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  #161  
Old Thursday, November 04, 2010
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Democracy & development


Some economists suggest a threshold that must be crossed before conditions necessary for the success of democracy can be met. They place the threshold at about $6,000 per capita income.


By Shahid Javed Burki
Tuesday, 26 Oct, 2010


IS democracy good for economic development or does it hinder it? The debate goes on. India has certainly been helped by it in recent decades. Pakistan has done poorly since its return to what the Washington-based lobby group, the Freedom House, labels a “limited form” of democracy.
Those who have studied the miracle economies of East Asia and their extraordinary economic performance over the last three decades defend the model pursued by that region according to which economic development naturally precedes democracy.

Most East Asians turned towards democracy after achieving economic progress. Some economists suggest that there is a threshold that needs to be crossed before all the conditions considered necessary for the success of democracy can be met. They place the thresh old at about $6,000 per capita income.

Lee Kuan Yew, the founding father of modern Singapore, once asserted that democracy leads to “disorderly conduct” that disrupts material progress. The is land state has been slow to loosen the control of the one predominant political party on the tightly run political system. The country is now one of the richest in the world.

China’s economic success in the last quarter of a century, which is as remarkable as that of the East Asian miracle economies, has created the case for a tight grip on political power in order to create a dynamic economy. China’s ability to pull out of the recession of 2008-09 while the established democracies of the West are still struggling is considered further evidence of the need to follow a sequential approach: of allowing the economy to take off before attempting to bring in democracy. The Chinese approach is being followed by other countries in East Asia, particularly Vietnam. China may, therefore, be one reason why the drive towards establishing democratic systems has slackened in the world.

America’s experience in Iraq and Afghanistan, where it launched military operations in part to bring in liberal democracy, has not helped advance that particular cause in the developing world. Repeated elections in Iraq have not created a representative system of governance in which all segments of a very diverse population have full confidence.

While Iraq has made some advance, Afghanistan remains way behind. The Americans have concluded that the best way of departing from that country is to negotiate with the Taliban, a group that has no interest in the western style of governance.

In the 2010 report, Freedom House found that declines in liberty occurred in 40 countries (in Africa, Latin America, the Middle East and the ex-Soviet Union) while gains were recorded in 16. Liberty and human rights had retreated globally for the fourth consecutive year. The organisation said that this marked the longest period of decline in freedom since it began publishing its reports nearly 40 years ago.

Freedom House classifies countries as ‘free’, ‘partly free’ or ‘not free’ by using a range of indicators that reflect its belief that political liberty and human rights are interlinked. As well as the fairness of their electoral systems, countries are assessed on issues like the integrity of their judges and the independence of their trade unions.

According to The Economist, that in January 2010 wrote a long article on democracy’s decline using Freedom House findings, there was “a huge turn for the worse since the bubbly mood of 20 years ago, when the collapse of Soviet communism, plus the fall of apartheid, convinced people that liberal democracy had prevailed for good. To thinkers like Francis Fukuyama, this was the time when it became evident that political freedom, underpinned by economic freedom, marked the ultimate state in human society’s development: ‘the end of history’, at least in a moral sense.” Both Russia and South Africa became ‘free’ for some time by the reckoning of Freedom House. In 2009, Russia went back to the ‘not free’ category.

To quote from The Economist again, “for freedom watchers in the West, the worrying thing is that the cause of liberal democracy is not merely suffering political reverses, it is also in intellectual retreat. Semi-free countries, uncertain which direction to take, seem less convinced that the liberal path is the way to the future. And in the West, opinion-makers are quicker to acknowledge democracy’s drawbacks — and the apparent fact that contested elections do more harm than good when other conditions for a well-functioning system are absent.” According to Freedom House, the number of electoral democracies went down by three, to 116 in 2009. This left the total at its lowest level since 1995, although it is still comfortably above the figure of 69 in 1990. Then, even though Gen Zia was no longer holding Pakistan in his tight grip, having been killed in an air crash in August 1988, Freedom House still classified the country as ‘not free’.

Pakistan provides a good illustration in support of the following position: that elections alone don’t qualify a political system as a democracy. A more nuanced argument against the promotion of electoral democracy has been made by several analysts, most notably Fareed Zakaria and Paul Collier. They have argued that democracy cannot take hold in the absence of several pre-conditions that ultimately assure its success.

It is evident from Pakistan’s case that the legal and judicial systems are still playing catch-up with the election-based political structure. There is an ongoing con frontation between the government’s executive and legislative branches on the one side and the judicial system on the other side. The latter is still attempting to instil respect for itself among the ranks of those who dominate the other two branches. The former is not prepared to have its freedom constrained by the niceties of established law.

How should the debate be settled? Extending the universe to be studied beyond East Asia helps to conclude in favour of democracy. A study by Morton Halperin, Joseph Siegle and Michael Weinstein using World Bank data between 1960 and 2001, found that the average annual economic growth rate was 2.3 per cent for democracies and 1.6 per cent for autocracies. Those looking for more evidence point out that a climate of freedom is most needed in knowledge-based economies, the state towards which most successful countries are moving.

It is no accident that that every economy at the top of the Global Innovation Index is a democracy with the exception of Singapore and Hong Kong. China comes in 27th. Given all this evidence Pakistan should not be tempted to return to the controlled systems it has tried in earlier times.
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  #162  
Old Thursday, November 04, 2010
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Making the railways work


By Shahid Javed Burki
Monday, 01 Nov, 2010


THE Great Flood of 2010 not only killed a couple of thousand people, displaced millions of poor, also killed hundreds of thousands of animals on which the poor depend to generate some additional income, and laid waste to millions of acres of land. It caused an estimated damage of $10 billion to economic assets and will reduce the GDP increase by as much as one percentage point a year for several years to come.

The floods also exposed a number of weaknesses in the way Pakistan has been governed and the way it has managed its economy. Among these is the pitiful neglect of infrastructure that was built at great expense by the British rulers and from which the country could have drawn great benefit only if it had looked after what it inherited. In the days following the floods there was some commentary on the neglect of the system of irrigation but hardly any mention was made of the deterioration that has been allowed in the system of railways over the last many decades.

There are several reasons why successive administrations that have governed Pakistan since its creation allowed the well developed railway system to quite literally rot. One of these is the political power that was wielded by the rich who did not have to respond to the needs of the poor. The poor couldn’t afford air travel, didn’t have cars to use the roads whose development fared better than the railways in terms of the attention given by the state, and the state did not have the resources to invest in infrastructure.

Could this trend be reversed? The answer is “yes” but it will need those who rule to recognise that railways even now perform a major function in helping economies function and grow. Dozens of countries around the globe, both developed and developing, are heavily investing in improving the railways systems. Pakistan is not one f them.

A recent book by Christian Wolmar, a historian of railways, provides an overview of how the various large systems in the world were built and how they have contributed to economic advance. Railways, he maintains were the driving force behind the first age of globalisation in the nineteenth century. “Railroads let Kansas wheat farmers feed Manchester workers, and Indian cotton growers clothe Brazilian peasants. Railways drew those Irish and Chinese immigrants to America, and their counterparts from other countries to construction projects around the world.

Railroad-building enticed capital from developed to developing economies of the United States, India and elsewhere. Trains allowed people who might never have travelled more than 100 miles from their places of birth to roam around continents in comparative ease.” Railways, in other words, encouraged the movement of goods, commodities, people and capital to go to places where they would never have gone had the cost and pain of travel not been eased by them.

There are a number of management systems that have been tried in various parts of the world. In the United States, the business is almost entirely in the hands of the private sector in so far as inter-city transport is concerned. It is only the systems that run in the cities that the ownership is in public hands. In continental Europe the system combines government ownership with construction and maintenance largely in the hands of the private sector. This management model has given rise to large manufacturing companies that have dominated the sector before the recent arrival of the Chinese..

That the use of the management model can have profound – sometimes negative—consequences for the development of the railway system is demonstrated by the way the privatisation of the British system affected is efficiency. The impact of splitting up track from signalling, development from maintenance, management from coordination played havoc with the system.Today Britain is decades behind Continental Europe in terms of the efficiency of its railways.

The business of railways is changing and in dealing with the sector, Pakistan being a late starter in modernising the system, could possibly leap-frog into the future. There are a number of management systems that have been tried various systems of the world to improve railway transportation. In the United States, the business is almost entirely in the hands of the private sector in so far as the inter-city transport is concerned. It is only the systems that run in the cities that the ownership is in public hands.

That is largely because the operations are highly subsidised though taxes. In the Continental Europe, the systems combine government ownership with constuction, expansion and maintenance is largely in hands of the private sector. This form of management has given rise to large manufacturing companies that have dominated the system before the arrival of the Chinese companies on the railway scene – subject to which I will return later in the article.

It is the system of railway management in Europe that gave rise to equipment manufacture, track construction and maintenance behemoths such as Germany’s Siemens, United States’ General Electric, Japan’s Kawasaki, France’s Alstom and Canada’s Bombardier.

The Chinese have now entered the business of railways in a big way. Earlier this year China’s Xinhua news agency published a long article explaining how the country had “achieved 40 years of high speed railway development in just five years.” According to one analyst, the Xinhua “document should be read by all manufacturers doing business in China, a reminder that they are dealing with a nation that is no longer willing to be technology follower and is able to use the allure of its vast market to catch-up”.

As China did in several other sectors including coal and nuclear power generation and manufacture of automobiles it has granted access to its enormous market by insisting on the transfer of technology. It has managed to develop its railway industry to the point at which it was able to out-compete the established systems in Europe and North America in winning the contract to build a high speed line connecting Mecca with Medina.

India is also making impressive strides in the railway sector. The underground system in Delhi has won the admiration of many foreign experts for its engineering as well as management. The inter-city system is being modernised in terms of both the quality of service on offer as well as the new equipment being used.

The Indian and Chinese systems are by far the largest in the world and the two countries as a result of the advances they are making will come to dominate the world railway industry and business. Pakistan being a neighbour of these two rapidly growing and giant economies could benefit enormously from the development of the two systems.

Pakistan needs to move quickly and ambitiously in at least three areas. It should modernise the system by improving the track and increasing the speed at which the trains travel. It should use the railway system to provide mass transport in the major cities. And it should link its system initially with those of China and India but eventually also with those of Afghanistan and Iran. That way Pakistan will be able to make good use of its geographic situation.

As I have suggested on many occasions before, giving India the transit rights to Afghanistan, China, and Iran could yield enormous economic benefits to Pakistan. Such a programme will require large resources to be implemented but these should be available not only from the donor community but also through the international bond markets. As Wolmar describes in the work cited above, some of the major railway networks were built by tapping the international financial markets.
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  #163  
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The middle-class millions


Pakistan’s liberal, educated and modern middle class can be counted upon to resist any attempt by conservatives to take over the country and its institutions
.

By Shahid Javed Burki
Tuesday, 02 Nov, 2010


AN earlier article on these pages has led to a controversy among some who are paid by their think tanks to worry about Pakistan; where it is today and where it might go in the future.
In the article I suggested that there were tens of millions of people in Pakistan — mostly in the urban areas — who constituted the expanding middle class. I put a number on my estimate. I suggested the average income of the middle class and its size in Pakistan suggested that there was a middle-income segment embedded in the country’s population.

I went on to suggest that the value system and aspirations of the people belonging to this group of people were not very different from the middle classes in other parts of the world. They were more liberal and less religious, more educated and more open to modernisation than the more conservative elements in the society. They could, therefore, be counted upon to resist the attempt by conservatives to take over the country and its institutions.

It was this conclusion that drew the attention of some academics and policy analysts in the West — in particular the US — to my estimates and to my argument. Those who objected were also those who believed that Pakistan was moving along a path from which it could not be rescued; that a takeover of the country by the extremists was inevitable; that Pakistan’s arsenal of nuclear weapons would inevitably fall into the hands of terrorists and thus equipped, some people from Pakistan would attempt to create havoc in the West much worse than 9/11.

Some of my Pakistani colleagues who were present when my findings were discussed in some of these seminars suggested that I should buttress my argument by making clear the methodology I had used to derive the numbers I had presented in the article. I told my friends that my method was simple. I had assumed that one could separate the top 10 per cent of the population in terms of the in come distribution as rich or well-to do and the bottom 60 per cent as poor or under great economic stress. The remaining 30 per cent of the population could be said to constitute the middle class. If Pakistan today has a population of 175 million people, then those in the middle class numbered 52.5 million. This was a simple enough calculation.

What made my estimates interesting was not the number of people belonging to this class but their average income. To calculate that I used the World Bank’s income distribution data from its World Development Indicators tables. These tables tell us that the top 10 per cent of the population had a combined income of $43.2bn or a per capita income of $2,450 in 2008. This group accounted for 43.2 per cent of the national income.

The bottom 60 per cent of the population received only 22 per cent of the national income. This meant income per head of this group at only $340, or less than one-seventh that of the rich. The residual $83.75bn accrued to the middle class. This class had income per head of $1,600. Their share in the national income was 34.8 per cent and their per capita income was 72 per cent of the average for the country.

It is, of course, quite arbitrary to classify 30 per cent of the population as belonging to the middle class. If we assume that their proportion is 20 per cent of the population this would still give us 35 million people belonging to this category. This revised estimate would increase the per capita income of this segment of the population to $1,900 or their combined total to $66.5bn or 40.8 per cent of the total. If we say that a typical middle-class family has five members, it is safe to assume that seven to 10 million households belong to this category.

The point of this exercise is to indicate that Pakistan has a large number of people with a middle-class income and with a middle-class pattern of consumption. They spend a large amount of their total incomes on services such as education, health and entertainment. A significant proportion of the households in this category have their members living and working abroad.

According to one estimate, there are about 800,000 people of Pakistani origin in North America. This would suggest that some one-tenth of households in the upper income group — the rich, the well-to-do and the middle class — have some exposure to this part of the world. Notwithstanding the case of Faisal Shahzad, the US citizen of Pakistani origin who was recently sentenced by an American court to life im prisonment for attempting to set off a bomb in New York City, I can’t imagine that the exposure of such a large number of households to North America would not have some liberalising influence.

That a large middle class has begun to flex its politi cal muscle was shown by what has come to be called the lawyers movement that resulted in the restoration of judges fired by former president Pervez Musharraf. It is this social and economic class that is supplying both audience and talent to the electronic media that is displaying an extraordinary amount of independence in commenting on and analysing national and international affairs.

This class is committed to a representative form of government and would also like to see the policymakers deliver clean and effective governance. It is unlikely that it would countenance an attack on either of these goals from any quarter, from the establishment or from religious zealots. This is one reason why, in spite of all the misgivings expressed about Pakistan’s political, economic and social future, I remain confident that we will see the country successfully muddle through the present sets of crises and continue to move towards a democratic form of government.
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Old Friday, November 26, 2010
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Using trade to grow and develop


By Shahid Javed Burki
Monday, 08 Nov, 2010



AN open trading system helps to increase the rate of economic growth and the pace of development. It is always helpful to distinguish between growth and development since the former concept does not fully capture the benefits that should accrue when the national income increases.
The rewards from increments to national income should be distributed as widely as possible not only among different segments of the population but should also reach the country’s more backward regions.

Empirical evidence gathered and analysed by development institutions such as the World Bank and the Asian Development Bank suggests that open trading systems also aid in the alleviation of poverty and the development of backward regions.

For a number of decades after most of the countries that achieved independence from colonial rule, the received economic wisdom was that it was better to participate in international trade after a certain amount of industrialisation had been achieved.

Some of the earlier thinkers from the developing world, most notably the Argentinean economist Raul Prebisch, had concluded that open trade would beep what they called the world’s periphery backward since the world’s industrial cores would use their economic muscle to put a downward pressure on the prices of the commodities exported by the developing world.

This would lead to the transfer of wealth from the periphery to the centre keeping the former permanently dependent on the latter. This came to be called the “dependency theory”.

This theory was applied rigorously by the countries of Latin America and South Asia; in the case of the latter for four decades after the countries in the region had gained independence from British rule. Jawaharlal Nehru, India’s first prime minister who ruled the country for 17 uninterrupted years, was the most articulate exponent of this theory. He exercised his influence through the Non-Aligned Movement he dominated to influence the international trading system as it was evolving after the Second World War.

The NAM countries were able to get the right to protect most of their industries under the “infant industry” argument according to which sometime was needed to allow the manufacturing enterprises in the developing world to mature before they faced competition from the more developed industries in rich countries.

Once again empiricism came to the help of economic theory. When the remarkable economic performance of some of the countries of East Asia was studied by the World Bank in the mid-nineties, it concluded that international trade was the real driver of growth of the “miracle economies”.

Using industrial policy, these countries were able to develop a manufacturing sector that was able to compete successfully with the more established industries in the developed world. A wide range of products were exported; they included not just cheap labour merchandise such as ready-made garments but also such highly engineered items as ships and eventually automobiles. This became possible because these countries oper ated relatively open trading systems.

It was only in the mid-eighties – more fully in the early nineties – that the countries in South Asia began to change their policy stance. They began to open their economies with Pakistan taking the lead under the financial stewardship of Sartaj Aziz who was then the minister of finance.

India under its finance minister Manmohan Singh followed even more aggressively. New Delhi dismantled what had come to be called the “license raj” and thus unshackled the economy which had kept the private sector under a very tight control of the government.

Even with more openness, the South Asians have not used international trade as the engine of growth and development to the extent done first by the miracle economies of East Asia and later by China. In terms of the making of public policy in the region two issues remain unresolved: what approach to use in opening the economy to the world outside and how to encourage exports.

Economists have debated for some time different approaches to openness. Three of these have been put forward. The purists believe in what is termed as the “unilateral approach”. This is done by lowering the barriers to trade without waiting for reciprocity from the trading partners. This is what the East Asians had done to some extent.

If they constrained imports it was more by way of the exchange rate policy. Domestic currencies were kept seriously undervalued which meant that foreign goods remained expensive in the domestic market while the products produced by domestic industry became internationally competitive.

China, to the consternation of the United States, continues to follow this approach. The second approach is to let openness come through changes in the multilateral trading system. This is the favoured view on the part of those who believe in reciprocity. This is what guided the series of multilateral trading rounds that have established the rule-bound international trading system. The latest of these – the Uruguay Round – was concluded in 1995 with the signing of the treaty at Marrakesh in Morocco that led to the establishment of the World Trade Organisation. Another round was initiated at Doha in November 2001 the specific purpose of which was to address the problems the developing world faced in the new system.

The most important of these was the restricted trade in agriculture as a result of the extensive support provided by the governments in the United States, Europe and Japan. The various kinds of subsidies by the state to the small number of people who continued to draw their living from agriculture in the developed world meant loss of great deal of income for the millions of poor farmers in developing countries.

How to produce a level playing field in the sector of global agriculture became the central issue in the Doha Round. The round remains stalled because of the differences between developed and developing countries.

The third approach to opening to the outside world has resulted in the signing of free trade agreements (FTAs) between trading partners or among countries in well defined regions (RTAs). The South Asians have tried both mechanisms. Pakistan, for instance, has free trading agreements with China and Sri Lanka and is also the member of the South Asia Free Trade Area.

The Safta was signed in January 2004 at the summit of the sevenmember South Asian Association of Regional Cooperation and was launched two years later in 2006. Pakistan was the last country to ratify the agreement. Since the launch of the SAFTA, Afghanistan was admitted as the eight member of the Saarc.

The Safta has not delivered what was expected from it. There has been only a marginal increase in the value of regional trade in part because the attention of India and Pakistan has remained diverted towards other places – India’s towards East Asia and Pakistan towards the United States and Europe.

Pakistan has heavily invested its political capital in gaining access for its traditional products in the American and European markets. The products whose access it has sought belong mostly to the textile group where there is increasing competition from the countries that have even lower wages than Pakistan.

This strategy has delivered some limited results: the Europeans have agreed to grant access to a limited set of textile manufactures for a short period of time. The Americans may do the same. I believe this approach is wrong. It may provide temporary relief to the highly stressed textile industry but it will only serve to prolong the distortions in the industry that have created problems in the first place.

International trade will not become an engine of Pakistan’s economic growth and development for as long as it does not concentrate on developing markets nearer home and promote the production of goods and commodities that have a better future than textiles in the international market place.
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History must not lie


The Pakistan movement may have used the idiom of Islam to draw mass support. But the objective was to secure a better economic future for the Muslims of India, not to create an Islamic entity.


By Shahid Javed Burki
Tuesday, 09 Nov, 2010


EVER since gaining independ ence Pakistan has done a re markable job of either ignoring its history or simply not telling the truth about it. The first is true for economic history, the second for the part of history that concerns the country’s polit ical evolution.
In a well-known work Khursheed Kamal Aziz — or simply KK as he was known to his friends and admirers — wrote about the series of lies and distor tions that crept into the writing of histo ry. In The Murder of History, one of his last works, he confessed that he was also guilty of committing this crime.

In the officially sponsored The Making of Pakistan which for many years remained the definitive account of the founding of Pakistan as a separate state for the Muslim community of British India, Aziz gave greater prominence to Muslim na tionalism as the reason for the creation of Pakistan than suggested by the facts.

This line of argument was pursued in a number of works by several other political historians who followed Aziz’s work. They identified religion as the motivating factor behind the movement for the creation of Pakistan. The question of why a segment of the Muslim population of British India came to believe that separation from the Indian mainland was the only way to protect their interests acquired importance in the writings on the founding of Pakistan. Increasingly, the answer came to be provided in religious terms.

This interpretation of history is not only wrong, it is also dangerous. What we are seeing now in terms of the rise of extremist Islam in the country can be attributed to this line of thinking. This approach to history has also resulted in casting ‘Hindu’ India as the eternal enemy. I have advisedly put the word ‘Hindu’ in quotation marks since India is not by any stretch of the imagination a Hindu state. It is a secular state that de fines itself as such in the constitution it has followed carefully and dutifully. It is no doubt a Hindu-majority country but has permitted all religious communities to exercise their rights according to the law of the land.

Distorting the Indian political entity has already done considerable mischief and has influenced Pakistan’s relations with its large neighbour. As Raza Aslan, the young Islamic Iranian-American scholar of some repute has emphasised in his recent book, How to Win a Cosmic War, conflict based on ideologies can only be waged if the enemy can be defined as the ‘other’ — an entity, political or otherwise, against which a struggle must be waged no matter what the cost.

These conflicts become dangerous, prolonged and unending when both sides take recourse to a higher being. This is what Al Qaeda has done globally and what various Islamic groups are doing in Pakistan at this time. For the first the Christians, Jews and what it calls the “crusaders” constitute the ‘other’. For some of the Pakistani groups India has been cast in that role.

This approach has done an enormous amount of damage to Pakistan. As Raza Rumi recently wrote in a weekly newspaper devoting considerable space to K.K. Aziz’s work, the writing of history was brutalised during the Zia era. “Pakistan’s military-bureaucracy complex reinvented an ideological state based on a sectarian world view; history was an instrument propagating this ideology; and the jihad factories were flourishing. Jinnah’s Pakistan was irreversibly shattered and perhaps destroyed. For K.K. Aziz’s generation this was nothing short of betrayal.” As I have written in several of my own works, the Pakistan movement may have used the idiom of Islam as a way of drawing mass support; it was not a movement for creating an Islamic entity but an attempt to secure a better economic future for the Muslims of British India. This is why there was a paradox in the way the movement achieved its ultimate objective — the creation of Pakistan.

The movement was led by a group of people who belonged to the Muslim minority areas of British India and who felt that their economic future would be threatened in a state in which the Hindu majority would rule. However, they created a state in the part of British India in which Muslims constituted a large majority and felt secure about their economic future even after the departure of the British from India. It was for this reason that Punjab and the Frontier were at best lukewarm to the idea of Pakistan. But once Pakistan came into being these two elements coalesced to define a view in which the economic betterment of the citizenry was the main goal to be pursued.

However, then Islamists under Gen Ziaul Haq entered the picture and began to distort the original idea of Pakistan. Mohammad Ali Jinnah’s famous words uttered as he was preparing to launch the new state of Pakistan — “You are free. You are free to go to your temples, you are free to go to your mosques or to any other place of worship in this state of Pakistan. You may belong to any religion, caste or creed — that has nothing to do with the business of the state” — meant nothing to these ideologues. They got busy in rewriting the meaning of the idea of Pakistan.

The inherent conflict between the two ideas of Pakistan remains unresolved. What is it that we want to create in what is now the second largest country in the Muslim world? Do we want a state ordered according to the ‘principles of Islam’ whatever that term implies or to improve the economic and social circumstances of the country’s citizens? There is enough evidence around to suggest that it was the latter objective that was in the minds of the founders of the country. It is that objective that we need to follow.
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Knowledge as a driver of growth


By Shahid Javed Burki
Monday, 15 Nov, 2010


ECONOMISTS have moved away from their belief that growth is mostly the consequence of the application of capital and the use of surplus labour. Emphasis on labour and capital as the main determinants of economic growth was the foundation of development and growth economics.
It was this way of looking at growth that convinced early policymakers to concentrate on raising capital for investment. If capital could not be generated from within the economy by increasing domestic savings rates – these were low in most of the developing world half a century ago – then serious efforts should be made to get it from abroad.

The latter approach was followed by Pakistan throughout its history. This dependence on foreign money meant that Pakistan has had to accommodate the interests of those countries and institutions that were prepared to finance its growth.

Protracted discussions with the IMF in recent months are one example of the kind of pressures the country comes under because of the reliance on external finance.

As experience was gained in development and growth and as more data became available to recognise and quantify the drivers of growth, economic thinking deepened.

There is now consensus among economists that a number of other contributors to growth are also important – some of them are vital if growth is to be sustained over a period of time. Among them are technology, the capacity to innovate and the levels of skills obtained by the workforce. These three elements are usually lumped together and called “knowledge”.

Some of the pioneering work in this area was done at the World Bank which in 1996 devoted its World Development Report to this important subject. Since then the institution has gathered more data, including from the countries in South Asia, to study how the application of knowledge advances the rates of economic growth and what are the various areas of policy on which the governments should act.

In the process the bank developed a useful tool for benchmarking to determine how countries across the globe were doing in terms of using knowledge to grow their economies. The knowledge economy index, or KEI, was developed which highlights how countries are performing in relation to others.

The bank’s findings indicate that South Asia as a region and Pakistan within this region have done particularly poorly with respect to KEI. Two conclusions can be drawn from this finding. One, that the countries that have fallen behind in terms of using knowledge to advance their economies could possibly catch up if they paid attention to knowledge and, two, that the governments have a critical role to play in helping the countries to catch up with those that have moved ahead.

The KEI is based on four pillars – economic incentive regime, innovation, education, and information infrastructure. The index ranges from zero to ten with the countries doing poorly closer to zero and those doing well closer to ten.

A comparison between two points in time provides an indication of how well the countries have performed in the past and how they might do in the future if the content of public policy does not change. The accompanying Table provides some useful information which is worth considering in formulating public policy in the laggard regions such as South Asia and laggard countries such as Pakistan.

The Table provides data for two points in time: 1995 and the more recent, which is generally the early 2000s. The KEI has declined for G7 group of industrial countries, for all of Europe, and for most of the developing world. It has improved for East Asia.

This is one important reason why East Asia is catching up with the more advanced countries of Western Europe, North America and Japan and is also the reason why the South Asia continues to fall behind. It also tells us why Pakistan is doing so poorly relative to India.

In 1995, the KEI for India was measured at 4.02, the highest among the South Asian countries. At 2.82, Pakistan came in third, behind India and Sri Lanka. A decade or so later the Indian situation worsened a little but Pakistan’s deteriorated sharply.

The gap between India and Pakistan widened from 1.73 points in 1995 to 1.92 points in the early 2000s even though the scores for both countries fell. The Indian decline occurred in spite of improvements in the economic incentive regime as the governments headed by Prime Minister Manmohan Singh continued to dismantle what had come to be known as the “licence raj”. The country also improved its capacity to innovate. But there was decline in education and surprisingly in information infrastructure pillars. Pakistan saw declines in the heights of all the pillars. The sharpest deterioration was in the area of the “economic incentive regime” and the smallest in the “innovation” pillar.

Another way of looking at Pakistan’s situation with respect to the use of knowledge and growth for development is to do it by comparing the country’s performance with respect to India. Using the data presented in the Table we can estimate the ratios between India and Pakistan for the two periods. It is in education with the Pakistani achievement at 40 per cent of India’s that Pakistan has lagged the furthest behind. It is in information technology with Pakistan at 68 per cent of the Indian achievement that Pakistan has done the best relative to India.

Recalling that the KEI is made up of four pillars and that each pillar has five components there are in all 20 public policy options available to the state to use knowledge to promote growth. Which of these are the most important for Pakistan?

The government needs to focus on at least two areas of public policy: education and research and development or R&D. It is now well recognised that well educated and skilled people are key to not only creating knowledge but also sharing and disseminating it. There is need not only to get all children to attend school and stay in the class room to acquire basic education, there is also the need to improve secondary, higher and technical education.

South Asia has not done well in the past in these areas and continues to perform poorly. Between 1990-01 and 2002-03 enrollments rates at the secondary level worldwide increased from 55 to 71 per cent and from 16 to 26 per cent at the tertiary level. For high income countries the increases were 94 to 107 per cent for the secondary and from 47 to 66 per cent for the secondary and tertiary levels respectively. For South Asia the enrollment was only 49 per cent for secondary education. Similarly South Asia invests very little in R&D, with India once again taking the lead.

In conclusion one needs to recognise that a growth strategy for Pakistan should not only be about savings and investment rates and the allocation of investment in high priority sectors. It must also include innovation.
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Foundations of economy


In Pakistan’s early days, economic policymaking was in the hands of professional civil servants. This meant leaving the economy in the hands of the private sector but keeping a watch on its activities.


By Shahid Javed Burki
Tuesday, 16 Nov, 2010


LAST week I wrote about the way in which Pakistan’s history has been misrepresented by his torians, mostly under pressure by a succession of governments from the very beginning. But the most mischief was done by the administration headed by Gen Ziaul Haq.
I will focus today on how this telling of history has led to our understanding of Pakistan’s economic foundations. Having proposed a political entity that would provide economic and social com fort to the Muslim community, Jinnah and his associates failed to define its con tours. They seem to have assumed that once an independent Muslim state was created it would pursue the style of polit ical and economic governance that was practised by the British when they ruled India. That did not happen largely because of the transfer of population that accompanied partition.

As a result of the migration of 14 million people who moved across the newly defined border between India and what is now Pakistan, the Pakistani political system was seriously unsettled. This had a profound impact on the making of economic policy in the country.

Later the ‘Muslimisation’ of Pakistan — the fact that the population transfer led to an increase in the proportion of Muslims from less than 70 per cent to nearly 95 per cent — created spaces within which ‘Islamic’ operators in the country were able to redefine the idea of Pakistan. The economic significance of this development was indirect. It had two consequences. It led to an obsession with India in the making of policy and it reoriented Pakistan’s external focus towards the Middle East.

The immediate consequence of the partition of British India and the making of economic policy during Pakistan’s formative years was the attempt to create an economy that was separate from and independent of that of India. To understand why and how that was done we should concern ourselves with at least four subjects.

One, what was the shape and structure of the Pakistani economy in the late 1940s? Two, what was the policymaking environment within which the early decision-makers operated? Three, what were some of the decisions that were taken in the early days of Pakistan? And four, in what way was Pakistan’s economic future affected by the decisions that were taken early in the life of the country as an independent state?

Pakistan’s economic historians have not provided us with a detailed quantitative picture of the Pakistani economy as it was in 1947, the year of the country’s birth. There is much speculation in the picture I am going to paint today. What is Pakistan now — by that I mean the country that emerged in 1971 after East Pakistan separated to become the independent state of Bangladesh — had a population of only 30 million people. In today’s prices and exchange rate, the size of the Pakistani economy was less than $8.4bn and its per capita income was $280.

Seventy per cent of the GDP came from agriculture while almost 90 per cent of the population lived in the countryside. Working from these numbers it would appear that while rural per capita income was only $185 that in the urban areas was close to $1,000, a ratio of one-to-five.

In other words, Pakistan’s economy was primarily rural and there was much poverty in the country. Perhaps fourfifths of the population lived in what today would be called absolute poverty. Another two million people were added by the transfer of population that followed the partition of British India. Since about half the refugees settled in urban areas, the proportion of the urban population increased sharply.

Trade was an important part of the economy with trade-to-GDP ratio of 40 per cent. Much of this was with the parts of British India that became independent India and almost all of it was in commodities — food grains and raw cotton. In return most of the basic consumer goods came from India that had a much more developed industry than was the case in Pakistan.

This structure of the economy was suddenly changed by three circumstances. The first of these was the fact that those who dominated economic decision-making in the early days of Pakistan did not subscribe to any particular ideology. That was not the case in India where the political leadership took command of the economy.

In Pakistan economic policymaking was in the hands of the professional civil servants who had developed their skills in the last couple of decades of the rule by the British. This meant leaving the economy in the hands of the private sector but keeping a watch on their activities.

In India, on the other hand, Jawaharlal Nehru, the country’s first prime minister, was so impressed with the Soviet Union that he put the state on the commanding heights of the economy as Lenin had done in his country. This led to the development of the ‘licence raj’ under which the state had a tight control over the decisions taken by private enterprise. The state’s control over the Pakistani economy came later in 1972 when Zulfikar Ali Bhutto began the task of socialising the Pakistani system.

The second circumstance was the initial domination of the political structure by the migrants from India who were mostly from the urban areas. They had little understanding of an economy dominated by agriculture. Thus disposed they got an opportunity presented by India — the third circumstance — when Nehru refused to accept Pakistan’s decision not to devalue its currency with respect to the US dollar. This changed the rate of exchange from parity to 100 Pakistani rupees to 144 Indian rupees. In reaction India cut off trade with Pakistan and forced rapid industrialisation by the first generation of Pakistani leaders.

This is how the foundations of the Pakistani economy were laid in its formative years. What happened then is still resonating. It takes a good reading of economic history to comprehend how the Pakistani economy came to be developed and how it must move forward. ¦ The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.
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Changing profile of global economy


By Shahid Javed Burki
Monday, 22 Nov, 2010


I HAVE written before in these pages on Pakistan’s relations with China. The question now is whether an adjustment is needed in these relations in the light of President Barack Obama’s recent visit to India and his warm endorsement of the rise of India as a global power. I believe that a closer examination of the US position should not cause any worry in Islamabad.
China continues to raise its profile in the global economy, a fact noted by President Barack Obama, the United States president in his first visit to Asia in November 2009. Then in a widely noted speech in Tokyo before he continued his Asian trip that included stops in Singapore and China, President Obama declared that he wished to cooperate with Beijing to manage the global economy.

He was recognising two facts about the structural changes that were occurring in the global system at some speed. The first was that America was no longer able to dominate the global economy as it had done after the collapse of the Soviet Union and the fall of the Berlin Wall. The second was the fast rise of China as an economic power which was to set to pass Japan and become the world’s second largest economy. This in fact happened in the middle of this year. The American president proposed a type of arrangement that was soon dubbed the “G2” in which Beijing and Washington would collaborate to define the contours of the new global economy that was emerging. The details within these contours would be filled in by the larger G20 group of countries. This larger group included not only all the members of the club of rich nations known as G7 but also a number of large emerging economies such as Brazil, India, South Africa, South Korea and Turkey. Pakistan is not a member of the group.

On his more recent trip to Asia that began with a three day stay in India, President Obama seemed to signal a significant change in his earlier stance. He appeared no longer to be focusing on the Washington-Beijing relationship as the hub from which a number of spokes emerged to reach other parts of the world. In the reordering of the world, he was now advancing the case of India.

In a meeting with the press in Mumbai he described India not as an emerging economy but as an economy that had already emerged. He repeated that sentiment in a speech delivered to the Indian Parliament in New Delhi, his next and final stop in India.

“The just and sustainable international order that America seeks includes a United Nations that is efficient, effective, credible and legitimate. That is why I can say today that – in the years ahead, I look forward to a reformed UN Security Council that includes India as a permanent member” , he told the Indian legislature that resulted in a long applause from the law makers.

This appear to spell a major change in Washington’s position with respect to the Indian interest in securing a permanent seat – and hence a veto – in the Security Council. The US president was not suggesting that he would work quickly to seat India in the Security Council as a perma nent member, a step that would not be supported by China, the only country in the region that had that status. “This is bound to be a very difficult process and it’s bound to take a significant amount of time” explained William J. Burns, the US undersecretary of state for political affairs. Burns was also speaking in New Delhi.

Why this change of heart – and mind – by President Obama and his administration about the relative roles of China and India in the global economic and political orders? There are several answers to this question. The first is that President Obama was promising India a much more important political role in the evolving global system.The role was different from the one he had promised Beijing a year earlier as he reached out to the Chinese leadership. The quasi G2 formulation was related to the management of the world economy, not the global political system.

Second, even more important than the first explanation was the rapid and somewhat unexpected economic rise of China. It had occurred much more rapidly than seen by Washington in November 2009. The US seemed to be getting worried about the pace at which China was rising. Some numbers about China’s performance tell an interesting story. According to the IMF the global economy grew by 0.19 per cent in 2009, measured in terms of purchasing power parity. China contributed 1.19 percentage points to that growth. This means that without China, the global economy contracted by one per cent.

China saved the world from serious recession. According to Vivek Arora, assistant director of the IMF’s Asia-Pacific department, China “clearly made a signifi cant contribution. It is there in the numbers. But beyond the arithmetic impact, if you take into account spill over effects, the contribution is even larger”. China, for instance, contributed 46 per cent of global domestic demand in 2009-10, up from only 22 per cent in 2008-09.

What gave China the salience it now has in the global economy is the highly successful stimulation package it developed and launched n 2009.This was a four trillion renminbi programme worth $601 billion. It saved the Chinese economy from a free fall and provided employment opportunities to 200 million migrant workers who had lost their jobs and posed a real threat to the stability of the social and political systems. This stimulation was used to restructure the Chinese economy. It has now, for instance, the world’s biggest high-speed-rail net work.

While China went about rescuing its economy vigorously, the United States dithered. According to Nobel Prize winning economist Paul Krugman who is also a columnist for The New York Times, politics inhibited action by the Obama administration.“Fearing opposition in Congress, the Obama administration offered an inadequate plan, only to see the plan weakened further in the Senate. In the end the small rise in federal spending was effectively offset by cuts at the state and local levels so that there was no real stimulus to the economy.” China has not only been able to promote its economic rise with its stimulation policies, it has also expanded its reach. Beijing has purchased $50 billion worth of IMF bonds thus increasing its presence in the institution which will help it influence the making of global economic policy. It has negotiated $95 billion in currency swaps with a number of countries including Pakistan which will pave the way for making the renminbi a global reserve currency. It has provided a third of the funds for a regional back-up mechanism for the countries in financial stress. The idea for such a fund was first mooted in 1997 following the Asian financial crisis of 199697.

China’s demand for industrial commodities is also helping to reshape global trade. Its demand for these commodities was only seven per cent of the total in 1999 but increased to 31 per cent in 2008 just before the global economy plunged into the Great Recession. As a result of the way it handled stimulation, the share increased further to 48 per cent in 2009. This has had an enormous impact on its relations with other major economies.

China now is a major trading partner of Germany. According to Goldman Sach’s Jim O’Neill, in another 12 to 18 months, “German trade with China could be as big as German trade with France”. Much of this is because of the Chinese imports of German machinery and automobiles. Total imports from Germany were $300 billion in the first nine months of 2010 compared to the same period last year.

In 2009 President Obama began to recognise China’s rising economic power and attempted to accommodate it in the evolving global economic structure. A year later he paid heed to India’s increasing political role in Asia. Pakistan needs to accommodate itself to both, not exaggerate the meanings of the American president’s recent pronouncements.
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Economy under stress



Pakistan’s economy does not show any sign of imminent collapse. What it shows is that it is under great stress. What it has also shown is the ability to recover quickly— sometimes with a bounce.


By Shahid Javed Burki
Tuesday, 23 Nov, 2010


IS the Pakistani economy in a deep crisis? The answer is most definitely ‘yes’. Is the country’s economy standing at the edge of a deep abyss into which it could conceivably fall? Once again, yes. Is the economy collapsing, though? The answer is ‘most cer tainly not’.
During my long career in development economics, both as a student of the sub ject and for a much longer time as a prac titioner of the still-evolving discipline, I dealt with many faltering and some col lapsing economies. I can say with some conviction that Pakistan has not yet reached that stage.

There are several signs that point to an economic collapse. The currency loses its value, plummeting to a newer depth every day, if not every hour. I saw that happen in Argentina and Brazil. Inflation may reach the point where it becomes almost meaningless to measure the increase in prices. In some ex treme cases, barter may replace cash transactions. This too I saw happen in the southern cone of Latin America.

The government may run out of foreign reserves and may not have the money to service foreign obligations. Default becomes a possibility; it became a reality in Argentina and Ecuador. Pakistan has been close to this situation a few times but by going to the IMF, it was able to avert default. Commercial banks may default and there may be a run on the banks. This almost happened in Mexico in December 1994.

There are of course close links between politics and economics. A dramatic change in one will most likely affect the other. The writ of the government may not apply and society may begin to display total lawlessness. I saw that happen on many occasions in Haiti during my service with the World Bank in that part of the world. This is the situation of many nations of sub-Saharan Africa that have been torn by internal strife for decades.

The Pakistani economy does not show any of these signs of imminent collapse. What it shows is that it is under a great deal of stress. What it has also shown is remarkable resilience which has made it possible to pull back from near-collapse and move forward, reaching a higher plane of activity. The economy has absorbed many shocks delivered both by man and nature, and by circumstances beyond the control of those in charge of the economy at any given time.

At this time it is dealing with stresses that have been caused by all these different sources. What the Pakistan economy has also shown is the ability to recover quickly — sometimes with quite a bounce. With this as the background what I will do today is discuss three things: the current state of the economy and its immediate prospects, some ideas about the options available to the current group of policymakers and, finally, the form recovery might take once it takes hold of the economy.

Pakistan today is South Asia’s poorestperforming economy. Its projected growth rate for the next couple of years is about a third of that expected in India and about half of that considered to be plausible for Bangladesh. The current financial year — 2010-11 — is likely to be particularly bad for the economy. The great flood of 2010 has caused a loss equivalent to 3 per cent of the GDP. The damage to the economy has been estimated by foreign development agencies at $10bn.

This could lower the rate of growth of the economy by one to 1.5 percentage points a year for several years to come. This means that for the current year there will be a decline in the level of average per capita income and that, in turn, will translate into a significant increase in the number of people living in absolute poverty. The country may add 10 million people to the pool of poverty, bringing it to 40 per cent of the total population. This will be the highest point reached in many decades.

The shocks to the economy during the last couple of years have worsened the fiscal situation to the point where the budgetary deficits being experienced and projected are no longer sustainable. These deficits have not translated into a balance of payments crisis as would normally be expected. This is in part because of the steady flow of external finance, not all of which has come from the IMF and the United States. Capital sent by Pakistanis living and working abroad is an important source for covering the balance of trade deficit. Access to the income and wealth of the Pakistani diasporas is one of the several sources of possible strengths of the Pakistani economy.

Turning now to the options available to policymakers at this time to pull the economy back from possible disaster, I would start with listing three broad categories of reform that need to be put in place. They are improving the quality of governance, restructuring production and giving greater prominence to trade as a driver of growth.

Pakistan’s economy is stuck in a groove from which it is experiencing difficulties in exiting. The high-potential sector of agriculture continues to perform well below its capacity, neglecting to produce the products in which it has comparative advantage. The firms operating in the industrial and commercial sectors remain small, use antiquated production processes and don’t have much capacity to innovate. The government has seriously underinvested in the development of infrastructure and the production of public goods needed by a large and growing economy.

Trade as a driver of growth was an afterthought for Pakistan’s policymakers. The patterns that developed over time, largely the consequence of accidents of history, have remained in place. They are not allowing the country to use the extraordinary opportunities available in the international marketplace. But for reforms to be introduced in these two areas, the state will have to play an important role. The state can only become an effective player if the quality of governance improves, which I will discuss in greater detail in later articles. ¦ The writer is chairman of the Lahore-based Institute of Public Policy, a former finance minister of Pakistan and former vice president of the World Bank.
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Playing the ‘moral hazard’ game


By Shahid Javed Burki
Monday, 29 Nov, 2010


THOSE of us who have argued for years that Pakistan needs to develop a new type of relationship with the world outside are finally getting their voice heard.
Some recent developments seem to indicate that the donor community is prepared to finally tell Islamabad that it needs to do much more than it has done in the past to stand on its own two feet, giving up the foreign clutch on which it has been leaning for so long.

As has been noted in these columns on many occasions, the country does well whenever there is a large inflow of foreign capital. The rates of GDP growth during the periods of Generals Ayub Khan, Ziaul Haq and Pervez Musharraf were high – about 50 per cent higher than the structural rate of increase in national output – not because the military was in charge. The rates were high because, for strategic reasons, Washington chose to pour financial resources into Pakistan.

The US strategic interest in Pakistan reappeared after 9/11 and its money started flowing in again in copious amounts. During most of this period of almost ten years the military was in charge. That is no longer the case. It is for the first time in Pakistan’s relations with the United States that a civilian government is in place as Washington’s interest in Pakistan’s economic development has acquired considerable strategic significance.

It is not because Washington is dealing with a bunch of civilian interlocutors that the message being given has changed. The donors have learnt from experience that they should not encourage the “moral hazard” approach to economic policymaking pursued by Pakistan in the past.

The term moral hazard is applied by those working in the field of finance when the regulatory system encourages excessive risk-taking. This happens in the belief that a foreign government or some other well endowed entity would come to the rescue if the risks that were taken turn sour.

One example of the working of this approach was the large-scale rescue of the American banks by the government to save them from collapse once the risks they had taken with what has come to be called “subprime” lending resulted in heavy losses. Washington stepped in with a large dose of financial aid to the banks that were considered to be “too big to fail”. More recent examples are the rescues of Greece and Ireland by the European community working with the IMF.

The same kind of approach was shown towards Pakistan on several occasions when some bilateral or multilateral donor step ped in to save the country’s economy from collapsing. It had happened in December 1996 when, on leave from the World Bank, I was placed in charge of Pakistan’s finance.

Upon arriving in Islamabad I was told that the country was close to bankruptcy with the State Bank of Pakistan running down its foreign reserves to the point at which it was unable to honour its obligations to the “preferred creditors.” This term is applied to the International Monetary Fund, the World Bank and the Asian Development Bank. Default on any of these institutions means that the country resorting to such a tactics would be shut out of the international financial system. A move in that direction is extremely hazardous.

To save the country from that situation I travelled to Beijing and was able to get a soft loan from the Chinese prime minister that helped us to tide over the payments problem we faced. An amount of $500 million was deposited immediately into Pakistan’s account in New York at the Federal Reserve Bank.

A trip to Abu Dhabi by me brought in some additional resources. I recount that story in order to underscore the important point that by resorting to the moral hazard approach we may be able to tide over the immediate financial difficulties, but each time Islamabad takes that line it erodes the confidence of the international financial markets.

Pakistan found itself in a difficult situation once again in 2000 when it went to the IMF to get support to save itself from bankruptcy.The Fund is obliged to respond to requests from its member states under what are called the “articles of agreement” – the institution’s charter. It enters into a Stand Bye Agreement (SBA) with the member facing a crisis situation under which it is able to draw down a certain multiple of its quota – the share it has contributed to the IMF capital – but only after it has agreed to fulfil a number of conditions. Most of these relate to the way the country manages its fiscal system.

The Fund’s board – the ultimate authority in the institution – does not like large budgetary deficits. There is a belief that large fiscal deficits by increasing domestic demand for goods and services also weaken the external situation as imports exceed exports and have to be paid out of the accumulated foreign exchange reserves.

The SBA 2000 with the Fund was successfully concluded and then Prime Minister pledged that the country would never return to the IMF with a begging bowl in hand. Three years later the same prime minister, however, presided over a sharp expansion in the size of the budgetary deficit and encouraged the State Bank to flood the economy with cheap money.

This was done to help the ruling party to win the 2008 elections and for President Pervez Musharraf to stay in office. A heavy price was paid for this profligacy. By the time the prime minister left office Pakistan was once again close to the brink of economic disaster.

The accumulated reserves were being depleted at a speed at which they would have been exhausted within a matter of a few months. The pledge of never going back to the IMF was broken by the new government that took office in the spring of 2008 and a very large SBA was concluded with the institution.

In terms of conditionality this was a softer arrangement; the only serious pledge made by the government was to stay within the fiscal deficit limits the Fund considered to be prudent. But the Zardari/Gilani government has found it difficult to stay within the boundaries prescribed by the Fund.

In response the Washington-based institution has decided to postpone the release of the final tranche of the large loan. Even then it allowed Pakistan $400 million as emergency assistance to take care of the additional expenditure forced upon Islamabad because of the large-scale damage to the economy and the extreme pain inflicted by the great floods of this summer. While this cycle of near-bankruptcy and rescue has taken a heavy toll on the economy, it is not clear that all decision-makers are aware of the damage that is being done. It is this cycle the donor community is asking Islamabad to break into.

This was made plain by the many speakers at the meeting of the Pakistan Development Forum in Islamabad held in mid November. That the government needs to set its house in order was vividly and depressingly demonstrated by two ministerial statements at the PDF.

On November 14, Interior Minister Rehman Malik said that Pakistan was fighting terrorism and deserved that its $50 billion foreign debt was written off. He does not seem to have realised that such a suggestion was in fact a call for default on foreign obligations, a step that would be disastrous for the country faced with so many economic problems.

Recognising that his cabinet colleague had made a serious mistake, Finance Minister Hafeez Sheikh withdrew the suggestion, using strong language. “It is a grave issue with grave consequences for future prospects”, he told the PDF a day later. “Nobody asks for it. We don’t want to be included in the list of those countries that take that route and become international pariah states.” The conclusion is clear: not only Pakistanis need to learn to live within their means, meagre though they are. The country’s leaders have also to recognise that the moral hazard approach to economic and financial management is a perilous course to take.
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