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  #111  
Old Monday, April 05, 2010
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Emerging trends in world trade


By Shahid Javed Burki
Monday, 05 Apr, 2010


PAKISTAN’s senior leaders in their discussions with the Americans and the Chinese have emphasised that the country in addition to aid, also needs opportunities to trade. The United States is at this time the single largest importer of Pakistan’s commodities, manufactures and services. That this is the case is the consequence of politics rather than economics.

Economists have a theory they call the gravity model of trade according to which the direction of trade is determined by the mass (size) of the trading partner and the distance involved.. Applying this to Pakistan’s case, the direction of trade should be very different from what it is.

China should be the largest trading partner given its physical proximity to Pakistan, the growing size of its economy and the rapid growth in its gross domestic product. India should be the second largest.

However, to move in that direction will not only need the resolution of long-standing disputes with India. It will also require a fairly significant restructuring of the country’s economy. This the various governments that have held sway in Islamabad have not done either for political reasons or for lack of full understanding about the important role trade can play in developing the economy. In other words, the emphasis on trade by the Pakistan administration is correct. But I have a difference with the policy makers about the content of the trade dialogue being pursued with the large trading partners. Before indicating how I would conduct the dialogue on trade, I will provide some data on some of the recent trends in international trade.

According to a report recently released by the World Trade Organisation (WTO), world trade is projected to expand by 9.5 per cent in 2010, twice the rate of growth expected in global GDP. This is a striking turnaround. In 2009, world trade shrank by 12.2 per cent, the largest decline in several decades. International trade therefore will see a turnaround of almost 22 percentage points. Slow down in trade was much lower in previous recessionary periods. It declined by 0.2 per cent in 2001, two in 1982 and seven per cent in 1975. As measured in dollar terms rather than volume, the drop was even larger. The value of trade fell by 25 per cent to $12.15 trillion. This was because of sharp decline in commodity prices, particularly oil and agricultural products. The decline in shipments was accentuated by lower demand for consumer durables such as automobiles and investment goods like industrial machinery.

There is consensus among trade economists that the measured decline in exports might have been exaggerated by some of the structural changes in the pattern of trade. Global supply chains have multiplied over the years in which goods cross national borders several times during production process, getting counted as exports more than once, before arriving at their final destination.

“We see the light at the end of the tunnel, and trade promises to be an important part of the recovery”, said Pascal Lamy, the Director General of WTO. The anticipated increase in international trade will come from both large exports and imports by China and India, the two economies that are growing most rapidly.

Export declines were greater last year for the major trading nations than the overall decline in world trade. Japanese exports fell by 24.9 per cent; the European Union by 14.8 per cent and the United States by 13.9 per cent. Exports from China also declined but by a smaller percentage – 10.5 per cent – compared to decline in international trade. The WTO confirmed that China overtook Germany as the world’s largest exporter of merchandise in 2009. It now accounts for 10 per cent of world trade.

This means there are significant structural changes taking place in global trade. Developing countries are carving out a larger presence in world trade. Exports from developed countries are expected to increase by 7.5 per cent, two percentage points lower than the increase in international trade. The increase for rest of the world, mostly from the large emerging economies, is projected at 11 per cent. What do these changes in the pattern of global trade imply for a strategy for Pakistan? It is correct to focus on increasing exports in order to pay for imports as well as becoming the source of investment in the economy. But as suggested, it is important to change the direction as well as the content of trade.

Trade figured prominently in the strategic dialogue with the United States held in Washington in late March. However, I believe that the approach taken by the government was not correct. Islamabad sought larger access for textiles in the US market and to expedite the establishment of special export processing zones in the areas that border Afghanistan. There are problems with both policies. Obtaining a larger share in textiles in the United States will only keep emphasis on an industry that does not have much future in the global economy.

It is important for Pakistan to wean itself away from this sector than to continue to emphasise its importance for the economy. While it is correct that the sector accounts for the bulk of formal employment in manufacturing. It is also correct that by increasing exports to the United States, it will be possible to increase immediately the number of people employed. But these are short-term improvements in an economy that suffers from a number of structural weaknesses. To remove them will need greater understanding of the dynamics in international trade.

Policy makers should pay attention to two significant changes in international trade. One, Asia is now playing a larger role in the increase in international trade than the more developed parts of the global economy. And, trade in parts and components is much more significant than that of finished products. Given these changes in the pattern of international trade, it is important for Pakistan to pay much greater attention to trade with the countries that are near and to produce the products for export that have high and growing international demand. For instance, developing strategic relationships with the rapidly expanding automobile industries in China and India would help to develop the vendor industry.

I also believe that an emphasis on the creation of special processing zones in some sensitive parts of the country in which production will be directed at the United States is a mistake. It will only introduce more distortions in the economy.

It will also lead to misuse of the incentives as happened in the case of the Gadoon industrial estate that was set up decades ago to provide opportunities to entrepreneurs from the backward areas. However, in that case industrialists from the more developed parts of the country simply created a token presence in the estate to draw benefit from the tax incentives that were given.

The main conclusion that I draw from this analysis is that in framing a structure of incentives to promote trade as a driver of economic growth and modernisation, it is important to understand the opportunities that are available in the global economy. Ignoring the trends will only retard progress.
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  #112  
Old Tuesday, April 06, 2010
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Strategic dialogue with US


By Shahid Javed Burki
Tuesday, 06 Apr, 2010


THE tenor of the statements issued by the two sides following the conclusion of the strategic dialogue between Pakistan and the United States last month would suggest that both Islamabad and Washington achieved most of their objectives. The large Pakistani delegation achieved most of what it wished to get from the Americans.

The United States was relieved that it had finally placed Pakistan on the track on which it wanted to have it proceed in terms of its fight against terrorism especially with reference to carrying out its Afghan policy.

The Pakistani group made up of politicians, and senior civil and military officials came to Washington hoping that their relations with the United States would be placed on firmer ground. The off-and-on nature of this relationship over the last half century has hurt Pakistan. Washington sought Pakistan’s help when it suited its strategic purpose.

This was the case during the period of Ayub Khan when the Americans were busy constructing a wall around the communist world in Asia and Europe. This was also the case during the Ziaul Haq period when Washington needed Islamabad’s help to drive the Soviet troops out of Afghanistan and when America, in the period of President Pervez Musharraf, wanted Pakistan’s help to protect itself against the rising tide of Islamic extremism.

There are two reasons why Pakistan continued to turn to the United States even though the latter had demonstrated repeatedly that it did not have the staying power once its immediate concerns were satisfied. The first, of course, was the concern with India. There may have been good reason for this in the early days when the first generation of Indian leaders, having been disappointed that they were not able to keep India united after the departure of the British, attempted to do away with partition.

As India became progressively more powerful economically and militarily its interest concerning Pakistan changed. The Pakistanis, however, have not adjusted fully to this change in the circumstances of the two countries. I believe this was the thrust of the position taken by the Indian foreign secretary in the conversation with her Pakistani counterpart.

The other reason for Pakistan’s continued interest in being close to the United States was its inability to generate enough resources from within the country to pay for investment. Without foreign capital flows Pakistan can only see its economy grow at four per cent a year; with large amounts of finance coming in from the outside it has demonstrated that the GDP can increase at the rate of eight to nine per cent a year. The quantum and quality of external flows is heavily influenced by Washington’s attitude towards Islamabad.

The stop-and-go nature of the relationship between the two countries has meant that the Pakistani economy was on a rollercoaster ride: the economy did well when US attention was turned in Pakistan’s direction. It did poorly when Washington lost interest in Islamabad. This type of relationship may have eased Pakistan’s economic problems over the short term but did little to secure the country’s future over the long term.

Islamabad sent a strong team to Washington to ensure that relations between the two countries would be less subjected to the latter’s short-term interests. It was able to push the Americans towards putting in place a strategic dialogue between the two sides and to have it conducted at the senior political level. As one American analyst put it, “the ‘strategic dialogue’ was by itself meant to send a message: the administration used the term reserved for the substantive, wide-ranging exchanges it carries on with important countries like China and India”.

By agreeing to change the nomenclature of the discussions held between the two countries, Washington brought Islamabad to the same level as Beijing and New Delhi. At a reception on March 24 at the State Department Secretary of State Clinton said that the two governments had agreed to meet at the senior political level every year and that the next round of discussions would be held next year at Islamabad.

Given Pakistan’s grave economic circumstances and the situation in the part of the world in which the country is located it is not surprising that economic assistance, help to the military to improve its capacity to fight insurgency, America’s Afghan strategy and Islamabad’s resolve to fight Islamic militancy were the main areas of focus in the dialogue. Pakistan came well-prepared to discuss three of these four issues.

Where its own preparation fell short was in the area of economic development. The 56-page paper it gave the Americans had a list of projects for which it needed American assistance. But a project list does not make a strategy. There was no indication as to the strategy the policymakers were likely to pursue to bring about a number of needed structural changes in the economy.

These included raising more resources from within the country for the government as well as the economy, thus making both less dependent on outside flows; increasing the economy’s capacity to export in light of the changes occurring in the global system of production and in the direction and composition of international trade; improving the quality of human resource so that a large and young population became an economic asset rather than remained a political and social burden; and improving the quality of governance.

There were two areas of interest for Pakistan where it did not see much movement on the part of the United States. One was the desire to have the country recognised as a nuclear power which would make it possible to access nuclear technology. The other was to engage the United States in resolving the many disputes with India. In the press conference following the conclusion of the dialogue Ms Clinton was non-committal on both.
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  #113  
Old Monday, April 12, 2010
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Provincial autonomy sans fiscal devolution


By Shahid Javed Burki
Monday, 12 Apr, 2010


THERE cannot be any doubt that the 18th Amendment to the constitution will have a profound impact on the way the economy is managed. The federating units will receive additional powers as a result of the abolition of the concurrent list put into the 1973 constitution by its framers.

This will mean transferring large amounts of economic authority to the provinces. They will, for instance, have the right to manage labour laws, environmental impact of development in both the public and the private sectors of the economy, generation of much larger amounts of electricity than currently permitted, development of infrastructure etc.

This will happen only if the provinces find a way of financing these activities. If they remain dependent on the central government for funds, the autonomy promised by the amendment will remain illusory. What is the meaning of the 18th Amendment for economic decentralisation? While Pakistan may be on the way towards establishing not only a fully democratic system with political authority vesting in a directly elected parliament, it may also be moving towards the creation of a truly federal system in which there is sharing of power between governments at different levels – between the federal and provincial governments and between provincial and local governments. If this happens what will be the impact on the economy and on delivering services to the people?

The answer to this question has been provided by many theoretical and empirical studies done over the years by scholars from both developed and developing countries.

While many benefits have been claimed for federalism, it is “paradoxical that that we observe so few countries in the world which posses all the attributes of a strong federalist structure”, writes Dennis C. Mueller of University of Vienna. “There are two possible explanations for this paradox. First, there may also be several disadvantages associated with federalism, so many that for most countries the disadvantages outweigh the advantages. Thus full-blown federalism may be rare, because in fact it is undesirable. The second possible explanation for federalism’s rarity is that it is somehow inherently unstable. When it is chosen, it fails to survive, not because of any fundamental difficulty in the outcome it produces, but because of the existence of forces in a democracy which undermine it.”

To explain the case for federalism we should perhaps start with the reason why the state is involved in economic matters in the first place. The main reason for this is made in the public choice literature according to which markets fail in many situations particularly when public goods such as defence of the borders or police protection or a bridge connecting two places across a river are to be provided or where what economists call externalities become important. There are positive and negative externalities. Markets are less efficient providers in both cases; the governments, at least in theory, do a better job. But what type of government? There are three possibilities: a unitary state, a federalist system, or a confederation. I will concern myself with the first two.

A unitary system need not be distant from the people especially when the state is decentralised with government departments organised to reach people where they are located. This was the system used by the British during their long rule of India and was the one that Pakistan inherited when it became an independent state.

But it was not a federalist system in the sense that elected representatives of the people were not responsible for providing public goods to the people. That responsibility rested with the officials appointed by a highly centralised state.

In a unitary system, responsibility to the people is only at the central level. In a federal system people through elections have control over those who serve them. That in theory is the system that Pakistan attempted to establish following the adoption of the 1973 constitution.

Once the decision is made to establish a federal system the next question concerns its optimal design. How many levels of government should there be is one of these questions? What should be the division of responsibility among them? How should the governments at various levels finance their activities? The 1973 constitution established two tiers of government, one at the central and the other at the provincial level.

The 17th Amendment introduced into the constitution by President Pervez Musharraf effectively introduced a third tier into the structure. This was done by devolving various sate responsibilities to an elaborate system of local government. A new position was created to assign responsibility for delivering public services to an elected official called the “nazim”. This official was to be elected by the people and the bureaucracy at the local level was made responsible to him (or her).

The 1973 constitution – even when amended by President Musharraf – did not provide many resource generation responsibilities to the governments at the sub-national levels. They were mostly dependent on the central government for financing their activities. The provincial governments were given some say in the amount of resources they obtained from the centre by their representation in the National Finance Commission. The NFC was to be convened every five years and decide on the formula to be followed for allocating the resources available in what was called the divisible pool.

However, this provision, like so many other in the constitution, was largely ignored. For instance, the most recent NFC award was signed in 2009, almost 13 years after the one it replaced. Whatever shares were agreed upon were provided to the provinces in the form of grants. According to many economists, this way of providing resources to the federating units introduces serious distortions.

More than a 100 years ago, the economist Knut Wicksell established what has come to be called the Wicksellian connection. According to this each public expenditure should be coupled with a tax to finance it so that the voting public knows how much it is paying for the services being provided. Some experts go a step further. They suggest that the people receiving services from the state no matter where the state is located should be charged for the services they are being provided.

This approach serves several purposes. It forces the state to be efficient in the business in which it is involved. It also makes it possible for the people to bypass the state and go to the private sector if they are not happy with the services being made available by the state. This is what has happened in the case of education and health for the more well-to-do segments of the society. The people who can afford to go to the private sector have largely abandoned the state in these areas.

There is a virtual consensus among economists that intergovernmental grants lead to an expansion of the public sector – there is empirical evidence to suggest that a local government generally spends a far larger fraction of an unconditional grant from a higher level of government than its citizens would consider to be optimal. Applying this finding to Pakistan where financing for the provinces will come mostly from the NFC awards, 18th Amendment induced autonomy will not necessarily lead to economic efficiency. The provinces must be given a way to finance most of their own development.

The main conclusion from this discussion should be clear. While the 18th amendment has taken a major step forward in moving towards a federal system, the real test of efficiency will come once a system of providing services which the provinces will have the responsibility is decided upon. The amendment has largely left this as an open question. That is a mistake. It is only when the devolution of responsibility is coupled with the responsibility of raising resources that the real test of the new system will be in place.
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  #114  
Old Tuesday, April 13, 2010
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Pakistani diaspora in US


By Shahid Javed Burki
Tuesday, 13 Apr, 2010


ON April 1, 2010, the US government conducted the population census for the year 2010. That this should be done at the beginning of each decade is a constitutional requirement. The American government is required to count the number of people that live in all the states of the union on April 1 of the census year.

This needs to be done in order to apportion seats in the House of Representatives, the lower house of the US Congress, and to determine the amount of federal funds that must flow to each of the 50 states.

The responsibility for conducting the census and maintaining population statistics lies with the commerce department. The reason for this is contained in what the Americans call the ‘commerce clause’, the provision in the constitution that allows the free flow of goods, commodities and people among the states of the union. This clause was used by various administrations in US history to increase the presence of the federal government in the US system of governance.

The department sends out to all the households in the country a simple form they are required to fill and mail back on or around the date of the census. The form has questions pertaining to the name, gender and race of each member of the household. The relationship of the persons residing in the households to the head also needs to be indicated. This time, for the first time, the census-takers have included ‘Pakistan’ as a race for those responding to the census questionnaire. This means that for the first time the US government will have a rough idea about the number of people of Pakistani origin who live in the country.

This estimate will be ‘rough’ for the reason that the racial identification of the people filling the form is entirely up to them. There is no doubt that several people of Pakistani origin will misidentify themselves. This is for several reasons of which two are particularly important. For those who acquired US citizenship and the country’s passport, the place of origin is identified from the place of birth. Thus those who were born in India but migrated to Pakistan are still identified as Indians in their American passports.

The other reason stems from the belief that by identifying yourself as a person of Pakistani origin, you may be exposing yourself to extra checks at US points of entry and exit. Until some days ago Pakistan was identified as one of the 14 countries whose citizens were subject to extra screening by the Travel Security Administration.

While the census form clearly states that the information provided therein is strictly confidential, it is known that various government agencies share a great deal of data as part of the American ‘war on terrorism’. There is no confidence that the information given on the census form won’t be passed on to law-enforcement agencies. In the environment that prevails in the US, people of Pakistani origin have become very cautious about revealing their national identity.

Having some idea about the number of people of Pakistani origin who live in the US is important for several reasons. It will influence the attitude of the members of Congress towards Pakistan as has happened in the case of India and other large diasporas such as those from Israel, Greece and Armenia. This information will also help the US citizens of Pakistani origin get organised at the state level. It is from the states that a great deal of power wielded by Congress flows. Exerting pressure on state representatives is one way of influencing the making of public policy in the United States.

The third reason is the role that people of Pakistani origin can play in the development of their original homeland. That the presence of a reasonably prosperous Pakistani diaspora in the US can have an impact on the economic development of the homeland was recognised by Washington when Secretary of State Hillary Clinton invited its members to attend a reception hosted by her in honour of the Pakistani delegation that came to Washington to participate in the strategic dialogue with the US. In their addresses she as well as Foreign Minister Shah Mehmood Qureshi invited members of the diaspora to get more involved in the development of what was once their homeland.

The size of the Pakistani diaspora in the US has increased mostly through immigration. In the 1970s and 1980s, the US admitted a large number of people from the developing world to fill the skill gap that had emerged in the country. Visas — and ultimately green cards and citizenship — were granted without much hesitation. It is for this reason that the Pakistani diaspora is dominated by the professional classes — physicians, engineers, accountants, economists.

However, when it became known that the US could also absorb semi-skilled labour, there was a large inflow into the country of those who are called ‘illegals’ — people who have overstayed their officially sanctioned sojourn or have entered without proper entry papers. That there are many people of Pakistani origin in this category was revealed by the deportations that took place after 9/11. The US is unique among developed countries that it grants automatic citizenship to the children of even those parents who are in the country illegally. This is because of the 14th amendment to the constitution according to which those born in the US automatically became the country’s citizens.

I have argued for years that Pakistan should develop a well-thought-out strategy for attracting finance and talent from the large diasporas its citizens have created in many parts of the world. This is particularly the case for the Pakistani community in the United States which is more prosperous than the communities in other parts of the world and which has also well-developed skills. The US census of 2010 provides an opportunity to begin strategic work in an important area.
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  #115  
Old Monday, April 19, 2010
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Will rising oil price stifle recovery?


By Shahid Javed Burki
Monday, 19 Apr, 2010


OIL prices have begun to rise just as Pakistan seems to be emerging out of a deep economic recession. The increase in oil price was partly responsible for the sharp slow down in the economy in 2008-09. The rate of GDP growth declined to only two per cent that year, one of the lowest in the country’s history.

How badly will the current oil price rise hurt the economy? The answer, given the experience of 2008-09, is that the effect on Pakistan will be considerable. It could – probably would – once again result in increasing the trade deficit which, in turn, will have an impact on the balance of payments.

The most recent rise in oil price comes at a time when the flow of funds from the IMF is stalled because of the lack of progress the country has made in instituting tax reforms. There is lack of satisfaction at Islamabad’s ability to move in instituting the value-added tax (VAT). This is considered vital for increasing tax-to-GDP ratio from less than 10 per cent, the lowest in a major emerging economy.

With the flow of funds from the IMF no longer certain to arrive according to the time schedule, Pakistan had factored in its own calculations, any pressure on the balance of payments will have a very debilitating effect. This will happen if the recent trends in the world oil market continue into the future.

Last week oil climbed to $87 a barrel, the highest level since October 2008. This jump in price occurred after a period of eight months when oil traded between $70--80 a barrel. The oil- producing and exporting countries had expressed satisfaction that oil was being traded within this narrow band. Saudi Arabia, the largest producer and exporter of oil, had indicated that it was comfortable with this price. It satisfied its financial requirement while it was not considered to be disruptive for recovery in the global economy.

The latest surge in oil price appears to be the result of the way the market players are reading the extent and level of recovery from the Great Recession of 2008-09. There is a rising confidence in global economic recovery. The rise in the Dow Jones Index of stock prices in the United States – it crossed the 11,000 mark on April 13, the day the price of oil touched its highest level in recent months – is one of the several indicators of return in confidence. The more optimistic Wall Street players see a further rise in oil prices. According to Barclay Capital oil price will touch $97 a barrel; Morgan Stanley sees the price climbing even higher, to $100 by next year; while Goldman Sachs sees it increasing to $110.

Let us go back for a moment in history in order to understand what may be in store for oil importing countries such as Pakistan. Oil prices first hit $100 in January 2008. They continued on a rising trend, reaching a peak of $147 in July of that year. This meant an increase of 47 per cent in six months. While the shock delivered to the global economy was not as severe as in 1974 and 1979 when price increases resulted from the actions taken by the oil producers and exporters in the Arab world, the effect on the health of the economy in 2008 was severe. This was the case since the global economy was already under great pressure because of the problems in the financial sector.

This time the increase in price is occurring as the global economy is recovering rather than being on the way down. But that notwithstanding, according to Olivier Jakob of Petrometrix, a group that keeps watch over oil prices, “recovery of 2009 was fuelled with crude oil at $62 a barrel, not at $90 a barrel or $100. We fear that the latest run in oil prices will be a kiss of death for the global economy that was trying to avoid a double-dip recession.”

During the earlier period, the United States and other rich countries were able to absorb to some extent price rise since the consumers were able to draw upon home-equity loans and credit cards to finance the increases in petrol and home heating oil. These cushions are no longer available. For most consumers equity in their homes has evaporated because of the decline in house prices and credit card companies are not prepared to offer loans as liberally as they did then. In other words, if the price of oil continues to increase, the effect on them and hence on the economy may be as sharp as was the case two years ago. This was one reason why the prospect of oil-induced recession cannot be altogether ruled out.

In the case of Pakistan the increase in the price of oil will impact in three ways. If there is another global economic downturn, Pakistan will suffer once again by seeing its exports failing to increase at any appreciable rate. This is what happened last time around. Also worrying is a possible increase in the prices of commodities Pakistan must import in order to maintain a reasonable amount of economic activity. But the most severe consequence for the country will be on the price it will have to pay for importing fuel oil, an important source for generating electricity.

It has been two years since Pakistan began to experience shortages of electricity which led to load shedding. This had impacted all sectors of the economy, in particular manufacturing. If anything, the load-shedding duration has increased in most cities and industrial areas. There was an expectation that the government would take some steps to ease the shortage by establishing additional power generation. That has not happened. Some increase in capacity will come through but it will not be sufficient to ease the pressure and the economy will continue to perform poorly.

In spite of the repeated crises Pakistan has been through, the government has still to put together a viable strategy that will take care of the energy needs.. This strategy must address a number of issues. It must settle on what are the most attractive sources of energy. In that context policymakers have to decide how they can use the enormous potential that exists for using hydro resources. Politics has stalled any major effort to tap the waters of the Indus River system for generating electricity.

Several decades ago the UNDP prepared a long-term plan for the realisation of the potential that exists. This assessment needs to be updated. There is also the need to settle on an appropriate institutional structure for managing the generation, transmission and distribution of electricity. Advised by the World Bank, Pakistan spilt these functions and assigned them to separate entities.

In addition a regulatory agency was created for determining the appropriate level of tariffs for consumers. These changes resulted in the break-up of WAPDA. But the logic behind this move was not fully followed through with the consequence that much confusion now prevails. This approach needs to be revisited. There is, in other words, a great deal of policy work that needs to be done to secure Pakistan’s energy future and avoid another recession brought about by an increase in the price of oil.
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  #116  
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New nuclear strategy


The summit itself turned out to be a tame affair since the Americans had worked hard to achieve a consensus among the participants before they arrived in Washington.


By Shahid Javed Burki
Tuesday, 21 Apr, 2010


PAKISTAN was one of the 47 states that participated in the nu clear summit called by President Barack Obama. It was represen ted by Prime Minster Yousuf Raza Gilani who arrived in Wa shington with his hands strength ened by the passage of the 18th Amendment to the constitution.
This will transfer to parliament and through it to him many of the powers wielded by President Asif Ali Zardari. The command of the authority that con trols Pakistan’s nuclear weapons was handed over to him earlier even before the political agreement on the constitu tional amendment was reached.

The nuclear summit was held in Washington and took place after the American president signed a new and far-reaching arms control agreement with his Russian counterpart President Dmitri Medvedev. The signatures were put on the new treaty on April 8 in Prague, the city where President Obama had initially laid out his plans to bring under control the spread of nuclear weapons and material in the world.

The Washington conference was also meant to prepare the way for a major UN gathering scheduled for May at which the parties to the Nuclear NonProliferation Treaty (NPT) would review the NPT with the aim of updating it. Pakistan, not having signed the NPT, will probably be under pressure to accept the main strictures imposed by the treaty.

On the eve of the Washington summit the United States made public the Nuclear Posture Review (NPR), a document that revealed the country’s approach towards the use of nuclear weapons. The NPR took a long time to prepare; there were sharp differences within the administration about the size of the US arsenal and its possible upgrading. The final draft of the review calls for major new investments in nuclear weapons laboratories and facilities to maintain the aging arsenal. However, these weapons would not be upgraded as called for by the strategy developed by President George W. Bush. Pursuing that approach would have gone against the basic purpose. It would have started another arms race. The review also recommends tighter penalties on nuclear rogue states — a matter that would be taken up in New York.

That he would work to make the world a safer place by reducing the number of nuclear weapons around the globe making it difficult for countries that did not have them to acquire them and that he would specify the circumstances in which the US would use them were some of the promises candidate Obama made during his bid for presidency in 2008. This was a difficult posture for a presidential candidate who faced experienced opposition in the fight for his party’s nomination as well as in the presidential election itself.

Both Hillary Clinton, his Democratic challenger, as well as John McCain the Republican candidate were supposed to have a better appreciation of America’s strategic interests than the inexperienced neophyte Barack Obama. The latter won the election, and devising a new nuclear strategy not only for the United States but for the world at large became one of the several matters of deep concern for the new president.

In the first week of April, the president sat down with the press to give an insight into how he wished to conduct his country’s nuclear policy and how he would be pushing other nuclear powers and those who were near to crossing the nuclear threshold to follow suit. He said he intended to revamp the American nuclear strategy to substantially narrow the conditions under which the US would use nuclear weapons.

The country would forswear the use of nuclear weapons against non-nuclear countries. But the president included a major caveat. The countries must be in compliance with their non-proliferation obligations under international treaties. That loophole means that Iran will remain on the potential target list. Iran could be attacked if it developed nuclear weapons since that would be in defiance of the NPT it had signed decades ago.

The new policy specifies that the US weapons are for the purpose of deterrence but does not go as far as the leftwing of the Democratic party wished Obama to go. It wanted the president to take out the option of first-strike altogether; the weapons would only be used if the US was under threat of attack or was actually attacked. Going as far as some of the fellow Democrats wanted him to would have unnerved some of America’s European allies who lived under the US protective nuclear umbrella.

The summit itself turned out to be a relatively tame affair since the Americans had worked hard to achieve consensus among the participants before they arrived in Washington. The communiqué issued after the meeting promised several actions by the participating countries which will be reviewed by a follow-up summit two years later.

The summit accepted President Obama’s goal of securing all loose nuclear materials worldwide within four years. In the summit’s opening session, the American president drew the attention of the world leaders to the threat posed by not fully securing nuclear material. “Nuclear materials that can be sold or stolen and fashioned into nuclear weapons exist in dozens of nations,” he said. He called for action to “lock down” such materials — highly enriched uranium and separated plutonium. “For the sake of our common security, for the sake of our survival, we cannot drift.” Pakistan was in the spotlight throughout the summit having been involved in nuclear proliferation through one of its scientists. While the summit was on some American newspapers revealed that Pakistan had activated a new facility to manufacture additional nuclear weapons material. Also, the impression exists that the government’s repeated assurances notwithstanding, extremists in the country could lay their hands on some of the material the country has accumulated. It was in the light of these concerns that Prime Minister Gilani’s commitment to strengthen port security and prevent nuclear smuggling was well received at the summit.
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Reinvigorating agriculture


By Shahid Javed Burki
Monday, 26 Apr, 2010


One of the major policy changes needed to make is in the area of sectoral priorities. Although Pakistan was born with a rich agricultural heritage, it neglected the sector in order to focus on industrialisation.

The need to develop the industrial sector was underscored by the hostile attitude the first generation of Indian leaders adopted towards Pakistan. Under Jawaharlal Nehru, India’s first prime minister, New Delhi tried hard to economically cripple Pakistan. There was a hope in New Delhi that the new government of Pakistan that was struggling in Karachi to stand on its feet, would fail economically.

Economic pressure could be used to make the Pakistani leadership change its mind about the viability of their new state and about the rationality of partitioning India. Nehru and his associates believed that the Pakistan’s forming establishment may recognise that partitioning British India was a mistake. It might reconsider its position and rejoin India.

Trade was one of the instruments of pressure used by New Delhi. In 1949, India imposed a trade embargo on Pakistan. This action was prompted by Pakistan’s refusal to join India and other members of the British Commonwealth, then called the Sterling Area, to devalue its currency with respect to the dollar.

This changed the rate of exchange between the currencies of India and Pakistan from parity to 144:100 in Pakistan’s favour. India felt humiliated and stopped all trade with Pakistan. Since Pakistan was totally dependent on imports from India of all basic manufactures, the country’s citizens suffered greatly. Pakistan’s leaders responded by undertaking a massive industrialisation drive. The attention given by the government came at the expense of agriculture.

Some economic historians practice what they call the “What if…?” approach to understand how some events or decisions change the course of history. Had some events not occurred (such as Hitler’s defeat by the allied powers) or some decisions had not been taken (such as Nehru’s decision not to accept the Cabinet Mission plan that had received Jinnah’s approval), history would have proceeded in a very different direction.

Applying this approach to Pakistan’s economic history reveals some interesting insights. Had Nehru and his associates not acted with such hostility towards their neighbour, economic relations between the two countries would have remained strong. Trade would have continued to increase and India would have remained the largest destination for Pakistani exports and the largest origin for its imports.

Pakistan would have invested more in agriculture not only to feed its rapidly growing population but to also serve the large Indian market. Agriculture would have retained its position as an important driving force for the economy. But that did not happen.

Could public policy still move agriculture in that direction? There are several initiatives policymakers in Islamabad and various provincial capitals could take that would lend new dynamism to the sector. One of the more important ones is to help farmers to produce for the market. Help has begun to arrive from an unexpected source: the large foreign retail firms that have entered the Pakistani market over the last couple of years have begun to change several aspects of the agricultural economy.

This is particularly the case in processing agricultural produce and marketing it. For them to make profit, they must procure as much as they can from domestic suppliers. They can accomplish a great deal by introducing their business models that rely on hyper-efficient practices and speed the flow of goods and commodities from the producers to the shelves in their stores. There is considerable room for expansion in their activities: modern stores make up just five per cent of the country’s retail industry.

The challenges faced by these stores indicate both the backwardness of agriculture as well as the potential that exists. Buying and transporting produce are difficult tasks because of millions of small-scale farmers who dominate the sector and an agricultural system that is riddled with middlemen.

It is incredible that marketing for many agricultural and livestock products is still governed by the antiquated agricultural marketing acts that have long served their initial purpose. These acts came on the books when the British administration wished to protect the Muslim peasantry from the predatory practices of Hindu and Sikh operators who dominated the marketing sector of the agricultural economy. The non-Muslim middlemen dominated the commercial aspects of agriculture in the areas that now make up Pakistan. They are long gone from the area.

The large retail firms that are establishing themselves in South Asia – Metro and Carrefour have come to Pakistan while Wal-Mart now has operations in India – typically pay 5-7 per cent more than the producers from local wholesale markets. And farmers don’t have to organise and pay to transport their produce; that is picked up by the firms.

The firms are also guiding the producers to improve their productivity. According to a farmer in the Indian state of Punjab who is selling his produce to Wal-Mart, “yields have risen about 25 per cent since he started following farming advice about when to apply fertiliser and which kinds – more zinc, less potash.” There are similar cases in Pakistan which remain to be documented.

Since road infrastructure is weak in Pakistan and other South Asian countries, foreign firms are limiting fruit and vegetable distribution centres to obtain their produce from the farmers that have operations within a radius of 200 km to keep them fresh. By comparison Wal-Mart’s operations in China pick up their produce from farmers within a radius of 400 km. This is the case with such perishable commodities as fish.

According to Metro which is now operating four large outlets – two in Lahore and one each in Islamabad and Faisalabad – it has brought both new production, processing and marketing practices to fish farming and transport of the product from points of production to points of sale. These large firms have also introduced agricultural processed products to various markets in central, eastern and western Europe where they have large operations.

Policymakers have done well to allow foreign retail companies to operate without too many restrictions. This is not the case in India where Wal-Mart had to link up with Bharti Enterprises, an Indian conglomerate that also owns the country’s largest cell phone company, to establish its operations within the confines of the India law.

The companies that have entered Pakistan don’t feel such constraints. Their main concern is with security. Once that issue gets resolved, there is no doubt – given the size of the market n Pakistan, the potential of agriculture, and the country’s geographical location – that their operations will expand considerably.

Pakistan may be at the point where it can begin to realise the remarkable but long neglected potential of its agriculture. As already noted it was the approach adopted by the first generation of Indian leaders that pushed Pakistan in a direction not supported by the country’s endowment. Had Pakistan been able to more fully develop its agriculture – it has, after all the largest contiguous irrigated area in the world – the structure of the economy would have been very different. That may still happen if peace comes to South Asia.
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Need for a new paradigm


By Shahid Javed Burki
Tuesday, 27 Apr, 2010


PAKISTAN is an economic mess. It is well behind other large Asian countries. In 2010, the Chinese economy is likely to expand at the rate of 8.8 per cent and India’s by 6.7 per cent. Both countries will improve on these rates in 2011.

The Chinese GDP is set to grow by at least 10 per cent; India’s by 8.8 per cent. Both countries have achieved these extraordinary results by integrating, in different ways, parts of their economies with the global system. Even Bangladesh is doing better than Pakistan.

In Pakistan, the situation is very different. The GDP in 2009-10, by official estimates, increased by only two per cent. This increase in national output was slightly more than the increase in population which the government estimates at 1.8 per cent. This means that the incidence of poverty must have increased significantly. The country probably added another five million people to the pool of poverty, bringing its total to 65 million. This translates into 38 per cent of the population of 170 million.

In the current year the government says the GDP increase will be little higher, perhaps three per cent. This may just be enough to keep the total number of poor at 65 million. In the years ahead the rate of growth may begin to increase, bit by bit, reaching five per cent in five years. The rates of growth achieved by China and India are not on the cards for Pakistan. Even at five per cent a year of GDP, the poverty pool may begin to shrink a little but not very much.

These are national averages; the overall GDP growth is being helped by a more rapid increase in some sectors and geographical areas. Conversely there are parts of the country and some sectors of the economy that are performing below the average for the country. Among the better performing areas are perhaps Karachi, Lahore, Islamabad and central Punjab. Among the poorly performing regions are rural Sindh, southern Punjab and most of Balochistan and Khyber Pakhtunkhwa.

What these numbers paint for us is an exceptionally grim picture. It is the picture of a country that is unable to provide adequately for more than three-fourths of its population most of which — but not all of it — lives in backward areas. About 40 million out of 170 million people in Pakistan have succeeded in keeping their living standards from falling. Of these about 15 million have improved their economic situation in spite of the sluggish economy. If this is the right representation of the changes in the social and economic structure of the population, it appears that income distribution in the country must have widened considerably.

We can, in other words, look at Pakistan and its people in two different ways. Geographically there are three areas — backward, stable and relatively prosperous — in the country. Karachi, Lahore, Islamabad, Faisalabad and Hyderabad and the countryside in central Punjab fall in the category of relatively prosperous areas. Even in these there are pockets of extreme poverty.

The middle-sized cities of Punjab and lower Sindh can be regarded as economically stable. Most of the rest of the country can be considered as backward although even here there are pockets of prosperity. The other way of viewing the situation is to use some rough measure of income. Some 15 million can be considered rich; another 25 million as belonging to the upper middle class; another 65 million fall in the category of the lower middle class; the remaining 65 million are desperately poor.

Putting these two pictures together produces a canvas which begins to explain the persistence of militancy and insurgency against the established order in the country. We know from the profiles of the people — men, boys, women and girls — who were persuaded to wear suicide belts that they came from backward areas and belonged to the lower middle class. They were indoctrinated by those who have opted out of the state and challenged the governing order from outside the system.

Such people are prepared to use whichever instrument or method would do the most damage to the existing order, create the most noise, produce the greatest amount of publicity for their cause. Their cause is to produce a new political, economic and social order that is to their liking and the liking of those who have indoctrinated them.

How can this situation be addressed? The use of force is one part of the solution and it has begun to show some results in the areas of the country where it was applied. But the difficult part is the effort to bring the disaffected into the mainstream of economics and politics.

To achieve the latter result Pakistan must move towards a new development paradigm. The one that I have in mind has several elements of which the following four are particularly important. The first is improving the quality of governance. The second focuses effort on improving the country’s resource situation. The third would provide the young with education and skills they can use to enter the economic and social mainstream. The fourth is to make Pakistan a functioning part of the global economic and political system. These four elements of the new development paradigm merit discussion.

There is some progress on the first — the need to improve the quality of governance and bring the state closer to the people. The 18th Amendment to the constitution has done more than go back to the original system. The 1973 Constitution provided the country with a federal system in which the provinces were to have considerable authority over economic issues. This was a promise that was to be fulfilled after a period of political maturation.

The subjects over which the provinces were to exercise total control were lumped together in the ‘concurrent list’ over which during the interim period both the central government and the provinces were to share responsibility. With the constitution amended a stage has been set for bringing about some improvement in Pakistan’s miserable economic situation? I will take up this question next week.
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The World Bank’s Global Monitoring Report 2010 has acknowledged the economic and financial costs Islamabad has incurred due to the security situation in the country. The report places Pakistan among the conflict-affected countries where political uncertainty and fighting continue to disrupt economic activity.
Two other countries in the region — Afghanistan and Nepal — have found a place in this category. Compared to other nations in South Asia, the report says, these three are expected to face more moderate growth outturns. The report also places Pakistan among those countries whose economic growth has been the weakest because they entered the global crisis with large internal and external imbalances. Countries that entered the crisis with stronger economic fundamentals, such as Bangladesh, Bhutan and India, faced up to the problems better.

Pakistan’s internal security problems have worsened in the aftermath of 9/11. It has experienced more violence, particularly acts of terrorism, in recent years than elsewhere in the region. A recent research paper published by the Lahore University of Management Sciences points out that the per capita incidents (of violence) in Pakistan have increased far more rapidly in the last five years than anywhere in the region, mainly because of the insurgency in the northwest of the country. Even Sri Lanka, once considered to be the most violence-prone nation in South Asia, has recently seen its internal security situation improve after the successful quelling of the Tamil separatist movement.

Islamabad has paid a huge economic price for its role in the war on terror. The direct costs of economic disruptions include rapid increases in internal and external security spending at the expense of education and health. Thousands have lost their lives or suffered permanent or temporary destruction of property. Indirect costs include a slowdown in economic growth and manufactured exports. The country’s image has suffered enormously. Foreign buyers are reluctant to travel here and investors have lost confidence in the country. A government estimate puts the direct and indirect costs incurred by the national economy from 2002-2008, because of the war on terror, at just below $5bn. Concessionary funding from multilateral lenders or grants from friendly countries are no solution to Pakistan’s problem. This kind of assistance only encourages consumption, adding to internal and external imbalances. What we need is investment in our energy sector and manufacturing. We need market access in developed countries for our exports. Our economic woes will not go away unless fresh investments are made in the power and manufacturing sectors for job generation and sustainable growth. But before all that we need to formulate sound policies to restore the investors’ confidence.
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Technology-driven growth


By Shahid Javed Burki
Monday, 03 May, 2010


INITIALLY economists believed that economic growth was the consequence of applying increasing amount of capital and labour to production processes. By capital they meant machines as well as land, the latter being more important in the economies in which agriculture was the most prominent activity.
However, diminishing returns set in beyond a certain point and output per unit of input declined as more and more of the two factors were added to the processes of production. This was one reason why rapidly growing work force in developing countries employed mostly in agriculture did not produce corresponding increases in output. A way had to be found to employ labour in more productive activities. An economy had to industrialise in order to grow.

More recently, economists have concluded that a production function that only has capital and labour as variables does not fully explain economic growth. They brought in two additional factors into play: human development and technology. Human development was also referred to as skill formation. Improving either could improve the rate of economic growth without adding greatly to the stock of capital and labour. Since developed countries had a distinct advantage over those that were still developing in being able to improve their technological base and the levels of skills of their work force, they could still sustain higher growth rate even when fewer and fewer people were able to join the work force.

Even more recently, there is a growing recognition that a new type of technological development is taking place that will give the more populous emerging economies an edge over those that have reached the post-industrial stage. This is aimed at developing products that can reach the markets in the countries that have large populations but still low per capita incomes.

This realization was first applied to marketing by large manufacturers of basic consumer products. Large firms began to see handsome returns if they could package their products in a way that they could be transported at a lower cost and could be sold at a lower unit price. Companies such as Lever Brothers and Proctor and Gamble came out with smaller soaps and shampoos packaged in small plastic bags rather than in large bottles.This way they were able to attract new and relatively less well-to-do customers.

But then manufacturers went a step further. They came to the conclusion that repackaged old products were only a small technological way to develop markets for old and traditional products. What was required were entirely new products. That led to some remarkable innovations by large companies that had their base in large emerging economies.

There are several examples of this approach to manufacturing. One of the most interesting ones is the Nano, a small car that is being marketed in India at a price of $3000 and is likely to take a significant share of the markets in the developing world. The other is a $300 laptop computer developed by Huawei, a Chinese telecommunications, giant that would reach millions of new customers in the developing world.

Some observers of changes in the global economy believe that this development is as significant a revolution as the introduction of the assembly line by Henry Ford in the United States in the early part of the 20th century or the development of lean manufacturing by Toyota in the later part of the same century. But the new innovations are not only being applied to the automobile industry. They are being developed for application in some unexpected areas.

One example is the Narayana Hrudayala Hospital in Bangalore where Devi Shetty, India’s most celebrated heart surgeon, has developed techniques and processes to perform mass surgery. His hospital has 1000 beds and he and his team of four dozen cardiologists are performing 600 open-heart surgeries a week. The hospital charges an average of $2,000 for open heart surgery compared with $20,000 to $100,000 in America, but its success rates are as good as in the best American hospitals.

These developments in the emerging world have been noticed by the firms in more developed countries. Many of them have begun to take advantage of the technological surge in many emerging economies. For instance, of the world’s 500 largest firms, 98 have R&D facilities in China and 63 in India. IBM now employs more people in developing countries than in the United States. Its largest product development facility is no longer in Poughkeepsie, north of New York, but in the vicinity of Beijing. This –devolution of many advanced firms to locations considered appropriate by western and Japanese firms not only helps with the employment of trained people who may not be able to find jobs in the part of the economy run by indigenous firms. It also provides the developing world access to new technologies. This development in the world of technology involving firms in many emerging markets has earned a new epithet: it is being called “frugal innovations”.

This on-going technological revolution is not likely to peter out soon. It is the result of a set of circumstances that are going to be around for a long time to come. First is the sheer size of some of the emerging markets. Between the two, China and India have 2.5 billion people. Of these a billion would be classified as the middle class. They are potential customers of all kinds of manufactured products that were beyond the dreams or imagination of their parents.Their demand is funding the growth of firms that are already giants in their fields. For instance Infosys (an IT services company) and ZTE (a manufacturer of mobile phones) are growing at the rate of 40 per cent a year.

Second firms in emerging markets are bringing in managerial and technical talent from outside the world. Toyota for long did not hire non-Japanese to the senior ranks of its management but companies in countries such as Brazil, China and Indian are bringing the talent from wherever it is available.

Third, technologically savvy firms are expanding outside the borders of the countries in which they are located. In 2007, before the world went into recession, China spent $30 billion acquiring assets abroad. India did even better. It reported spending $35 billion. Brazilian companies are also picking up companies in Europe and the United States Once again Pakistan is missing out on an important development which could quicken the pace of the economic development and help alleviate poverty and improve the distribution of income. No significant technological innovation in the past decade can be attributed to a Pakistani scientist, or a Pakistani engineer or to an institution based in Pakistan.

There are many reasons for this. Of these two are particularly important: neglect by the state to develop skills among the members of the rapidly expanding workforce and neglect, once again by the state, to encourage the development of institutions that can take the lead in technological innovations.

The state needs to step forward with a well developed plan. This should be aimed at improving the technological base of the economy, making research and development (R &D) an important component of the activities of all enterprises, moving the export sector towards the marketing of more knowledge-intensive products, helping the farming community better their processes, move towards the production of crops for which the country has comparative advantage, and provide incentives to all firms to upgrade the levels of skills of their workers.
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