Corruption, Indian style

There are many cases of corruption in India. But there are also institutions that spring into action when they come to light. This is where Pakistan needs to go.

By Shahid Javed Burki
Tuesday, 30 Nov, 2010

EVEN those who continue to believe in the idea of Pakistan — and I count myself among them — cannot but accept the fact that that while India and the ‘idea of India’ have taken off, Pakistan continues to slip, falling rapidly behind its now prosperous neighbour.
The idea of Pakistan to which I refer has many meanings attached to it. I touched upon this subject in my article ‘History must not lie’ in this space earli er this month. For me the idea that a sep arate political entity was needed that did not have to contend with the weight of the Hindu majority made sense in the late 1940s.

Whether this idea will make sense ul timately will have to be left to the judg ment of history. India pursued a differ ent idea: for many leaders involved in the movement for gaining freedom from the long rule by the British it was sensible to craft a political system that would allow space to many diverse people. Diversity in India came in many forms — religious, linguistic, ethnic, caste, geography etc. There cannot be any doubt that a few hiccups notwithstanding, India has been able to work that idea.

It is quite remarkable that a Sikh has been the country’s prime minister for six years and that an Italian-born woman is by far the most powerful political figure in the country. On the other hand, the Pakistan idea is still under test. For the last several years, the Pakistani state has been failing its people: the proportion of people living in absolute poverty has been steadily increasing and has probably touched 40 per cent. If that is the case the level of poverty has touched a new record in 50 years.

I have been to India since I wrote the article mentioned here. I went to speak at a seminar organised by the Indian Council for International Economic Research where I was invited to speak on a provocative subject of ‘Has the Pakistani economy failed?’ My audience included young people from the Saarc nations. Pakistan was represented by two young women who held their ground on a variety of subjects. Since I thought my answer to the posed question would interest my read ers, I covered it in an article that appeared a week ago. Today I deal with another subject which concerns the role of the institutions of the state in handling large-scale corruption, a problem that is of great concern in both countries.

During my brief time in New Delhi, newspapers were full of stories about what had come to be called the Raja affair. Until a couple of weeks back, A. Raja from the state of Tamil Nadu was a minister in the Manmohan Singh cabinet, in charge of the portfolio of telecommunications. This is an important area of government responsibility because of the enormous economic rewards available to those who are able to secure the necessary bandwidth from the government for their operations.

India has one of the most rapidly growing telecommunications systems in the world with the penetration of cellphones increasing by the day and thus bringing in hundreds of millions of people into the expanding networks. China is the only country that has done better than India in terms of the number of people reached.

Giving the telecommunications portfolio to Mr Raja was part of the deal that Manmohan Singh struck with the Dravida Munnetra Kazhagam (DMK), a powerful party in the state of Tamil Nadu, in order to form a coalition government at the centre. The DMK has 18 members in the lower house of the Indian parliament and their support is needed for Congress to remain in power. The DMK’s powerful chief minister M. Karunanidhi wanted the telecommunications portfolio for his party because of the leverage he could exercise on his constituency.

Mr Raja took up his position when India was preparing to auction licences for the 2G spectrum, the second-generation bandwidth system, which allows hand-held devices such as cellphones to do much more than was possible under the older system. The minister apparently ignored the rules in awarding the contracts to what appeared to be favoured companies. According to a report prepared by the comptroller auditor general (CAG) and tabled in parliament a day after the minister quit his job, 85 out of 122 licences granted were illegal.

According to the report “Raja issued a press release at 2:47pm on Jan 10, 2008 giving just 45 minutes notice to the companies to assemble at the department of telecommunications to collect response letters and furnish various guarantees. It was clear that some companies had been given prior warning”. Several companies turned up with financial guarantees that pre-dated the government announcement by several days. It seemed that they had been informed of the action the minister was to take. The loss to the exchequer was calculated at a staggering Rs1.76 lakh crore.

What this incident points to is not the staggering size of corruption that was involved but that there are systems and accountability institutions in place to deal with those who go off the track. Not only was Mr Raja forced out of his lucrative position by a report prepared by a government agency, the opposition is now pushing for the establishment of a parliamentary committee that would further investigate the affair.

A. Raja was not the first high-level political person to fall. Earlier the Congress had forced Maharashtra chief minister Ashok Chavan to quit in the face of the Adarsh Cooperative Society scandal and removed Suresh Kalmadi from the party post in the light of controversies surrounding the Commonwealth Games. As The Times of India wrote in an editorial, “the compulsions of coalition politics were hardly an excuse when the minister couldn’t convincingly explain his decisions, which according to the CAG had resulted in the loss of government revenues to the tune of a staggering Rs1.76 lakh crore”.

What this particular case demonstrates is not that the Indian democracy is in danger when such a crime has been committed by a high political appointee. There are other cases being reported daily in the press including the collapse of an unauthorised building in Delhi which killed 50 people. What it shows is that there is plenty of big and small corruption in India but there are also institutions that kick into action when they come to light. This is where Pakistan needs to go. ¦ 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.

Will the IMF abandon Pakistan?

By Shahid Javed Burki
Monday, 06 Dec, 2010

ECONOMIES can turn quickly both ways. They can go from a situation of extreme distress to reasonable health within a matter of a few months or they can move in the opposite direction equally fast. The latter happened in the case of Pakistan in the early 2000s. From the start of the decade to mid-2007, the country’s macroeconomic performance was robust.
During the period 2000-01 to 2004-05 the country had a respectable record of growth. Real GDP grew by more than seven per cent a year while inflation also remained at seven per cent. International position improved; gross official reserves increased to $14.3 billion, sufficient to finance 3.8 months of imports.

In the period following 9/11 Pakistan received generous support from the United States and the institutions over which Washington has some influence. These include the IMF and the World Bank.

The country successfully implemented two IMF programmes, a Stand-By Arrangement (SBA) and a threeyear agreement under the Poverty Reduction and Growth Facility that provides capital to eligible borrowers on relatively easier terms – easier than the terms charged on the SBA.

The successful completion of two Fund programmes in itself was a turnaround since Islamabad had a long record of signing agreements with the Washington-based institu tions only to renege on them. The reason almost always was the same: the government’s inability to control its finance and run large and unsustainable budget deficits.

The flow of official finance was accompanied by significant debt write-offs. The result was the creation of what economists then called “fiscal space” within which the government could spend more than would have been possible otherwise.

There were also large flows of private capital that took the form of foreign direct or portfolio investment. The latter was a change for Pakistan. That foreigners were prepared to invest in the country’s stock markets was an indication of confidence in Pakistan’s economic future.

The widely read Newsweek wrote a cover story in the spring of 1985 proclaiming that Pakistan was one other Asian giant that was stirring from sleep. But that expectation turned out to be misplaced and Pakistan went back to sleep once again.

When Pakistan completed its agreements with the IMF in January 2005 it promised that it will never pick up the begging bowl again and return to the Fund for additional support. That pledge was made by the then prime minister who concurrently served as the country’s finance minister.

However, the same official presided over a significant increase in public spending. Not only that: the State Bank of Pakistan stepped in with easy money policy, flooding the economy with cheap capital.

A significant amount of the central bank’s money went into consumer finance and housing. All this was seemingly done to help President Pervez Musharraf and his political party, the Pakistan Muslim League (Q), to win the elections of December 2007. The elections were postponed by a couple of months after the assassination of Benazir Bhutto on December 27, 2007.This extension in the pre-election period gave further opportunity to the government to continue to spend freely. The result was a sharp increase in the budgetary def icit and, as is always the case, also an increase in the pressure on external resources.

Free spending by the government, however, did not win it the election held in February 2008. A new government took office in March and its finance minister de clared that he had inherited a bankrupt economy. This was a marked turn for the worse in the economy. However, relief from the donor community, including the IMF, was not immediately sought.

The country remained politically unsettled for several more months. It was only af ter the largest opposition party, Pakistan Muslim League (Nawaz), had quit the coalition government and Asif Ali Zardari had replaced Pervez Musharraf as president that Islamabad turned its attention towards managing the rapidly deteriorating eco nomic situation. One part of the strategy was to go back to the IMF for help.

The begging bowl was back in the hands of the government. In November 2008, the Fund responded with a 23 month-long Stand-By Programme for $7.6 billion, equivalent to 500 per cent quota (share) in the institution’s capital.

In return for the IMF support, the government made two promises: that it would restore macroeconomic stability and confidence through a significant tightening of fis cal and monetary policies and that adequate support would be provided to the poor.

The government promised to balance these two objectives which meant that poverty alleviation programmes would not lead to larger fiscal deficits. Islamabad indicated that it would work to reduce the fiscal deficit from 7.4 per cent of GDP estimated for 2007-08 to 4.2 per cent in 2008-09 and to only 3.3 per cent in 2009-10 while allowing for spending on social safety net.

This was an overly ambitious target to pursue; per haps an unnecessary one. In its annual report issued in June 2008, the Lahore-based Institute of Public Policy, using a macroeconomic model it had developed, determined that a fiscal deficit of 4.5 per cent of GDP was sustainable in Pakistan’s case.

The larger deficit would not produce intolerable inflation and would, at the same time, ensure that growth was not sacrificed. But the Fund prevailed and Pakistan signed on the dotted line, promising a drastic fiscal adjustment.

Apart from the impracticality of reducing the budgetary deficit by almost four percentage points in three years, the Fund’s programme was based on the assumption that a new democratic order that was beginning to take shape will have the capacity to deliver difficult structural changes. That did not happen and the targets were not achieved.

While intense discussions were taking place between Islamabad and the Fund – these were often conducted in Dubai since the Fund management was too nervous to send its staff to Islamabad as the security situation continued to worsen.

Pakistan was hit by an unprecedented flood. The floods led to a sharp deterioration in the economic outlook. The agriculture sector which accounts for 21 per cent of GDP and nearly half of employment was hard hit. There was also substantial damage to infrastructure and private property.

A combined assessment by the Asian Development Bank and the World Bank put damages and losses from the floods at about $10 billion. This could reduce the rate of economic growth by one to 1.5 per cent a year for years to come.

There was also impact on the budget. The government planned to provide $1.8 billion or one per cent of GDP in cash transfers to flood victims. Most of this money if properly delivered was likely to be spent on housing.

The Fund has kept its pressure on Islamabad in the last few months. It was not satisfied that enough effort was being made by the government in addressing the growing budgetary problem. In a statement made at the Pakistan Development Forum (PDF) on November 15, the Fund’s representative, while recognising that prior to this summer’s floods growth was picking up, “the 2009/10 budget target was missed by a significant margin and the end-2010 ceiling on government borrowing from State Bank of Pakistan was also exceeded. As a result the fifth programme review could not be completed on time.” This was the IMF’s way of saying that it was not prepared to release the next tranche to Islamabad at least not by the end of the year as was expected earlier. It continued to press for structural reforms to improve budgetary performance.

According to the IMF’s statement at the PDF: “Two areas stand out. One is the reformed general sales tax (RGST), including an effective input-crediting mechanism, reduced exemptions, and elimination of zero-rating and special rates.The other is electricity reform, where action is needed to eliminate untargeted subsidies while protecting the poor and address the problem of circular debt.” What would happen if the Fund pulled back? Would the economy take a deep plunge or would it be able to survive without too much damage to the fundamentals? I will take up these question in later articles once the results of the ongoing deliberations between Islamabad and the Fund become available.

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Corruption’s impact

At first the World Bank approached the subject of corruption with some diffidence even when it wished to communicate the message about its ill effects on development.

By Shahid Javed Burki
Tuesday, 07 Dec, 2010

CORRUPTION obstructs development; its prevalence hurts the poor, increases the income gap and produces political and social instability. These are no longer treated as abstract notions. As a result of some serious qualitative and quantitative work done initially at the World Bank and subsequently at several other development institutions there is now a great deal of authority behind these statements.
In the beginning the World Bank approached the subject of corruption with some diffidence even when it wished to communicate the message about its ill effects on development. It used the term ‘poor governance’ as a euphemism for corruption. It was only after the institution came under pressure from the community of donors that it incorporated corruption formally in its research programme and the concern associated with it as a part of its policy framework. Some of its senior staff got involved with NGOs that were committed to reducing corruption across the globe.

By far the most serious work in the area of corruption worldwide has been done by Transparency International (TI), an NGO based in Berlin. Its founder Peter Eigen was once a senior official at the World Bank. He joined hands with a number of former World Bank officials to create TI which within a few years developed a presence around the globe. The organisation has chapters in most large countries, including Pakistan. They work with considerable autonomy from the parent organisation but follow the methodology developed in Berlin.

TI’s annual reports based on the perceptions of those who know and work in the economies being reported on have become influential in throwing light on the incidence of corruption across the globe in developed as well as developing countries. The 2009 report which caused a fair amount of official stir in Pakistan drew on 13 different expert and business surveys “to measure perceived levels of public-sector corruption in a given country. The results in the 2009 index are sobering: the vast majority of countries score below five”.

Pakistan received a low score, sharing the 139th position with several countries including Bangladesh. On a score of zero to 10, with 10 being the least corrupt and zero given to the most corrupt, Pakistan was rated at 2.4. India was ranked at 84 with a score of 3.4. New Zealand with a score of 9.4 was assessed to be the cleanest country; Somalia with a score of 1.1 was seen to be the dirtiest.

Most of the 19 countries with scores below two had social and political problems. Among them were Iraq, Sudan, Haiti, Myanmar and Afghanistan. Pakistan was at the margin of this group of countries. According to TI, the results presented by it “prove that corruption continues to lurk where opacity rules, where institutions still need strengthening and where governments have failed to implement anti-corruption legal frameworks”. A look at the TI index suggests a strong link between democracy and the absence of corrup tion. Of the 30 countries that receive scores of more than six only two (Qatar and the UAE) are non-democratic while two (Singapore and Hong Kong) are partially democratic.

Among the world’s established democracies Portugal with a score of 5.8 is seen as the most corrupt. That democracies would score better is obvious: they have the institutions that help people to air their grievances and provide a way for punishing those who in the public sector don’t walk the straight line. A recent example of this is the way India is handling the case of its former telecom minister who is said to have caused a loss of $40bn to the government. Not only was the minister forced to resign but a criminal investigation is likely to lead to his prosecution.

There were reports in the western press that the authorities in Pakistan were harassing the Pakistani chapter of TI after the latter issued its 2009 annual report. In a recent issue, the New York Times reported that “the head of the Pakistani branch of Transparency International, the global advocacy group that monitors corruption, has alleged intimidation and harassment by government officials for its monitoring of American aid in Pakistan”. The newspaper reported Syed Adil Gilani, chairman of the Pakistani chapter of TI as saying that “recent statements of the Pakistani government amount to harassment”.

From Pakistan’s perspective continuation of corruption at a worrying level is doubly problematic since it affects the poor more than other segments of the population. Development experts have determined that the GNP needs to increase at a rate that is a multiple of the rate of increase in the population to reduce the incidence of poverty.

For a country with a highly skewed distribution of income, the GDP increase should be at least six per cent a year for the incidence of poverty not to increase. With the GDP increase expected to be less than three per cent in 2010-11 the number of people living in absolute poverty may increase by 10 million and reach 70 million.

According to the TI 2009 report, corruption prevents the “poor from participating equally in political decisions, from enjoying equality under the law, from seeing their needs reflected in policies and budgets and from accessing public goods and services. …Decisions on food and energy security, natural resources, technology and investments are often compromised by corruption — with fatal consequences”.

The debate in the country as to how much damage the prevalence of corruption was doing to the quality of governance in general and economic development in particular received a new twist with the release by WikiLeaks of cables exchanged by American diplomats with the State Department in Washington. According to one dispatch from Riyadh, King Abdullah spoke scathingly about the Pakistani president. His comments may have consequences by making the international development community even more reluctant to assist the country.

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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Public policy, private sector and economic crisis

By Shahid Javed Burki
Monday, 13 Dec, 2010

HISTORICAL experiences of a number of countries such as India, Mexico, Argentina, suggest that economies in crises can rebound quickly if right public policies are put in place.
Central to producing such a policy framework requires a close collaboration between the government, private sector, and other societal stakeholders. It was for this reason that the government established a Task Force on Private Sector Development in December 2008. It submitted its report to the government a couple of weeks ago after discussing its findings with President Asif Ali Zardari on October 29.

One of the major conclusions reached by the Task Force was that the private sector can-- and should – play an important role in getting the country out of the mess in which it finds itself today and in setting it on the path of sustained and high level of growth. Properly managed, the country has the resources and the capability to match the rates of growth of other large South Asian countries. What is needed is intelligent public policy and the grant of space within which the private sector can play its part.

In this context, the Task Force placed particular emphasis on developing an institutional and analytical framework to guide the process of decentralisation of economic decision-making. The process has begun as a result of the passage of the 18th amendment and needs to be fully supported by the governments at the federal and provincial levels. Once completed, it will bring policymakers closer to the firms and other economic actors in the system.

The Task Force recognised that the private sector has gone through periods of ups and downs. From the private-led growth model pursued between 1947, the economy in 1972 shifted to a state-led growth model as a result of the nationalisations of 1972 and 1974. Even though the process of privatisation started in 1991 and the early 2000s that reduced the role of the state in business, much remains to be done as a number of important enterprises in the utilities sector are still in the hands of the public sector.

Most of them are incurring severe losses. They are doing poorly, needing the support of the government to keep them solvent. This places additional stress on the government’s already strained budgetary situation.

Although 90 per cent of the economy today is controlled by the private sector, the culture of government subsidies to certain sectors and firms persists which has created a large budgetary burden. The private sector is dominated by very small enterprises that remain inward oriented, technologically backward, employing low-skilled labour and producing products with low levels of sophistication.

These enterprises remain small primarily because of the regulatory system in place which allows those who employ less than ten workers to avoid a number of requirements larger firms must meet. The regulatory system is also poorly enforced, focusing their attention on large firms. This creates an incentive for enterprises not to grow in size and to remain small.

There are a number of ways of encouraging the private sector to play a larger role in the economy. The private sector members of the Task Force agreed that obtaining macroeconomic stability must be a high priority for Islamabad. This will require great effort on the fiscal front. To begin with it is important to rationalise and expand the fiscal base with the goal to increase tax to GDP ratio from the current nine to 17 per cent over a period of five years.

This goal was adopted by the Task Force. Some of the sectors that are currently excluded from the tax system need to be brought in and those – individuals as well enterprises – who are able to avoid paying taxes need to face harsh penalties.

Owners of large firms complain that they are operating in an uneven playing field, unable to compete with small enterprises that avoid both regulation and the tax man. However improving the tax collection system is not the only way of improving government finance. The other is to ensure that the government spends wisely it’s albeit limited resources.

One way of ensuring this is to periodically conduct “public expenditure reviews” at the federal as well as provincial levels and share the results with the public by presenting them in the national and provincial legislatures. This will create confidence that the people’s tax money is being well spent and not wasted on frivolous activities.

I have been struck for many years – especially when I began writing on Pakistan’s economic history – as to the number of antiquated laws that have accumulated on the books. One example of this is the Agricultural Marketing Acts that were enacted by the British in the 1930s to provide protection to the Muslim peasantry against the predatory practices of Hindu moneylenders and marketing middlemen.

The Hindus are long gone but the laws remain on the books since they have developed strong vested interests that would not like to see them repealed. It is laws such as these that inhibit the development of domestic commerce. We discussed this issue in the Task Force and there was lot of support for reviewing all laws pertaining to economic activities with a view to rationalising them. This review would be a major undertaking but rationalising the legal framework would encourage private investment as well as development.

Laws that need to be consolidated and rationalised include those pertaining to labour and conditions of employment; business laws constraining Companies Ordinance of 1984; laws concerning insolvency, conglomerates and secured transactions; and those pertaining to urban land use.

In a study of the enterprise sector a few years ago – a study the government has yet to release for public consumption – the World Bank provided a picture of the current situation. Both industrial and commercial sectors are dominated by small enterprises that prefer to remain small for the reasons discussed above. Any talk of using the private sector to aid the process of development will remain abstract unless there is a full understanding of the nature of the Pakistani firm and how it can be developed.

Some of what needs to be done is in the fiscal sector and some in the legal structure. But of equal importance is the need to improve the levels of skills available to the firms. This requires a nationwide action plan based on a strategy that provides roles for both the public and the private sectors.

Trade, both external and domestic, is one other area that received a great deal of attention by the Task Force. Emphasis on a “trade oriented growth strategy” does not make much sense as an end itself. Trade should be the outcome of a whole lot of other things that need to be done and not the end point to be reached in a growth strategy. What are these things that should be highlighted in a review of trade policy that should encompass all aspects of commerce, in particular what economists call “trade facilitation.” The review of the legal system discussed above will be critical in encouraging domestic and international commerce. Improving the flow of commerce needs improvements in infrastructure but the development of a national infrastructure policy requires better understanding of what is available and what is needed. This could be done by conducting an Infrastructure Expenditure Review with a full appraisal of the available infrastructure and needed export and import supply chains covering railways, roads, airlines, ports, inland waterways, trucking etc.

The main point I would like to emphasise, basing it on the work of the Task Force, is that the use of the private sector to promote development requires review of the current interface between the public and private parts of the economy and making it more efficient and effective.This can only be done if careful thought is given by the government as well enterprise owners to the way they can support one another.

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Is America faltering?

By Shahid Javed Burki
Tuesday, 14 Dec, 2010

"WE can focus on what`s necessary for each party to win the news cycle or the next election. We can do what we`ve been doing. Or we can do what this moment demands, and focus on what`s necessary for America to win the future,” said President Barack Obama in a meeting with his supporters a few moments before he struck a deal with the Republicans in the US Congress on extending, among other things, the tax cuts passed during the presidency of George W. Bush.

The deal was popular with the Republicans but was received with anger by the president`s Democratic supporters. They called it a capitulation. But Obama began to sell it as “our generation`s Sputnik moment”. The reference to the Sputnik was to remind the Americans that they can be provoked into action once challenged. That happened in October 1957 when the Soviet Union launched the first Earth-orbiting satellite into space. The United States reacted by creating the National Aeronautics and Space Administration, Nasa, that put an American on the moon in 1969, 12 years after the Sputnik launch.

This could become a `Sputnik moment` if the Americans are able to set aside their deep differences and save the country from sliding into history, no longer the pre-eminent and most prominent power militarily and economically in a fast-changing world. Which way America will go matters not only for Americans but for the rest of the world as well. If history is any guide, each time the leading power has been brought down from the pedestal on which it has stood, a period of extreme chaos has ensued. If such a transition occurs it will have enormous consequences for Pakistan and the countries in its neighbourhood.

Pakistan`s neighbourhood is full of countries in which the old and new rising powers will need to compete; for the former to retain power, for the latter to acquire it. The flurry of recent activities such as President Obama`s visit to India and that of the Chinese Prime Minister Wen Jiabao to Pakistan in December indicate that that competition has already begun and will intensify for as long as the global system remains in a state of flux. That may be for a very long time. Chaos inside its borders and around it are the last things Pakistan needs at such a delicate moment in its history.

Some historians argue that the moment of transition has already arrived. It began perhaps in 2003 when President Bush launched an ill-advised and unnecessary invasion of Iraq that was to cost more than 4,000 American lives, lead to hundreds of thousands of Iraqi deaths plus an expenditure of trillions of dollars. The burden left by the war in Iraq has weighed America down.

According to historian Alfred McCoy, “despite the aura of omnipotence most empires project, a look at their history should remind us that they are fragile organisms. So delicate is their ecology of power that, when things start to go truly bad, empires unravel with unholy speed: just a year for Portugal, two years for the Soviet Union, eight years for France, 11 years for the Ottomans, 17 years for Great Britain, and in all likelihood, 22 years for the United States, counting from the crucial year 2003.”

Going by this calculus, the United States is likely to quit the world stage as the sole superpower by the year 2025. It would have occupied that position for 34 years starting with the collapse of the Soviet Union in 1991. When 2025 arrives it may not entirely leave the stage but make space for such rising powers as China and India.

As historians tell us wars not won usually lead to the demise of empires and the fall of the imperial power. It does not happen quickly; it takes many years of chaos and confusion before the new order establishes itself. The situation for America is more complicated than those faced by the powers that had dominated the world in earlier times. Washington has done poorly in the two wars it fought recently. It is in the process of getting out of Iraq but still does not know how not to get trapped in Afghanistan. But this indifferent performance in two conflicts is not the only reason why so many are now talking about America`s decline. The New York Times

The United States faces a different kind of challenge. As Thomas Friedman wrote recently for , “We don`t seem to realise: we`re in a hole and still digging. Our educational attainment levels are stagnating; our infrastructure is fraying. We don`t have enough smart incentives to foster both innovation and manufacturing; we`re not importing enough talent in an age when we have to compete for jobs with low-wage but highly skilled Indians and Chinese — and we`re still piling up debt. Responding to all this will require a whole new hybrid politics for where to cut, where to save, where to invest, where to tax and where to untax. Shaping that new politics is a revolutionary role I still hope President Obama will play.”

In other words, what is failing for America is not lack of success on the battlefield but the inability of its political system to make to the country move forward. This movement is needed in particular in an area in which America had excelled for many decades and which had contributed to the country`s rise. It was quality education which made it possible for America to invent and innovate. It is the slippage in education that will lead to America`s fall from the pedestal it has occupied since the collapse of the Soviet Union.

How poorly America is doing compared to several rising powers is revealed by a test developed by the Programme for Student Assessment and given to 15-year- old students by the Organisation for Economic Cooperation and Development, OECD. With a score of 511 in science, 500 in reading and 487 in mathematics America ranks well below a number of Asian countries including Singapore, Korea and Taiwan.

The test was given separately to the students in Shanghai, Hong Kong and Macao in China. All three ranked higher than the US with Shanghai on top of the table in all three areas. China is preparing well to ascend the ladder as America loses its step.

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Continuing climate talks

By Shahid Javed Burki
Monday, 20 Dec, 2010

PAKISTAN, in spite of all the environmental problems it faces, has given the subject little thought. It has done little to address the various types of environmental degradation it is experiencing – air and water pollution in the major cities, and contamination of water used for irrigation, accumulation of solid waste in urban areas and general deterioration in the standards of hygiene.
There is not much recognition that the country will have to deal with the melting of the Himalayan glaciers as a result of global warming. Pakistan’s exporters will have to contend with the increasing rigorous environmental requirements by the importers of the country’s products.

Islamabad has been absent from the international scene, particularly from the series of conferences that began in Copenhagen last year, concluded at Cancun in Mexico on December 11, 2010 (and will be held in Durban South Africa in 2012).

These meetings are intended to lend more substance to the Kyoto protocol which requires that most wealthy nations to trim emissions while providing assistance to developing countries to pursue a cleaner energy future. Pakistani delegations have attended the conferences but made little contribution to their deliberations.

After signing the Kyoto Protocol in 1997 – a protocol that was not endorsed by the United States under President George W. Bush – the signatories agreed to meet every year under the United Nations Framework Convention on Climate Change. But there was a problem with the adopted approach: Under the framework any of the more than 190 participating nations can hold up an agreement. It is this provision that has made it so difficult to arrive at binding international treaty to succeed the Kyoto Protocol. These meetings and others before them were held under the auspices of the UN supported Conference of Parties.

Lack of resolve and action will mean that poor countries and emerging economies of South Asia will suffer much more than rich nations and their people. Rising sea waters will render large chunks of Bangladesh’s coastal planes inhabitable. Tens of millions of people will be displaced; many will seek to find new homes in the already crowded parts of east India. India too will suffer – as will Pakistan – from the premature melting of the Himalayan glaciers that feed the large rivers of the two countries.

Climate experts believe that unusual weather patterns will become common. The floods that wrecked a good part of Pakistan will become more frequent. South Asia, in other words, will have to pay a heavy economic price for climate change produced by actions in the world’s more advanced countries. There was a hope that the promise made at Kyoto to develop a more comprehensive approach to solve this problem would be realised. That did not happen at Copenhagen in late 2009 and did not happen again in Cancun, Mexico in 2010.

For the second time in a year, world leaders failed to produce a comprehensive agreement on preventing global warming from reaching the point from which it would be exceedingly difficult and costly to pull back. At Copenhagen in December 2009, the 15th meeting after the Kyoto Protocol, the main stumbling block was China’s refusal to ac cept a mechanism that would allow the international community to verify the implementation of targets set internationally. At Cancun, the scene of the 16th meeting, Beijing appeared to soften its position, recognising perhaps that since Copenhagen it had leapfrogged over the United States to become the world’s largest emitter of greenhouse gases.

As the Cancun conference drew to a close, China and the United States appeared to be reaching an agreement for ensuring that all nations would adhere to their pledges to reduce emissions of carbon dioxide and other heat trapping gases. According to one account, the Chinese signalled a willingness to sign an accord at Cancun as long as it met their “objectives on financial aid to developing countries, transfer of clean energy technology to poor nations and a continuing of discussions under the Kyoto Protocol”.

Most developing countries insisted that targets be set and the money should continue to flow to them for projects that contribute to global warming. Japan surprised the conferees at Cancun that it would not accept any new targets under the Kyoto Protocol and Russia, Canada and some other parties to the protocol also signalled a reluctance to assume new commitments.

The developing world came with a sense of urgency to Cancun. This was heightened by the release of a report by NASA’s Goddard Institute for Space Studies which showed that “the past 12 months had produced the highest land temperatures ever recorded. The data mean that 2010 is likely to pass 2005 as the warmest ever since detailed records have been kept…The year was marked by extreme weather events, from a recordbreaking heat wave in Russia in July to the dramatic floods in Pakistan. High sea temperatures were also blamed for a global bleaching of coral reefs.” The pledges that had been made to deal individually with the matter fell well short of ensuring global temperatures don’t exceed 3.6 degrees. Celsius above pre-industrial levels which many scientists agree could be significant tipping point for a number of developing countries. Small island nations were particularly concerned; 43 of them, including, Maldives, threatened by rising sea levels went to the Cancun meetings in the form of a group determined to get some help from the international community.

There was an expectation when the international community gathered in Copenhagen in late 2009 that a successor to the landmark 1997 Kyoto Protocol would be renegotiated before it expires in 2012. For the moment, this is the only legally binding international accord aimed at reducing greenhouse gases. It was expected that at Copenhagen – if not there then at Cancun – agreement will be reached on a “common path for cutting the world’s carbon output, dole out key nations’ specific obligations and create a common market for trading greenhouse emissions. That vision has evaporated, replaced by a much looser web of climate-related efforts across the globe.” It was this “frustration that the UN climate negotiations were not producing real-world results, individual nations, states and businesses are cobbling together patch-work solutions to preserve forests, produce clean energy and scrub pollution from the air. Under this approach, businesses in California will offset their greenhouse gas emissions by funding tropical-forest preservation in Mexico and Brazil, Japan will pay for nuclear power plants in developing nations, and South Korea will in vest in promoting renewable energy at home.” The meeting in Cancun began with modest aims and ended with modest achievements. But according to one assessment, “while the measures adopted here may have scant near-term impact on the warming of the planet, the international process for dealing with the issue got a significant vote of confidence. The agreement fell well short of the broad changes, scientists say, are needed to avoid dangerous climate change in coming decades. But it lays the groundwork for strong measures in the future if nations are able to overcome emotional arguments that have crippled climate change negotiations in recent years.” The Cancun Accord sets up a new fund to help poor countries adopt to climate changes, creates new mechanisms for clean energy technology, provides compensation for the preservation of tropical forests and strengthens the emissions reduction pledges that were incorporated in last year’s Copenhagen Accord. Rich countries promised to provide $100 billion in annual climate related aid but it was left open as to where that money will come from.

There is enough in the Cancun Accord for Pakistan to benefit from but it will need a great deal of work by Islamabad working with the provinces to draw up an integrated programme for mitigating the effects of climate change – a programme that has the potential of receiving international financial and technical aid promised under the accord.

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Regional strategy needed

By Shahid Javed Burki
Tuesday, 21 Dec, 2010

OF the 190 or so countries that participated in the recently concluded climate talks at Cancun, those of South Asia arrived without the benefit of having first worked on a regional strategy.

And yet there are many problems associated with global warming that will need to be addressed by a close collaboration among the countries of mainland South Asia — Afghanistan, Bangladesh, Bhutan, India, Nepal and Pakistan.

Regional cooperation is needed in a number of areas. These include compilation of data in order to guide the making of public policy. Research in subjects that are of particular interest to the region such as the development of crops that can withstand drought would have great consequence for the parts of the region that are likely to face water scarcity. It will be increasingly necessary to regulate the flow of water in the rivers that the countries in the area share. Reducing atmospheric pollution will need common standards and regulatory systems.

It is no longer just scientific speculation that the changes in weather patterns will cause havoc in many parts of the world. A recent study by Nasa suggests that the devastating floods that brought so much misery to many areas of Pakistan in the summer of 2010 resulted from global warming. There will be many more such weather-related events. But Pakistan is not the only country affected in South Asia.

The Indian National Centre for Ocean Services based in Hyderabad has estimated that the average global sea level rose by 1.8 millimetres a year between 1950 and 2000 but the rate of increase went up to 3.3 millimetres from 1993 and 2005. There were further increases in 2005-09. A rise in the sea level in the Bay of Bengal will inundate coastal areas and displace millions of people who will find it difficult to find living space for themselves in the already overcrowded Bangladesh. This will result in the forced migration to the highlands of neighbouring east India causing tensions between the two neighbours unless they make a joint effort to mitigate the effects of climate change.

Melting of the glaciers in the Himalayas will initially cause a significant increase in the flow of water in the many large rivers in the South Asian subcontinent that have their sources in these mountains. Once large chunks of the glacier cover have disappeared, there will be precipitous declines in the amount of water in these rivers. This will have a profound impact on the parts of India and Pakistan that rely on irrigation for sustaining agriculture. Science Daily

The security of food availability in South Asia is dependent mainly on the weather. A recent report in stated that “the South Asian summer monsoon — critical to agriculture in Bangladesh, India, Nepal and Pakistan — could be weakened due to rising temperatures in the future”. A Purdue University research group found that climate change could “influence monsoon dynamics and cause less summer precipitation, a delay in the start of monsoon season and longer breaks between the rainy periods. …With extensive research and adequate technology, the people of South Asia have the potential to learn how to guard their land and crops from the weather changes lying ahead”.

Increases in population in the South Asian countries and growing incomes in most of them would increase the demand for electricity and other forms of power in a region that is already seriously affected by brownouts. To meet this demand the South Asians will want to burn the fuels that cause atmospheric pollution. The other way would be to build a system of pipelines and electricity grids to bring energy from the energy-surplus countries of the Middle East and Central Asia. However, for that to happen, the South Asians will need to develop confidence that supplies would not be disrupted for political reasons.

In sum, South Asia is faced with a number of problems that are the result of global warming. Some of these can only be handled if the countries in the region work together to handle the situation they face. That said, it is unfortunate that the region has not developed a regional approach to the problems that have manifested themselves and will do so with even greater force in the years to come.

In the Cancun climate conference, South Asia did not present itself as a region but participated as individual countries representing their very narrow interests. India was the most active country from South Asia at Cancun. However, its interests as projected at the conference were not regional but related to its own concerns as a rapidly growing economy in need of producing energy from coal and other atmosphere-polluting sources. Like Beijing, New Delhi did not want the international community to adopt a binding treaty that would work as a constraint for it to achieve its projected rate of economic growth. This objective was achieved by both countries.

There is agreement among experts that Cancun succeeded in establishing a new way of approaching climate change. Rather than moving towards the adoption of a mega-international treaty designed to achieve enforceable objectives, a more prudent approach would be to take small steps to realise less ambitious targets. Some of these baby steps will need to be taken by the South Asian nations working together to reach common goals. The next climate meeting will be in South Africa. The countries on the South Asian mainland could begin preparing for that meeting by defining a regional agenda for which they will need foreign financial and technical assistance.

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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Turning to wind for rescue

By Shahid Javed Burki
Monday, 27 Dec, 2010

BY now it has become conventional wisdom to attribute the persistent energy crisis in the country – the growing gap between demand and supply in electricity and natural gas – to the lack of political will to tap the large resources available.

Pakistan has resources it could use for increasing power generation and with more emphasis on exploration it could bring more gas to the surface.

Wind is one of the sources of supply that can be tapped without creating too much political fuss. There is enough of it available in several parts of the country. What is needed is a strategy that would do three things: create partnership between the public and private sectors so that investments can be made by the latter within a regulatory framework developed by the former; undertake investment in transmission lines from the areas that are rich in wind to the points of consumption; and provide incentives to the Chinese to invest in the sector. In this context, it is interesting to note how the wind-power sector has developed in China over the last few years.

In developing their wind-power industry, the Chinese used the strategy with which I had become familiar when I was looking after the World Bank`s programme in that country in the period 1987 to 1994. One of the first projects I was responsible for developing in China for funding by the bank was a massive power plant at a place called Beilongjiang near Shanghai. The Chinese wanted the bank to finance the building of four 300 MW coal-fired plants. They accepted the bank`s requirements that financing will only be available by selecting the supplier through international competitive bidding. But they insisted that the winner of the contract would be allowed to bring in only one plant; the remaining three would be made in China by a subsidiary that would be established with Chinese participation. America`s Westinghouse was the bid winner.

The company went on to create a production facility in China which increased the capacity of the plants it produced first to 600 MW, then to 900 MW and now to over 1,000 MW. China is now one of the biggest manufacturers of coal-fired plants in the world. During Prime Minister Wen Jiabao`s recent visit to India, Beijing offered to build a number of plants with financing to be provided by China`s public sector banks.

The Chinese have followed the same strategy in developing their wind-power industry. In the case of this sector, the Chinese forced the Spanish company Gamesa to help create a domestic industry in the sector. According to one account, “nearly all the components that Gemesa assembled into million-dollar turbines here are made by local suppliers – companies Gamesa trained to meet onerous local content requirements.

And these suppliers undermine Gamesa by selling parts to its Chinese competitors –wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.” On 4 July 2005, the Chinese National and Reforms Commission, the country`s planning authority, issued “Notice 1204” directing that domestic wind farms had to buy equipment in which 70 per cent of the value was domestically manufactured.

This local content requirement was in clear violation of the rules of the World Trade Organisation (WTO). The Chinese had joined WTO in 1991. Its rules don`t allow the use of the incentives the Chinese have employed to create competition by developing their own industries. But companies such as Gamesa could have persuaded their home governments to go to the WTO. They decided not to take that route in spite of the fast development of the domestic industry in China.

Gamesa sells more than twice as many turbines in the country as it did when it was the market leader five years ago. In other words, even if domestic competition was developed by state support the sheer size of the economy has enough potential demand to accommodate several suppliers, both foreign and domestic.

Now the Chinese manufacturers control more than 85 per cent of the wind turbine business. Sinovel, the country`s largest company, has said it wants to become the world`s largest wind-turbine company by 2015, a goal it is well on its way to winning. In order to ease this path, the Chinese authorities withdrew “Notice 1204”. By then it was not needed.

For instance, Gamesa was now selling turbines in China that had 95 per cent local content. Their development was aided by the state that provided the companies with land and cheap credit to set up their plants and quickly expand their capacity. Gamesa`s market share has declined from about 35 per cent to only three per cent.

“With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.”

What is the relevance of the rapid development of the Chinese wind-power industry for easing Pakistan`s energy shortage? The answer to the question is obvious: China could become a major supplier of both equipment and finance to develop Pakistan`s potential in this neglected area. What China is doing in developing nuclear energy in Pakistan, it could also do for wind. I am told that during the time President Pervez Musharraf was in charge, the Chinese proposed a wind project that would have produced 1,000 MW of energy.

His prime minister, however, asked the Chinese to scale back the project to 250 MW which Beijing declined to do, arguing that a smaller wind-farm did not make much economic sense. If this story is correct, it obviously set back the country by years and discouraged the Chinese from investing in Pakistan to develop wind power.

The situation may be changing now. While in office, President Asif Ali Zardari has developed strong relations with China. His government has allowed a Chinese bank to set up operations in Pakistan which Beijing undoubtedly will use to finance the projects China is interested in building in the country.

The Chinese signed a number of agreements during Prime Minister Wen Jiabao`s three-day visit to Pakistan. These included support for the development of wind power. It is interesting that Wen`s visit and display of his country`s interest in aiding the development of wind-power came a few weeks after the late Richard Holbrooke signed an agreement to build three wind power plants in Sindh that will produce a total of 450 MW at a cost of $375 million.

This amount will be paid out of the $7.5 billion Pakistan is set to receive from the United States under the terms of the Kerry-Lugar bill.

Pakistan, in other words, may see the United States and China compete with one another to gain a foothold in its energy sector in the country.

China is already involved in developing nuclear power with the promise that it would build a large 1,000 MW plant to augment the supply of power already coming from the plants built or nearing completion. If China enters the field of wind-power, it will do so on a large scale, establishing large wind farms that will generate hundreds if not thousands of megawatts of power.

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Obama’s two wars

In designing its own strategy, Pakistan has to take note of an important development: the increasing American resolve to quit the Afghan scene.

By Shahid Javed Burki
Tuesday, 28 Dec, 2010

WHEN on Dec 1, 2009, President Barack Obama announced his intention to escalate the war in Afghanistan it was also his intention to keep the country fully informed about the success or failure of the strategy he was adopting.

There were three significant parts of the new strategy. The first was the deci sion to increase the size of the American force operating in Afghanistan by add ing another 30,000 soldiers, thus bring ing the total to 100,000.

The second was to shift the focus of America’s involvement away from ob taining an outright victory over the Taliban and to create, instead, areas which would be virtually free of the pres ence of the enemy. This was more likely to happen in the country’s urban areas where the government, aided by the expanding Afghan military force, could establish its control. There was also the expectation that once these areas had been pacified, economic development would win the hearts and minds of the people.

The third element of the strategy was to induce Pakistan to play a more aggressive role in helping the Americans achieve their limited aims. In return for Islamabad’s help, the Obama administration promised the country generous economic and military support valued at $9.5bn of which $7.5bn was for economic development and was to be disbursed over a period of five years.

To convince Pakistan that this assistance would be available for a reasonably long time, the US Congress passed what came to be known as the KerryLugar bill. America, in other words, was preparing to fight two wars, one each in Afghanistan and Pakistan. The Americans also indicated that they would use unmanned aircrafts, the drones, to kill the leaders and commanders of the Taliban operating out of the tribal areas of Pakistan. This was to be done with the tacit approval of the Pakistani government. It was expected that Islamabad would continue to condemn the attacks while secretly providing the Americans intelligence about the targets to be struck.

Following the announcement of the new policy, President Obama promised that a full review would be carried out and released for public view a year from the adoption of the new approach. That has happened. On Dec 16, 2010, the White House released its appraisal of the US effort in the region the Obama administration had once called Af-Pak.

The United States announced in the review that it had ‘arrested’ even ‘reversed’ the Taliban’s momentum in much of Afghanistan, particularly in the country’s south. There were successes in and around the city of Kandahar, the area from where the Taliban had risen a decade and half earlier. However, in presenting his report to the public President Obama said that gains made “remained fragile and reversible”.

The review said that specific components of its strategy for both Afghanistan and Pakistan were working and highligh ted what it said were “notable gains”. The review added: “In Afghanistan, the momentum achieved by the Taliban in recent years has been arrested in much of the country and reversed in some key areas.” But it went on to say: “The challenge remains to make our gains durable and sustainable.” According to one assessment, “the review coincides with the administration’s bid to reverse what Robert Gates, defence secretary, acknowledged was public opposition to the war in both the US and its more than 40 partners”.

Although the public policy community quickly reached the conclusion that there was nothing unexpected in the review, one part of the assessment stood out. President Obama, while signalling to Pakistan that much more was expected of it for America to succeed in Afghanistan indicated that there was also growing recognition in Washington that Islamabad’s options were limited.

The American military leaders in the field were now of the view that their country’s limited goal — creating an environment that would help the US to begin to pull out of Afghanistan by July 2011 — could be achieved even if Pakistan was unable, or unwilling, to close the sanctuaries in North Waziristan. In other words, America was concentrating on fighting one war and not two, the other being waged with the help of the Pakistani army on the other side of the border. Success, the military strategists now believed, could be achieved without a thorough cleansing of the forces of resistance operating from the Pakistani side of the border.

That Pakistan’s all-out support for the American effort across the border in Afghanistan can have grave consequences for the country has lately been underscored by suicide attacks in Mohmand and Bajaur. The army appears to have had little success in eliminating the militants here. Such attacks are part of the Taliban strategy to signal their presence in a brutal way. Earlier in the month, twin attacks in Mohmand killed some 40 people, including senior tribesmen, journalists and security personnel, in an attack on a “peace jirga assembled to plan a strategy to stand up to the Taliban … Such attacks have by now become familiar tactics. Insurgents have been often struck with suicide bombers at meetings of government officials and tribal elders to prevent them from forming anti-Taliban militias”.

In fact on the day the US administration released its assessment Germany which has the second largest force in Afghanistan, announced that it would start withdrawing its contingent of 4,800 soldiers as early as next year and complete the pullback by 2014. This was also the date when the Americans were expecting to be out of the country.

In designing its own strategy, Pakistan has to take note of these developments: the increasing American resolve to quit the Afghan scene starting in 2011 and completing the process by 2014; unwillingness on the part of America’s Nato allies to stay engaged in the country; partial success by the US in bringing peace to some of the contested areas; and some doubt on the part of the American military commanders as to the sustainability of their successes in the battlefield. ¦ 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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The year ahead

By Shahid Javed Burki
Monday, 03 January, 2011


By Shahid Javed Burki
WILL 2011 be a better year for Pakistan? Probably yes. Will the little bit of recovery in the rate of economic growth expected in 2011 place the country on a sustainable path of development that will approach those of the other large economies in South Asia? The answer is probably ‘not’, unless Islamabad gets serious about reforming the economy.

Will the international community continue to support Pakistan, filling the gap between government revenues and expenditures and between export earnings and import outlays? The answer is probably ‘not’, but with one exception. The exception is the IMF which is now acting at least implicitly on behalf of the entire donor community.

All these answers require some explanation which is what I will now proceed to provide. My purpose will be to describe the domestic and external environment in which Pakistan will manage its economy in 2011 and how that will affect the rate of growth, the incidence of poverty and the relations between different regions and provinces of the country.

Pakistan has just finished what will be one of the worst years in its economic history. It will be a while before the final numbers come in but one thing is certain: there will not be any increase in the average income of the citizenry. Given the distribution in national income which is becoming increasingly skewed, per capita incomes of the bottom 60 per cent of the population will undoubtedly decline. The number of poor will increase with the proportion increasing to close to 40 per cent of the total.

If the 2011 population is 175 million, this means that some 70 million people will live in absolute poverty. Perhaps 40 per cent of the poor will live in large cities and small towns where the social structure is weaker than in the countryside. In other words, the options for the urban poor are fewer than those available to those living in villages. It is this group of people that are supplying recruits to the various extremist causes.

The poor performance of the economy in 2010 was caused by natural disaster – the floods in the summer of the year just past – and poor economic and financial management. There was also a lingering effect of the Great Recession of 2008-09 which constrained the markets for Pakistani exports although the country is not as well-linked with the world as is the case with many Asian states. How the economy fares in 2011 will depend upon a number of factors. By far the most important of these will be the ability of the government to keep its programme with the IMF on track. That is necessary since the donor community has made it clear to Islamabad that its much-needed help will need the Fund’s “good housekeeping seal of approval”. For decades, Pakistan has not paid much attention to the need to generate most of finance needed for public sector investment for development and for running its non-development operations. This has made the country excessively dependent on external capital flows. The economy performs well when external finance is available; it does poorly when the flow is constrained.

Since the flows from the outside that come in the form of “official development finance” will be constrained because of the delays in carrying out the IMF supported programme aimed at fiscal reforms, this will affect the availability of resources for the government. This constrained flow of official assistance will provoke two responses. The government will borrow more from the central bank or from the market.

In the case of the former, the State Bank will be reduced to printing money which, in turn, will cause the rate of inflation to increase. In the case of the latter, government borrowing will crowd out private investment and have an effect on investment and later on the rate of growth. Since the government is depending upon its friends in the foreign community of donors, in particular on the World Bank, to finance the provision of relief to the millions of people affected by the floods, the recovery from that particular disaster will also be delayed.

The only silver lining in this dark cloud is the promise of some relief to textile exporters in obtaining enhanced access to the markets in the European Union and the United States. There is some movement on this front and this relief may become available. If that leads to increased exports it might take some pressure off external balances and stop the haemorrhaging that will otherwise result because of the decision by the IMF to suspend payments. Since so much rides on the Fund, it will be useful to provide a bit more background to the country’s current programme with that institution, the latest of the many Pakistan has attempted, but mostly failed, to implement.

A 23-month Stand-by Agreement (SBA), in an amount equivalent to about $7.61 billion was originally approved on November 24, 2009. On August 7, 2009 the SBA was augmented to $10.66 billion and the period of disbursement was extended to December 30, 2010. The Fund reviewed the progress of its programme in May 2010 when its disbursements had reached $7.27 billion and concluded that the Pakistani authorities needed to do more work before further releases could be made.

The remaining amount was to be released upon the adoption of the Reformed General Sales Tax. But the RGST legislations failed to move through the Sindh assembly, the province from where a significant amount of additional resources will be collected. It was opposed by the MQM. Islamabad told the Fund that it needed more time to prepare the political ground for the imposition of this important tax.

As was to be expected, in spite of Islamabad’s failure to adopt the policies that would increase the pitifully low tax-to-GDP ratio – this is one of the conditions of the SBA with the IMF – the institution granted a nine month extension to Pakistan for disbursing the remaining amount. According to a press release issued by the Fund on December 27, the nine month “extension will provide time to the Pakistani authorities to levy the GST, implement measures to correct the course of fiscal policy and amend legislative framework for the financial sector”.

This extension could be treated by the authorities in two very different ways. They might convince themselves that Pakistan is too big and too important a country to be allowed to fail – a kind of Citibank in the troubled world.

According to one scenario, the IMF could allow the current programme to lapse while negotiating another one that did not have the RGST as an explicit condition. The other – and I hope that is the one the government will take – is to finally adopt the series of reforms that will put the economy on the track to recovery and sustained growth. For that to happen Islamabad will have to get serious about addressing both sides of its financial ledger – the resource mobilisation as well as the expenditure side.

The environment in which Pakistan must manage its economy in 2011 is a difficult one. There are no easy options. The country is in such an economic mess for the simple reason that it has always opted for the easier course in the belief that there is somebody out there ready to pull it back from falling into an abyss.

The donor community appears to have wised up to this way of doing business in Islamabad. It should keep the pressure on. It will be good for the country, its people and for the world around Pakistan.

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