Obama’s global strategy

By Shahid Javed Burki
Tuesday, 08 Jun, 2010

IT is the obligation of the US president to inform Congress of the strategy his administration is pursuing in international affairs. This is to be done every year but presidents also take this opportunity every few years to present a more comprehensive review.

The last time this was done was in 2002, a few months after the terrorist attack on the United States. As was to be expected, the Bush strategic statement was heavily influenced by 9/11.

Eight years later, President Barack Obama has unveiled his strategy. It couldn’t have been more different from the one followed by his predecessor.

President Bush declared that the United States would be prepared to act unilaterally if it felt that its strategic interests were being hurt by unfriendly actors on the global scene. These could be countries or stateless elements bent upon doing the US harm. The latter was the case with Al Qaeda that had declared its intention to attack American interests whenever and wherever it found the opportunity. Washington under Bush also sent out the signal that it would take action without waiting for a hostile event to occur. It would act preemptively.

That some of the declared intentions violated international law did not seem to bother the Bush administration. In fact, the 2002 strategy statement laid the ground for the attack on Iraq that soon followed. The case for the attack was the basis of the preemptive action. As then Bush’s national security adviser — later secretary of state — Condoleezza Rice famously indicated that to act when the “mushroom cloud” had appeared would be to wait too long. Washington had said that it had credible information that Baghdad was working on weapons of mass destruction, and therefore it was its right to act before the mushroom clouds appeared.

The Bush strategy statement went far in another direction. It said that the US position as the world’s premier power would not be allowed to be challenged. Washington would be prepared to act, peremptorily, whenever it thought that a situation was arising which might result in a serious challenge to its position in world affairs.

President Obama’s thinking is totally different from the one encapsulated in the 2002 statement of the man he succeeded as president. There is no swagger in the way the US presents its position. According to the new statement, officially called the National Security Strategy (NSS) report, the United States must first get its economic house in order if it wants to reinvigorate its global leadership.

In the preface to the 2010 statement President Obama assures the American people as well as those in the world who are comfortable with the idea of America leading the way that his country has been “hardened by wars” and “disciplined by a devastating economic crisis”. These have already taken a heavy toll in terms of lives lost and led to a rise in the rate of unemployment and a decline in real income. The statement emphasises that the nation’s huge national debt, estimated at $13tr, is becoming a major threat to US security and leadership.

The focus on the state of the domestic economy is meant to serve two purposes. It is a call to action by a leader who has been left battle-scarred by his fight to win comprehensive health reform intended to provide cover for tens of millions of uninsured people. His effort to reform the financial system battered by the recession of 2008-09 are also meeting with resistance from the Republican party that is determined to oppose him on every initiative he takes.

The other reason for focus on economic issues in a statement on international affairs is to convince the world that the United States has an administration in place that understands the economic problems the country faces and also has the solutions to address them. The tragedy in Greece is a reminder that governments relying on fiscal deficits to provide for people’s basic needs are standing on shaky ground.

After abandoning President Bush’s unilateralism, the Obama administration declares that it will expand partnership with rising powers like China, India and Russia. It calls these countries the “21st-century centres of influence”. But the US will also look beyond these countries and develop strong relationships with the “increasingly influential nations such as Brazil, South Africa and Indonesia”.

While focusing a great deal of attention and space in the statement on the emerging powers, it reassures Europe that its traditional ties with the continent will remain the cornerstone of US engagement with the world. A couple of weeks before the statement was issued President Obama had involved himself deeply in finding a solution for the Greek financial problem. It was at his urging that German Chancellor Angela Merkel had agreed to provide large amounts of financial support to the beleaguered Mediterranean nation.

The most important parts of the statement are the treatment of the threat posed by radical extremism and the opportunities created by the rise of China. The NSS makes it clear that it will not define America’s engagement with the world from the perspective of extremism and terrorism. This is another significant departure from the Bush strategy.

On China, the statement seems to pull back somewhat from the position President Obama had taken during his first official visit to East Asia in November 2009. Then he was working towards an arrangement in which Washington and Beijing would work together to guide the world towards a better economic future. That thought remains but there is now greater focus on China’s military rise. “We will monitor China’s military modernisation programme and prepare accordingly to ensure that US interest and those of its allies, regionally and globally, are not negatively affected.” This is the only place where there is some continuity with regard to the Bush strategy.

How will the new strategy affect Pakistan and its interests? That is the subject for the article in this space next week.

Wooing sovereign funds for capital

By Shahid Javed Burki
Monday, 14 june, 2010

FINANCIAL innovation was the most important feature of the development of the global economy in the 1990s. It was a part of the process that came to be called “globalisation.” By now the story is well known about the use of a technique called “securitisation” and the havoc it wrought on the global financial system. That havoc resulted in the Great Recession of 2008-09.
Banks and investment houses developed new lines of products which they used to package loans they had made into investment products that were then sold to the institutions that were prepared to hold long-term paper. Some components of the packaged products were “toxic assets” – mostly loans made to households for the purchase of residences. There was no possibility that these loans would be either serviced or paid back. When that fact came to be widely known, confidence in the banking system quickly collapsed. Bank systems cannot work without confidence. Consequently the flow of capital virtually ceased for a few months. The rest, as they, say is history.

What is not so well known is the birth and rapid development of an other instrument of finance called the “sovereign fund.” As the name suggests these entities are run by governments. And since they manage vast amounts of money for investment they are gaining enormous clout in both developed countries as well as among emerging markets that are desperately short of foreign finance. The latter group of countries includes Pakistan. A large number of countries are wooing the funds to obtain capital.This is all the more reason why their operations should be fully understood.

Sovereign funds are located in the countries that have large foreign reserve holdings. Most of these were produced by trade surpluses. They are, therefore, mostly to be found in the regions that have enjoyed trade expansion, mostly exports of manufactured goods over long periods of time. This includes mostly countries in East Asia. Or they are in the countries that are large exporters of oil and other minerals. These are not only in the Middle East but also in North Europe. Norway, for instance, was the first country to launch a sovereign fund with the objective of making investments that would yield returns for the country’s future generations.

Now with the demand for commodities and metals increasing particularly by such rapidly expanding economies as India and China, the countries engaged in their production and extraction are also setting up sovereign funds of their own. Australia is an example of the some of the new entrants into this financial game.

Countries that have accumulated large foreign exchange reserves like to place them mostly in safe investments. The United States Treasuries are considered to be the safest assets available even though the rate of return provided by them is low – much lower than available from other types of investments. The conventional wisdom that guided this approach to investment was that since reserves are held to tide over unforeseen crisis they must be kept in the assets that were highly liquid. This meant gold and government paper issued by developed countries. The United States government bonds were highly valued for this reason.

There is no reliable estimate of the amount of money the funds have accumulated in the form of liquid assets as well as investments. The estimates range between $2-3 trillion with Abu Dhabi’s Investment Authority being the richest. Most, but no all, sovereign funds are in the Middle East but countries such as Australia and China are also ex panding their activities in this area.

For capital deficit countries in the Western world – a category that includes the United States and most European nations – sovereign funds helped close the gap between foreign earnings and foreign expenditures. There is some nervousness on the part of the countries that have invested huge amounts of funds in the US Treasuries that their capital may not be as secure as used to be believed. China, of course, has the largest amount invested in the US, close to a trillion dollars. Any significant change in the value of the dollar would result in a serious decline in the value of the total holdings the country has accumulated in America.

The countries receiving investments from sovereign funds have their own worries. On two occasions the United States successfully blocked intended investments by these funds in its territory. Last year a Chinese oil company partnered with the country’s fund to acquire an oil refining company in Texas. But it was not granted permission. On another occasion, a Dubai based port operator attempted to buy the P&O a well known port owner in America. This time the authorities used the powers available to them under national security to deny the sale of American assets.

There is no regulatory mechanism to watch the performance of these funds and to determine how they should be treated by the capital receiving countries. One may evolve as the fund managers begin to meet one another in formal settings.The second such meeting was held in Sydney, Australia in early May. Australia is one of the two developed countries – the other is Norway – that has also established a sovereign fund.The Australian reserves come mostly from the sale of minerals with China being the largest buyer. It calls its fund the Future Fund emphasising, one of its most important aspect: it is creating an asset base to be used in the future when the country’s mineral wealth begins to run out.

Two dozen members of the Forum of Sovereign Wealth Funds were at the meeting concerned mostly with what they called “uneven treatment”. At the same time they have begun to develop voluntary guidelines to improve transparency and governance. In this they are being helped by the IMF which, in 2007, began work with SWF to develop best practices, working with Abu Dhabi’s Investment Authority and Australia’s Future Fund. Leading funds adopted the guidelines that were developed at a meeting in Santiago, Chile held in 2008. They are called the Santiago Principles. David Murray, the head of the Australian fund said in his opening address to the forum that the group was working with multilateral agencies such as the Organisation for Economic Cooperation and Development and some United Nations bodies to foster fair treatment of the funds.

There was great clamour for transparency in the West with the sovereign funds invested heavily in the go-go markets in the early 2000s. The funds were asked to publish annual reports providing list of the assets they held. Most funds were not prepared to go along. Singapore’s Temasek was an exception which produces annual reports. China Investment Corporation that manages $200 billion of assets was not prepared to do this, fearing political pressure in the United States to liquidate some of the assets the people there may regard as being against national security. As these efforts develop it is important that countries such as Islamabad keep watch, taking care that the frameworks that evolve protect their interest as well.

It is incumbent upon the policymakers in Islamabad to develop good understanding of these relatively new instruments of finance and also develop a policy framework within which approach will be made to them to secure resources either for development or for meeting short-term capital needs.

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In the context of terror

By Shahid Javed Burki
Tuesday, 15 Jun, 2010

IN a speech at a conference in May in New Delhi, I told my Indian audience that there are no permanent trends in the lives of nations. The fact that Pakistan had slipped badly over the last quarter of a century while India had risen did not necessarily mean that these trends would persist.

Using the data assembled by some Indian economists I said that for 40 years after achieving independence Pakistan was the rising star of South Asia while India was caught in what the Indians themselves called the Hindu rate of growth.

For several years income per head of the Pakistani population was much higher than that in India. Now the situation has reversed. Could the situation change for Pakistan? This could happen if Islamabad and Washington act wisely.

In the National Security Strategy (NSS) of the Obama administration India is regarded as one of the countries that will be part of the group that will constitute the “21st century centres of influence”. However, Pakistan along with Afghanistan is described as “the epicentre of the violent extremism practised by Al Qaeda. The danger from this region will only grow if its security slides backward” with the Taliban controlling large swathes of territory. I don’t think it has been fully appreciated in Pakistan that the attempted bombing of Times Square was a traumatic event for the government and the US people. It destroyed the assumption that people of Pakistani origin — also those who had come from other Muslim countries had settled in the US and were making a decent living — were not receptive to the kinds of stresses and pressures in so many parts of the Muslim world that had persuaded many individuals to try to hurt America.

The problem of Islamic extremism is not an American problem; it is one created by the way some elements in the Muslim world see the US. It was this belief that led President Obama to give a major address last year in Cairo. The theme of the address was America’s relations with the Muslim world. The Cairo speech was the new president’s attempt to repair his country’s tattered relations with Muslim states.

The Faisal Shahzad affair stood that assumption on its head. It showed that there were people living within the Muslim community in the United States who were prepared to do damage to the US even though their adopted homeland had extended a welcoming hand to them. The fact that Shahzad may have been influenced by people he met during an extended stay in Pakistan before he attempted to explode his improvised bomb further complicated US-Pakistan relations. This places additional burden on Pakistan. It must not only address domestic terrorism but also ensure that the perverted ideology that supports it does not get exported to countries where there are sizeable communities of people of Pakistani origin.

In spite of the advances made by the Pakistani military in beating back the Taliban from some of the areas where they had established control, their influence has not been markedly reduced. There are almost daily reminders that the Taliban can inflict heavy damage on the Pakistani state and society and on the assets belonging to its allies, especially the US. A recent example of this is the attack on a Nato fuel convoy near Islamabad that destroyed a number of vehicles. In the light of such developments how does the US perceive its future ties with Pakistan, the second largest country in South Asia in terms of the size of population and economy? A related question: why does it matter for Pakistan that at this point in time Washington looks at it through the prism of terrorism?

The NSS covers widely the way Washington views its relationship with Islamabad. “…[W]e will foster a relationship with Pakistan founded upon mutual interests and mutual respect. To defeat violent extremists who threaten both of our countries we will strengthen Pakistan’s capacity to target violent extremists within its borders and continue to provide security assistance to support those efforts,” says the strategy statement. But the United States promises to go beyond the use of force to contain terrorist activities in Pakistan and work to alter the conditions that invite some segments of the country’s very young population to join the extremist ranks. This will require both political and economic development.

“To strengthen Pakistan’s democracy and development, we will provide substantial assistance responsive to the needs of the Pakistani people, and sustain a long-term partnership committed to Pakistan’s future. This strategic partnership that we are developing with Pakistan includes deepening cooperation in a broad range of areas, addressing both security and civilian challenges, and we will continue to expand those ties through our engagement with Pakistan in years to come.”

There are at least two elements in this strategy that should please the Pakistani people: one, the commitment that the United States will stay involved with the country for a long time to come. Unlike the late 1980s, Washington will not walk out as soon as some solution is found to the Afghan problem. Second, the Americans will help not only with the strengthening of Pakistan’s security apparatus, but also with social and economic development.

Both are positive policy positions. But the fact remains that the basis of the relationship with Pakistan will be in the context of terrorism and Pakistan’s involvement in it. A great deal more will need to happen in the country before it can aspire to reach the status attained by India — that of being regarded as a centre of influence in the world. Being the sixth largest country in the world in terms of the size of its population that is something reasonable to aspire to but that would require a complete reorientation of public policy.

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Look out for the neighbourhood changes

By Shahid Javed Burki
Monday, 21 june, 2010


NOW that Pakistan has a new economic team in place – a new finance minister and a new deputy chairman of the Planning Commission – this may be a good time to rethink the way the country should be planning for its future. In doing so it should look at the changing world outside its borders, in particular at the opportunities that are being created in the country’s immediate neighbourhood.
For decades, economic policymaking was focused on domestic issues. The world outside was never factored in to the strategy for development. This has to change in light of the significant developments that are taking place in the structures of the global production and trading systems. There are also important changes in the world of finance.

For a country that remains dependent on external flows in order not only to pay for investment but also to help it meet its external obligations, the restructuring of global finance must be fully understood. In the article in this space last week, I took a look at the emergence of sovereign funds as an important source of finance for the capital-short countries of the world, both developed and developing. The subject today is the development in Pakistan’s immediate neighbourhood. All the countries that share borders with Pakistan are experiencing enormous changes that could have a bearing on the future of its economy. These should be noted by our policymak ers, in particular those who now have responsibility for finance and planning. Afghanistan, Iran, India and China are all going though changes, some positive and some negative. All of them matter for Pakistan.

Given its high rate of economic growth and industrial expansion, China’s appetite for natural resources – particularly energy and material – is practically insatiable. It is making massive investments in places such as Afghanistan and the Middle East to import the materials it needs. Some of this could be transported through trade corridors that connect China through Pakistan with these sources of supply India also has natural resources and consumer goods to export to Pakistan, Afghanistan and points beyond. Those destined for Afghanistan and Central Asia could be transported through Pakistan. Gas from Iran and the Middle East is needed by both China and India, two giant economies that are short of energy. This could flow through Pakistan from the several points of origin to several points of consumption. Pakistan, in other words, could become a major artery of commerce for the fast developing and rapidly changing areas around its many borders.

For that to happen, a major change will be required in Pakistan’s position with respect to the use of its territory for the purpose of transit. Whenever I have discussed this possibility with the senior leaders of Pakistan, I have been told that security and geo-political considerations exclude the possibility of giving transit rights to India for trade with the countries it cannot reach via land.

That is a mistake for several reasons. The first is simply a cost-benefit issue.

Before taking such a firm position, Pakistan should carefully study the benefits that would accrue to the economy if India was allowed to use the country’s territory for trade. Once an estimate is available – say the benefit to the Pakistani economy is equivalent to one per cent of the country’s gross domestic product every year – then Islamabad would know what it is sacrificing in terms of potential growth by not granting transit rights to India through its territory.

What kind of benefits Pakistan could expect from the use by India of its territory for international commerce? To begin with it will increase the use of the motorway system that Pakistan has constructed at a great cost to the economy. The system is underused. By charging Indian trucks and buses significant transit fees, the country would not only recoup some of the investments it has made. It will also be able to generate the revenues for expanding the system.

The current system links Lahore with Peshawar with a world-class motorway. This could be extended east to the border with China, northwest to the border with Iran and west to Karachi and Gwadar to provide Afghanistan, China and India access to the resources of the Middle East and the region’s rapidly developing markets.

Pakistan also needs to rethink its international trade strategy. The focus has always been on market access to the world’s developed countries – the United States and the European Union. And when Islamabad talks about market ac cess the reference is to the export of textiles. Both elements of this trade strategy are misplaced. Even though textiles are the largest component of Pakistan’s industrial sector and provide employment to a significant proportion of the workforce engaged in manufacturing, this is not where the future is if the country wishes to build a strong and dynamic economy.

The country has to focus on the development of industries that have a rapidly increasing demand in the global market place, where a large number of new workers can find employment, where Pakistan can accommodate its youth in well paying jobs, and where there are important forward and backward linkages. These objectives won’t be easily realised in the sector of textiles.

Our planners have to concentrate their attention on the development of modern services – the IT and communication sector, the sectors of health and education, the activities related to sports and culture – which could provide employment for millions of skilled and well trained workers. A simple calculation tells us that employing an additional one million people in the IT sector alone can provide additional exports worth $20 billion a year.

The other important adjustment that needs to be made is to find markets closer at home than search for them in the places that are very distant from Pakistan. The gravity model of trade tells us that destinations of exports should be largely the countries in the neighbourhood. Pakistan is uniquely placed in this respect. It has as its immediate neighbours two countries that are the world’s most rapidly growing economies and have rapidly expanding markets. Both China and India should be the preferred destinations of the export industry in Pakistan rather than the United States and the European Union.

This brings me back to the need for aggressively developing trade and economic relations with India. I am aware of the fact that there are important constituencies in India that are against developing close relations with Pakistan. The same is true for Pakistan. Serving these two groups is not in the larger interest of both India and Pakistan.

At the “Aman ki Asha” conference held in New Delhi in May this year at which I was one of the keynote speakers, I was asked why Pakistan had not granted the “most favoured nation” status to India which it is required to do under the WTO. My answer was simple and honest. I said that the reason why that had not happened was once given to me by former President Pervez Musharraf. When I pressed him on that issue by saying that it was in Pakistan’s own interest to extend the MFN status to India, he said that the problem was that the term “most favoured nation” did not translate well in Urdu.

The conservative Urdu press would play up the issue that Pakistan had declared India to be the “nahaet pasandeeda mulk.”That would be hard for his government. The United States was once faced with the same quandary with respect to its trade relations with China. It dropped the term MFN in favour of trade promotion activity. Pakistan could do something similar.

The main conclusion that we should draw from this analysis is that a serious reconsideration of our economic strategy is required to factor in the opportunities available in the country’s immediate neighbourhood.

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Where are the answers?

By Shahid Javed Burki
Tuesday, 22 Jun, 2010

PAKISTAN has struggled with two questions ever since its birth as an independent state almost 63 years ago.

The first focuses on what kind of a Muslim state should it become. Should it be an Islamic state or a state that blends a Muslim way of life with the western — or Indian — style of secularism.

The second focuses on the type of alliances it should seek with other states that would strengthen its national security. Should it work with the West to protect itself against India’s real or perceived designs? Should it align itself with the Arab world and aim to become an important component in the pan-Islamic community? Or should it look to Afghanistan, Iran and Turkey, the non-Arab countries in the Muslim world?

These questions were not important in the minds of Mohammad Ali Jinnah and his associates who founded Pakistan. They did not anticipate the massive transfer of population that occurred soon after the partition of British India that turned Pakistan from a Muslim-majority to a predominantly Muslim country. Had a sizeable number of non-Muslims continued to live in Pakistan after independence — before independence about 30 per cent of the population of the areas that would become Pakistan was non-Muslim — these questions would not have acquired the significance they did. This is one reason why they were not asked, let alone answered, by the founders of the country.

Had East Pakistan not separated and one of its part become the independent state of Bangladesh, the Bengali influence on West Pakistan would have forced it to remain a more liberal society. These are two important ‘what ifs…?’ of Pakistan’s history. These questions force us to ask another: where would the country have been today had certain things not happened? But they did happen and the present set of policymakers must deal with the situation as it is today.

What should inform the making of foreign policy in a country in Pakistan’s situation? Of the many available options the following four could become the basis of policymaking. One, we need to address the question of whether Pakistan should continue to be concerned about India’s seeming designs towards it and continue to develop appropriate mechanisms for defending itself. That, after all, was the focus of policymaking in external affairs for much of the country’s history.

Two, as it is a predominantly Muslim country we have to ask whether it should follow the rest of the Muslim world in defining its place in the global community. But the Muslim world does not sing from the same sheet of music. Which of the various Muslim blocs should Islamabad follow in designing its approach?

Three, it is also a country that has seriously mismanaged its economy for the last several decades and has become dependent on foreign largesse for economic survival. In these circumstances, should it work with the world so that the flow of the external resources it needs continues?

Four, we must also ask how much attention should policymakers give to the enormously important changes occurring in Pakistan’s immediate neighbourhood. We are seeing the emergence of China as an economic superpower that is now being courted by the United States as a partner. We are also witnessing the rise of India as a major economic presence in the global system. How much weight should be given to these developments in the making of foreign policy?

My answer to these questions will take us towards the adoption of a composite approach. I would like to see Islamabad change its attitude towards India in a fundamental way. It should seek to become a partner of that country in helping South Asia catch up with the rest of the continent and not continue to be distracted by the misplaced fear that New Delhi is bent upon hurting its neighbour.

The New York Times recently carried a story about the extremist group Lashkar-i-Taiba being encouraged by some Pakistani elements to carry out anti-India operations in Afghanistan. With the United States having declared its intention of beginning to pull out of that country next year, a vacuum is likely to occur that will suck in a number of regional powers, including India and Pakistan, into Afghanistan. To prepare itself for that outcome, the newspaper alleges that many in Pakistan have begun to support extremist groups to fight a proxy war in Afghanistan. This, as we know from our recent history, is a dangerous course to pursue.

The formulation of foreign policy can become difficult if the objectives being sought are not clearly defined. The questions regarding the four observations above — the approach towards India, the role of Islamic ideology, the importance of securing a flow of finance on a sustained basis, the importance of focusing on Asia’s rising powers — should not only be asked they must also be clearly answered. It is clear to me that the time has come when we need to totally reorient our external policy away from constant preoccupation with India and basing it on the vaguely defined interests of the Muslim world.

We should shape our policies towards the world by focusing on only one thing: the need to improve our economic situation and prospects so that a better life can be delivered to the rapidly expanding population. Such an approach would have many outcomes. Of these the following three will be very important.

First, we will begin to view India from a different angle. That country’s rapid rise can become an asset for Pakistan if we are prepared to cast off the burden of history and seek to align our economy with the one that is rapidly developing across the border. Two, we will pay much greater attention to the continent of Asia in seeking markets for our products and sources of finance. Three, we will dispense with the use of Islamic ideology to determine the way we look at the Muslim world. Foreign relations will be defined totally on the basis of economics. Perhaps a clear statement by the new managers of the economy that economics will be the foundation on which we will build the country will help to clear the air.

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Trilateral deal for hidden assets

By Shahid Javed Burki
Monday, 28 june, 2010

THERE is an urgent need for Pakistan to define its economic future in the context of what is happening in the countries it borders. Major developments are occurring in all the countries around Pakistan as well as in those that are not far from it.
In this context let us take a look at Afghanistan, not at the way the American led war is going in the country but with reference to the possibility that the areas in around Afghanistan may become the centre of global mining activity. The recent reports in a section of the American press about the unexploited mineral riches in Afghanistan lend further substance to the approach I have been advocating.

“The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself”, wrote The New York Times in a story carried by the newspaper on the front page of its issue of June 14.

“The value of the newly discovered mineral deposits dwarfs the size of Afghanistan’s existing war-bedraggled economy, which is based largely on opium production and narcotics trafficking as well as aid from the United States and other industrialised countries. Afghanistan’s gross domestic product is only $12 billion”. Afghan officials, in commenting on the report said that the American estimates were on the low side: the total value of the deposits may be as high as $3 trillion.

The story of how this conclusion was arrived at is, in a way, the story of the recent conflict in Afghanistan. The first indication that the country may have very large deposits of a variety of minerals came from the investigations done by the Soviet experts when the country was occupied by its soldiers. Maps and data produced by the Soviet scientists were deposited at the Afghan Geological Survey in Kabul but were removed by the Afghans who had also worked on the investigations.

The decision to remove this material was taken when the country was run over by the Taliban in the late 1990s. They were returned only after the Taliban were defeated by the Americans. However, this material did not come to the attention of the Americans until 2004 when geologists from that country were sent to Afghanistan as a part of a broader reconstruction effort.

The Americans decided to carry out a series of aerial surveys after they had studied the charts prepared by the Soviets. This was done in 2006 using advanced gravity and magnetic measuring equipment attached to an aircraft.This way about 70 per cent of the country’s area was surveyed and mapped. The data was so promising that an even more sophisticated investigation was carried out a year later. The results were astonishing but were largely ignored for another two years.

The Americans were too preoccupied with Iraq to spend much time on this discovery. It was only when the conflict in Iraq wound down that Afghanistan reappeared on the American radar screen. Under the new administration of President Barack Obama America turned its attention towards Afghanistan. It was then that the Washington began to look at the country’s economic future. The Americans and its NATO allies were worried that an insurgency that was fed not just by ideology but also by the production and trading of drugs would be difficult to bring under control.

That was the lesson the Americans had learnt in the long drawn-out fight against drug trafficking in Colombia. American aid to Afghanistan is likely to de cline significantly once Washington begins to pull out its troops beginning next summer. In that case the drug economy and the associated drug culture will take an even greater hold over the country. These will also seep into Pakistan.

In 2009 a Pentagon task force that had worked on developing business opportunities in Iraq was transferred to Afghanistan and was told of the studies done by the Soviets followed by the investigations by a series of America teams. The Pentagon team firmed up the estimates and briefed Defence Secretary Robert Gates about their findings. “For the geologists who are now scouring some of the most remote stretches of Afghanistan to complete the technical studies necessary before the international bidding process is begun there is growing sense that they are in the midst of one of the great discoveries of their careers”, continued The New York Times report cited above.

What is particularly exciting for the geologists is that Afghanistan may have large deposits of some of the rare minerals the demand for which is increasing because of the development of new technologies. Lithium is one such material, an important ingredient in batteries that power not only mobile phones and computers but also hybrid automobiles. Ghazni province showed the potential for lithium deposits as large as those of Bolivia in Latin America which now has the world’s largest known reserves of this important mineral.

Other finds include large deposits of niobium, a soft metal used in producing superconducting steels. The Pentagon estimates put the value of this particular deposit at $81.2 billion, third in importance among the 22 minerals identified by the geologists. Iron with estimated value of $421 billion and copper at $274 billion are the two largest finds.

Would the discovery of these potential riches make Afghanistan rich almost overnight? It will take time before the country becomes a mining giant. The initial reaction of the large mining companies is that of caution. Poor security particularly in the areas that have the largest potential is not the only reason why Western companies are not likely to move into the country with any kind of speed.

Afghanistan’s mining laws are also a problem. Even if a company invests heavily and discovers exploitable reserves, the government can move in and assume control over them and rebid the contract. To remedy this, the government has turned to the World Bank to update the laws and also draw up standard bidding documents to minimize the scope for corruption.

The minister in charge of mining in the previous Karzai government was removed from office when reports began to circulate that he had enriched himself mightily by taking bribes from some of the mining companies that were admitted into the country. If the Western companies are slow to enter Afghanistan, China, which already has a large mining project in the country is likely to increase its involvement.

What do these developments mean for Pakistan? If we look at the geological map identifying the various deposits in Afghanistan, several of them are right on the border with Pakistan.There is no reason why these mineral deposits should not extend into Balochistan and parts of the Pakistani tribal belt. Copper is already being mined by the Chinese in Balochistan and there are reports of large deposits of the metal in the areas nearby.

It would be a good idea to create a trilateral arrangement involving Afghanistan, China and Pakistan to plan for the exploitation, processing and transport of this enormously large mineral wealth. This could transform the Pakistani economy along with the economy of Afghanistan.

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Major policy rethink

Democracies function well only when the citizenry is educated and informed about the issues. This is where the media and civil society enter the picture.

By Shahid Javed Burki
Tuesday, 29 Jun, 2010


THE great virtue of democrat ic systems is that the policies governments adopt reflect the will of the people. While Pakis tan is tending towards the adop tion of democracy as the prefer red system of governance it is quite clear that the country is not there as yet.
If it had become a fully representative system some of the approaches being pursued in foreign affairs would not have been adopted.

In this space last week I argued that economics rather than ideology or histo ry’s many burdens should inform the making of public policy. That is not hap pening. While people want the govern ment to focus on their economic situation that has markedly deteriorated over the last several years, some of the powerful policymakers continue to focus on what for the common citizens must be marginal issues. This is happening since the people have a poor voice in the making of policy.

In weak political systems strong institutions fill the vacuum. This happened in the case of Pakistan when first the powerful civil service and then the military stepped in and dominated policymaking for most of the country’s turbulent history. Even when these institutions believed that they were working for the good of the country and its citizenry they could not possibly forsake their narrower interests. No matter how dysfunctional a political system is — and Pakistan’s system at this time is not functioning well — it is still better than a system that has a narrow base.

But the transition to a more representative system will not be smooth or easy. In moving forward with the development of the political system, those who are taking the lead will need to take account of what economists call ‘path dependence’. This means that the past has a strong influence on the present. The path followed in the past cannot be easily abandoned for something that is new. That is certainly the case in Pakistan, a country going through major political change. A great deal of caution will have to be shown so that the strong interests that have dominated the system don’t reassert themselves. But the fear that that might happen should not paralyse the move towards democracy.

In the case of Pakistan, the political system was not made up of three components that have given, for instance, the American structure the checks and balances the country’s founding fathers recognised were essential to ensure stability. They strongly believed that no single segment of the population should be able to dominate to the disadvantage of the others. In pursuit of this objective they divided responsibilities among the executive, legislative and judicial branches of the government. If one of these attempted domination, it was checked by the other two.

The latest manifestation of this is the way the supreme court, under the leadership of John Roberts, a highly conservative judge, is attempting to contain the pursuit of the ‘big government’ ap proach being followed by the administration headed by President Barack Obama. This conflict will ultimately get resolved by the American Congress as it reinterprets the country’s constitution in light of what the people want now and not what the founders thought should be the principles of governance.

In Pakistan’s case, the political system has four rather than three branches. The military is the fourth component. While it has stepped back to allow the political system to have the space in which it can develop further, it is no secret that it is happy to intervene when it believes that the other branches of the government are putting the country’s security at risk.

Two interventions in particular — in 1958 when Gen Ayub Khan overthrew a legally constituted government and again in 1977 when Gen Ziaul Haq removed Prime Minister Zulfikar Ali Bhutto from power — the military came in, said its leaders, ‘to save the country from meltdown’. The two other interventions were prompted by personal ambition. But how could the military decide what posed risks to the country’s security?

The Zia period provides an interesting case study of how the will of one man came to prevail over the will of society. Zia ordered Islamisation on the pretext that that is what the people had wanted all along. By moving in that direction, he set the country on a course from which it will take a long time and a great deal of effort to depart.

How did Zia conclude that Islamisation is what people wanted when the people had not voted in significant numbers for any Islamic party? It was not the will of the people that Zia was minding but his own. What prompted Zia to fight the American war against the Soviet occupation of Afghanistan by creating a new force of Islamic fighters that eventually morphed into the Taliban? Had the issue been openly debated the result may have been very different.

The current ambivalence of Islamabad towards two of the more important policies that will shape the country’s future reflects the tussle for influence between the military and the representatives of the people. One example of this is the way the military establishment views India. The military continues to see India as the main threat to Pakistan’s security and continues to believe that in Afghanistan it should seek strategic depth in case of hostile activity by India. In other words, the military continues to place India’s seeming hostility towards Pakistan at the centre of its concerns.

Whether suspicions about India’s intentions should preoccupy the policymakers to the extent that they inhibit the economic development of the country and the welfare of the citizenry is something that needs to be debated openly and by the representatives of the people in the forum that is meant to serve that purpose. That, of course, is the National Assembly.

But, as is often said, democracies function well only when the citizenry is well educated and informed about the issues. This is where the media and the civil society enter the picture. They too have to shed some of the old biases and look at the situation anew in light of the enormous changes that have occurred inside and outside Pakistan. If that were to happen — and there are indications that may be occurring — we may see a major change in the way we view the world outside our borders.

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Austerity approach and the fear of depression

By Shahid Javed Burki
Monday, 05 Jul, 2010

MOST international structures owe their existence to crises. They were created to deal with a critical situation that could not be handled by existing institutions.

The G-20, a group of states and institutions, owes its existence to the Asian financial crisis of 1996-97 when the countries that were affected needed to undertake changes in their financial systems in return for infusion of cash from rich countries and multilateral institutions.

Finance ministers from the world’s largest economies, developed and developing, were asked to work with international financial institutions to devise the rules that would guide the troubled countries out of the crises they faced.

The G-20 further evolved when the world economy went into what came to be called the Great Recession of 2008-09. It was reconstituted at the level of the heads of state in November 2008 and met for the first time in Washington under the chairmanship of George W. Bush, the lame-duck US president. The group met for the fourth time in Toronto on June 26-27 since its reincarnation in Washington.

A global economic approach that works requires a consensus among the major players in the world economy. A consensus is reached more easily when there is fear that is shared. That was the case in November 2008. They were afraid that the world was headed towards another depression and decided to act in concert.

They agreed to have their governments use the budget to stimulate their economies. This was done more aggressively by China, the United States and some countries in East Asia but more cautiously by the Europeans and Japan. John Maynard Keynes, the British economist who had urged the world in the 1930s to spend its way out of the Great Depression, was back in fashion with the policymakers.

There is a consensus among economists that these moves saved the world from another depression. But the governments in Europe as well as North America failed to convince the electorate and the markets that they had taken the right approach. The markets as well as the electorate began to punish the governments that, in their view, had irresponsibly relied on the printing press to save their economies. The new administrations that came into office ( as in Britain) as well as those that survived (as in Germany) became cautious as the spreads widened between the government paper issued by the countries that were deemed to be fiscally prudent and those that were regarded as profligate. German Chancellor Angela Merkel argued at Toronto where the G20 met for the fourth time since November 2008 that these widening spreads will increase the cost of carrying a large debt.

As should have been expected, the differences in the approach towards handling the 2008-09 crisis – more aggressive in the United States and East Asia and more restrained in Europe – showed in terms of the rates of growth in their national products. In Germany, the world’s cheerleader for fiscal continence, the GDP increased by only 0.2 per cent in the first quarter of 2010. France, also led by a conservative president, did even less well, with GDP increasing by a bare tenth of one per cent in the same quarter.

The UK, whose new government, believing in the election rhetoric of its newly installed leadership, took the baton in the race to cut expenditure, adopting austerity as the governing principle. It saw its GDP increase by only 0.3 per cent. Among developed economies, the US that had followed Keynes more aggressively than other industrial economies moved ahead briskly by 0.8 per cent. Japan outdid the industrial world with a rate of growth of 1.1 per cent. China, of course, led the field with the GDP increasing in the year’s first quarter by 13 per cent.

That the politicians differed about how to proceed – President Barack Obama cautioned the leaders assembled at Toronto that it would not be right to head for the exit together – was not surprising. They have to be mindful about the views of the electorate. What is troubling is the sharp difference among the academics who occupy the same space in the ideological spectrum.Paul Krugman, the Nobel Prize winning columnist of The New York Times, fears that without continuing stimulation the world is likely to head towards a depression. If that were to happen this would the third time such a sharp downturn would have occurred in the last century and half.

“Recessions are common; depressions are rare”, he wrote in a recent article. “There were only two eras in economic history that were widely described as ‘depressions’ at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31. We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost – to the world economy and above all, to the millions of lives blighted by the absence of jobs – will nonetheless be immense”.

But Jeffrey Sachs, an economist of equal calibre differs. He dismissed the fear of either a double-dip recession or of a depression. In an article written for the Financial Times, he argued that those who were urging governments to keep on spending to deal with Great Recession of 2008-09 “ignored one of the key elements of modern macroeconomics: that the result of fiscal policy depends not only on current taxes and spending but also on their expected trajectories in the future”.

He is of the view that the Keynesian stimulus used by several governments to deal with the 2008-09 economic crisis “was premised on four dubious propositions: that it was needed to prevent a global depression; that a short-term fiscal boost would jump-start the economy; that ‘shovel-ready projects’ could combine short-term cyclical and long-term structural agendas; and, last, that the rapid rise of public debt occasioned by stimulus need not be a concern. That these ideas were so widely accepted was a testament to the perennial political attractiveness of tax cuts and spending increases.”

The communiqué issued by G-20 on 27 June attempted to paper over these differences among countries and experts. The leaders agreed on a non-binding timetable for cutting deficits and curbing the growth of official debt, but acknowledged the need to move carefully so that reductions in spending did not set back fragile global recovery.
“There is a risk that synchronised fiscal adjustment across several major economies could adversely impact the recovery”, the joint statement said. The group accepted the fiscal deficit target – halving it by 2013 – pushed by the Canadian prime minister who was the host of the meeting. However, a number of caveats were added to the communiqué. “There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth.”

At the Toronto meeting, therefore, the G-20 countries decided to follow their own separate ways rather than operate within a globally accepted policy framework as they had done at the previous three summits.

The result of this will be that the Europeans will constrain their economic growth rate by being fiscally prudent, while the East Asians led by China – and to a lesser extent also India –will continue to promote growth while restructuring their economies. The US will come out somewhere in between. Following this meeting one should see a widening of the growth gap between the old and new industrial economies. Asia will see a quickening in the pace at which it is playing the “catch-up game.”

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America’s Afghan strategy

By Shahid Javed Burki
Tuesday, 06 Jul, 2010


A RECENT article in Rolling Stone magazine by a young freelance writer that appeared under the title of ‘The Runaway General’ created a crisis in Washington. There is no doubt that the contempt so openly shown by Gen Stanley McChrystal, the then American commander in Afghanistan and the subject of the article, for the senior civilian leadership could not be tolerated by President Barack Obama.

This was the case especially when the US constitution makes it clear that the military is answerable to civilian authority. The general’s impertinence had to be dealt with.

As one commentator wrote, “the moment he pulled the trigger, there was near-universal agreement that President Obama had done the inevitable thing, the right thing and, best of all, the bold thing”. But the general’s removal brought the US strategy in Afghanistan back in focus. In its attempt to stabilise Afghanistan by following what is called the ‘counter-insurgency’ strategy, or COIN, the US seems to be losing its sense of direction. Will the change of command pull back Afghanistan from the edge of an abyss?

Given the circumstances, a change of command was needed to give an unambiguous signal that the civilian leadership would not tolerate insubordination by the military. The choice of Gen David Petraeus as the replacement sent another important signal: that there would be little or no change in the counterinsurgency strategy being followed to achieve the American objectives in Afghanistan. The stated objective was to clear Al Qaeda out of Afghanistan.

But the second signal did not hide the fact that there are many in Washington who believe that America is in deep trouble in Afghanistan. As a senior adviser of the dismissed general told the Rolling Stone presciently, “If Americans started paying attention to this war, it would become less popular”.

What is interesting about the Rolling Stone article is not just what it said about the way the top American general felt about his bosses but also the conclusion reached by the author as to where American strategy stood in Afghanistan. “Whatever the nature of the new plan [for Kandahar], the delay underscores the flaws of counterinsurgency. After nine years of war, the Taliban simply remain too strongly entrenched for the US military to openly attack. The very people that COIN seeks to win over — the Afghan people — do not want us there. Our supposed ally, President Karzai, used his influence to delay the offensive, and the massive aid championed by McChrystal is likely to make things worse,” wrote Michael Hastings, the article’s author.

He quoted Tuft University’s Andrew Wilder to underscore the perverse impact of one element of the COIN strategy. “A tsunami of cash fuels corruption, delegitimises the government and creates an environment where we are picking winners and losers — a process that fuels resentment and hostility among the civilian population. So far counterinsurgency has succeeded in creating a never-ending demand for the primary product supplied by the military — perpetual war.”

The reference to the change of plans in the Rolling Stone article is to the postponement of the Kandahar operation that Gen McChrystal had announced for August. However, the experience of a much smaller operation in Marja, a small urban centre of only 60,000 people in Helmand province, convinced the Americans that they needed more time to prepare. Not only did they need more soldiers to overpower the large Taliban force that was present in Kandahar, a city of several hundred thousands, but also greater commitment of follow-up by the Karzai regime.

The province was dominated by Ahmed Wali Karzai, the president’s half brother, who is alleged to have amassed an enormous amount of personal wealth through corrupt practices. He was said to be deeply involved in the flourishing drug economy of the province. Handing over the province to him after expelling the Taliban hardly met the goals of the counterinsurgency strategy.

In moving forward President Obama faces two obstacles: fast diminishing support at home for what he had once called America’s war of necessity, an unpopular government in Afghanistan, led by an unpredictable president and Pakistan’s changing perception of its interest in its neighbour.

It is clear that by turning to Gen Petraeus to lead the Afghan effort, the American president was providing some comfort to the conservatives in his country who had begun to doubt his commitment to the war in Afghanistan. Gen McChrystal was popular with this group and his removal was viewed with considerable apprehension. But the right also has a great deal of faith in his successor, confirmed recently by the Senate.

According to Robert Kagan, a powerful voice in neo-conservative circles, the appointment of Petraeus “signalled Obama’s determination to succeed in Afghanistan, despite the chorus of wise counselling, as our wise men always seem to do, a rapid retreat. Those on the region who have been calculating on an American departure in July 2011, regardless of conditions on the ground, should think again. That date was never very realistic, and the odds that Petraeus will counsel a premature withdrawal — or that he will be ordered to withdraw regardless of his assessment of the situation — is infinitesimal”.

This then is a time of great uncertainty about the future of the American enterprise in Afghanistan. There seems to be a general agreement that a negotiated settlement is the only way out of this conundrum. But how to get there is not clear. Some of this uncertainty may be removed when the operation in Kandahar materialises. A victory at Kandahar would certainly help the Americans and its allies but it will take time before it becomes apparent as to which side has won. Under the COIN philosophy, a military operation must be followed by a palpable improvement in the quality of governance. For that to happen a credible leadership must be available in the wings. That appears not to be the case either in Kandahar or in Kabul.

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Global Pakistani assets and their volatility

By Shahid Javed Burki
Monday, 12 Jul, 2010


PAKISTAN is one of the very few developing countries that place few restrictions on the movement of capital by individuals. China has many restrictions, India even more.

In Pakistan individuals – but not firms – can move money in an out more or less at will, acquire properties outside, and pay no taxes on the returns these properties produce.

The result of this is that a flourishing external market has developed for the Pakistanis. This is made up all kinds physical and financial assets. Nobody knows the size of the external market under Pakistani ownership but given the extent of uncertainty at home it must run into billions of dollars and must be equivalent to a significant proportion of the country’s gross domestic product.

Let us assume that the size of this market is between $20 and $50 billion dollars. This is a pure guess on my part. At the lower end it would constitute 11 per cent of Pakistan’s GDP; at the higher end, some 28 per cent. Assuming a return of around 10 per cent a year – not an exaggerated number given the profits available in Pakistan – this amount of finance employed in Pakistan would add 0.6 to 2.8 per cent to the rate of growth in the national product. If this capital were to come back to the country it would add substantially to the rate of growth of the economy. How can this be done? I will take up this question at the end of the article.

The bulk of the Pakistani investment overseas is in real estate followed by investments in various capital markets. The first market in particular has suffered some spectacular declines in recent years. What happened to real estate in Dubai is not the only example of a market in which Pakistanis heavily invested and which lost its bottom. Most real investments have done poorly in the Middle East, even in the more conservative Saudi Arabia.

There are also large investments in real estate by Pakistanis in the United States – both by those who continue to live in Pakistan as well as those who are part of the Pakistani diaspora in the United States. A significant amount of these investments were in the areas where the housing boom has been punctured thoroughly and a lot of speculative air just went out. There must have been hefty losses suffered by the Pakistani investors in these imploding markets.

Chastened by this experience, the Pakistanis investing abroad have shifted their focus to such East Asian markets such as Malaysia and Singapore. However, as the governments of these jurisdictions recognise, the real estate markets are experiencing bubble-type of investment behaviour there as well. The Singapore government in particular has taken several steps to cool the market. This means while the investments made in these markets may be secure, the returns are not certain since there is no assurance that there will not be capital losses.

What about the capital markets that have attracted considerable Pakistani investments especially since the advent of internet trading? Those who are actively involved in these markets are looking for security as they are in the real estate market and also are attempting to read the likely changes in the currency markets. The latter is a difficult thing to do even for those who are well versed in these matters.

It matters therefore for many very well-to-do Pakistanis how the fluctuations in the more important currencies in the world are creating turbulence in what financial people call the wealth market. Factoring in these fluctuations in the rates of return provided by investment in foreign assets must be taken into account by those who have entered these markets. As a foreign analyst put it recently in an article, “If you have a global portfolio, chances are that you’re feeling more pain these days than investors who have kept their money close to home.”

There have been significant up and down movements in most of the world’s more important currencies. The dollar index, for instance, that measures the value of the dollar against the more important currencies has seen some wide fluctuations over the last several months. It was at 120 on January 31, 2002 but plunged to 71 on March 31, 2008, recovered to 89 on March 9, 2009, fell back to 74 on November 30 2009, went back again to 78 on December 31, 2009, and rose further to 88 on June 1, 2010.

Pakistani investors must not only watch these movements, they must also assess the likely movements of the domestic currency. Those who invested in dollar denominated assets would have done very well because of the almost 13 per cent increase of the value of the dollar. However, since the value of the Pakistani rupee was relatively stable during this period the returns were lower compared to those that were available when the rupee depreciated from 60 to the dollar to 80 over a few months earlier on. This was a depreciation of 33 per cent but the value of the dollar with respect to other currencies also declined significantly during this time.

Therefore, the profits made by those who invested in euro-based assets must have done very well compared to those who chose the dollar or dollar assets. In other words, fairly complicated calculations have to be done in order to profit from the movements in foreign capital and financial markets.

How have the Pakistani capital markets performed compared to some of the other large markets around the globe? This is an important question to determine whether those who chose to take capital out of the country did the right thing if we were to look only at personal and not at national interest. One answer comes from The Wall Street Journal that estimated the performance of 78 markets in the world. Among these Pakistan ranked the 36th, showing a decline of 34.4 per cent. As against this the markets in the UK. and the United States declined by 27 and 31 per cent respectively. These two are the favourite places for Pakistani portfolio investors outside their own country.

The difference was not justified by the risks the investors were taking in terms of currency movements. They were certainly not worth the effort if we weigh in with social benefits into the equation. It is interesting to note that Tunisia, Sri Lanka and Chile were by far the best performing markets with increases respectively of 81.2 , 52.9 and 16.2 per cent. The Indian market by declining by only 13.1 per cent did better than that of Pakistan in this period. Of the 78 markets, only six markets had improvements; all other showed declines.

What needs to be done in order to stem the flight of capital from the country and have it stay at home and work for the domestic economy? The most obvious answer is to improve security in the country so that capital is not driven out because of fear that the assets in which it is put will be destroyed or not give acceptable rates of return. However, the most effective instrument for keeping capital deployed at home is to increase the cost of investing it abroad.

This can be done by ensuring that all incomes are appropriately taxed no matter where they are generated. This is called the global income approach to taxation. If those who send money abroad are aware that the incomes earned abroad will also get taxed they will factor that in their calculations. This should slow down the rate of capital outflow.

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