britain and France did during the first catch up episode a couple of centuries ago – but complement one another.

Notwithstanding the current exchange of difficult words between Beijing and Washington, I believe that the global economic architecture will neatly arrange itself into three tiers: the United States and China at the top (the G2), a number of secondary powers in the middle (the G20), and the rest of the world forming the base of the pyramid.

Those who believe that such a system dominated by two economies will not be stable derive the wrong lesson from the Cold War when for four decades the United States and the Soviet Union confronted one another, sometimes with murderous intent. It was only the mutually assured destruction made possible by the possession of thousands of nuclear weapons by the two sides that prevented the globe from being reduced to a giant mushroom cloud. It is not necessary that a great power must always beat back competition and seek total domination. When competing powers need each other as do the Americans and the Chinese, they will learn to work with another. This is likely to happen within the context of the global architecture for economic management that is being put in place.

While mutual dependence is likely to create equilibrium in the global economy – and also keep the political system in balance – could the same be expected in Asia? The continent has not one, not two but three great economic powers.

While Japan seems not concerned with the second rank it is soon likely to assume in the continent in terms of the size of the economy, would India be content to be the third? More important will it be prepared to be relegated to the second tier in the hierarchical structure I see emerging to manage global economic affairs?

I would like to emphasise that for India to gain the economic and political stature it desires, it will need to achieve a number of things: tranquility around its borders, an economic system that delivers to the less advantaged segments of the population, particularly in terms of education and skill development, development of physical infrastructure that can support a rapidly growing and modernising economy, and an economy that is more outwardly oriented so that it can take full advantage of the rapidly changing systems of trade and production. If it is able to do most of these things there is no reason why some time in the future the system’s apex can’t expand from the G2 to the G3.

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Persistent economic woes

At this stage, three types of investment are particularly important. These are: developing the human resource, improving the technological base of firms and improving physical infrastructure.

By Shahid Javed Burki
Tuesday, 09 Mar, 2010

PAKISTAN remains in the de pths of economic gloom and des pair while most of the rest of Asia is bouncing back from the slowdown economists call the ‘Great Recession of 2007-09’. Pa kistan’s two giant neighbours are performing particularly well.
China’s rapid recovery has surprised even the most informed observers. In the last quarter of the previous year the economy expanded by 10.7 per cent. The rate of growth in 2010 is expected to be 10 per cent, perhaps even better.

The Indian economy has also begun to recover. The country’s finance minister, while presenting the budget for the year 2010-11, forecast that the rate of growth during the year will be 8.8 per cent. He believes that the country will touch 10 per cent GDP (Gross Domestic Product) increase in a couple of years. Industrial output in the fourth quarter of calendar 2009 increased by 17 per cent. Even Bangladesh is looking forward to a rate of growth of six per cent.

The picture in Pakistan is very different. The rate of increase in GDP in 200910 was about two per cent. It would have come out lower had the government not revised downwards the rate of increase for the previous year. For the current year, even the more optimistic government officials don’t expect the rate of increase to be more than 3.5 per cent. The Planning Commission is currently drafting the 10th five-year plan which will cover the period 2010-15. It would like to see growth pick up, perhaps, to five per cent average for the period. Even if this more optimistic projection is realised, the per capita income gap between India and Pakistan will widen considerably and Bangladesh could soon catch up with Pakistan. What is more worrying is that the impact on the incidence of poverty with this kind of growth rate will not be significant. This has all kinds of nasty implications for social and political stability.

Given this what should the authorities do to revive growth? There are many an swers to these questions. However, instead of listing all the imperatives for economic revival and growth, I will today focus on one contributor: increasing the economy’s productivity. The rate of GDP growth, of course, is a combination of the increase in population and the accompanying increase in the size of the work force and productivity. If the population is increasing at the rate of two per cent — Pakistan’s growth rate is said to be a bit lower than that — and total factor productivity is increasing by three per cent, the GDP will increase by five per cent.

What can be done to increase the rate of productivity of the work force? What can be done to improve the productivity of the capital employed in the economy? What should be done, in other words, to improve the efficiency of the economy?

In the spring of 2006 I had two interesting conversations on this subject with the country’s two top leaders — President Pervez Musharraf and Prime Minister Shaukat Aziz. I challenged the statements the two were making according to which their policies had put the Pakistani economy on the trajectory of high and sustainable rates of economic growth. Both had said that the Pakistani economy was in a position to increase at the rates between seven and eight per cent a year. Aziz had even persuaded the Newsweek about the validity of the story he was telling.

Calling Pakistan a “sleeping giant that was waking up”, the magazine put the Pakistani story in a large spread in one of its issues in March 2007. I told the president that it was highly unlikely that the Pakistani economy could grow at the kind of growth rates he and his prime minister were implying in their speeches. These growth rates would be possible only if the economy was operating with remarkable efficiency.

While I have not seen a recent esti mate of the efficiency of the Pakistani economy my guess is that in the current situation the ICOR (Incremental Capital Output Ratio) is perhaps as high as five to six. This means that the country has to invest five to six per cent of GDP to produce a one per cent increase in GDP.

Several types of investments need to be made in order to lower the ICOR. Of these three are particularly important: developing the human resource, improving the technological base of firms and improving physical infrastructure. In developing the 10th five-year plan the Planning Commission should clearly make provisions for these three types of investments and provide estimates of how they will increase economic efficiency.

The effects on the economy of power and gas shortages, of a poorly function ing railway system, of ports that can’t handle large ships so that cargo bound from or to Pakistan has to be offloaded in places such as Colombo and Dubai and then shipped to Pakistan, of conges tion on the roads, are apparent. What is not easily seen and hence not demanded by the citizenry are actions aimed at increasing the efficiency of the firms. Their improvement has to be the focus of public policy.

The Musharraf government appreciated at least one of these shortcomings. In the Higher Education Commission (HEC) it set up an institutional mechanism that promoted higher learning in technology and science. Much of significance was achieved.

However, as has happened so many times in the country’s history, the successor government discontinued some of the more ambitious and imaginative initiatives the HEC had taken. It is interesting to note that India has now decided to set up an HEC type of body so that the country keeps up with the advances being made in other parts of the world. Perhaps a public debate on the importance of the issues I have identified today as deserving of government attention will lend continuity to the policies once they are adopted. ¦

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Targeting high growth with equity

By Shahid Javed Burki
Monday, 15 Mar, 2010

THE two continental Asian giants – China and India –seem to be adopting basically the same set of policies for moving forward the two large economies.

At first glance, Beijing and New Delhi, having recently announced policies they will be following as the recovery from the recent downturn takes hold, appear to be embarked on the same course. Parnab Mukherjee announced the budget for the year 2010-11 on February 26 and promised that the rate of Indian economic growth was headed towards double digits. He also opened the economy a little bit more to those outside the country who would like to place their bet on an expanding economy. Prime Minister Wen Riabao delivered his annual economic speech to the National People’s Congress on March 5 and also saw his country’s economy moving ahead briskly.

Both leaders were cautious about the international environment in which the two economies will be functioning. “While the global financial condition has shown improvement over the recent months, uncertainty about the revival of the global economy remains. We cannot, therefore, afford to drop our guard”, said Minister Mukherjee in his Lok Sabah address.

Much the same sentiment was expressed by the Chinese leader. “We must not interpret the economic turnaround as a fundamental improvement in the economic situation. There are insufficient internal drivers of economic growth” said the Chinese leader in his two-hour long address. In other words both capitals were indicating that they will not be pulling back on the efforts to stimulate their respective economies. These efforts had paid off but it was not the time to ease off.

Both leaders, while emphasising the importance of high rates of growth in their economies, gave a great deal of attention to distributive aspects. While the emphasis on redistribution was not new in the Indian way of thinking on economic issues – it was the platform on which the Congress Party was elected last year to another term in office – the stance adopted by the Communist party of China was a relatively new one.

A Communist country was supposed to look after its poor and the less advantaged. It didn’t have to make an explicit commitment to such a policy in its pronouncements and plans. But Prime Minister Wen went some distance in ensuring his citizens that meeting their social needs will be a high priority of the administration he was heading.

“We will not only make the pie of social wealth bigger by developing the economy, but also distribute it well. We can ensure that there is sustained impetus for economic development, a solid foundation for social progress, and lasting stability for the country only by working hard to ensure and improve people’s well being” he said in his address.

Reading together the two statements it is striking how much the Indian leadership emphasised the need to maintain high levels of growth rates while the Chinese leaders were promising to care for the poor.

Until recently – in fact up to the Great Recession of 2007-09 that shook the global economic system – the two countries had followed different models. China had relied much more on using external markets to develop scale for its industrial system. In that and several other respects, it had followed the East Asian model of export oriented industrialisation.

India, on the other hand, had pursued import substitution for industrialisation for more than first 40 years after achieving independence. When it opened its economy to the world outside starting in the late 1980s but more fully after 1991when the then Finance Minister Manmohan Singh had to deal with a serious balance of payments crisis, the Indians continued to be cautious about foreign participation.

Although the “license raj” that owed its existence to Jawaharlal Nehru’s socialisation of the Indian economy was dismantled, the participation of foreign capital remained constrained. It was allowed in a limited way into some sectors of the economy. Its involvement in the sectors of finance and retail trade was quite severely constrained. Foreigners were also not encouraged to participate in the development of the social sectors, in particular education. The Indians were now making an effort to open their education sector. They indicated that new incentives will be offered to private operators from the outside to enter the education market.

The Indian budget also promised a major effort in improving the quality and reach of physical infrastructure. The development of high-class highways was to be given special attention. In the budget for the railways, there was promise that quality of the services provided will be greatly improved by developing high speed railways. Here the two countries have adopted different approaches. The Chinese, having anticipated that a rapidly developing economy will need a well functioning transport system, began to invest in highways and railways early on. The Indians were now playing catch-up.

There are subtle differences in overall direction of public policy in the two countries. It is growth with continued emphasis on poverty alleviation in the case of India. It is considerably greater focus on distribution while maintaining a reasonable rate of growth in China’s case.

The Indian policy statement can be read as more directed at foreign audiences while that of the Chinese was more aimed at its own citizenry. New Delhi seemed anxious to make the case to foreign investors that the country should be a major destination for the funds they controlled.

With a high trade deficit and with still lower rate of savings than China’s, New Delhi was more dependent on foreign capital flows. It would like these to take the form of foreign direct investment. Portfolio investments were welcome but they had proven in the past to be a very volatile source of external flows.

However, to receive FDI in large amounts, potential investors had to be convinced that the Indian economy could expand at the rates that were comparable to those achieved by China and sustained over a long time. Minister Mukherjee, by repeatedly underscoring that a double digit rate of growth was well within India’s grasp and that such a rate of expansion could be sustained over time, was speaking to the foreign investor.

The audience for Prime Minister Wen was mostly within the country. He and his colleagues had heard the people. The people had voiced many concerns. The escalating price of urban housing was one of them. The discrimination against migrant workers said to number 240 million was another. Not only were their wages relatively low, they did not have access to the many social services that were available to the common urban dweller. They were also not secure about their place of residence. The Chinese law and practice required the unemployed to return to their place of origin.

Voices had also been raised about corruption in the ranks of the Communist party. The more informed public opinion that had the knowledge of such affairs was also worried about the widening income disparity. While Deng Xiaoping had famously said that it was glorious to be rich, he did not envision the kind of wealth accumulation that had occurred under the watch of his successors. It was interesting that an authoritarian structure was being so sensitive to the concerns of the common men and women. The Chinese prime minister promised to reduce the gap between the rich and the poor and between the more advanced parts of the country and those that had fallen behind.

In sum, Beijing and New Delhi were moving forward but were taking slightly different routes. For India achieving high growth rates was critical; for China, there had to be renewed commitment to improving the lot of the poor.

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Know your history

By Shahid Javed Burki
Tuesday, 16 Mar, 2010

WE don’t write much history; we read even less of it. Not much history is taught in schools and the little that is taught is not very accurate and reflects many biases that don’t help us to understand what we are and where we are headed.

I write all this as a prelude to expressing my strong belief that a society that does not come to terms with its past is not only destined to repeat it. It will also fail to draw any lessons from history.

As a person who has been in the field of economic history for decades, what is it that I think we should note from our history that can help us with our present and also give us the tools to fashion the future?

Probably the best way to answer this question is to define the ‘Pakistani way’ of managing the economy. Today I will focus on one aspect of our economic history: how we have allowed ourselves to come under foreign influence in the making of policy. We have done that in spite of a great yearning to be free of external influences. However, we are not prepared to recognise that the two positions are contradictory. To recognise this we have to be more conversant with our history, in particular our economic history.

A number of elements comprise the Pakistani way. The first, of course, is to put far more emphasis on the present than on the future to determine how we wish to spend our time and money. This attitude lends to emphasising consumption over savings and investment. For a person who does not live in Pakistan but travels to the country frequently, I am always struck by our lavish way of entertaining and the way we spend on occasions such as weddings, birthdays, anniversaries, even on events such as Valentine’s Day.

One direct corollary of this is that we have become very dependent on external capital flows for investing in our future. If foreign governments are the source of this flow of money then it is obvious that those who provide it will exact a price for it. Governments don’t normally provide charity. The only time they do that is when they face a natural disaster such as the earthquake in Pakistan’s north in 2005. On these occasions there is enough concern about fellow human beings for rich countries to come to the aid of those that are less fortunate.

In the normal course of things, however, the governments that give large doses of development aid seek to advance their strategic interests. If there is some truth in these assertions, the Pakistanis — or for that matter the citizens of any country — can’t have it both ways. They can’t continue to depend on foreign largesse to finance economic development and, at the same time, crave for an independent foreign policy. To be independent in foreign affairs, a nation has to be self-reliant. This was the basis on which leaders such as Mao Zedong in China and Jawaharlal Nehru in India built their nations.

In the case of Pakistan the leaders who were temporarily successful in the field of economics were those who were able to obtain large flows of external finance from abroad to meet domestic needs. This is why the rates of GDP growth in the periods of Ayub Khan (1958-69), Ziaul Haq (1977-88) and Pervez Musharraf (1999-08) were considerably higher than those at other times.

The fact that all three headed military administrations does not necessarily mean that the armed forces were more inclined to align the country with the West, in particular the United States. What it really implies is that the military did not have to bother about public opinion; it could forge relationships it regarded in Pakistan’s interests and also in its own interest. Sometimes the latter differed from the former.

Various public opinion surveys have shown that the Pakistani public does not approve of the United States and the policies Washington has been pursuing in various parts of the world. This view has not changed in spite of the change of administration in the United States.

There was a view when President Barack Obama took office that he would be able to improve the way the Americans were viewed by the people in the Muslim world. Last June he went to Cairo where he delivered a speech that addressed the main concerns the people of the Islamic faith had about the way his country had conducted itself in world affairs. He said that he was sensitive to the way Muslims viewed Washington’s policies. He had many friends from the Muslim community and several members of his family were Muslims. He had, in other words, heard it all. That was one reason why he travelled to Cairo — to try to build a strong bridge between two cultures; the Islamic culture and the West — so that mankind could work towards the achievement of common goals.

This message resonated well with most of the Muslim world but it seems not to have made any difference to the way the Pakistanis view the United States. Among the many different peoples of the Muslim world, President Obama is least popular in Pakistan. And yet, because of the way in which Pakistanis have managed their economy, they remain dependent on America and institutions such as the IMF and the World Bank over which Washington has considerable influence. This leads me to raise two questions.

First, why are the Pakistanis so critical of the United States and what the country stands for? Two, what needs to be done to translate this antipathy towards Washington into the right set of public policies? I will return to these questions over the next several weeks.

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How to avoid a steep fall

By Shahid Javed Burki
Monday, 22 Mar, 2010

PAKISTAN’s spectacular economic decline over the last few years and an equally spectacular decline in the country’s future prospects should worry the policymakers.
That this is not the case is revealed by the actions of those who currently wield power in Islamabad as well as their policy pronouncements. Now that a new finance advisor(minister) has been appointed, this may be a good time to look at what has gone wrong and how some lessons could be learnt from history. Today, in this column, I will view Pakistan in the context of the geographic region to which it belongs.

The country is losing ground with every passing day and as each day passes it will be difficult to address the damage that has been caused. It is useful to compare Pakistan’s situation with that of other large countries in the neighbourhood. In 2010, the Chinese economy is likely to expand by 10 per cent. India is aiming to achieve a rate of growth of 7.2 per cent in the year 2010-11. At best Pakistan will manage a paltry increase of three per cent in its GDP, coming on top of only two per cent in the previous year. Translated into income per head of the population these growth rates mean increase of 9.2 per cent for China, of six per cent for India but only 1.2 per cent for Pakistan. The country is slipping badly in its own neighbourhood.

This is unfortunate since Pakistan belongs to the part of the world that stands at the threshold of an economic and social take-off. Several eminent economists have called the 21st century the Asian century. The countries in the region that have realised that this indeed is the case are gearing to take full advantage of the opportunities that are currently becoming available in Asia. There are also opportunities in the continent’s rapidly changing role in the global economy. If that recognition has come to Islamabad, there is little evidence of it in the making of public policy.

Islamabad owes the country’s citizen to formulate a medium-term strategy that will arrest the serious declines in output and equally serious increase in the incidence of poverty. Properly developed and articulated such a strategy will help the people to gain confidence in their future. With confidence should return investment. A well formulated economic and social strategy should also help to revive foreign interest in the Pakistani economy. Without this, it will not be possible to stimulate the economy.

It is interesting how different are the world’s priorities with regard to India and Pakistan. When senior government officials come to Pakistan they have only one thing on their mind: the role Pakistan must play in countering terrorism of which it is said to have become the epicenter. That was the preoccupation of Robert Gates, the US Secretary of Defence, who recently came calling on Islamabad.

He wanted to ensure that Pakistan’s resolve to beat back the terrorists operating from its soil was not weakened. When India is visited by the world’s powerful, their main concern is to ensure the Asia’s third largest economy – after China and Japan – will play in their fields as well.

The most recent visit to India by a high level international figure was by Vladimir Putin, Russia’s prime minister. The visit was considered to be important enough for the Financial Times to write an editorial on it. “Russia is trying an old flame”, wrote the newspaper.

In the gift basket Putin brought with him to New Delhi were “suggestions that Russia might accelerate its nuclear plant building programme in India and partner the giant democracy to produce new military equipment…Stronger ties with Russia carries some appeal for India which likes to keep its options open, and will be weary of over-reliance on the US.” When seasoned news analysts write about India and Pakistan they focus on economic potential in the case of the former and terrorism in the case of the latter. For instance, in a recent article written after a visit to India, Financial Times’ Martin Wolf was impressed with the “strong sense of the technocratic elite in India’s performance and prospects. Similar confidence is palpable among the business elite. I have little difficulty in imagining that India can sustain growth of close to 10 per cent a year. Under conservative assumptions, the Indian economy would be bigger than the UK’s in market prices in a decade and bigger than Japan’s in two.” However, when something positive is written about Pakistan the focus is on terrorism. For instance, Fareed Zakaria noted in a recent article published in The Washington Post that “a spate of good news has been coming out of that complicated country which has long promised to move against Islamic militants but has rarely done so.” Pakistan’s policymakers would argue that their options have been limited by the rising tide of Islamic extremism that the West greatly fears and that will have to occupy Islamabad’s attention for as long as it is not beaten back. The West is currently not interested in Pakistan’s economic potential and how it could be exploited by it for its own profit.

But then India also has many insurgencies and they too have taken a very large human toll on that country. In fact, India lost more people to insurgencies in 2009 than Pakistan did in that year. There are two reasons why the West is consumed by Islamic militancy than by the armed conflicts in many parts of India. One, it is affected by militant Islam as well while the troubles in India are of consequence only for that country.

Two, India has done a very effective job of getting the world to focus on the economic opportunities it offers and not on the many problems it faces at home.

The “Incredible India” slogan coined by an advertising firm and displayed at Davos a few years ago has worked well for the country. For Pakistan the description that it is the “most dangerous place on earth” first used by the magazine Newsweek has stuck and resulted in turning the financial world’s attention away from the country. There is a lesson to be learnt by the policymakers from the Indian approach.

One important lesson is that the world pays attention to the tone adopted by the country’s leaders. In India, the leadership from all parts of the political spectrum has been telling the world that the country has the potential to grow at the rates that have become common in East Asia and have been achieved by China. If there are armed insurgencies in the country they should be seen in terms of the products of economic growth and modernisation that are inevitable in rapidly changing economies. This was pointed out almost fifty years ago by the political scientist Samuel Huntington of Harvard University.

The Indian leaders, in other words, have provided the context for the many problems their country faces. They also emphasise the positive about their country: the size of the middle class and the market that that size represents, the size of educated workforce that can provide the people-deficient West with many of the services it needs, the country’s location next to the most rapidly growing part of the global economy, and the development of entrepreneurship in the country that can challenge the best in the world. It is time that our leaders also begin to think and speak positively.

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Obama’s Asia policy

Islamabad should pay heed to significant changes in the way Asia is being looked at by Washington.

By Shahid Javed Burki
Tuesday, 23 Mar, 2010

NO two American presidents could be as different in their view of the world as George W. Bush and Barack Obama. That the latter succeeded the former makes this change all the more interesting to watch.
One of the major differences is the way the two view Asia. China is at the centre of the difference between these two heads of the American state.

There is now a consensus among Asia watchers that the 21st century is shaping up to be Asia’s century. Sometime in 2010, China will overtake Japan as the second largest economy in the world. It has already overtaken Germany as the world’s largest exporting nation. President Bush and his advisors saw this coming but were fearful of China’s rise.

In the summer of 2002 as the Americans were preparing to observe the first anniversary of the terrorist attacks of Sept 11, 2001, the Bush White House issued an extraordinary policy statement. It stated openly that Washington would not be prepared to share with any nation its status as the world’s premier economic and military power.

In case it was challenged, it would be prepared to take whatever action was required to preserve its pre-eminent position. It was clear that the statement was primarily aimed at China, a country that was rising fast both economically and militarily. The Bush administration quickly translated this policy into action by vigorously courting India as a country that could provide balance to China’s rapidly increasing strength. It proposed an agreement with India that would give the latter the status of a nuclear power in return for some minimal safeguards.

When Pakistan asked for something similar, Islamabad was told bluntly that it was not quite ready to be given that status. Under any other leader, the Indians may not have been that eager to sign off on the deal. But in Prime Minister Manmohan Singh they had a person with a strong western bias. He used all the political capital he had to get the Indian parliament’s approval for the US offer even though the opposition opposed it bitterly.

The Bush approach was a throwback to an earlier period. In the 1950s, Washington signed a series of defence pacts to create a ring around the Soviet Union and China. Pakistan was wooed then as a partner in that particular enterprise. This time it was India that had to be recruited as a supporter.

President Obama with a strong Asian background came to office with a very different world view. This was articulated clearly and eloquently during his first official visit to Asia in November last year. In a major address delivered in Tokyo, he said that he would seek to work with China to create a global order that would bring peace and prosperity.

Unlike his predecessor, he had no problem in sharing the world stage with another great power, especially China. He chose to give this message in the Japanese capital in order to emphasise that the previous American approach towards Asia that centred on a deep relationship with Tokyo had served its purpose. It was now time to move on to another phase in which Beijing would be a serious US partner.

This fundamental shift in approach troubled several constituencies in the United States. The powerful India lobby was highly agitated as it saw a troubling shift in Washington’s attention. The American right that had so thoroughly dominated policymaking during the Bush period was also concerned. It continued to believe that America should not so easily surrender its position as the apex power in the international order. It favoured not only India as a more acceptable partner, it also began to put forward Indonesia as a country that would serve the American purpose.

Jakarta was the most important stop for President Obama on his second visit to Asia originally scheduled for March 18 but now postponed to June. There was plenty of advice given to the American leader by the think tanks on the right of the political spectrum. “Mr Obama’s trip should lay to rest questions about his goals in Asia,” wrote Michael Auslin of the American Enterprise Institute (AEI) in The Wall Street Journal. The AEI had provided several policymakers to the Bush administration and had accommodated them once there was a change of government in Washington. The conservative agenda is clear. Also clear is the way the conservatives believe Washington should conduct itself in Asia. They don’t agree with the Obama position that the time has come for the United States to have China become a coequal. Instead they would like the United States to recruit a number of Asian countries as members of its team.

Containment of China is not mentioned as the main purpose of this strategy but that is what it amounts to. Obama should “signal a new commitment to supporting liberal regimes and maintaining America’s crucial role in the Pacific. Mr Obama should not seek to maintain the status quo but should unveil a bold agenda in Indonesia and Australia to use American resources to work with Asian nations to enhance maritime security, spread best standards in business and industry, reduce corruption and strengthen human rights and civil society. He should announce a new strategic relationship with Indonesia, whose goal is to overcome its reluctance to work more closely with Washington”, Auslin continued in his article.

At the same time the overtures made to India by President Bush should not be allowed to go to waste. It is proposed that Washington should convene a “liberty and prosperity roundtable” to be held annually. “For Washington this would be a way to reinvigorate America’s half-century alliance with Japan, to encourage South Korea to play a regional role commensurate with its economic standing and to further cement ties with India and its neighbours.”Islamabad is perhaps too preoccupied with the war against terrorism to take note of these significant changes in the way Asia is being looked at by Washington. It needs to pay heed.

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Taking advantage of a changing world order

By Shahid Javed Burki
Monday 29, March 2010

EVEN though some experts suggest that the current international economic turmoil is caused by globalisation, the fact remains that the increasing exchanges among the world economies will continue to reshape them. Those countries that position themselves to take advantage of globalisation will benefit. Pakistan, unfortunately, is not one of them.
Those that remain internally focused will be left behind. Again, unfortunately Pakistan belongs to this category of nations. To appreciate what is happening to the global economy, we might draw upon the work done by Goldman Sachs about the future of the world economy. It was this institution that, some years ago, developed the notion of the BRICs – Brazil, Russia, India and China – as one of the emerging centres of global economy.

The accompanying charts provide estimates by Goldman Sachs of national incomes for the 22 largest economies in the world in the years 2025 and 2050. While such long-term forecasts seldom turn out to be correct, what is interesting about those produced by the bank are some of the suggested changes that may occur in the ordering of the economies around the globe. According to these estimates, Pakistan in 2025 will be the 20th largest economy in the world, slightly larger than Egypt and Bangladesh.

There is a fairly significant realignment of the economies in the next 15 years. By 2025, the world economy is likely to be dominated by United States and China, each with national incomes close to $20 trillion in 2006 prices.

Japan, the next largest economy, is likely to be only a quarter of the size of the two largest. India is likely to be in the fourth position with its national product slightly smaller than that of Japan’s. As the display in the chart shows the world has two very large economies and then 20 relatively smaller ones. There is considerable difference between the sizes of the two large economies and those that are smaller in size. By that time the G7 as currently constituted will not represent the largest economies in the world. Already two among the seven largest economies will be from what is now called the emerging world.

Eleven of the 22 largest economies are in Asia. In the 25 years that follow there is further realignment with China overtaking the United States. Its GDP is expected to increase to $70 trillion, three and a half times its size in 2025. The United States economy will also increase but will only double its size, increasing to $40 trillion.

India, according to these estimates, will be almost equal in size to the economy of the United States. What do these increases in the size of the economies suggest about the rates of GDP growth? To increase three and half times over a period of 25 years implies an annual average rate of growth of 5.2 per cent. This is projected to be the rate of growth of China. For the United States, the implied rate of growth is 2.9 per cent; for India, 8.7. These are in line with the consensus view of most economists. The question is whether these averages can be maintained over such long periods?

There will be other significant changes. Japan’s relative decline continues. It will drop from the third position in 2025 to the eighth in 2050. The country’s rate of GDP growth will be less than one per cent a year. Some other current leaders in the world economy will also see major changes in the relative ordering.

Germany is likely to drop from being the 5th largest in 2025 to the 10th largest in 2050, UK may go from the 7th to the 9th and France may move from the 8th to the 12th. Of the many surprises in these estimates is the change in the relative positions of the European economies with Britain becoming the largest in the continent. No European economy will be among the five largest in the world by 2050.

Indonesia and Nigeria will see major improvements in their positions; the former moving from 14th position in 2025 to the 7th while the latter jumps from the 18th to the 11th. Some of the Latin American economies are also expected to do well. Brazil and Mexico will become the world’s 4th and 5th largest respectively, moving up from the 9th and 11th positions.

Among the world’s five largest economies in 2050, two – China and India – will be Asian, two – Brazil and Mexico – will be Latin American and the 5th, of course, will be the United States. By then the current G7 grouping is totally irrelevant; the United States will be the only country from this group that will still be included among the seven largest in the world. It is clear that the need for revising the current institutional structure will increase with every passing year.

Pakistan is identified as one of the laggard nations, dropping its position in the global order from the 20th to the 21st between 2025 and 2025. It is estimated to perform poorly relative to other large Asian economies. Could the country do better than projected by the Goldman Sachs estimates which were obviously influenced by the poor performance of the economy in recent years? I will come back to this question a little later in the article.

What are the main drivers of growth as seen by Goldman Sachs? Three of these stand out; expected increases in the size of the population, access to natural resources, and trade competi tiveness. More populous countries do relatively well, in particular those that are investing in improving the quality of the human resource. For the countries that are seeing declines in population size – this includes all countries in continental Europe as well as Japan – aging populations will begin to weigh increasingly on economic performance. As the centre of gravity of the global economy shifts towards the emerging world, the use of natural resources, in particular oil, will increase. This is one reason why the oil-rich countries do relatively well in these estimates.

The inclusion of international trade as growth drivers suggests further globalisation in production processes. Trade as a proportion of total international product will continue to increase and the countries that are geared to take advantage of this development will do relatively well. Trade in parts and components will expand faster than the rate of increase in total trade. This will bring greater benefits to the countries that are well integrated in the changing global production process. Could Pakistan improve its situation as the world changes? It could but it will have to break from the recent trend. This will require at least four policy initiatives. The country will have to rely much more on internal resources for needed investment. Only then will it succeed in climbing on to a growth strategy that can be maintained over time. Second, it will need to improve the technical base of the economy.

This will mean, in turn, greater focus on human resource development. Third, it will need to restructure its economy so that it can better perform in the global production system. And, finally, it will need to focus much more on increasing trade as a proportion of its gross domestic product. It would necessary for the policymakers, as they devise the country’s future, to keep in mind what is happening to other economies in the world.

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Economic challenges

By Shahid Javed Burki
Tuesday, 30 Mar, 2010

Pakistan has a new finance adviser, a man of exceptional background and many qualities. Included in his background is service with the World Bank and one of his assignments has been giving advice to Saudi Arabia.

He also had very successful tenures as the finance minister of Sindh and minister in charge of privatisation. It was only palace intrigue that prevented him from becoming minister of finance in the second administration assembled by then President Pervez Musharraf.

In other words, Abdul Hafiz Shaikh who has assumed his new job is well versed in Pakistan’s economic problems and its prospects. That said, it would not hurt if he received some advice from such long-time students of the Pakistani economy as myself.

I would suggest to Mr Shaikh to study the country’s past, get to know its present and plan for its future. In each of these areas he needs to focus on those issues that will help him better manage the economy. By my reckoning there are four of these in terms of lessons from history, and three each to be dealt with by understanding the present and planning for the future. In other words my advice touches on 10 subjects.

Let me begin with the past. We must study our troubled economic history in order to draw lessons for the future. There are many lessons to be learnt but four are particularly important. For a variety of reasons, Pakistan has neglected the development and modernisation of agriculture, its most important endowment at the time the country gained independence. It encouraged industrialisation by providing liberal incentives to private entrepreneurs. It neglected to develop its human resource by educating and training the large population. And it paid little attention to orienting the economy towards the production of exports.

One way of correcting these mistakes is to focus the government’s attention on these four areas. There is an urgent need to improve the technological base of both agriculture and industry. The sector of agriculture should be prepared to provide the economy with an export base. Industry must learn to stand on its own feet and not remain dependent on government largess.

In devising a strategy to improve the quality of human resource, the government needs to ensure not only the achievement of the Millennium Development Goals with respect to primary education and female literacy. It also must pay attention to developing higher level skills. A large population offers us the opportunity to develop the services needed by labour-short economies in the West. This will only happen if the skill level of the people is improved.

In so far as the present is concerned there are three things that will need the attention of the new finance adviser. He must recognise that the government in Islamabad overspends, under-collects taxes, and is not planning for the future. I will take up each of these three things in turn briefly.

In taking a close look at government spending it would be useful to carry out a detailed public expenditure review. It will show a number of areas of great waste some of which can be reduced by redesigning the way the government compensates its employees. By monetising a number of ‘perks’ given to those who occupy relatively senior positions the government will not only save itself a lot of money. It will also increase savings by the employee who will be less willing to spend on items like transport and telecommunications when the resources have to be deployed from cash compensation provided by the state. Devolving more functions to the provinces — and for the provinces to do the same to local governments — will help to reduce the amount of duplication that now occurs.

A concerted effort is needed to reverse the recent trend towards a declining share of taxes in GDP. By now Pakistan has reached the level at which it cannot spend any amount on development unless money is available from abroad. This is clearly not a sustainable situation if the managers of the economy wish to set the country on a trajectory of a high rate of growth that can be sustained over time. Dozens of studies have been conducted by many development agencies on what needs to be done in order to improve the tax base. The only way to get more people into the tax base is to make it very expensive for them to escape it. Also, some of the areas not taxed have to be brought into the tax net. These include agriculture, trade and many services.

Turning to the future, our policymakers must recognise three things: the country’s large economic potential will not be achieved unless the economy is fashioned in a way to take advantage of the enormous changes taking place in the international system of production and trade, unless Islamabad concludes peace with New Delhi to benefit from one of the world’s largest and most rapidly growing economies located just across the border, and unless the country’s politicians realise that the economy would be better managed by delegating a number of policymaking functions to the provinces.

A strategy that covers these 10 areas would serve Pakistan well. The country needs to develop agriculture, reduce the dependence of industry on the state, intensify efforts to provide education and skill development to the large and expanding workforce, and develop a viable programme aimed at expanding exports and thus increasing the trade-to-GDP ratio. It needs to reduce wasteful government expenditure while increasing the tax-to-GDP ratio. It needs to make trade the driver of growth by focusing in particular on trade with India. And it needs to develop the capacity to do serious analytical and strategic work to plan for the future.

The last can only be done by a revitalised Planning Commission working closely with a number of think tanks in the private sector. Perhaps the best way to begin will be to organise a brainstorming session involving some of those who have a deep knowledge of the economy.

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