[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]India’s challenges[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 21 Jul, 2009[/B]

THERE are moments in the lives of nations when those who rule can bring about profound changes in the lives of the ruled. In India, 1991 was such a moment when then finance minister Manmohan Singh, facing an economic crisis of immense proportions, chose to break with the past.

With a few bold strokes he demolished the ‘licence raj’ that had been put in place with tender loving care by Jawaharlal Nehru and his political associates. The raj had kept India stuck in an economic groove that produced what its own economists called the ‘Hindu rate of growth’ — 3.5 per cent a year when the population was increasing by almost two per cent a year.

That didn’t leave much room for the poor, and the latter, in whose name the raj had been established, suffered immeasurably. India became tremendously impoverished, with 40 per cent of the population living in absolute poverty. That proportion introduced a new term in economics — the bottom 40 per cent.

With reforms in 1991, India went on a different track. The rate of economic growth more than doubled, the incidence of poverty declined, the middle classes increased in size, and some parts of the economy got well integrated into the global economic system. By lowering the barriers on trade and encouraging the entry of foreign capital, India opened its economy to foreign influences.

The Indian brand name became valued in IT, pharmaceuticals and automobiles — even in literature, music and movies. The country seemed set to become a global economic power. The slogans ‘Shining India’ and ‘Incredible India’ coined by inventive Indian minds did not seem misplaced. And then the global economy went into a spin and affected India.

For a decade or so many serious economists — those from India included — had concluded that the global economy had become decoupled. By this was meant that a number of emerging economies were no longer as dependent on the markets of rich countries and on capital flows from them to make progress. These were the factors that produced the miracles in East Asia and turned China into an economic power house. Now a quarter of a century later, these economies had built strong economic links among themselves. Trade among them had increased and they had accumulated large foreign-exchange reserves to protect themselves from the vagaries of the international financial market.

If the West was sinking under the weight of its financial folly, emerging markets would not go down with it. But they did.

The decoupling hypothesis held sway during the good times. When these turned bad, it was clear that the decoupling hypothesis stood on shaky ground. Emerging markets soon found themselves in the grip of a credit crunch. The decision by US authorities to let Lehman Brothers sink produced a number of unintended consequences. Among these was the hoarding of cash by the large institutions to prepare for another institutional collapse.

Credit froze, including that needed by traders to finance their operations. Turning over fast — typically ranging in terms from 60 to 270 days — the total yearly flows amounted to $10tr. No matter what the destination of these exports, the countries that relied heavily on exports needed the finance. Its absence badly hurt them. One of the largest plunges in GDP growth rates occurred in Singapore and Taiwan, two countries for whom trade was an important part of the economy.

The crisis came to India through an entirely different channel. Its banking sector, mostly under the control of the state, was insulated from western finance. Its trade to GDP ratio was relatively low. But the more vibrant parts of its economy — the IT sector and the health services, for instance — were connected with the West through the links forged over time between its own enterprises and the large corporations abroad. When the latter collapsed or shrank in size, the more dynamic sectors of the Indian economy suffered. India lost close to 2.5 percentage points in its rate of growth, with the GDP increase declining from about nine per cent a year in the five-year period before the crisis hit the world economy to 6.7 per cent in 2008-09.

The Indian economy is showing another weakness: the widening in income disparities, both interpersonal as well as inter-regional. This was vividly portrayed in a study sponsored by the Asian Development Bank.

According to it a clutch of domestic billionaires control as much as 20 per cent of the country’s GDP and 80 per cent of the assets of the firms listed on the Bombay stock exchange. A significant part of this wealth was accumulated in the last couple of decades when the Indian economy began to open its gates to the world outside. An important part of this model was to push the state to the back seat of the economy. And, a very large proportion of the very rich come from the western part of the country. In other words the new riches are associated with the western economic model and with parts of the private sectors that operate at some distance from the government.

A vivid portrayal of the problem comes from the novelist Arundhati Roy in her latest book, Listening to Grasshoppers. While one arm of Indian society is “busy selling off the nation’s assets in chunks, the other to divert attention, is arranging a buying, howling and deranged chorus of cultural nationalism,” she proclaims. She discusses the recent economic boom as having merely created “a vast middle class punch drunk on sudden wealth and the sudden respect that comes with it — and a much, much vaster underclass”. She is extremely concerned that unless the state steps in to remedy the situation, the country may have to face a serious socio-political situation.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Deteriorating economic competitiveness[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, July 27, 2009[/B]

WHILE there is not a great deal of academic interest in Pakistan, its economy is being studied and analysed by a number of multinational institutions.
The World Bank continues to issue reports on the country’s macroeconomic situation and on some of the more important sectors of the economy. The Investment Climate Assessment, 2009 is one of the recent World Bank efforts focusing on some of the salient features of the country’s industrial economy.

The most recent entry into this genre of reports about the prospects of the economy is the State of Pakistan’s Competitiveness Report, 2009 launched by in the United States by Shaukat Tareen, Pakistan’s de facto finance minister. The report should be of tremendous interest to the policy makers since it presents the picture in Pakistan in the context of a comparative country framework.

Not unlike the World Bank report on investment climate, the Competitiveness Report by the Islamabad - based Competitiveness Support Fund, has both, good and bad news about the economy. It uses the methodology developed over the years by the World Economic Forum, a prominent international institution, perhaps best known for its annual meeting in Davos, Switzerland. WEF also publishes comprehensive reports on competitiveness, trade, information technology, gender and tourism.

The Global Competitiveness Report published by the institution is, “ the most widely read and respected ranking of the competitiveness of the countries since its inception 30 years ago.” The most recent report examined 134 countries across 113 different macroeconomic and microeconomic indicators. The indicators are grouped into what the World Economic Forum calls, the “pillars”. The assessment about the performance, of the countries is based on hard quantitative data and surveys. Last year 12,297 business leaders were surveyed across the developing world.

The bad news for Pakistan is that its overall ranking has slipped by nine places, from 92nd out of 131 countries included in the assessment in 2007-08, to 101st out of 134 countries examined in 2008-09. What is even more troubling is the fact that this slippage has occurred across the entire spectrum of indicators. Deterioration has occurred in all the categories into which the 12 pillars are grouped. These are “basic requirements”, “efficiency enhancers“ and “innovation and sophistication.” In terms of Pakistan’s place in the array of countries, the most significant slippage has occurred in the area of “financial market sophistication” where the country’s position has dropped by 23 places. In “goods market efficiency” the country is down by 18 places; in macroeconomic stability by 15 places; in innovation by 13 places; and in both infrastructure and tech nological achievement by 11 places each. Not surprisingly, the least amount of slippage has occurred in market size where Pakistan has dropped by one place. This indicator is based on the size of the population.

Another way of reading the results is to look at those pillars of competitiveness in which Pakistan’s place is even worse than its overall rank. These are four of these.. Again, not surprisingly, the country does very poorly in the area of “higher education and training” where it ranks 123rd among the 134 countries included in the analysis. “Labour market efficiency”, with a rank of 121st is the next worst followed by “macroeconomic strategy” and “health and primary education” where the rank for both is 116th.

In what lends importance to this work is that it provides a rich array of public policy tools, Islamabad could use to place Pakistan’s economic performance on to a higher plane. In that context the 2009 report includes information from some other areas surveyed by the World Economic Forum. These include the Global Enabling Trade Report, where Pakistan ranks 84th out of 118 countries included in the survey.

In terms of the indicators used in this analysis, Pakistan has the worst ranking _ the 100th -- in what the authors call the “proclivity to trade”. This measures the importance, both public policy makers and the entrepreneurial class attach to trade. The best reading in this area is “regulatory environment” in which the country ranks 40th.

The Global Information Technology Report is the second World Economic Forum document from which the authors of the 2009 report get their information. Here Pakistan ranks 98th among the 134 countries included in the survey. The troubling feature of this report is the sharp decline in Pakistan’s rank over the last three years, from 67th in 2005-06 to 98th in 2008-09. The number of countries examined increased by 19 in the three year period which means that Pakistan’s drop of 31 places cannot be explained entirely by the expansion in the size of the universe surveyed.

According to the report, the deterioration in Pakistan’s relative position was “led largely by steep falls in the indicators relating to the government’s use of technology (a drop of 23 places), business readiness (a drop of 15) and political and regulatory environment (a drop of 14). “Compared to last year, all indicators declined except the individual usage indicator which increased by nine ranks”.

The news for Pakistan gets really bad when the 2009 report brings in information from the Global Gender Report. The assessment is even worse than what the development community believes is happening in Pakistan.. . According to the report, “despite the notable example of women playing leadership roles, the World Economic Forum’s hard data and surveys show that Pakistan’s ranks 127th out of 130 countries”.

Discrimination against women is across many fronts, particularly in education, health care and economic participation and opportunity. In the education of women – enrollment in primary education _ Pakistan now ranks 127th out of 130 countries; in terms of women’s life expectancy the rank is 129th and in economic participations and opportunity, it is 128th.

Culture is an important contributor to women’s backwardness but it is not the only reason. Poor policy has played a significant contribution. In the report on the budget for 2009-10, Hina Rabbani Khar pointed with some pride in her budget speech to the fact that she was the first woman to take on that task in Pakistan’s history and she was doing it in front of the first female speaker of the national assembly. Women were doing relatively well in the political field but that presence had not translated effectively into public policy for importing women’s wellbeing.

The broad conclusion one reaches from the findings in these important reports is that Pakistan has to do hard work across a wide front to improve the competitiveness of the economy.

[SIZE="4"][COLOR="DarkRed"][B]China’s economic impact[/B][/COLOR][/SIZE]
[B][I][U]By Shahid Javed Burki[/U][/I][/B]
[B]Tuesday, 28 Jul, 2009[/B]


CHINA’S economy is being restructured in several different ways. Some of these are visible; some are more difficult to discern. How this happens will have great consequences for the rest of the developing world, especially for a country such as Pakistan.

Today I will focus on three aspects of this change: one, China’s likely role in the evolving global economic order; two, the revival of the country’s economy at a rate not anticipated by most China experts; three, the process of urbanisation in the country and how that might impact on the structure of the economy.

For the last several months, China is playing an active role in several different forums. These include the G20, the G8+G5 and the Shanghai Cooperation Organisation. For several reasons these organisations are unlikely to be the real driving forces in the global economic system. The G20 was being built on top of a system that had creaky foundations. The focus remained on the US and Western Europe. The latter in particular is no longer the most vibrant part of the global economy.

There may not, after all, be such a widening of influence and reshaping of the global economy as was believed would be the case only a few months ago. G8+G5 has demonstrated its inability to take important decisions on global economic matters. The SCO is an Asian organisation that can’t work for the entire world. What is likely to emerge is G2, a formal or informal arrangement between the US and China. The slow move towards multipolarism may be pre-empted by the continuing strength of the economy of the US and the rise of China.

There is now consensus among policy analysts the world over that China is well on its way to becoming a power house in the global economy. Even if it does not become the world’s largest economy in three to four decades, as some believe it might, it will certainly be the second largest after the US.

The fact that the country’s economy has begun to recover at a faster pace than was expected in the spring of 2009 is a testimony to its strength. This may happen while the rich countries are finding it difficult to shake off their economic malaise. When the global economy was in a deep recession Chinese dependence on the markets in developed countries was expected to hurt it badly. That did not happen. The World Bank has now forecast China’s growth rate at 7.2 per cent in 2009. While this is a long way down from the 11.9 per cent in 2007, it is still remarkable, given the sluggishness in other parts of the world.

China is likely to achieve this impressive rate of growth in spite of a fall in the rate of export growth from 20 per cent in 2007 to eight per cent in 2008 and to a forecast of minus 10 per cent in 2009. The country, it appears, is no longer that dependent on exports for growth as was believed before the present crisis hit the globe. It may lead the emerging economies towards ‘decoupling’, a concept according to which these economies are no longer very dependent on the world’s rich nations. How will this new China affect the global economy and its political system?

The current thinking in the US emanating from a number of policy institutions on both coasts of the country sees the coming global arrangement from the bipolar perspective, in part because such a system is familiar to policymakers as well as policy analysts. This is one reason why the administration of President George W. Bush paid so much attention to cultivating a new relationship with India. There is a simple idea behind this. Developing India as a counterweight to China will further America’s interests in Asia.

Among the features that will mark China’s rise, several have no historical precedent. Take for instance the pattern of urbanisation in the country. China’s urban future will be shaped all along the country’s east coast, from Dalian in the northeast to Guangzhou in the southeast. Within the next few decades, we will probably see 500 million people living in this narrow strip of land with a combined income of $10tr and income per capita of $20,000. The concentration of such a large number of people with high incomes in a narrow strip of land will have enormous consequences for China’s own economic growth pattern as well as on the global economy.

For instance, China is unlikely to concentrate on the development of land-intensive economic activities. This doesn’t only mean a move away from agriculture but also from the land-intensive patterns of manufacturing. China’s economy in terms of space use will go vertical and this will mean moving away from economic activities that need a great deal of ‘flat space’ towards those that can be carried out in high-rise factories.

What this implies is the shift not only from agriculture but also from traditional manufacturing. China will concentrate more and more on knowledge-intensive production systems. In fact it is encouraging this move by investing large amounts of public resources into developing the needed human resources.

What does all this suggest for Pakistan? Some conclusions are obvious. Islamabad must cultivate a close economic relationship with China and it should be based on a carefully worked out strategy. Pakistan can support China’s development as a country with a high population density along the country’s east coast by getting engaged in the provision of goods and commodities that will be needed. Pakistan could also concentrate on the activities that China will not be able to do on its own. That would mean highly linked industrial sectors, with Pakistan supplying parts and components to the Chinese industry. What is needed is a relationship based on careful thought and planning.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]How can the economy get off the rollercoaster ride?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 03 August, 2009[/B]

THE economy has been on a rollercoaster ride ever since the country gained independence more than six decades ago. At this time it is going through one of its periodic downturns. This one is more severe than many experienced in the past. The reason is not hard to understand.
The country is passing through a perfect storm; dealing simultaneously with a number of crises. All of these are not related to economics; some have their origin in politics, some in the structure of the society and some in the rise of Islamic extremism.

The questions the policymakers must address are obvious. One, how to pull the country out of its present economic mess? Two, how to ensure that it gets off the rollercoaster and gets on to a path that would take it towards higher and sustainable rates of economic growth and social development?

There are several answers to these two questions. The most tempting one the policymakers have always given is to suggest that the country needs a larger flow of external capital to augment the pitifully low rates of domestic savings and tax- to- GDP ratio. Whenever the geopolitical situation was conducive, Pakistan managed to obtain large doses of foreign money.

Given the ongoing struggle with Islamic extremists in which Pakistan now has taken a decisive position, Islamabad will manage to receive a significant infusion of capital. This will come mostly from official sources and will go largely to the government in support of the budget and of the various programmes and policies favoured by the donors.

Private capital flows needed by the entrepreneurial classes will only become available when the country becomes an attractive destination for the investors. For that to happen, the government will need to do a great deal of hard work. Some of this is needed to make the economy more competitive.

Last week, I used the latest report issued by the Islamabad-based Competitive Support Fund to point out the numerous weaknesses in the current structure of the economy. These had resulted in Pakistan slipping by nine places in the ranking of the countries on the competitive scale by the World Economic Forum. These weaknesses need to be removed in order to place the economy on a higher plane of growth and development.

One way of doing this is to bring to the economy the capacity to innovate. This is largely absent at the moment although, as the report points out, there are inherent advantages present which include a very young population . The median age of Pakistan’s population is 18.2 years – which means that tens of millions of young people are entering the workforce every year. Properly equipped with education and appropriate skills, they could lend enormous dynamism to the economy. Left alone to their devices they will only swell the ranks of the disgruntled.

The other advantage Pakistan has is the capacity to adapt new technologies and new ways of doing things when conditions are right. This was amply demonstrated in the late ‘sixties and the early ‘seventies when the farming community – in particular the medium sized farmers – quickly adopted the technology associated with high-yielding seeds developed in Mexico (wheat) and rice (the Philippines).

The government headed by President Ayub Khan had a great deal to do in facilitating the arrival of what came to be called the “green revolution”. The government – a different one – also had a great deal to do with the failure to bring another revolution which changed the agricultural economy of India. While New Delhi facilitated the adoption of biologically engineered cotton, the Bt, Islamabad discouraged it. The result was that India went from a cotton importing to a cotton exporting country while Pakistan moved in the opposite direction.

The importance economists have begun to place on innovation as a driver of growth and development is of relatively recent vintage. Development economics began its life as a separate discipline by suggesting that by the transfer of low productivity labour from the countryside to industry and modern commerce personal incomes would increase, markets would expand, and new opportunities would become available. All this would increase the rate of economic growth.

But the development of the modern sector needed more than the transfer of labour from less to more productive part of the economy. It also needed capital. This led to the development of production functions in which labour and capital were the two variables. It is only recently that economic model builders have introduced knowledge – and hence innovation – as a direct determinant of growth. This represents an enormous change in thinking which has not been fully factored in the work of economic policymakers. At this critical time in its history, the country certainly needs a lot of foreign capital. But to move towards an economic structure that will sustain high levels of growth, it also needs an economy that can innovate.

I will conclude with a quotation from The State of Pakistan’s Competitiveness Report, 2009, that very well summarises what the government could do to increase the rate of economic growth by focusing on innovation as an important contributor of change.

“Building a national innovation ecosystem for Pakistan is a complex and nuanced process containing many components. These include tax policies, government procurement, and protection of intellectual property rights.They include building the infrastructure for innovation and industry-university linkages. They include supporting entrepreneurs and businesses in general and in their technology identification and acquisition efforts. They include specialised support, such as business incubators and tech parks. They include strengthening education at all levels to encourage innovation and strengthening the ability of the financial sector to support commercially viable innovation. They include policies as straightforward as support for those wishing to file patents to more complex initiatives such as changing cultural attitudes towards risk.” This is a long and comprehensive list for what the government needs to do. However, as in so many other things it is not the dearth of advice that has prevented Pakistan from adopting the right course. It is the government’s poor capacity to implement what are the right sets of policies and initiatives. Whenever the United States government needs to take urgent and comprehensive action it appoints a “czar” to coordinate. More often than not this strategy has worked, most recently in restructuring the auto industry. The man given the responsibility did his job and has announced his intention to leave the government. Pakistan could perhaps do something similar in the area of innovation.

[SIZE="5"][COLOR="DarkRed"][B]A new beginning?[/B][/COLOR][/SIZE]


[B][I][U]By Shahid Javed Burki[/U][/I][/B]
[B][I]Tuesday, 04 Aug, 2009[/I][/B]


THERE have been few such moments before — moments when the different countries in South Asia may have seen national and regional interests moving them in the same direction.

Such a moment may have arrived in the summer of 2009 when, with the establishment of democratically elected administrations in the three large countries of the South Asian mainland, the conflict-torn area may be able to work towards regional cooperation and eventually towards regional integration.

Governments responsive to the wishes of the citizenry are more likely to give more weight to economics than administrations dominated by the military. For a considerable part of their respective histories, Bangladesh and Pakistan were directly or indirectly ruled by their armies. Since the armed forces did not have to gain and retain power through elections they were not compelled to give economics — and, therefore, poverty alleviation and improvements in income distribution — much consideration in the way they governed. Sometimes the quest for legitimacy made the military governments adopt policies they believed would win them favour with their populations.

In the context of much of South Asia, the anti-India stance was such an approach. This was adopted with enthusiasm by the military-dominated countries. It was justified at least in the case of Pakistan by the belief that India still had not accepted the creation of a separate Muslim state as a legitimate aspiration of a large segment of the population of British India.

The other important development in the region was the realisation that religious extremism and the focus on ethnicity as a basis for nationhood posed a real threat to the long-term interests of the people of South Asia. While the Islamists are currently at the forefront of the use of violence against both the state and ordinary people to promote their interests and agendas, other religious extremists have also been active in the region.

The threatened encroachment of Hindu extremism on the Indian state was checked by the elections of April-May 2009 in India that unexpectedly gave a much larger margin of victory to the secular Congress party and to Manmohan Singh, the party’s candidate for premiership. This may prove to be a defining moment for the evolution of secular democracy in India.

The Pakistani elections of 2008 may also prove to be as much of a turning point in the history of South Asia. In Pakistan’s case, the military was shown the door and it is likely to stay out of politics unless something even more dramatic happens than the decision by Islamabad to use the military to defeat the extremists in the country. The Sri Lankan military’s triumph in the long struggle with the Tamil separatists and the support it received from the people is an indication that there is a limit to tolerance in the pursuit of ethnic rights.

With these and other events, South Asia may have begun to turn the corner, moving away from a total adherence to the pursuit of national interests even at the cost of doing damage to the region’s long-term prospects. Should the meeting at Sharm El Sheikh be viewed in this context?

If the short statement issued after the meeting is to be read as the shape of things to come, New Delhi seems to be correctly reading the change in the mood of the Pakistani population and the course the elected representatives wish to take.

Given Pakistan’s precarious economic situation and the strong desire of the people to have their economic problems urgently addressed, there is a growing sentiment in the country that a hard stance towards India will not yield any reward. On the other hand, it would further burden the economy that is already straining under many pressures. People are doing a cost-benefit analysis and seem to have concluded that the balance is in favour of a major improvement in relations with India. Unfortunately the same can’t be said about the sentiment in India.

It is in India’s interest to reach out to Pakistan and restart the process for solving some of the major issues it has with its neighbour. Without bringing a degree of tranquillity to the region, India’s ambition to be regarded as a major global power would be difficult to achieve. Its leadership must have realised that while Pakistan may have initially encouraged the jihadists to balance India’s enormous superiority in conventional arms, the strategy backfired. The Islamic extremists that once had the support of the state have turned on the state itself.

The human cost to Pakistan of this misadventure is a multiple of that borne by India because of the attacks for which responsibility has been assigned to these groups. Both countries would undoubtedly benefit if the persistent tensions between them were eased. By doing so they would be removing one of the causes the jihadists have espoused.

The Sharm El Sheikh pronouncement is a subject of extensive analysis on both sides of the border, particularly in India. Considerable attention has been given to it for two reasons: one, because Manmohan Singh agreed to delink the dialogue on the issues that have created mutual tension from Pakistan’s attempts to bring Islamic extremists under control; and two, because of the reference to Balochistan in the joint statement. Several serious Indian analysts have chided their prime minister on these two positions.

The fact that the Sharm El Sheikh meeting was on the sidelines of a summit that involved a large number of leaders from the developing world, points to an interesting — and disturbing — fact about the nature of the relationship between Islamabad and New Delhi. Such meetings should not be held on the sidelines of other meetings but should feature prominently and regularly between the leaders of the two countries.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Focusing on ethnic markets[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday 10, August 2009[/B]

THE government announced last month a policy for increasing the contribution trade makes to economic growth and poverty alleviation.
The policy was first approved by the federal cabinet and then announced by the commerce minister in late July with the support of the political masters who currently govern from Islamabad. This is, of course, a positive development since in the past trade policy was largely made by the bureaucracy with little political input.

I will concentrate on some of the issues that have not been touched upon by trade policy analysts. I will look at how the policy has presented the current situation, what is proposed to be done in the next three years and what are some of the omissions..

The commerce minister presented a somber picture of Pakistan’s situation in terms of its participation in international trade.The way the situation was analysed, it is clear that those behind the formulation of the policy are well aware of the changes that are taking place in both the system of international trade as well as in the system of international production. This was not always the case. I have argued for some time that the policymakers need to be fully informed of the economic environment in which they are operating before they can improve the situation.

The minister underscored the important but depressing point that Pakistan had gradually lost even the little bit of space it had in the international market place. Its share in international trade declined from a low of 0.21 per cent in 1999 to 0.13 per cent in 2009, a drop of almost 31 per cent. As against this, both China and India – the former more than the latter – have increased their shares. Why did this happen? The policy answered this question implicitly. Had it been more explicit about the reasons for the slippage, it would have focused more public policy attention on some of the areas that were not covered. I will get to this point later in the article.

The data presented in the policy document suggest that the country has done poorly in all the items of export which were the subject of much public policy attention in the past.While the value of exports declined by 6.8 per cent in 2009 compared to the year before, the declines were much sharper in the case of traditional exports. Textile exports declined by 9.4 per cent. Within this group there were some significant reductions: the value of export of readymade garments declined by 21.7 per cent, yarn by 15 per cent, and bed-linen by 10.2 per cent.

There are several reasons for these reductions including the severe global recession, particularly in the markets of the country’s main trading partners; increasing competition from other suppliers, particularly from China and India; and the concentration of exports in the items that are losing shares in international trade anyway. The conclusion from this brief analysis is that in order to have a dynamic export sector, Pakistan has to concentrate the attention of public policy on other sectors and items, those the trade policymakers usually refer to as non-traditional items.

Pakistan has done well in increasing the export of rice since it produces a variety – the basmati rice – that enjoys a large and expanding market.There is an important lesson in this for the policymakers. Market surveys have shown that even during periods of economic stress, the commodities and products that have appeal for the relatively well-to-do segments of the population continue to do well. Even those who can’t spend too much on luxury items, tend to economise on low quality and low price items than those of better quality and higher price. Basmati rice falls in this category. Pakistan, in other words, would do well to concentrate as much rice acreage as possible on growing this type of rice. But that is not all the country can do for this important export commodity.

There is anecdotal evidence to indicate that some of the packaged basmati rice that sells in the ethnic markets of the United States and Britain – the markets that cater to the needs of the people from South Asia – is produced by Indian exporters operating out of Dubai. They buy the Pakistani rice in bulk, package it in smaller lots, and then export it under their brand names. They thus capture the value added in this trade, leaving the Pakistani producers with relatively lower earnings.

The trade policy incorporates a number of financial incentives and proposes to establish a number of new institutions to push the export sector towards greater modernity and dynamism. It also promises to strengthen the government’s capacity to do analytical work in the area of trade. An effort will be made to understand the underlying dynamics of international trade and relate that to Pakistan’s potential in some of the products for which there is a growing market even in difficult times. One area where the government should concentrate some effort is on analysing the ethnic markets and de termine how these could be served by the producers in Pakistan.

I will illustrate this point with one other impression. I am presently working on a book at Singapore’s Institute of South Asian Studies.There is a large population of South Asian origin in this country which shops for ethnic products. However, my visits to many stores shows clearly that Pakistani products are mostly absent from the shelves. Has an effort ever been made to promote Pakistani products in this very rich market and introducing the retailers here to what the Pakistani producers and exporters could provide? If such an effort was made why hasn’t it produced results?

I will close with a brief reference to an item that is totally missing from the trade policy. I did not find any reference whatsoever to the South Asia Free Trade Area. Pakistan is one of the few countries around the world that has ignored the gravity model of trade in determining its trade policy. This model suggests that much would be gained by promoting trade with India. Given India’s tendency to be protective, it would be better if Pakistan does this in the context of a regional arrangement such as SAFTA. Why are we ignoring this arrangement as one way of increasing exports?

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Trade and the state[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 11 Aug, 2009[/B]

IN the article today I will discuss the role of the state in economic management and how this relates to the making of trade policy. It is important to develop this understanding in order to fully comprehend what the government is attempting to accomplish in the important area of international trade.

Economists since the days of Adam Smith and David Ricardo, the pioneers of the discipline, have believed in the rationality of the individual. They argued that each person behaves in a way that is in his or her own best interest. They also thought, naively it would now seem, that when these individual actions came together the larger interest of the community and society would be well served.

Some called it the social utility of greed. However, it took a while before economists journeyed from the micro to the macro, from the behaviour of individuals and firms to that of the entire economy. The term ‘macroeconomics’ first appeared in 1945. It was coined by Jacob Marschak to explain how national economies worked. Much of his work was based on that of John Maynard Keynes who, a decade earlier, had questioned the rationality assumption as applied to both individuals and markets.

But some of the work done by Keynes and his followers was forgotten once mathematics invaded the domain of economics. Rationality was easy to model mathematically; irrationality less so. This line of thinking and this way of doing economic work eventually led to the development of the ‘efficient markets hypothesis’ or the EMH in the jargon of economists. In 1978, Michael Jerden, the American economist boldly declared that “there is no other proposition in economics which has more solid empirical evidence supporting it than the EMH”.

An important byproduct of this way of theorising was the reduction of the role of the state in the making of economic policy. A belief developed that individuals, firms and markets should be left to their own devices, allowed to do what was best for them. What will result from this will be good not only for components of the economy but also for the economy as a whole. This was an attractive way of thinking and also elegant since it could be embedded in sophisticated economic models.

Such an approach was attractive for what I would call lazy governments — governments that did not have the intellectual equipment or political pressure to use public policy to guide the workings of firms and markets or the behaviour of individuals.

There were many areas of economic activity where the governments could and should have intervened but chose not to do so since economic theories supported a stand-off approach. Trade was one such area. Activist governments in East Asia took a deep interest in trade, in particular international trade, but lazy governments largely stayed away from this area. Some of these were in South Asia. Pakistan was one such country where the governments chose to do little to influence the content of exports and the direction in which they were sent.

But economies are like complicated living organisms. What happens in one part of the body can have a deep impact on other parts. Even weak and lazy governments make fiscal policy and what they do with the structure of taxes deeply affects the pattern of trade. Export promotion may not become an important objective of government policy but whether a country creates an important space for itself depends to some extent on fiscal policy. In East Asia, for instance, by combining tax policy with some direct interventions, the state was able to create an impressive amount of space in the global markets for domestic producers.

Some other areas of public policymaking also influenced the pattern of trade and its importance for the economy at large. Industrial policy was one such government endeavour that had important consequences for what a country did in international trade. Lazy governments produce lazy economic actors. It is easier to continue to support the established order through tax and industrial policies. Doing anything different meant exposing economic actors and governments to risk. Innovation can produce attractive returns for those who succeed and for the economy as a whole but the road to success is often paved with failures. This is one reason why lazy governments prefer the status quo.

If the state is to get actively involved in promoting trade what is it that should be done? A good trade policy has at least four components. It must be based on a good understanding of the international marketplace. There are profound changes occurring in the way countries trade, the products they produce and the relationships they develop with other nations. Understanding all this requires careful analysis and production of current data and information on many aspects of international trade.

Second, the state must be aware of what the economy is capable of producing. If there are opportunities available in the international marketplace, can they be successfully exploited by firms engaged in production and marketing? If there are major gaps between opportunities and capabilities what kind of tax and industrial and other policies could be adopted to bridge them?

Third, to be effective, the making of public policy must not be jerky. This means that the various actors in the economy must familiarise themselves with the public policy milieu in which they are operating. Once a broad framework has been established, changes in public policy must be at the margin.

Fourth, there should be broad public support for the approach being adopted. Economic policies work well when citizens have some say in their formulation, when they are understood by the citizenry and when citizens have the means to watch over their implementation.

The new trade policy has met some but not all of these objectives. I will return to this subject in a later article.

[B][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Rental power plants: a crisis-driven remedy[/FONT][/SIZE][/COLOR][/CENTER][/B]

[B]By Shahid Javed Burki
Monday 17, August 2009[/B]

TO dispel misapprehensions, government decisions need to be transparent as it closes the deals on rental power plants. These are floating barges that carry large generators which can be hooked into the distribution or transmission systems. They produce anywhere between 100 to 200 MW of power.
Policymakers have a tendency to act in the field of energy during periods of extreme crises when serious shortages appear. Shortages cause distress and considerable economic loss. They create space within which the government can act without heeding criticism.

The present crisis is perhaps the most serious the country has ever faced, even more serious than the one caused soon after the country’s independence by India. Then the Indians decided to switch off the supply of power on which Lahore, the country’s largest city depended. It caused a great deal of discomfort and some economic loss. Pakistan then was an agricultural economy and 90 per cent of its people lived in the countryside. Electricity did not reach most villages and few people depended on it to lead normal lives.

The government of the day reacted by formulating a strategy for developing domestic sources for the supply of power and to meet the demand of an economy that was expected to grow much more rapidly than the rate of GDP increase during the colonial times. Producing hydroelectricity was at the core of the government’s approach and resulted in the development of the site at Warsak on the Kabul River. A couple of power plants were also built at the canal heads in central Punjab.

The other power crisis was in the ‘nineties caused by the government’s failure to see that the economic growth of the ‘eighties will put pressure on electricity supply which was increasing much less rapidly than the increase in national output.

The government headed by Prime Minister Benazir Bhutto launched an ambitious programme to have power generated by the power sector. It provided generous incentives to a couple of dozen “independent power powers” which included the commitment to purchase whatever was produced at a pre-determined price. The result was electric.

Within couple of years, Pakistan from being a power-deficit, advanced to a power-surplus country. But that strategy left the country with a problem. Its dependence on imported fuel increased since most of the power plants used this form of input.

How should the government respond to the new crisis? It makes sense at this time to include rented power in the package of relief measures that need to be adopted to ease the shortage of power. But the resort to this source of supply has to be as temporary as the peoples’ use of small and highly inefficient generators to supply power to their houses, shops and places of work.

The important thing to watch is that the use of these stop-gap measures will not introduce serious distortions into the economy.That won’t happen with private generators; they will be switched off and stored away once the supply of power from the national grid becomes reliable. People are better at making choices based on a cost-benefit analysis. Governments generally do a poor job of factoring in such calculations in the making of public policy.

It makes sense as Dawn did in its editorial of August 10 by asking the government exactly how much it will pay for each kilowatt hour of power it purchases, how this supply will be switched off once cheaper power becomes available, and whether long-term assurances are being given to those who are entering the power rental business. If the purchase agreements are being done to last over a long period of time, the government will be seriously distorting the picture.

It should be understood though that depending on rented power is essentially a relief measure, not a longterm, not even a medium-term solution to the problem the country faces. As the Americans say, crisis provides an opportunity that must not be wasted; it should be used to put in place a well-thought out strategy.

Islamabad has some plans briefly reflected in the budget speech for 2009-10. But some careful work needs to be done and, using the parliament and provincial assemblies, once a strategy has been developed, it needs to be debated so that it has the backing of the people. The strategy must encompass a number of areas.

The most important of these, of course, is the choice of the source to be used for generating power. Since in recent years the energy sector was developed in response to crises, the country has not developed an energy sector that maximises the use of domestic resources while opting for the least-cost solutions.

In calculating costs, what appears attractive over the short-term may prove to be expensive over the longterm. This is why it is not prudent to rely on imported fuel as a major source of generating power. It has been known for a long time that Pakistan has the capacity to produce very large amounts of power using its rivers and canals. Several estimates put the potential at between 40,000 and 50,000 MW. What has prevented the exploitation of this resource is the inability of successive governments to satisfy all the provinces that a fair deal can be worked out.

Working on one project at a time in this context is not a good strategy since it creates winners and losers whose interests cannot be balanced. A multi-project framework is needed to settle the differences among the varied interests of the provinces. A strategy aimed at developing the full potential of hydroelectricity needs to be worked out and placed before the representatives of the people for discussion and approval.

Coal is the second mostly untapped source of electric power. Since what is available in the extensive deposits in Sindh and Balochistan is said to be of low quality and since, given the increasing concerns about global warming, coal is losing its popularity as source for power, once again a well-developed strategy is required.

What I am arguing is for the government to apply itself seriously to develop a plan that would shift the focus to the long-term and increase the country’s reliance on domestic sources of energy. Crisis solving should not be the basis for finding a viable long-term solution.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Task of implementation[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 18 Aug, 2009[/B]

WHAT I am writing today is based on personal observations as well as what I have heard from some people. One of the most important problems the country faces today is the inability of the state to provide to the people what they need.

The government seems to know what it should do but seems unable to act; it appears stuck in a groove from which it is finding difficult to get out. Implementation is currently the government’s greatest challenge. I will illustrate this point with three examples.

Let me begin with a personal observation. A few weeks ago my wife and I, having spent two weeks in Pakistan, returned to Singapore to continue work on a book I am writing for the Institute of South Asian studies. We were travelling on a Singapore Airlines flight from Lahore to Singapore.

Our time of departure coincided with that of a couple of other flights destined for a couple of points in the Middle East. I would have thought that handling a few flights within an hour or so should not tax the capacity of a relatively new and modern airport. But that did not turn out to be the case. From the moment we were dropped outside the main verandah of the departure lounge to the point when we reached the sparsely appointed upper class lounge we were in the midst of enormous chaos and confusion.

There were no porters available to help us with our bags so we put them in a trolley and began to move towards the entrance gate manned by half a dozen security officials. It took us an hour to negotiate the few metres of space. Where there should have been one line there were five. Where there should have been only passengers in between the railings that were supposed to regulate those entering the departure area, there was a generous mixture of passengers and those who had come to say goodbye. To say that there was a great deal of shoving and pushing is not to adequately represent the mayhem through which we went.

When we finally got to the point of entry, I asked one of the security personnel why he was just standing there looking bemused. His response was simple and illustrative of the situation that travellers must confront daily. “Yeh dande ki qaum hai,” he said to me and turned his face away indicating that there was nothing more to say or do.

What would it take to sort this situation? A simple but robustly enforced requirement that only passengers will be allowed in between the rails, that they will form one line not several, and that they will not enter the queue wherever they saw a bit of opening would suffice. I am sure one security guard could enforce these simple rules but it would require somebody in authority to ensure that they were observed.

Once lined up in front of the airline desk to get our boarding passes I encountered the same lack of respect for the queue discipline. It was obviously a part of our evolving culture. There was one difference though. This time the airline official was watching the show from behind his counter, refusing to serve those who in his view had beaten the line. This did not particularly please those who had taken the trouble to plough their way to the front.

My second example of governance having gone awry comes from the conversation I had with a senior person of the World Health Organisation who said that in spite of the efforts made by his organisation to have Pakistan prepare itself for the flu epidemic that could take a nasty turn any time, there was no sense of urgency in Islamabad. Several meetings had been held with the health officials but the recommended strategy had not been put in place. According to him Pakistan ranks 139th out of 140 countries in terms of preparedness.

I draw the third example from the work I am doing at the government’s behest on the involvement of the private sector in the development of the economy. At one of our meetings a senior textile mill owner said that he was able to compete with any producer around the globe for the specialised fabrics he produces. In fact 90 per cent of his output went to some of the most demanding buyers. He was required to meet a number of conditions — that the water he used was cycled back into his operations, that his workers were properly housed, and since he employs a large contingent of women, that he provided their children with appropriate education on site. In spite of these requirements, he is able to beat competition.

However, he has a much more difficult time dealing with the small firms who compete with him in the domestic markets. “They don’t pay taxes, steal electricity and water, don’t observe labour laws and have no regard for intellectual property rights,” he complains.

The last point is particularly significant for him. He has a world class design centre but the designs the centre produces for his products get copied within a week and hit the markets soon after he has put out his own. His main plea to us is to persuade the government to ensure that there is a level playing field for all producers, big, small and those in between.

The three examples I have taken from three very different fields point in the same direction. There is a growing disregard in the country for carrying out assigned duties. Security personnel have no interest in ensuring discipline, the private sector is looking for ways to beat the system and government functionaries are casual when it comes to serving the people. What is at the bottom of all this? Perhaps a tolerant culture and an educational system that doesn’t instill in the people the difference between rights and duties.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Govt intervention and competence[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday 24, August 2009[/B]

ECONOMISTS have once again turned their attention to the role of the state in managing not only the macro but also the micro economy.
The state should not only be involved in minding the fiscal and monetary policies but can – in fact should – take over firms and the entire sectors of the economy whose demise could seriously hurt the national economy.

It took a major economic crisis in the West to recognise that the state could not be shoved on to the back burner. President Ronald Reagan’s statement a couple of decades ago that government was not the solution to economic problems but the problem itself seems so out of place now. That point of view was shared by Prime Minister Margaret Thatcher of Britain and the two working together were able to put in place an entirely different set of policies aimed at managing the economies not only in the developed but also in the developing parts of the world.

These sentiments led to the formulation of sets of policies that together came to be called The Washington Consensus. They represented a consensus among a bunch of economists who were worked at a number of economic and financial institutions based in Washington. The policies the Consensus promoted touched upon two things in particular. One, the state should leave most economic decision-making in the hands of the private sector. Even the regulatory aspect of economic management should be handled by the state as the last resort. It was in the interest of the private sector to regulate itself. If it did not, it will lose the respect of the market place and suffer economically.

Second, the economies should be open to the world outside. Movement of trade and capital should be as free as possible. The state should not be allowed to place obstacles in the way of these flows. The same theory should have been applied to the movement of people. But here an exception was made. The owners of most capital and a significant proportion of tradable products were the world’s richer countries. It suited them to advance the view that capital and tradable products should go to the markets where they fetched the highest return. This would increase general welfare and everybody would benefit Exactly the same logic should have been applied to the movement of people. However, since the bulk of the world’s people lived in poor countries, the world’s richer countries had no problem in deviating from the philosophy of openness that was being sold in the case of other types of flows. As the world became increasingly open in trade and capital flows, more and more constraints were applied to the movement of people.

The deep economic malaise that began in August 2007 in the United States and quickly engulfed the rest of the world, brought the state back to the front burner. The state is no longer seen as the problem; it has become the solution. America had gone the furthest in expelling the state from economic matters. Now reversing the course, it is the most aggressive in bringing the state back. President Barack Obama has succeeded in getting the state involved in recapitalising the financial sector.

Without public money going into the banks, credit would have remained frozen and the economic slump deeper. The American government also rescued the automobile industry from going out of business. Washington is now the largest share holder in General Motors, its largest automobile company.

Now the state is being used all over the world to save the private sector from its greed. Governments have poured extraordinarily large amounts of money to save their economies from slowing down and bringing with it increased unemployment. This has been done not only in the countries such as the United States and Britain that were at forefront of the earlier thinking on economic matters. It is also being done in several large emerging economies.

China showed great boldness in pumping large amounts of public money in building infrastructural projects so that more people will not lose jobs. India, although with a large fiscal deficit to manage, it also used a stimulus package to keep the economy growing at a pace needed to keep more people going into the already large pool of poverty. Indians are also using public finance to provide support to the people who can’t find work in the private sector.

Even before the Indian state got involved in helping the economy maintaining the rate of growth at a reasonable level, it was active in saving the collapse of Satyam, one of its largest IT companies. The state took over the company temporarily and then engineered its sale to another company engaged in the same business. This intervention helped to save the reputation of the IT sector on which so much of the Indian economy depends, particularly for bringing large amounts of exports and for also attracting foreign direct investment.

But Pakistan has not taken this route of active state participation in economic revival. To the multilateral financial and development institutions and bilateral donors that are involved in helping Pakistan navigate its way out of the current economic crisis, it is clear that the state is much too weak to handle some of the tasks that are being done by it in other parts of the world.

The Pakistani state in its present form can’t be trusted to handle the distressed economy. It is clear that Islamabad needs to focus on its present economic difficulties and prepare for the future. Why is the state weaker than is the case with the state in other countries at the same stage of development? The answer comes from a careful study of the country’s economic history which is beyond the scope of this article.

The state is exceptionally weak for the reason that it has seen so many different hands that have guided it in the past 60 years. Work on rebuilding it has to be given a very high priority now that a new political structure has begun to take shape. The work should start immediately.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]History’s many burdens[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 25 Aug, 2009[/B]

MOST regions carry the weight of history. For many of them the weight is heavy. In this respect South Asia is not all that much different from many other parts of the world. The only difference is that while other regions have been able to find ways to cast off these burdens, South Asia still carries them in the 21st century.

This is unfortunate since this is likely to be a century of change with significant realignments among the world’s large economies. For South Asia to gain a position in the fast-changing global system it will have to resolve some of the many inter-country conflicts that have bedevilled the region for so long. How several world regions managed to cast off the burdens of history has lessons for South Asia, in particular for India and Pakistan.

Since a great deal can be written — in fact has been written — on the subject of persistent inter-country conflicts in South Asia, I will say little on this subject and from a very different angle. My preference is to call this subject the burden of history. I call it a burden since it is my view that the weight the South Asians have carried for decades needs to be lifted if the region is to realise its considerable economic potential.

One important point to be made in this context is that the purpose of delving into history is not to open old wounds. These wounds were inflicted as a result of the deep suspicions in the way the South Asians looked at one another. The reason why that has happened is that the past is interpreted by every country from its own perspective. The South Asians are like the various players in Akira Kurosawa’s Japanese drama Rashomon where several people see the same crime committed but tell it from their own perspective. There is a great need for countries to develop a common historical narrative.

Rewriting the history of South Asia should start with a recognition of how in the distant past as well as in the more recent present complex societies managed to shed their differences and work together for the common good of the citizenry.

Sometimes this happened because enlightened leaders emerged simultaneously in different places and were able to look beyond the past and convince their people that working with neighbours had greater rewards for them than labouring against them. Sometimes the impulse for integration was generated by the realisation that past conflicts had been extremely costly and continuing them was not in anybody’s interest.

A great deal has gone wrong in the South Asian region because of the way India and Pakistan looked at each other. Being almost paranoid in their perception of the other’s intentions, they have cost the area a great deal in terms of lost opportunities.

These “what if…” exercises — what would have happened had the countries behaved differently towards each other, for instance — are difficult to quantify. However, based on some of the earlier work by me on these lines and concerning the cost to Pakistan vis-à-vis the Kashmir dispute, it would not be an exaggeration to suggest that had India and Pakistan not been so obsessed with each other and had not spent so much on their respective militaries, their combined GDP may have increased by as much as two percentage points each year.

Compounded over so many years this is not a trivial amount. But for the concentration of so much energy against each other, India and Pakistan today would have much larger economies, a far higher income per capita and fewer people living in absolute poverty. It appears that India is breaking out of this mould and Pakistan may be similarly disposed. But the two countries have been doing this for different reasons.

For India, its continuing obsession with Pakistan is costing it a more prominent place in the global economy and the evolving international political system. For Pakistan, the realisation appears to have finally dawned that the country’s real enemy exists within its borders and not on the other side of its frontier. If this reading is correct the economic rewards will come sooner for India than for Pakistan since the latter will remain engaged with its internal enemies for a while. That said, by redefining the threat to its security, Pakistan could set itself on a very different course.

Although economists have ignored the dividends of regional peace in identifying the determinants of growth for the ‘miracle economies’ of East Asia, the fact remains that the absence of inter-country conflict in this area was an important contributor to economic growth. This could happen in South Asia if its various conflicts get resolved. Among them are the long-enduring suspicions between Afghanistan and Pakistan which I will comment on in a later article.

Here, I recall a conversation with Prime Minister Manmohan Singh in his New Delhi office in December 2005. I had gone to see him to discuss the study I was then doing for USAID on the South Asia Free Trade Area. I had known Mr Singh for several years but it was the first time I was meeting him as prime minister. He told me that in one of his conversations with President Pervez Musharraf he said that neither had worked hard to gain the offices they then occupied. “We are both accidental leaders but since we are now here we should use our positions to bury the past and work for improving the economic and social welfare of our people,” he told President Musharraf. By moving in that direction at Sharm El Sheikh, Manmohan Singh may have taken a small step in that direction.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The China connection[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday 31, August 2009[/B]

IN a long one-to-one conversation with President Asif Ali Zardari late last year I talked about Pakistan’s economic relations with China, one of the two large countries that borders Pakistan. The other, of course, is India. The president said that it was his wish to put the relations with China on firmer footings rather than on ad hoc developments of the links that marked the past.
I thought then – and continue to believe even more strongly now – that the president was on the right track. Pakistan needed to develop a strategic relationship with its large neighbour. Pakistan should see China as an opportunity not as a competitor in the global market place. However, in order to make this dream real, policymakers in Islamabad needed to develop a fuller appreciation of what was happening in China and how that would affect Pakistan.

There is conventional thinking and then there is unconventional thinking about China’s economic future and how it will influence the world. Conventional thinking accepts the fact that China’s rate of economic growth will continue to outpace by a wide margin the rate of increase in America’s gross domestic product. Inevitably, even though the size of the Chinese GDP at the end of the first decade of the 21st century is about a third of the United States’, it will equal that of the latter in about a couple of decades. If the present trend continues it will overtake the United States before the 21st century is too old, perhaps as early as 2030.

Conventional wisdom also accepts the fact that in matching the size of the US economy in the coming decades, China will have departed significantly from the well established pattern. On previous occasions the catching up was done by the economies that were not very dissimilar from the one that was in the lead. This happened when France caught up with Britain after the latter had taken off because of the industrial revolution. Germany came next and then the United States. The Soviet Union tried to catch up with the western economies in the second half of the 20th century by adopting a very different model of economic growth. It failed spectacularly. But China is likely to succeed. What makes this catching up very different from the earlier ones is that it will be done by a very populous country that will remain poor in terms of per capita income terms. The consequences of this event will be very different than those that resulted from the previous catch-up periods.

As to how China will maintain this extraordinary growth path is a question that begins to separate conventional thinking from the unconventional wisdom. The first major difference between these two points of view concerns the links between China and the western world. According to conventional wisdom, China’s growth model will keep it dependent on the markets of the developed world. If these falter for some reason, China will be unable to maintain its hectic pace of growth.

And if the rate of growth falters, China will have to deal with a slow down in the rate of growth in employment. In fact, it may have to deal with massive layoffs of workers. The current slow down has cost 20 million workers their jobs. If this trend persists there may be social unrest which the Chinese system may not be able to absorb.

Unconventional thinking suggests that the future growth of the Chinese economy will forge new relationships between China and Asia in particular and that the process may have already begun. Some recent economic data about the way the “second rise of China” is affecting the Asian economies has already begun to lend substance to the second view, the unconventional one.

I have used the phrase “China’s second rise” in some of my earlier writings to distinguish it from the one that propelled China to the front of the global economic system. China became the world’s industrial workshop, producing cheaply manufactured goods for consumption in the United States and Europe. Those links had profound influences on the western economies. Exports from China resulted in the restructuring of the international production system as firms relocated their production facilities by closing down operations in the old industrial countries and relocating them in China. Politicians began to call this process “exporting of jobs” and railed against it. It became a major issue in the contest for the American presidency in 2008.

These were well noted results of China’s first rise. By exporting cheap products to the western markets China contributed to the low rate of inflation in these countries. Interest rates also remained low which helped firms to borrow and invest in the process of restructuring in which they were engaged. By exporting much more than it was importing, the Chinese built up large foreign exchange reserves. When the current crisis began in the West, Beijing held $2.1 trillion of reserves. The crash of the western economies had the expected consequences for the Chinese economy.

The West has not fully noticed that the way the Chinese are stimulating their economy will make it less reliant on the export industries on which it relied so heavily in the past. Beijing has used both the government’s budget and the state controlled banks to pump money into the economy. While most of the public sector money has gone into building new infrastructure, the banks have lent for investing in increasing the capacity of the economy to increase production. The government is putting almost $600 billion into the construction of infrastructure while the banks have doled out more than $1 trillion in loans in the first half of this year. More will come in the second half.

There are two points about the Chinese economic effort that most analysts have missed but are of tremendous significance for the global economy. Citigroup recently increased its estimate for annual Chinese economic growth to 8.7 per cent in 2009 from 8.2 per cent, and to 9.8 per cent in 2010 from 8.8 per cent For the first time the catalyst of global economic revival is coming from China in pulling the world economy from the deepest recession since the Second World War. Second, China is pulling with it the rest of developing Asia. Exports to China from East Asian economies rose 18.7 per cent in the second quarter of 2009, according to customs data, a sharp turnaround from the 16.2 per cent drop recorded in the previous quarter. There is no doubt that the centre of gravity of the global economy has begun to shift towards China. Islamabad should begin to understand the changes taking place in China to develop a sound strategy concerning its relations with that country.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Medical driver of growth [/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]Pakistan should focus on health services and set up a Medical City. The well-to-do Pakistani diasporas in the US and Canada should be invited to become partners.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, 01 Sep, 2009[/B]

ONE of the themes explored in these columns has been how to develop the Pakistani economy by using a new driver of growth.
I have maintained that the economy has missed the opportunity when first the East Asian economies and then China used their productive sectors to create space for themselves in the markets of the industrial world.

The industries they developed first focused on the simple low-priced consumer goods and later on more sophisticated goods. South Korea, for instance, is now competing with Japan in the export of luxury automobiles, Taiwan exports laptop computers and has become a major contributor to the development of nanotechnology. China has begun to manufacture aircraft parts and is becoming a large developer of solar technology.

The Indian growth model took a different line, using the large supply of skilled engineers and the contacts the non-resi dent Indians — the NRIs — had in America’s corporate world to build a vibrant IT industry that is now the envy of the world. In a general sense, I have been suggesting that Pakistan should search for a niche it could develop to ex ploit its skill base and its own diasporas to gain access to the global market.

Given the way the global economy is growing and changing its structure, the opportunities lie in the service sector. Within the service sector Pakistan should perhaps focus on health services. To develop this point I will today make a specific suggestion in the hope that it will attract the attention of policymakers in Islamabad as well as operators in the private sector who have the requisite skills, experience and competence. But the government will need to take the initiative. In this context what could it do? It is in answering this question that I will get into some specifics.

The government may set up a public–private-sector company to develop a site and call it the Medical City. Some pleasant location should be found — something like the Kalar Kahar area on the Islamabad-Lahore Motorway. The area has a relatively pleasant climate, has a great deal of history and very good road connections with Lahore and Islamabad, two of the largest urban clusters in Pakistan.

While initially capital for developing the site could come from the government, the extremely well-to-do Pakistani diasporas in the US and Canada should also be invited to become partners. These diasporas have a large number of medical personnel who are well-to-do and looking for business opportunities in Pakistan. Some of them have already invested in setting up hospitals and clinics in the country but these initiatives were taken on an ad hoc basis.

Pakistani expatriates have set up hospitals in Lahore, Islamabad and Karachi but they are operating as separate institutions. The idea behind the establishment of the Medical City is to make these efforts fit into a well-developed programme.

To begin with this programme should concentrate on three things. It should establish a hospital that concentrates on catering to the needs of the Pakistani population in areas that are not well covered at this time. In focusing on these, the needs of the Middle East and Central Asia should also be kept in mind. These would then become the catchment areas for the City. A teaching hospital and nursing institute should be developed alongside the hospital with a view to meeting the need for skilled personnel.

The second part of the plan should include locating, alongside the hospital, specialised institutions dealing with some areas of concentrations. These institutions should provide not only healthcare in these areas but also research facilities. The aim should be to establish world-class institutions in specific areas that will attract students and researchers from neighbouring countries.

The third element of the programme should be the development of a financing plan for the building of the City and developing it over time. The plan should have a combination of public resources and private money. Initially the City should be presented as an investment opportunity for venture capital firms that specialise in healthcare. Once the facilities have been created, private-equity firms could be attracted to take positions in the enterprise with a view to taking it to the capital markets. This would provide continuous access to fresh capital.

What I am proposing is an establishment that would work for profit. That said, there should be adequate provision for making it possible for the poor to access the facilities located in the City. This could be done by creating a fund that should have contributions from the government as well charitable organisations.

Is something like this possible in a country in Pakistan’s situation? Would it be able to attract the clientele essential for making such an enterprise a success? Initially the City would cater to Pakistan’s large population but once it develops a reputation the geographic area from which the users come would expand. When Pakistan no lon ger has the reputation of being a place unsafe for foreigners it could become the destination for what has come to be called medical tourism. India has become a beneficiary of this type of market. There is no reason why the Indian experience cannot be replicated in Pakistan.

My view is that it will work for the reason that there are a variety of people and groups who are interested in some aspects of the programme outlined here but are looking for the support of an institution that will bring together these interests. The government is best able to do this.

A task force that includes both the public- and private-sector people could be assigned the job of developing these ideas. The people included in it should represent the various disciplines that will need to be tapped to give shape to this type of initiative. The task force could be located in the Planning Commission.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Expanding government[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, Sep 07, 2009[/B]

IN many ways, some of them much too subtle to be grasped easily, the role of the government is likely to change quite significantly in the years – perhaps even decades – to come.
It is known from experience that ideas about economic governance readily flow across national borders. This happened in the 1980s when what came to be called Reaganism or Thatcherism, depending on which side of the Atlantic you happened to be, relegated the state to the sidelines.

This economic philosophy had tremendous consequences for policymaking in countries such as Pakistan that had to take advice from Washington and London in order to access the foreign capital that was desperately needed. Under this approach, Pakistan during the period of President Pervez Musharraf, adopted an approach that gave a great deal of space to the private sector and pushed the state to the background. But foreign influence was not the only reason why that happened. Economic policymaking at that time was led by an individual whose own background was in commercial banking with very little knowledge of economics and even less interest in strategic thinking.

Under his stewardship, the private sector ascended the commanding heights of the economy while the institutions of the state were allowed to weaken. Two sets of institutions were affected adversely in particular. The Planning Commission was virtually taken out of the business of strategic work and regulatory institutions that could oversee the working of the private sector were not given the autonomy they needed to work effectively.

The thinking on the economic role of the state has changed quite dramatically over the last several months. This creates an opportunity for Pakistan to redefine the state’s role since it will not be forced to go in a different direction by institutions such as the IMF on which the country is once again dependent for access to external capital.

There are at least four reasons why the thinking has changed. The first, of course, is the deep economic recession across the globe. This started in the United States where the private sector, left more or less to its own devices, showed that the assumption that it could self-regulate was totally misplaced.

Alan Greenspan’s belief that the state should keep itself at a long distance turned out to be totally misplaced. With the private financial sector having gotten itself into a series of tight situations, it had to rely on the state to get it out and to have it functioning again.This was done with a great deal of public money doled out to the banks and to the automobile sector. Without formally nationalising parts of the private sector, the US government now owns large chunks of the assets in a number of vital sectors.The second reason for the disillusionment with this philosophy was the growth in income disparities in a number of countries that had followed it aggressively. In the United States the gap between the incomes of the well placed executives and owners of assets and their workers increased to the point that it became a political issue. President Barack Obama owes his impressive victory in last year’s presidential election to the growing public discomfort with growing income and wealth disparities. He promised “change” from the past and won handsomely against a candidate who wanted the continuation of the status quo.

The third issue with the philosophy that granted the private sector so much space was the way a number of corporations and wealthy individuals acted and swindled the state as well as those who were relatively less affluent. Enron Corporation and Worldcom were two companies in which their owners and managers built huge fortunes at the expense of the government – by avoiding to pay taxes – and at the cost of the middle class who owned shares in these companies and relied on the pension funds the companies managed. The fact that a number of these managers went to jail was small comfort for those who has lost a great deal of money and the promise of good life after retirement. They wanted the system to be changed. The fourth reason why the private sector system of economic governance is being replaced by the one in which the state will play a much more important role is that the latter was shown to be demonstrably better than the former. European capitalism that cared more for the poor and the disadvantaged placed less burden on the society than did Reaganism and Thatcherism.

The Asian countries also demonstrated that their system of the state being more prominent was also producing better results. The most recent example of this is the crushing defeat of the Liberal Democratic Party (the LDP), at the hands of the newly formed Democratic Party.

The LDP, in spite of its name, was as conservative in its approach towards economic management as the Republicans in the United States and the Conservatives in the UK. Yukio Hatoyama, the presumptive Japanese prime minister, rallied campaign crowds with his pledge to shift away from what he said were “excessive reforms” in the economic system.

“The recent economic crisis resulted from a way of thinking that was based on the idea that American-style free-market economics represents a universal and ideal economic order”, he wrote in an article first published in a Japanese monthly magazine and reproduced by The New York Times.The American system, he went on to say, was “void of morals or moderation”.

These developments in economic and political thinking need careful reflection in Pakistan as the country struggles to revive its faltering economy and put in place a new political structure. Having relegated the state to the background during the period of Pervez Musharraf, the country needs to bring the government back into play.

How should that be done; what should be the respective roles of the government at various levels, not just the centre but also in the provinces and at the local level; how should the state be provided the skills and the talent it needs to run an effective system of governance; what is the best way of holding those who hold public positions accountable for their deeds; and how should economic strategies be formulated and what kind of political involvement should be included in this process? These are vital questions and they need to be studied. Some good work was done by the commission headed by Dr Ishrat Husain.The report he prepared appears to have been shelved. Perhaps one way of moving forward in this area is to release the report to the public and to begin a dialogue.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Change in Asia[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 08 Sep, 2009[/B]

ASIA is changing rapidly and change is coming from several different directions. With the exception of China, it is the exercise of democracy through elections that is producing the change. China is on the fast track to become the world’s most prominent economy.

India is also making rapid economic advances but the most important development in its case is the clear signal sent by the electorate in this year’s elections. The voters were unambiguous in their message: they would not tolerate extremism of any variety, and certainly not one that would allow Hinduism to become the dominant force.

The development of the Indian political system has also influenced the countries on its periphery. Pakistan, after being dominated for years by the military, has turned the corner and is now engaged in developing a political structure in which the will of the people will prevail. Bangladesh is moving in the same direction. It has also discarded strongman rule in favour of a system based on people’s representation. Sri Lanka continues to follow a broadly representative system but has still to come to terms fully with minority rights.

Also significant is the way some of the Asian governments have decided to enforce the writ of the state in cases where some of their people, after having operated from the margins of the political system, attempted to use force and intimidation to increase their influence. Pakistan is at the forefront of the war against non-state operators and has gained some successes in recent months. Its operations in Swat appear to have been successful.

Afghanistan is the only South Asian country that is still struggling to find a direction. The presidential election held last month has not resolved ethnic differences that have continued to weaken the central government and allowed local warlords to maintain their control on the population in their areas.

There are also changes in some other parts of Asia. The Chinese government has reasserted its control on the economy and the evolving political system. Its approach towards economic management with the state playing a commanding role is no longer considered to be off-base. This is where the rest of the world is also going — a subject I will discuss in some detail next week in this space.

Another change, not entirely anticipated that has occurred was produced by the elections held in Japan on Aug 30. The Japanese voters threw the Liberal Democratic Party out of power for only the second time in the country’s post-war history. The LDP had governed for more than 60 years; its rule was briefly interrupted by the narrow victory of the opposition a couple of decades ago. Then the opposition was able to govern for only 11 months. It was too fractious to rule and the coalition fell apart bringing the LDP back to power.

This time the change is likely to last since the Democratic Party has won massively. It has captured 308 of the 480 seats in the lower house of parliament. Working with the smaller parties, it has enough of a presence in the lower house to pass important legislation. When the incoming Japanese prime minister, Yukio Hatoyama, forms the government he will set the country on a path that will deviate significantly from the one Tokyo has followed since its defeat in the Second World War.

Change will come but it will come slowly. Coming slowly, it will endure for a long time. What the world may see is a significant restructuring of the global political and economic order. There will be change in four areas, all of them significant for the world. Japan will begin to address the problem posed by a rapidly ageing population, it will redirect public money towards the less advantaged segments of the population, it will redefine its relations with the US and it will get closer to its Asian neighbours, in particular China.

Watching this development from Pakistan, it is the last two changes in public policy that should be of interest. If Hatoyama begins the process of disengaging his country from the United States, it will not happen suddenly. The first series of adjustments will concern the positioning of the American troops on the island of Okinawa which has become a contentious issue. The Democratic Party had pledged in its manifesto that the agreement with America will be renegotiated. The agreement allows the US to keep 50,000 soldiers on the island.The other change will be the Japanese withdrawal from another agreement that has the Japanese ships fuel the American fleet in the Pacific. This is controversial in Japan; it has been vigorously opposed by the left especially as the refuelling involves the fleet engaged in active operations as has been the case in the Iraq war. As Japan begins to pull back from a close military relationship with the US, Washington may get even more dependent on India as a friend in the Asian region. If that happens it will have implications for Pakistan.

The second area of interest for Pakistan will be the likelihood of closer relations between Japan and China. Since Beijing has been close to Islamabad for decades — it has been rightly called Pakistan’s ‘all-weather friend’ — it is conceivable that we may be seeing the emergence of two blocs. Washington may form a close working relationship with India while China, Japan, Myanmar, Bangladesh and Pakistan — the last three countries nervous about India’s hegemony in the region — may form some kind of an alliance. The main point to be underscored is that the election in Japan has produced a dynamic of considerable consequence for Asia, in particular Pakistan.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]South Asia’s failure to develop an identity[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 14 Sep, 2009[/B]

IN the lead up to any discussion of the various regional integration initiatives taken by the governments of South Asia over the last several decades, three points are worth highlighting. South Asian governments have found it difficult to turn to regional integration as a way of promoting economic development in the area.
This has happened even though there is recognition in the world that, notwithstanding trade theory, size matters in international trade. For the smaller countries in the developing world, size can be enlarged through regional integration.

At this time the world has hundreds of regional trading arrangements not only involving developing countries but also industrial nations. The most successful of these is the European Union which was initially set up to administer trade in two commodities – coal and steel – among the European countries. It is now a full-fledged customs union of 27 countries some of whom have abandoned their own currencies in favour of the Euro, a common currency managed by the European Central Bank.

While the developing world does not have any example of regional cooperation that matches the success of the European Union, some regional integration initiatives have succeeded more than others. The Association of South East Nations, the ASEAN, has evolved into a viable regional arrangement that is moving, albeit slowly, towards a custom union. In the southern part of Latin America, the Mercosur arrangement has scored both economic and political successes.

If regional arrangements can make contribution to economic development and if there are cases of success in other parts of the world, why have the countries of South Asia not been able to move in that direction? This should have happened given South Asia’s “historical and civilizational links” in the words of Professor Baru who has written a paper on the subject for the Asian Development Bank.

However, this notion would be rejected by many in each of the countries of the region since each one of them is seeking to establish not just their individual national identity, but also a distinct cultural identity. “What geography proposes, history disposes” writes Baru. In other words, the countries of South Asia carry a heavy burden of history in which hostility towards one another has developed over time.This was the result of the actions taken early on as each country attempted to develop an identity of its own.The most obvious example of this is to be found in the troubled history of relations between India and Pakistan, South Asia’s largest countries.

The second reason why South Asia has been so slow to move forward in terms of regional integration is the relative size of India. Especially after the acceleration in the Indian rate of economic growth in recent years, the country towers over its neighbours. The evolving theory concerning regional integration would suggest that it is advantageous for the smaller countries to work with the large ones to draw benefits from their larger markets. This has not happened in the case of South Asia mostly for political reasons..

The third reason for South Asia’s failure at achieving regional integration is the weakness of the institutions that could have supported it. It has to be accepted that for regional integration to work, the countries involved must be prepared to surrender some aspects of their sovereignty to regional institutions.The South Asians have been very reluctant to do this.

While the South Asian Association of Regional Cooperation, the SAARC, created a secretariat, this institution was given few powers. The countries that were members of the SAARC jealously guarded their sovereignty and did not allow the Kathmandu based secretariat to develop. All decisions were taken by the capitals with practically no initiatives coming out of the secretariat.

The member countries have gone to considerable length to prevent the SAARC Secretary General to gain stature. He is even denied a seat at the table when the heads of state and government meet for their annual summits.

To these three reasons I would add a fourth – the proliferation of regional institutions in South Asia. Some of this was done as an extension of the persistent hostility between India and Pakistan. The BIMSTEC, for instance is an institution for regional cooperation that was created in parallel to the SAARC. Although the initiative for its establishment came from Thailand, India took an active interest in its development. It was seen as “SAARC minus Pakistan” with Myanmar and Thailand added to the original formulation. Some of the regional institutions that have been created were set up to pursue very limited objectives. Almost all of them exclude Pakistan.

It is not often realised that there are enormous economic benefits of regional integration. South Asia could add at least one percentage point to its rate of economic growth by going in for regional integration much more seriously and aggressively than it has done in the past. It is clear that that has not happened with the creation of the SAARC and the decision taken in January 2004 at the summit in Islamabad to move towards a free trade area.

Although, the South Asia Free Trade Area, the SAFTA, was launched formally two years later and became effective on July 1 of that year, it has made little difference to trade among the countries of the region. Why has that not happened? Could this have occurred had the SAARC and SAFTA been supported by the right set of institutions?

Have the South Asian peoples and governments decided to which part of geography they belong? India is looking east while Pakistan continues to flirt with the Middle East. In the case of the latter religion sometimes dictates international economic relations more than pure economic interests.

In my view regional integration will only become possible when the South Asian countries grant transit rights to each other. This has become a highly contentious issue. The three countries that matter in this context – Bangladesh, India and Pakistan – have played politics by not allowing trans-country land trade through their territories.

There is also the need to determine what is the appropriate institutional set up required to promote regional integration in South Asia. How should the institutions that already exist be improved to make them more effective in terms of regional cooperation. In this context there are lessons to be learnt from other successful efforts at regional cooperation. As South Asia continues to make an effort to develop a customs union it would be useful to examine how this was helped by institutional development in Europe.

Necessity or choice?
 

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Necessity or choice?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 15 Sep, 2009[/B]

WHILE contesting for the nomination of the Democratic Party and campaigning for the country’s presidency, Barack Obama took a position on the Afghan conflict that clearly distinguished him from his two rivals, Hillary Clinton for the Democratic Party’s nomination and John McCain for the presidency. Both Clinton and McCain had voted for the Iraq war resolution.

Obama gave a speech in which he strongly opposed the war, arguing that there was no reason for the US to get involved in Iraq. It was Afghanistan where it had to fight the Al Qaeda responsible for the 9/11 terrorist attacks. He called the Iraq conflict a war of choice and the one in Afghanistan a necessary war. If elected president, he promised that he would pull America out of Iraq while getting more involved in the conflict in Afghanistan.

Once he became president he stuck to his position. The United States has reached a point where it has to take important decisions on Afghanistan. Will the American political system allow Obama to lose more American soldiers in Afghanistan without clearly defining what Washington expects to achieve in that difficult country?

The sentiment against the continuous involvement of the US in Afghanistan is growing and while the president is fighting on a number of other fronts — especially trying to get Congress to reform the health system at home — he may not have much political capital left. Already his approval rating has fallen precipitously, faster than that of any other president in the first six months of his tenure. What are then the choices for Obama in Afghanistan?

One suggestion offered is that Obama should take his cue from former Texas Congressman Charlie Wilson who almost single-handedly won the support of the Democratic legislators who were deeply troubled by the Republican President Ronald Reagan’s involvement in the civil war in Nicaragua. Wilson persuaded his fellow Democrats that while involvement in the Central American country went against US interests and was not legal, the ‘war’ against the Soviet Union’s occupation of Afghanistan was just and in America’s strategic interests.

Will President Obama prove to be the Charlie Wilson of this story, confident of what he has been saying all along about Afghanistan and committed to victory over the Taliban? As the US withdrawal from Iraq proceeds and challenges in Afghanistan mount, it won’t be long before we learn the answer.

The Charlie Wilson analogy is interesting since it would mean having Obama clearly identify the enemy — in Wilson’s case it was the Soviet Union — and spell out the US mission in no uncertain terms. In Wilson’s case it was to throw the Soviets out of Afghanistan.

In August, Obama seemed to be moving in that direction. Al Qaeda and the Taliban

who supported it were the enemies and their removal not only from Afghanistan but also Pakistan was the twin mission. Speaking at a meeting of the Veterans of Foreign Wars in Phoenix, Arizona the president could not have been more explicit. “We must never forget,” he said of the conflict in Afghanistan, “This is not a war of choice. This is a war of necessity.”

The US would now “take the fight to the Taliban in the south and the east”, in effect to the borders of Pakistan. The area of American involvement was expanding. It was now both Afghanistan and Pakistan — the region for which the policymakers in Washington already had a shorthand, Af-Pak.

There are voices in the policy establishment that have begun to question these assumptions and the strategy based on it. “Wars of necessity must meet two tests,” wrote Richard Haas, the president of the Council on Foreign Relations in a recent article, “They involve, first, vital national interests and, second, a lack of viable alternatives to the use of military force to protect those interests.”

Haas has written a book on America’s two Iraq wars, the first launched by President George Bush in 1991 to expel Saddam Hussein’s forces from Kuwait. This was a short engagement. Bush did not go into Iraq and stopped his forces at the border. Haas calls that one a necessary war. The second Iraq war was started by the younger Bush in 2003 for no apparent reason. It is still not over six years later. This was a war of choice.

The Second World War, Haas says, “was a war of necessity, as were the Korean War and the Persian Gulf War. In the wake of 9/11, invading Afghanistan was a war of necessity. The United States needed to act in self-defence to oust the Taliban. There was no viable alternative. … But even if the United States were to succeed in Afghanistan — with ‘success’ defined as bringing into existence an Afghan government strong enough to control most of its territory — terrorists could still operate from there and would put down roots elsewhere. And Pakistan’s future would remain uncertain at best. Afghanistan is thus a war of choice — Mr Obama’s war of choice.

“In this way Afghanistan is analogous to Vietnam, Bosnia, Kosovo and today’s Iraq. Wars of choice are not inherently good or bad. It depends on whether military involvement would probably accomplish more than it would cost and whether employing force is more promising than the alternatives.”

Haas believes that at this point the war in Afghanistan has become a war of hard choice. There are alternatives available which Washington should try including limiting the possibility that Afghanistan could ever be used to launch another attack on the US. Pakistan could also be saved from collapsing if non-military tactics were deployed, including strengthening democracy and the country’s economy. The choices are clear and the right ones should be made.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]A year after the financial crash[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, Sep 21, 2009[/B]

THE outline of the story is by now well known. My interest is in the part that has only begun to catch the attention of analysts and historians.
This relates to the part governments around the globe should have played but didn’t since the prevailing economic philosophy believed that the markets were allknowing and there were fancy ways of spreading the risk that would not produce financial shocks. In fact, exactly the opposite of what was expected happened.

There is nothing unusual about the fact that the global economy has gone so quickly through first a boom and then a bust. Such cycles have happened before and they will happen again. Each boom and bust cycle has a different set of players. What is common between them is that they try to play the system to the very edge of its tolerance. Some do it to innovate and some to make profit. The first class of people helps the economies and societies in which they operate. The second only help themselves at the cost of societies. Such people and the booms and busts they produce are not unique to America.They are to be found in all parts of the world.

There were three sets of players who performed important roles in the crisis that began in the United States in the summer of 2007 and probably bottomed out in the early summer of 2009. The first were the Chinese who managed their economic system in a way that it produced much more than they could consume. The surplus was exported to the West, mostly to the United States.

The Chinese ran up large trade surpluses with the United States which left them with large amounts of dollars which were invested mostly in the United States. The flow of large quantities of funds from China kept the rates of interest low and produced enormous liquidity in the market. A significant part of this went into real estate. Loans were given out at low rates which increased the demand for houses and also their prices.

A large number of people who borrowed to buy houses couldn’t really afford to service the loans they obtained, especially when the variable rates on which they had borrowed increased. This is generally referred to as sub-prime lending.

The Chinese were not the only people who had surpluses to dispose off. Almost the same amount was available with the oil ex porting countries. Leading into 2006, the capital exiting Saudi Arabia and Kuwait alone matched the funds leaving China – approximately $200 billion per year.

For five years, from 2003 to 2008 when the price of oil climbed to unprecedented heights, the Middle East’s massive petrodollar outflows, combined with excess liquidity due to low interest rates fueled the housing bubble not just in the United States but also in Britain and the Middle East itself.

Once sub-prime lending became pervasive, a third player – in addition to the Chinese and the oil exporting countries – entered the picture: financial engineers working in various parts of the financial system. They invented a number of fancy products that went under the name of deriva tives.

The loans given out by banks to those who couldn’t afford to buy houses were bundled and sold to the institutions that could bring longer-term securities on their books. These were mostly investment banks, pension and hedge funds, and large endowments. Having purchased these products, these investors insured them with insurance companies. The entire financial system got involved.

A big problem with this spreading of risk was that while the banks were tightly regulated, investment and hedge funds were not. There was logic behind this system of regulation. Since the banks received deposits from ordinary citizens, the governments were anxious to protect them. The hedge funds and pension funds relied mostly on the relatively well-to-do. If they wished to take risks there was no reason why the governments should protect them.

The crisis shows how modern finance is developing strong linkages within the system and how quickly shocks get transmitted from one part to another. It shows how policy makers, no matter the level of their sophistication have nothing more than raw instincts to work on. And it demonstrates how the same set of events appears very different with the lapse of time and upon cooler reflection.

This is a good time to go over some of the main elements of the story since this is the first anniversary of the bankruptcy of Lehman Brothers, the fourth largest investment bank in the US financial system. The United States Treasury working with the Federal Reserve System, the central bank, pulled the rug from under Lehman after having rescued Bear Sterns. This happened on September 15. The stock market sank more than 500 points that day. The Reserve Primary Fund, a money market fund that held Lehman bonds, ‘broke the buck’, or dropped below $1 a share in net asset value.

Two days later, American International Group, the AIG, the world’s largest insurance company that provided cover for many Lehman products, collapsed and had to be bailed out with an extraordinary $85 billion loan from the US government. Stanley Morgan, another financial giant, was rumoured to be next. Banks all over Europe were teetering on the edge of an abyss.

Ever since that weekend, most people have viewed the decision by Henry M. Paulson Jr., then the secretary of the Treasury and Ben S. Bernanke, the chairman of the Federal Reserve, to allow Lehman to go bust as the single biggest mistake of the crisis. For instance, Christine Legarde, the French finance minister, called the decision horrendous. In speeches and articles and books commentators of every political stripe have pointed to the Lehman bankruptcy as the event that turned the subprime crisis into a full-blown financial meltdown.

Passage of time has changed the way the official action that led to the Lehman collapse is being viewed now. It is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although no body realised it at that time, Lehman Brothers had to die for the rest of Wall Street to live. Now that the crisis appears to be coming to an end, the governments are beginning to reform the system. The US is taking the lead but the going will be rough since so many vested interests are involved. President Barack Obama took the initiative by giving a speech in New York on September 14 to indicate why reform was necessary. The next step on the way will be the G20 meeting in Pittsburgh before the end of September.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Addressing climate change challenges[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, Sep 28, 2009[/B]

THE global community is gearing up for Copenhagen where its leaders will gather to negotiate an international treaty on climate change this December.
The hope is that these talks will produce commitment from each nation that, collectively, would keep temperatures from rising two degrees Celsius above pre-industrial levels.

That will require deep cuts in emissions – as much as 80 per cent among industrialised nations – by mid-century. In order to reach agreement two countries will have to show great political resolve. Together China and the United States produce 40 per cent of the world’s greenhouse gas emissions. As The New York Times editorialised recently, “together they can lead the way to an effective global response. Or together they can mess things up royally.” In an op-ed article contributed to The New York Times as the first week of the United Nations General Assembly got under way, Prime Minister Gordon Brown identified climate change as one of the five major issues that confronted world and on which urgent action was needed.

“The next six months will test international cooperation more severely than at any time since 1945”, he wrote. “That may seem strange to say after a year of global crisis that has demanded unity on an immense scale, yet five challenges confront us and we cannot delay our responses”. Of these five, halting climate change was perhaps the most important one.

“This week starts with efforts to reinforce talks to secure a new international agreement on climate change in Copenhagen this December. Progress is too slow and a deal now hangs in the balance. But failure will increase the threat not only of humanitarian and ecological catastrophe but also of economic decline. Investment in energy efficiency and low- carbon energy resources will help drive economic growth over the next decade – as well as reduce dependence on imported oil and enhance energy security. Millions of jobs stand to be created as this investment expands – the low-carbon sector is now larger than defence and aerospace combined. But it is vital that we give confidence to such investment through a new international climate agreement”.

The previous one negotiated at Kyoto, Japan could not be put into effect because the United States under the leadership of President George W. Bush turned away from it. Kyoto was negotiated in 1997 by the administration of President Bill Clinton with Al Gore, his vice president, taking the lead. Bush who succeeded Clinton, was not persuaded that there was sufficient scientific evidence to support the view that human activity was leading to a change in climate. Many scientists had argued that if the change was not arrested and ultimately reversed, economic and social catastrophe would be the result.

South Asia would be one of the many world regions that would be seriously affected. Rise in the level of the seas would inundate large parts of Bangladesh. Under one scenario, as many as 30 million people of that country could be displaced.

They will seek refuge on higher ground of which there was not much in Bangladesh. They will need to go to the neighbouring India, posing serious problems for that country. But that would not be the only problem that climate change would bring to India. Pakistan and India will have to deal with the ultimate reduction in river flows that draw most of the water from snow and glacier melts in the mountain ranges. Melting glaciers will initially produce enormous floods endangering the irrigation systems that were built over centuries in these two countries. Once the glaciers had been reduced in size, these mighty rivers would begin to dry up. Much of Pakistan would revert to being a desert again.

While the science that supported the view that climate change produced by the emissions of green house gases posed a real threat to the global economy improved, President Bush refused to budge. This gave Al Gore, now a private citizen, to concentrate even more effort on educating the American public. His efforts won him a Nobel Peace Prize.

While campaigning for the presidency, Barack Obama promised to put his country in the lead of the effort that needed to be made if he were elected. Once in office, he developed what he began to call the “green agenda” for his administration. A number of regulatory steps were taken by his administration to reverse the decisions taken by his predecessor.

However, even with this change of heart in Washington, a new treaty on controlling climate change did not seem to be anywhere near the capacity of the global political system to deliver. On the eve of the UN meeting devoted to clearing the air before the world met again at Copenhagen, Rejendra Pachauri, the Indian scientist who had chaired the Intergovernmental Panel on Climate Change, warned that “science leaves us no space for inaction”.

Along with this panel of scientists report, a report written by a group of economists chaired by Britain’s Lord Nicholas Stern, had presented the costs and benefits of actions taken at this time. The calculus was clearly in favour of immediate action but international agreement did not seem to be in sight.

There were two reasons for this. It was by no means certain that the US Congress would be prepared to pass the needed legislation to move in that direction. Any international treaty that meant higher costs for the US industries would be a hard sell.

Second, a number of large developing countries – most notably China and India – were opposed to a treaty that would slow down the pace of their economic growth. It was the second resistance that Gordon Brown addressed in his article. A new treaty “will not be possible without the cooperation of developing countries”, he continued. “For this reason, Britain has suggested a programme of $100 billion a year by 2020, financed by wealthier countries and the private sector, to help poorer nations develop low-carbon economies”.

On September 22, the UN General Assembly was addressed by Presidents Hu Jintao and Barack Obama indicating their respective country’s approach to the problem that could not remain unaddressed. It was the Hu speech that surprised the climate community. He promised to reduce the rate of growth in carbon dioxide by a “notable margin” – at which, he implied, China would seek to reduce them in absolute terms. Among the promised actions was a government programme that would bring millions of acres of new land under forests. This was a small step but it was in the right direction. The question remains whether India would also go the same way.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Where Pakistan stands[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]The economy is coming out of a deep crisis. Foreign reserves have been rebuilt. There is an indication that domestic investment has begun to pick up although FDI has yet to return.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, Sep 29, 2009[/B]

IN describing Pakistan’s current situation I have sometimes used the metaphor ‘a perfect storm’. The storm appears to have passed but it has left a weakened country that continues to face a number of structural problems in a number of areas.
It would be useful to recall what produced the storm in the first place in order to see in which direction the country is headed and how it can be made to achieve the potential that still exists to ensure a better future for its 170 million people.

A year ago the economy was under great strain. Foreign reserves held by the State Bank of Pakistan were declining at an unsustainable rate. There was fear that if help did not arrive in time Islamabad would have to default on some of its foreign obligations thus bringing the country to the point of bankruptcy. The drain on foreign reserves was the result, in part, of the increase in the price of oil.

In July 2008 the closing price per barrel of oil touched $147.27 three times the price a year earli er. Oil has become an important commodity for Pakistan as the country’s dependence on it for generating electricity has increased.

The increase in the price of oil and a sharp reduction in foreign exchange reserves meant that the country was not able to import as much fuel as needed. This led to serious power shortages which, in turn, resulted in loadshedding that lasted for several hours a day during the peak of the summer. The summer of 2008 was warmer than normal adding to public discomfort. It also took a heavy economic toll. According to one estimate, the power crisis cost the economy seven per cent of industrial output and two per cent of the gross domestic product.

The strain on the economy was felt precisely at the time when the process of political transition was going through many difficult motions. The elections held in February 2008 had made clear that the military would have to give up its political control. Under President Pervez Musharraf, the military had made a desperate attempt to keep its grip on the lever of power.

On Nov 3, 2007 the president had introduced a new ‘constitutional order’ which had given him additional powers. The president felt that he needed that power to discipline the judiciary which, backed by a remarkable movement led by the legal community, had gathered enough strength to try and bring the executive in line.

This movement was launched when President Musharraf dismissed Chief Justice Iftikhar Chaudhry earlier that year. Chaudhry was reinstated by the courts but was out again in November after the emergency.

Emboldened by its earlier success in support of the Chief Justice, the legal community agitated against what it called President Musharraf’s second coup. Supported by the civil society, it put enough pressure on the president for him to yield and give up the powers he had assumed. The final blow was delivered by the February 2008 elections.

It took the politicians several months before they were able to get President Musharraf out of his office. It took that long for the reason that the main political parties were not able to reach an agreement on the shape of the political structure they wished to build in the country.

Should Pakistan choose to be a parliamentary democracy with all power resting in the National Assembly or should it be a hybrid system in which power was shared between the president and the parliament? The question remains unanswered.

Unsettled economic and political systems gave space to the forces of Islamic extremism. They were able to expand their reach by the use of force and gained control in several areas in the northwest including Swat and its adjoining districts. It was at that time that the military was authorised by the civilian leadership to start an operation that would rid the area of the militants and later re-establish the writ of the state over the tribal areas. The first part of this mission has been achieved.

The economy is coming out of a deep crisis, helped in part by the International Monetary Fund, the World Bank and the Asian Development Bank. A group of countries that Islamabad calls the Friends of Pakistan met in Tokyo a few months ago and pledged significant amounts of resources. The US is set to provide substantial assistance — to the tune of $1.5bn a year — which will be sustained for at least five years. Foreign reserves have been rebuilt to the point where the country can comfortably finance its large trade deficit. There is some indication that the level of domestic investment may have also begun to pick up although foreign direct investment has as yet to return.

On the political side, tensions between the two mainstream parties have heated up somewhat but have not yet reached the point at which the stability of the system could be seriously threatened. It appears that the main political leaders are anxious not to do anything that would tempt the military to reassert itself. But as already indicated the most significant development has been on the terrorism front. Where will Pakistan go from here? To answer that question we should look at how the country got into such a troubled state to begin with, a subject that will be focused on in the coming weeks. ¦

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]No consensus on ending global imbalances[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, Oct 05, 2009[/B]

THE choice of Pittsburgh by the administration of President Barack Obama for the meeting of G20 seemed strange in the light of the city’s reputation as the capital of the “rust belt” – once the industrial heartland of America dominated by steel mills and other capital intensive industries. Those factories were long gone; only American Steel remained.
But slowly and helped by a unique working relationship among the members of big business, academia and the health industry, Pittsburgh rediscovered itself. It was this resurrected city that the American president wished to showcase not only to the world but also to the citizens of his own country.

Pittsburgh had shown how a city that was once so dependent on the industries in which America was no longer competitive could provide large-scale employment to the displaced workers in new sectors of the economy. According to The Economist, “today, its main industries, health care and education are thriving.

Pittsburgh’s heath services business has almost tripled in size since 1979 creating more than 100,000 jobs. More than 70,000 work in research and development in the metro area’s 35 universities (Jonas Salk produced the polio vaccine at the University of Pittsburgh in 1955) and 100 corporate research centres, such as that of Bayer US, a pharmaceutical company…Pittsburgh’s unemployment rate, at 7.8 in July, was lower than the national rate of 9.4 per cent.” And, the city was also a good example of how the new “green technologies” could be put to the use of a large city. “The building hosting the G20 is the world’s first and largest LEED certified (meaning green) convention centre and sits on the city’s former red-light district.” The Pittsburgh meeting will go down in history not so much for the decisions taken to improve the functioning of the global financial system. These will have a lasting effect on the way the world manages its financial institutions. The meeting’s historical significance lies in the fact that it has become the primary forum for discussing global economic issues.

President Obama proposed that G20 should replace G8 as the primary policymaking body for international economic affairs. “Dramatic changes in the world economy have not always been reflected in the global architecture,” said the White House on the eve of the meeting. “This all started to change today with the historic agreement to put the G20 at the centre of efforts to work together to build a durable recovery.” Britain’s Gordon Brown went even further describing G20 as offering “more chance of delivering results than anything since the Second World War”. The move highlighted the growing importance of Asia and parts of Latin America in the global economy.

The United States and many European countries were now aware of the fact that the global economy was emerging from the “Great Recession” because of the aggressive measures adopted by some of the large Asian economies, in particular China.

The G20 consisting of 19 countries, including the seven developed nations that made up the G7 (Canada, France, Germany, Italy, Japan, UK, USA), plus the European Union, was created at a G7 meeting of finance ministers to help the global community deal with the aftermath of the Asian financial crisis of 1996-97. The dozen countries that were added to G7 included Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey.

Pakistan was one of the largest developing countries to be left out of the group. The first meeting of the group was held in September 1999. The idea was to devise ways for not having such a crisis repeat itself. From that point on the finance minister met annually. At the November 2007 meeting in Cape Town, there was agreement that central banks should pump liquidity into markets in response to the start of the global financial crisis.

In November 2008, the lame-duck President George W. Bush called the first G20 summit of heads of state in Washington to coordinate the global response to the crisis. By that time it had been recognised that China would have to play a critical role in preventing the global economy from spinning out of control and going into a depression.

The second summit was held in London in April 2009. It was the first large heads of state meeting held after Barack Obama was sworn in as the US president. Among the deci sions taken at London was the agreement to provide the IMF with $500 billion additional resources. Pakistan is one of the beneficiaries of that move.

The G20 heads of state met for the third time in Pittsburgh since the beginning of what economists have begun to call the “Great Recession”. This time President Barack Obama was in the chair. Though differences persisted among the participants, a broad consensus was reached in the discussions on the measures to be adopted in order to put the global financial system on the right track The firmest area of agreement was for higher capital reserve requirements at banks and other financial institutions. This would mean that the institutions will have less latitude to leverage their investments with large amounts of borrowed money. Agreement was also reached on the more contentious issue of regulating compensation for the executives working in financial institutions.The French, always critical of the Anglo-Saxon approach to the management of the financial sector, had argued for specific caps on bonuses but did not pursue the matter at Pittsburgh.

The most difficult area of discussion involved the issue of global imbalances that were central to the bubble and burst cycles of last several years.The biggest of these was between the trade deficits of the United States and the surpluses of China. The group did not reach any consensus on how to reduce these imbalances but there was agreement to monitor each other through a “peer review process” managed by the International Monetary Fund. Some of the more difficult areas were left out of the communiqué issued after the Pittsburg meeting. These included climate change.

Would the G20 evolve into a more effective forum for global decisions? While some of the large G7 countries are optimistic, some of the smaller ones such as Canada have indicated that they will continue to focus on the G8. The Canadians have decided to invite the G20 finance ministers when they host the next G8 meeting. Some experts believe that it would have been better to reconstitute the G8 by replacing, for instance, Canada and Italy by China and India. But inter-governmental cooperation always adds; it never subtracts. It appears to me that while G2 – the United States and China – will emerge the focus of global economic cooperation, G8 and G20 will at best play supporting roles.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Pakistan and US aid[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 06 Oct, 2009[/B]

DIRECTLY or indirectly the United States has been involved in helping Pakistan develop its economy. It is good to acquaint ourselves with the history of this involvement in order to prepare for what is likely to come.

The strategy of growth adopted by Pakistan in the early days of independence was a reaction to some of the measures adopted by India in dealing with its new neighbour. One element of this strategy was that it forced the country to industrialise quickly by seeking to become self-sufficient in the production of basic manufactured goods.

But the strategy needed finance of which Pakistan had very little. It turned to America for help, first indirectly and then much more directly. A deep relationship of mutual dependence was to develop between the two countries. This relationship was underlined by four wars — the Korean War, the Cold War, the war against the Soviet occupation of Afghanistan and the war against terrorism. Pakistan played a role in each one of these which meant that America’s relations with the Pakistani military became an important part of the dealing between the two countries.

According to a newspaper account, “a searing report by the US Government Accountability Office last year said that the Bush administration had relied too heavily on the Pakistani military to achieve its counterterrorism goals, and had paid too little attention to economic assistance”.

The US Congress has passed an act for aid to Pakistan that will triple the amount of economic assistance the latter has received in the last few years. Large sums were provided since 9/11 to the government headed by President Pervez Musharraf. Most of the $11bn worth of aid went to the military as compensation for the help it was giving to the Americans in their operations in Afghanistan. Some assistance was also provided for building the country’s capacity to undertake counterinsurgency measures. This was something relatively new for the defence forces in Pakistan since their preoccupation up until now was to protect the country’s borders against possible attacks by India.

This time around, the US is committing itself to helping Pakistan to improve the lives of its citizens. This is being done as a part of the belief that unhappy people are potential insurgents and there are many of those in Pakistan. In this context Washington has come to two correct conclusions.

One, the country with some 170 million people subscribing to the Islamic faith and located in the world’s most sensitive area is too important to be left to its own devices.

Two, given the previous involvement of the United States in Pakistan when Washington abandoned Islamabad suddenly because its own purpose had been fulfilled, there is a suspicion in Pakistan that this time as well the engagement will be there for as long as Afghanistan needs attention. Once the US chooses to downsize its presence in that country for whatever reason, interest in Pakistan will also be lost.

To convince the Pakistani citizenry that this will not happen the Americans are willing to commit themselves for a longer period of time.

The US is now keen to draw a sharp distinction between economic and military aid.

It is the former that concerns me today. According to newspaper reports, the United States has several concerns as it rebuilds its economic presence in Pakistan. It wants to ensure that there will be not a great amount of leakage from the money likely to flow to Islamabad. There are two types of leakages and both give foreign aid a bad name. The first is the amount of money that stays behind in the country that provides assistance.

This is not a new concern. The extent of money that never goes to the recipients can be large. Some estimates were made decades ago by the Organisation of Economic Cooperation and Development (OECD) on the basis of a methodology developed to estimate what was called “tied aid”. Having concluded that the proportions can be large, the OECD went on to develop rules that bilateral donors were expected to follow.

In spite of these rules, the proportion remains large. In an interview given to The New York Times, Shaukat Tarin, Pakistan’s finance minister, said that “foreign contractors absorbed up to 45 per cent of the assistance in the past years”. The proportion can be much larger if aid has a provision that only the goods manufactured or commodities produced by the aid giver can be procured by the recipient.

The other leakage occurs through corruption in the recipient countries. According to the above cited newspaper report, “Obama administration officials are debating how much of the assistance should go directly to a government that has been widely accused of corruption”. However, bypassing the government and giving aid directly to non-government organisations may appear to be attractive over the short-term but would be very counterproductive over the long-term. What the United States should be turning its attention to right away is to build the institutions of government rather than ignore them.

This poses an important question. How should the government be strengthened? For an answer we may look to Pakistan’s own history. In the 1960s when a great amount of money was to be spent on building “replacement works” under the Indus Water Treaty President Ayub Khan had signed with Jawaharlal Nehru the Indian prime minister, the government in Pakistan turned to the Water and Power Development Authority to implement the projects.

Wapda did an extraordinary amount of high quality work over a constrained period of time. It was able to recruit the best talent available in the country, reward it well but hold it to high accountability standards. In business school literature Wapda-type organisations are called “special purpose vehicles” which governments set up in order to implement special programmes and projects. This is precisely the route the US should follow in developing some of the sectors on which it should concentrate.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Policy response to the Great Recession [/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, Oct 12, 2009[/B]

THE “decoupling” hypothesis that the emerging world of which Pakistan is a part is no longer so closely tied to the old industrial world – that whatever happens in the latter would affect the former – became popular before the global economy went into what economists have begun to call, the “Great Recession.” The down turn began in the United States in the summer of 2007. Initially there was a consensus among economists that the downturn’s effect would not be felt by the emerging countries to the extent it would influence the more linked economies of the industrial world. That didn’t happen.
We know from Pakistan’s experience that even in an economy that was not an integral part of the global production system, there were many negative consequences from the economic crisis in the United States and Europe. Pakistan’s exports were affected by the contraction in the global markets. The Karachi stock market, shaken by the rapid deterioration in the security situation, suffered as foreign capital flew out and joined the exit from a number of other emerging markets.

It is important, therefore, for Pakistan’s policymakers to stay abreast of the developing situation in the global economy.Today I will explore some of the current expert thinking on the subject of the Great Recession. I do this in the belief that there are lessons to be learned for the governments in the emerging markets.

How close was the Great Recession to the Great Depression of the 1930s? One answer to the question was provided by Christiana Romer, the head of President Barack Obama’s Council of Economic Advisers. She is one of the two senior officials in the new administration who have a good understanding of the Great Depression. The other, of course, is Ben Bernanke, the Chairman of the Federal Reserve, America’s central bank. Bernanke studied the subject as a graduate student and then published a book about it. He is generally credited with pulling the American economy back from the brink of a depression.

What is an economic depression? What distinguishes it from a deep recession is the paralysing fear of the unknown. That fear leads consumers, investors and business managers to pull back from the market. They begin to hoard cash by sharply cutting expenditure.

According to the students of economic depression, “a devastating loss of confidence inspires behaviour that overwhelms the normal self-correcting mechanisms (lower interest rates, inventory re-supply, cheap prices) that usually prevent a recession from becoming deep and prolonged: a depression.” In other words, economic managers have to try to address the situation by using new tools. As the US economy got close to a depression, Bernanke, having lowered interest rates to near zero, went for what is called the “quantitative easing” of money. This he did by printing enormous amounts of money and gave it to the credit starved sectors of the economy. This was done while hundreds of billion dollars worth of stimulus was being provided to the economy through the budget by way of President Barack Obama’s large stimulus package.

Did the state of the US economy justify these extraordinary moves? A report issued recently by Ms Romer finds that the initial impact on the levels of confidence for all categories of eco nomic actors was much more severe than was the case at the beginning and during the Great Depression.

While it is correct that stock prices fell by one-third from September to December 1929, the beginning of the downturn, it has to be recognised that far fewer people owned stocks then than is the case now. The effect on the economy, therefore, was not as severe as was the case now when the fall in stock prices affected the levels of wealth for many more people. At this time, home prices barely dropped then but fell sharply now. From December 1928 to December 1929, households lost three per cent of their accumulated wealth. This time they lost a much larger proportion – as much as 17 per cent.

There were some policy missteps that accelerated the pace of economic deterioration. Among them was the decision not to support Lehman Brothers, the fourth largest US investment bank. The anniversary of the bank’s collapse inspired much commentary. While there was disagreement about the wisdom of the decision – some argued that even if the bank had not been allowed to fail, some other would have become the victim of the economic malaise. There is a consensus that the decision accelerated the deterioration. As Robert J. Samuelson of Newsweek puts it, by “allowing Lehman to fail almost certainly made the crisis worse. By creating more unknowns – which companies would be rescued, how much were ‘toxic’ securities worth? It converted normal anxieties into abnormal fears that triggered panic.” The economy, in other words, was brought near the state of depression not only by the economy’s own internal dynamics, but by public policy.

The Lehman decision froze credit markets and resulted in the collapse of the stock markets. By year end, the Dow Jones industrial average was down 23 per cent from the level reached before the bank’s collapse and 34 per cent from a year earlier. There was panic in the financial markets which affected general confidence.

In September, the Conference Board’s Consumer Confidence Index was 61.4. By February 2009, it fell to 25.3. Spending on consumer durables fell at the annual rate of 12 per cent in the first three quarters of 2008, accelerating to a decline of 20 per cent in the fourth. Investment by businesses fell by 39 per cent in the last quarter of 2008. This is when the Obama administration decided to act.

The most important lesson to be drawn from this episode in recent American economic history is that public policy plays an important role in the way economies develop and how they should be steered out of the crises into which they can find themselves as they move forward.

This lesson is particularly important for a country such as Pakistan that has allowed economic institutions in the public sector to weaken greatly, has lost the capacity to do serious analytical work on the state of the economy in both the public and the private sectors, and has not developed linkages between the private and the public sectors to develop. The last is particularly important since it provides the policymakers advice from analysts who don’t have political axes to grind. One important step the government could take is to put in place a strategy for undertaking analytical work in economic management in both public and private sectors.

Troops for Afghanistan?
 

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Troops for Afghanistan?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 13 Oct, 2009[/B]

OCTOBER may turn out to be the defining month for the presidency of Barack Obama. This is not only because the US Congress will need to reach a decision on whether it will support the president’s efforts to reform America’s dysfunctional health system.

Nor will solely be because of the progress — or the lack of it — that the Obama administration, working with Congress, is likely to make in reforming the financial regulatory system.

What will really define the Obama presidency is the decision he takes on Afghanistan. A couple of weeks ago, Obama met his National Security Council to review the request he had received from Gen Stanley McChrystal, the top American commander in Afghanistan, to send 40,000 additional American troops to steady the rapidly deteriorating situation in the field. The request was leaked to the press through Bob Woodward, the veteran Washington-based journalist, in an effort to put pressure on the administration to accede to the general’s demand. This was a classic Washington operation with two sides on an important issue involving the public to support the position they were taking.

The military’s efforts to increase the number of soldiers fighting what has come to be known as Obama’s war has been opposed by a powerful group within the administration, led by Vice-President Joe Biden who has strong links in Congress. That is important since there are a number of powerful figures in Congress who let it be known that they would not be in favour of increasing troop strength in Afghanistan. It was awkward for the president that the opposition came from the members of his own party whose support he badly needed.

The McChrystal plan is based on the counter-insurgency strategy the Americans implemented in Iraq as the tenure of President George W. Bush was coming to a close. The strategy had four parts. Additional troops were to be sent to Iraq to secure some of the critical areas in the country, in particular its large cities. A large number of Iraqis were to be trained to man the country’s army and the police force. Alliances were to be made with the insurgents who were prepared to give up their weapons and work with the government and the Americans. And, serious development efforts were to be put in to improve the living conditions of the citizenry.

Even with considerable opposition from the Democrats, President Bush accepted the strategy and allowed a “surge” in American troops. The strategy seems to have worked as the level of violence has declined significantly which has allowed the Americans to begin to pull out their troops from the Iraqi countryside. Gen McChrystal recommended the adoption of the same approach in Afghanistan.

The opposing view as represented by Vice-President Biden also has a number of elements. America’s military operations in Afghanistan would be limited. Ground forces would be used sparingly, most of the work being done by special forces who would have Predators attack high-value targets, picking those who were resolute in their opposition to America and the presence of foreign troops on Afghan soil. Washington would concentrate its efforts on Pakistan that had the institutional capacity to fight the Taliban provided its military was given appropriate training equipment. Both of this could be done by the Americans.

In addition, the Americans would provide Pakistan a great deal of economic support. A bill authorising $7.5bn in economic aid to be spent over a period of five years was passed and awaits the president’s signature.

It will be of concern to Pakistan how President Obama views and acts on the question of the size of the American contingent in Afghanistan. With the debate on the issue heating up in Washington, there have been statements in Pakistan that the country’s military was readying itself for a major battle with the Taliban in South Waziristan. The news that the preparations had been finalised also came via news leaks from the Pentagon.

As has happened in the case of so many other policy disputes, it was The Washington Post that was used by both sides to project their case to the public. Earlier in the month, the newspaper carried an item titled ‘Pakistan plans key offensive’ to report that “Pakistan’s military is preparing what may be one of the most significant offensives in years against a major Taliban stronghold near Afghanistan….The operation in and around the tribal area known as South Waziristan will target Taliban fighters from the powerful Mehsud tribe”. It was revealed by a senior Pakistani official who talked to the newspaper that the military had “made all arrangements, and a full-scale operation against the Taliban could begin anytime”.

Defence experts in Washington let it known that the two initiatives — the increase in the size of the American contingent and the move by the Pakistan military — were parts of the same strategy. The military part of the strategy was to deny the Taliban insurgents the operational space on both sides of the Afghan-Pakistan border. At the same time, there should be a concentrated effort to bring economic development to the people on the two sides. The passage of the aid to Pakistan bill by the US Congress was one important step in that direction. President Obama was prepared to take the time for the two sides to debate the issues. Differing opinions in Pakistan have made it unclear as to which side of the argument the Pakistanis would take.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Policy signals in Nobel prizes ’09 in economics[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 19 Oct, 2009[/B]

THE various Scandinavian committees charged with awarding the Nobel Prize for various endeavours continue to send powerful signals for policy shifts.
First the Norwegians awarded the coveted Peace Prize to President Barack Obama of the United States saying that by preferring diplomacy over unilateral action, he had set a new tone in world affairs.

Obama is showing that the United States cannot dictate to the rest of the world what is only in its own interests. Now the committee in Sweden has awarded the Nobel Prize in economics – formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel – to two American scholars who had discarded the rationality and “market is perfect” approach to economics by concentrating on the way the real world works.

The two who were thus honoured are Elinor Ostrom, a political economist at Indiana University, and Oliver Williamson of the Berkeley campus of the University of California. The work done by the two – in particular by Professor Ostrom – is of considerable significance for developing countries such as Pakistan. She is also the first woman to be given the prize in its 41 years’ history. And she is the first winner of the prize whose basic training was in political science rather than in economics.

The Nobel judges, in their description of the work done by the two winners said that economic science should extend beyond market theory and into actual behaviour. The two academics awarded the prize had done that. In a news conference given after the award was announced, Ostrom said that her “work shows the importance of combining ideas from economics, political science, sociology and other fields in order to understand how the real world works”.

Summarising their work, the award announcement said: “Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise monitoring and enforcement work better when conducted by insiders than by outsiders. These principles are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees.” Professor Williamson received the reward for his work on large corporations and for his findings that they exist because, under the right conditions, they are an efficient way to do business. According to Nobel Committee’s citation applauding his work, “large corporations may, of course, abuse their power.They may, for instance, participate in undesirable political lobbying and exhibit anti-competitive behaviour.” What should be done to ensure that large firms use their economic and financial power that does not go against larger social interest?

In reacting to the news that he had won the Nobel Prize, Professor Williamson answered this question by reminding people that the confidence in the selfcorrecting role of the market can be misplaced. “If you believe that markets operate in Alan Greenspan fashion, then you don’t enquire into the details. One assumes that that the outcome is optimal but that assumption cannot be made”.

However, it is the work of Professor Ostrom that has much greater relevance for a country such as Pakistan that is struggling to develop local systems that would protect the economic interests of the less-well-endowed and prevent poaching by the po litically and socially powerful. She works in collaboration with Vincent Ostrom, her 90 year old husband, and has gathered most of the material for her work by undertaking extensive field work.

Her initial focus was on understanding what economists call, “the tragedy of the commons”. According to this line of thinking, it is perfectly rational for people to maximise their own welfare when using common resources even when such an approach would do long-term harm. Thus when there is common ground available to shepherds, the tendency will be to overgraze it even if the land would be damaged over the long-run. There are two ways of handling this problem. One is to have a central authority institute laws to manage the commons. The laws would discourage irresponsible use even when it produces private profit by punishing those who violate it. Such an approach creates powerful bureaucracies that abuse their power in rent seeking behaviour.

The other is to move the common property to private ownership. Ms Ostrom concluded in her earlier work that the tragedy of the commons was an inaccurate concept. “Particularly in the 17th and 18th century England and Scotland, the concept described villagers’ overgrazing their herd on the village commons, thereby destroying it as pasture.’ Privatisation of land that ensued inflicted a lot of damage on the poor. Privatisation of the property held by a community of users often results in harming the majority of its members. According to Joseph Stiglitz, another winner of the Nobel Prize, “conservatives used the tragedy of the commons to argue for property rights, and efficiency was achieved as people were thrown off the commons. But the effects of throwing a lot of people out of their livelihood were enormous. What Ostrom has demonstrated is the existence of social control mechanisms that regulate the use of commons without having to resort to property rights.” Ms Ostrom has applied her findings to a number of different situations. “When local users of a forest have a long-term perspective, they are more likely to monitor each other’s use of the land, developing rules of behaviour. It is an area that standard market theory does not touch,” she has written.

Another example comes from the field of environment. Degradation of the earth’s atmosphere has been caused by the excessive discharge of pollutants such as carbon dioxide into the atmosphere. There is resistance to any attempts to regulate this or to have the pollutants pay the price for their activities. But it has been found that the same people will behave differently when the damage they are doing is obvious and visible. Getting the government to intervene when civic responsibility is not viewed in terms of personal interest is often not very productive.

Translating these findings to the situation in Pakistan, one would conclude the following. First, greater space should be given to the communities to formulate their own rules of behaviour. This means developing institutions of local governance that are flexible so that each community can develop its own way of conducting its business. This would not only lessen the burden on the government but also ensure that the rules are followed by all members of the community.

Second, education should include explaining to the people what are the benefits and costs to them of their everyday actions. In that way they will be able to change their behaviour in a way that brings them long-term benefits.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The bill explained[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 20 Oct, 2009[/B]

THE reaction in Pakistan to the Kerry-Lugar bill surprised both Islamabad and Washington. Foreign Minister Shah Mehmood Qureshi conveyed to the Obama administration the Pakistani military’s unhappiness with some of the provisions of the bill.

Following the meeting with the minister, the sponsors of the bill agreed to issue a statement clarifying that it was neither the intention of the US authorities to micromanage Pakistani affairs nor to do anything that would subvert the country’s sovereignty.

The bill passed by the US Congress, popularly known as the Kerry-Lugar bill, seeks to restructure Pakistan’s relations with the United States on a more durable basis. In the past these relations were on an ‘on-and-off’ basis; they were ‘on’ when Washington needed Pakistan in pursuit of its strategic interests and ‘off’ when Washington’s attention was diverted away from the region of which Pakistan is a part.

While it is easy to understand why the military high command was upset with some of the provisions in the bill, the reaction of some of the politicians and a section of the press and electronic media is more puzzling. The bill, now the Enhanced Partnership with Pakistan Act of 2009, after President Obama’s signature, covers a fair amount of ground: it defines the objectives the United States would like to see achieved after the large amount of assistance it is planning to provide; it has many expectations from Pakistan and includes provisos for evaluating the performance of the country in the use of the funds released by the United States.

It is worth quoting at some length what are described as the ‘findings’ of Congress in the bill. These usually express the sentiment in the legislative body at a given time. The bill states that “the people of the Islamic Republic of Pakistan and the United States share a long history of friendship and comity, and the interests of both nations are well served by strengthening and deepening this friendship”. Only those would quarrel with this statement who would not like to have a close relationship with Washington.

Then there is the question of the orientation of the earlier help provided to Pakistan. The bill states: “Since 2001, the United States has contributed more than $15bn to Pakistan of which more than $10bn has been security-related and direct payments” to compensate Islamabad for the services provided to the American forces operating in Afghanistan.

One of the criticisms against American assistance in the past was that it concentrated a lot of effort on providing to the military and not for developing the economy. The bill seeks to address this imbalance by providing a much greater amount for economic development. In addition it would support the country’s efforts to move towards democracy. “With the free and fair election of February 18, 2008, Pakistan returned to civilian rule, reversing years of political tension and mounting popular concern over military rule and Pakistan’s own democratic reform and political development.”

Once again, there cannot be any problem with this finding or with the requirement that Pakistan’s continued progress towards putting in place a democratic structure would be periodically reported upon by the administration in Washington to Congress. There are also Congress’s ‘findings’ about the progress Pakistan has made in controlling the increase in domestic terrorism. I will take up this issue in a later article.

The bill is divided into three parts, or ‘titles’ in the language of the American legislature. The first covers economic assistance, the second security assistance and the third accounting and monitoring. What is laudable — and should be seen as such in Pakistan — is that separate provisions are made for the two objectives of the bill: economic development and security.

A total of $7.5bn is to be provided for developing the economy but an unspecified additional amount will be given for aiding the security forces. Neither of the two titles carries the kind of conditionality that comes with loans from the World Bank and the Asian Development Bank or the programmes negotiated with the International Monetary Fund. In those cases, the country usually commits itself to taking a number of specific steps.

Two examples illustrate this point.

When a decade ago Pakistan borrowed from the World Bank some funds to develop its power sector it agreed to restructure Wapda according to a plan essentially developed in Washington. This was implemented but it had the unintended consequence of reducing investment in the power sector. Similarly Islamabad agreed to very specific fiscal and monetary targets with the IMF when it negotiated an agreement with that organisation in November 2008. It is understood that the flow of funds would stop if these conditions were not met. The World Bank sends out supervision missions and the IMF review missions to make sure that their conditions are being met.

The American bill does not have such conditions. The only requirement is that the administration report to the various committees of Congress on the expectations it has of the policies Pakistan will adopt. The bill does not have the provision that economic aid to Pakistan will be terminated or reduced if the country does not implement some of the recommendations made by the US Congress. The World Bank and IMF support comes with this kind of contingency. However, since Congress will authorise expenditure on a yearly basis in the context of the overall bill, it is possible that a change in political system could lead to a reduction in the amounts that would be made available. This is the way the US system works. It is not peculiar to aid to Pakistan.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Planning for national food security[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 26 Oct, 2009[/B]

PAKISTAN’s yo-yo food security situation – years of plenty followed by years of extreme shortages – is the consequence of a combination of several factors. Some of these originate inside the country; some are from the outside. Over some, policy makers have some control; over several others they have to react to external developments.
Over the short term, the availability of food supply within the country is affected by weather, by decisions made by farmers in response to prices they anticipate for their produce, and by price changes in the external markets. Over the long-run, however, food security will be influenced by some of the trends over which policy makers don’t have much control.

I will begin with demography. After having become sanguine about anticipated increase in population, experts have once again begun to focus on the problems created by the unrelenting increase in global population. Several decades ago when population increase was a concern, it was based on the prospect of fairly significant increase in world’s population. This was projected to reach about 12 billion in 2050.

However, unexpectedly the rate of fertility began to decline in most populous countries and the worry ceased about globe’s capacity to feed the population of that size. In 1972 when food and agricultural experts were planning the international food summit, populous countries such as Bangladesh were a serious problem. Now almost four decades later population growth is no longer a concern for Bangladesh.

The country has experienced one of the more profound changes in its demographic situation, with the population’s median age increasing by four years within a couple of decades. Now, concerns have risen more for environmental reasons than for the capacity of the agricultural system to produce the required amount of food.

Once again if Bangladesh were to be used as an example, if global atmosphere continues to increase and ice in the polar regions continues to melt, the rise in the level of sea will have serious consequences for low lying countries. According to one estimate, some 300 million Bangladeshis, or one fifth of the total population, could be displaced.

Returning to the issue of population increase let me provide some numbers. The world’s current population is estimated to be 6.7 billion; by 2050, it is expected to grow by 2.5 billion, increasing to 9.2 billion. Practically all of this increase will be in the developing world. If Pakistan’s population growth averages at 1.6 per cent a year in this period, its population will increase from 175 million in 2010 to 275 million in 2050. At this rate, its share in world population will increase from 2.6 to three per cent. Will the domestic output of food keep in pace with the anticipated increase in population? Unless a significant change occurs in the structure of agriculture and in the way farmers use land, water and chemicals, the answer to this question has to be no. The country has very little virgin land left to be exploited – a situation it shares with most of the developing world For the most of human history, the main way to boost food supplies was to increase the amount of land under cultivation. From 1700 to 1961, global population increased five times. Global cropland also increased by the same magnitude – five times. Largely because of the industrial production of nitrogen and the development of high yield hybrid crops while population increased by 80 per cent from 1961 to 2001, crop land increased by only eight per cent Pakistan is among the several large agricultural systems in the developing world that don’t have much new land to bring under cultivation. Several countries – in particular those in some parts of Africa and Latin America – agricultural production is being boosted by clearing millions of acres of rain forest. This is unfortunate since it has an enormous impact on global warming. That said, even this option is not available to Pakistan. It has already used much of its forests.

Land constraint and damage to land productivity by the excessive use of chemicals are not the only constraints faced by the sector of agriculture. Pakistan has also to face the coming water shortages. These will be caused by the increase in the non-agricultural use of water when the number of people living in the urban areas increase, industry’s demand for water grows, and global warming, by melting glaciers, will first produce floods and then reduce the flow of water in the rivers. These are some of the reasons why experts have called Pakistan as a water stressed country.

Restraining population growth is one way of dealing with the problem of food security. If the rate of fertility was to decline further, quickening the trend that has been established, a significant improvement will occur in the food security situation. Pakistan will have 25 million fewer mouths to feed if the rate of population increase was to drop to 1.2 per cent a year between now and 2050.

That this can happen in a Muslim country has been demonstrated, as already indicated, by Bangladesh. What made it possible was a combination of factors. The country has one of the most impressive NGO activities anywhere in the developing world and a number of these have fixed their sights on family planning. The spectacular growth of the ready-made garment industry has increased female employment. A large number of women have left their homes to work in the garment factories. By working, they have also a source of income that frees them from the control of their husbands and families. This has changed the reproductive behavior of millions of women. This option will become available to Pakistan only if the grip of Islamic extremists can be loosened.

Consumption patterns are changing which will impact the global food economy. As China grows and its people become richer, desire for more dairy and food products will divert cereals to feed animals. With oil prices expected to rise, the use of food crops to produce bio-fuels will increase. These developments have already affected food supplies. In 2007, squeeze on global supplies resulted in an average food price increase of 23 per cent. This trend continued in 2008 with another increase of 54 per cent. These prices rises were felt in Pakistan when food inflation soared.

In view of all these reasons, the challenge before the policy makers is a complex one. In planning for food security, they will need to deal simultaneously with a number of factors: increase in population of between 75--100 million by 2025, not much scope for increasing the amount of land put under crop cover, pressure on the environment, reduced supply of water and highly volatile domestic and foreign prices. The government may wish to appoint an agriculture and food security commission to come up with a set of policy initiatives to deal with a problem that may become difficult with every passing year.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Ideas can win the war[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 27 Oct, 2009[/B]

NOW that the military has begun its Rah-i-Nijat operation in South Waziristan, the question has begun to be asked whether it will succeed. We will not know the answer for several weeks, perhaps not even then.

The real victory will come only when the people not just in the tribal areas but in all parts of the country decide that they have been misled by a small of group of extremists.

The people must make clear that they don’t see their country and religion being under assault by the West, in particular the United States, and that it is their own people who are attacking them. In addition to the use of military power, what is required is the use of people’s power. The war being fought in the hills of South Waziristan is not simply a military war; it is more a war of ideas.

There has been much reflection in the American press in recent days about the meaning and ends of war. This was prompted by the on-going review of the options Washington has in the war in Afghanistan. There appears to be consensus among the commentators that no matter what the American president decides regarding the course of the conflict, it will, from now on, be ‘Obama’s war’.

One analyst, Gordon M. Goldstein, writing for The New York Times, drew a number of lessons for the current president based on the experiences of Presidents John Kennedy and Lyndon Johnson in conducting the American war in Vietnam. Kennedy chose the middle course, preferring to concentrate on building the capacity of the state to help the people who had turned to insurgency since they saw no other way to better their rapidly deteriorating economic and social situation. Johnson, on the other hand, was overawed by the military and opted for the military option.

What is the relevance of this debate in the United States for Pakistan’s policymakers as they conduct their operations in South Waziristan? There are several. Of these I would like to focus on the following three. First the civilians must provide credible leadership to this effort by the military. We know from our own history that the military cannot galvanise popular support when it goes into battle to protect the interests of the state.

There was great popular support for troops in the brief war with India in September 1965 but it could not be sustained when the politicians, led by the leadership that had come from the military, were not be able to credibly explain the purpose of the war and its aftermath.

Similarly, while the civil war in East Pakistan was provoked by the military, its aftermath had to be handled by the civilians. In the present context, we should recognise that a good start was made by convening a well-attended meeting of political leaders that authorised the use of force against the entrenched Taliban in South Waziristan.

Second, there has to be only one system of governance in one country. Pakistan allowed the Taliban to run a parallel government in the areas they control. The jihadists in the populous province of Punjab would like to do the same in the areas where they have influence. They will succeed only if the state abdicates its responsibility of providing basic services to the people. This should not happen if the institutions of the state are strong and the government has the resources to provide for the people. The cash-strapped government in Pakistan has to collect more resources to finance its operations and to use the money it spends effectively and efficiently. It is doing neither at this time.

Third, people have also to act. Let me quote at length from a recent article by the journalist Thomas L. Friedman who has written extensively on the developing world, especially on Muslim countries. “In places like Egypt, Syria, Saudi Arabia, Afghanistan or Pakistan you have violent religious extremist movements fighting with state security services. … And while the regimes in these countries are committed to crushing their extremists, they rarely take on their extremist ideas by offering progressive alternatives. And when these extremists aim elsewhere … these regimes are indifferent. That is why there is no true war of ideas inside these countries — just a war.”

This is a correct and insightful observation. “These states are not promoting an inclusive and tolerant interpretation of Islam that could be the foundation of people power,” Friedman continues.

Pakistan, unlike the countries on Friedman’s list has had a ‘people power’ movement when the lawyers demonstrated that by acting with courage and resolution, they could bring about more than regime change. They could also force a strong executive to begin to show respect to the judiciary and its opinions. The same people power needs to be mobilised to rescue religion from the clutches of the extremists.

Those on the margins of Pakistani society have found leadership from the ranks of the people who, although basically illiterate and poorly informed, are able to compensate for their shortcomings by the extremely strong courage of their convictions. The lawyers managed to find leaders from their own ranks. The progressive elements within the Pakistani society must search for those who can lead them in a much-needed people’s movement in the war against extremism.

What is needed at this critical moment in the country’s history is a group of civilian leaders who can galvanise broad support for the difficult journey on which the armed forces have embarked. Also needed is an economic plan for building state institutions to deliver the appropriate services to the people in stress and also improve their access to basic needs. Finally the moderates in Pakistani society need to let it be known that they are not in agreement with the extremists in the way they interpret Islam, the way they see the functioning of the state and the way they would place Pakistan in the international community.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Food security and small farms[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 02 Nov, 2009[/B]

EXPERTS are advising the developing world to focus on ground realities to achieve food security as its population continues to increase. They are not counting on another technological revolution to occur in the near future.

The next technological breakthrough will probably come from genetic engineering but that is not likely to happen any time soon. Even when it occurs its acceptance will not be easy since there are growing health and environmental concerns associated with this kind of tinkering with plants’ genetic material. In the meantime, the global demand for food will continue to increase.

The productivity increases that took place in many Asian countries including Pakistan beginning in the late ‘sixties and going on into the ‘seventies could happen again. But they will not be produced by developments such as the availability of high yielding seed varieties that resulted in doubling grain outputs in India and Pakistan between the late 1960s and the mid-1980s. That episode in the history of agriculture in the developing world is generally referred to as the “green revolution”.

It is now recognised, however, that the green revolution became the victim of its own remarkable and unprecedented success. Adjusted for inflation, food prices plunged by some 60 per cent by the late 1980s. This produced complacency among policy makers in the developing world as well as those in the aid giving agencies that had played a critical role in helping the green revolution to take place.

They turned their attention to the poor people’s other needs such as health care and education. These were called the “basic needs” in addition to food. Food was now cheap and hunger was no longer a big concern.

With the policymakers’ attention turned away from agriculture, farming was starved of investment resources. In 1979, 18 per cent of official development assistance (ODA) went to agriculture; by 2004, a quarter century later, that amount declined to a paltry 3.5 per cent.

During the green revolution years crop yields in the areas that benefited from new technologies saw yields grow routinely by 4 - 6 per cent a year. By the end of the 1980s, the annual increase had fallen to two per cent or less.

Reallocation of land to non-food crops and the continued expansion of urban land have put great pressure on land availability. The rate of increase in the world output of food began to decline significantly. This put pressure on the amount of food reserves available across the globe; they are at the lowest levels since the early 1970s.

By early 2008, there was panic buying by the countries that had the financial resources to spend on food imports which further depleted the stocks. To make matters worse, many large food producing countries, including India, imposed restrictions on grain exports. These constraints drove up prices in the international food markets.

The sharp increase in the price of agricultural commodities and the use of agricultural land for producing crops for the production of bio-fuels along with a continuous increase in population have, once again, raised the spectre of world hunger and starvation. Complacency is gone among both aid providers and as receivers. The last summit meeting of the world’s developed economies – the G8 – held in Italy in July 2009 declared, “there is an urgent need for decisive action to free humankind from hunger” and went on to pledge $20 billion for agriculture.

The Rome-based Food and Agriculture Organisation that had been campaigning for the renewal of donor interest in agriculture was pleased with the result of the Italy summit. “Since 2007, we have seen greater attention from world leaders on food security, in developing and developed countries alike,” said a senior official of the FAO after the G8 issued their communiqué..

But where should this money be invested? This is where the “small is beautiful” approach in agriculture has begun to take some traction. The lead is being given by India and in India by one of the more underdeveloped parts of that country.

When the Indian National Congress defeated the BJP in the elections of 2004, Dr Manmohan Singh, the new prime minister and an economist of some repute, decided to focus his government’s attention on agriculture and on the development of small farmers. Between 2003-04, the last year of the BJP administration, and 2008-09, the last year of Dr Singh’s first term, New Delhi’s budget for agriculture quadrupled.

According to one account, “government schemes built rural roads to help farmers get their produce to market, forgave some of their debt and raised minimum purchase prices on cotton, rice and other crops. In 2005, policymakers launched the Bharat Nirman Programme, aimed at providing electricity, housing and irrigation systems to farmers, and a year later, the National Rural Employment Guarantee Scheme, which promised at least 100 days of work each year for poor farming households often on public works to develop infrastructure in the countryside.

In the latest federal budget, announced in July, funds allocated for the rural jobs scheme jumped 144 per cent from the previous year to more than $8 billion – making it the largest social-welfare programme in the budget – while funding for Bharat Nirman was boosted by 45 per cent.”

What does the evolving global food situation and India’s attempts to deal with it suggest for Pakistan? Given Pakistan’s stretched fiscal situation it is not going to be possible to throw a great deal of public money into agriculture for some time to come. The country will have to be very selective. It should concentrate on improving the productivity of small farmers by using simple technologies that will help small-holder agriculture to produce more from the little bit of land the peasant-proprietors own.

In India, for instance, providing the poor farming communities with small amounts of funding to construct small ponds that can hold rain water has helped to increase the productivity – and hence incomes – of the small farmers.

By introducing the farmers to the internet, it has made it possible for the small holders who have surpluses to market to get the best prices for their produce. The introduction of the internet has provided poor communities to invest in education. They can see right away the benefits to be derived from education.

What is clear is that the Pakistani policymakers will need to concentrate on the development of the agriculture sector to revive the slumping economy. But what is needed is not a large increase in the infusion of public funds since these are not available. What is required is a paradigm shift in the development of agriculture and within agriculture on the development of the small farmer. This way the country may be able to achieve self-sufficiency in food but also alleviate rural poverty.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Future need not be bleak[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 03 Nov, 2009[/B]

I HAVE used the ‘perfect storm’ metaphor before in these pages but that was always in the economic context. I have argued on several occasions that the Pakistani economy has been buffeted by simultaneous events and developments that merit some extraordinary interventions by the state.

There will have to be a departure from the conventional wisdom on how to pull an economy out of extreme distress. But what works in normal crises will not work in Pakistan’s case.

The state remains weak, there is still considerable uncertainty about the direction politics could take in the country. There is immense foreign interest in guiding the country towards a future that does not pose a serious threat to the rest of the world.

Pakistan finds itself at the centre of developing events that could produce global upheaval of a magnitude that is difficult to predict. This is the other perfect storm which a developing and still-to-mature political system must face while it is deeply engaged in dealing with an economic crisis without precedence in a crisis-prone country.

The country has been targeted by a number of different forces some of which have shown remarkable resilience. Let us begin with Al Qaeda. The top leadership of this group has shown the ability to survive for many years in dark caves and tunnels in a region which has felt the effects of isolation. The strength of the leadership could have been depleted but it still seems capable of sending its message across to a large number of people scattered across the globe. According to this message the world order has to change in order to serve Al Qaeda’s interests.

Then there are a number of groups in Pakistan who have developed a strong belief that the state has not fulfilled the country’s original purpose, which was, they believe, to create an Islamic entity that would be the centre of the Muslim world. They believe that the Pakistani elite has always stood, and continue to stand, in the way of the realisation of this goal.

Also included in this troubling situation are the interests of the various large countries in the area. The United States is active for the reason that it was from here that the most devastating attack was launched on American soil on Sept 11, 2001. It would not want to see that happen again. China is rising in a way not anticipated by even those who know the country well. India, largely because of the remarkable development of its economy in recent years, has regional and global ambitions which include reducing Pakistan’s capacity to do it harm. And, finally, there are the countries of the Middle East which are in a state of economic, political and social flux that washes onto Pakistan’s shores.

How do we deal with this dangerous situation? Having practised economics all my professional life, it is not surprising that I would suggest that it is in this area that we must search for a way to steer the country out of this storm. International interest in helping Pakistan find a way out of this difficult situation has presented the country with an enormous opportunity. This must not be missed. Cash-strapped Pakistan will have to work closely with the international community that has shown enormous willingness to help with money and advice.

The much — and I believe wrongly — maligned Kerry-Lugar bill was crafted and signed into law with this intention in mind. The fact that it was received with such scepticism in the country can only be ascribed to certain reasons and motives. Those who have adversely commented on it did not familiarise themselves with its content and intent. Also, a small number of critics believe that Pakistan must reduce its dependence on foreign capital flows that always come attached with political strings. But it will take time before the country develops the capacity to wean itself off dependence on foreign money. In the meantime it must not only accept the offered assistance but put it to good use.

How should this be done? The list is long but I will mention three at this stage. The first is to build the capacity of the state to serve the people. This has deteriorated over time. It not only means providing good governance with all that the term implies. It also means bringing the government closer to the people. This can only happen if Islamabad is prepared to devolve authority to the provinces and the provinces to the institutions of local government, particularly in the cities and towns of a rapidly urbanising country.

The second is to remove the obstacles that stand in the way of putting the country on the path of long-term sustainable rates of growth that can begin to reduce the number of people living in absolute poverty. Power shortages must be removed, infrastructure improved and an expanding population provided with modern skills.

The third is to make this rate of growth ‘inclusive’. This term is being used with increasing frequency in economic literature and means helping those sectors of the economy, and within those sectors those activities, that help the poor by providing them with productive employment.

These and several other approaches that cannot be elaborated upon in this limited space must be incorporated into a comprehensive strategy of economic growth and the promotion of human welfare. This may seem like a daunting task but it isn’t. The continually evolving discipline of development economics provides enough knowledge about what works and what does not to put together a strategy that would be credible and pertinent for Pakistan’s current difficult circumstances.

Power sector: the coming constraints
 

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Power sector: the coming constraints[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, November 09, 2009[/B]

DURING my recent brief visit to Pakistan, I attended a meeting in Islamabad on the energy crisis which shows no sign of easing. There were two interruptions in power supply during the meeting arranged by a private consulting group hoping to take advantage of the priority, energy has been given in the recent Kerry-Lugar Act.
The US is prepared to put a fair amount of money into the sector. The American interest in the area is related to the damage energy shortage is doing to the economy, in particular to those parts of the economy that are important for providing employment to the restive youth.

Already the shortages experienced over the last two years have taken a heavy economic toll. While all sectors of the economy have suffered, industry is particularly affected. Within the industrial sector, small and medium enterprises have suffered more since it is not practical for them to install their own power generating units.

The question asked at the meeting was what the government in Islamabad should do to ease the problem and get industrial production back on track. There were two presentations on the potential sources of supply. One dealt with the abundance of coal in the country. We were told that Pakistan has the world’s fifth largest coal reserve. Fully exploited it could take care of our energy needs for the next 200 years. This was encouraging but the related question whether the country would be allowed to go that route was not raised.

Another speaker focused on the po tential offered by the fast flowing rivers in the north and northeast. Some familiar arguments were made and some known data offered. The point made was that with proper planning and appropriate amount of political will, Pakistan could generate an additional 40,000 MW of electricity over the next two decades. This is economically and technically feasible but the real question is, whether the politicians are in the position to move their constituencies towards the resolution of the problems that have held back public investment in hydro power generation.

I drew two conclusions from this meeting. One, the private sector needs to get more involved in planning for a better energy future. Second, both the public and the private sectors will have to inform themselves much more about the global environment in which they will have to operate because of the treaties and agreements that will be negotiated among the world’s nations in the next few months.

Pakistan will not be able to ignore these treaties/agreements. This is relevant for both the private and the public sectors. I recall the indifference shown to international agreements on the use of child labour by our small and medium sized operators working in industries such as sports goods and carpets. The realisation that the world had a way of enforcing these agreements came when sports goods and carpet importers in Europe and the United States refused to buy the products of those producers who were not in compliance with international laws and regulations on the use of child labour. The same will happen in the area of energy and environment.

Where is the world today in terms of subjecting the producers of energy to agreed environmental standards? As an analyst put it, “when historians look back at 2009, they may judge the most significant event of the year to have been not the global recession, or the war in Afghanistan, but the UN climate talks in Copenhagen in December.

At that meeting the world faces a choice between agreeing to mount a concerted effort to – and eventually reduce – greenhouse gas emissions, or decide that the costs of doing so would be too great, and the attempt will have to be put off for another time. Whichever way the meeting goes, it will have profound implications for the energy industry worldwide.

There are three issues which policymakers assembling in Copenhagen in December, will have to decide. I don’t believe Islamabad has taken a position on any of these or that the private sector has developed its own views on these subjects. It needs to do that to have an impact on what Pakistan’s representatives will say when they go to Copenhagen. The first issue concerns the universality of the targets to be agreed on at the summit.

If an agreement that applies to all countries is negotiated, it will have a severe impact on the development prospects of less developed countries. They emit much less carbon per head of the population than do the world’s more developed countries. However, if different standards are adopted, they will give a competitive edge to the more advanced countries in the developing world. Businesses in developed countries fear a serious loss of competitiveness if their industries face tougher standards on carbon emissions than those in emerging economies.

Even if some kind of mechanism can be found that would level the playing field, what should be done to prevent “leakages” from the agreed regimen. These fears have led to demands from industrial lobbies in some countries such as France and the United States to impose taxes on imports from countries that do not adopt stringent greenhouse gas targets or cheat in implementing the targets even if they sign a global treaty.

What these deliberations make clear is that countries and businesses will face serious limitations on the types of energy sources they develop. That is why those who dream of turning coal into a major source of energy in Pakistan may remain just that – a dream. Pakistan will not be able to put this resource to use unless new technologies come along that trap carbon dioxide that coal-fired plants emit. As in so many other things, the country has lost an opportunity. It paid no attention to the development of this resource while there were no global standards to observe.

The countries that use coal as a major source of electric power – these include China, India and the United States – will probably be allowed some time to adjust. It is unlikely that new entrants such as Pakistan will be permitted to set up coal-using power plants using existing technologies. External assistance will certainly not be available for this effort.

I also believe that it will not be possible for the private sector to invest in “captive plants” to generate power for their own use if they are environmentally unfriendly. If they do, those who sell their products in the international market place may not be able to do so. Here the example of what happened to those who ignored child labour regulations is instructive. If moral pressure and international treaties don’t work, the pressure of the market place will yield results.

The conclusion that I would draw from this analysis is clear: both the private sector and the government need to get fully informed about the constraints that will inevitably come as concerns about global warming increase.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Terms of reference[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 10 Nov, 2009[/B]

HILLARY Clinton, the US secretary of state, has come and gone but her visit to Pakistan will reverberate for a long time. It may be useful at this stage to summarise what she was expected to accomplish in Pakistan.

If she was given some terms of reference they may have read something like this: ‘Madam Secretary, you know Pakistan well; you have visited the country before but this is your first visit as the senior-most diplomat in the administration of President Barack Obama. Your visit is of great importance for both the United States and Pakistan. The two countries need each other at this time. This was also the case when, on a number of previous occasions, Washington and Pakistan worked together.

‘This relation was always asymmetric, however. To a certain extent that is inevitable. We are a superpower with the world’s largest economy and with military strength that is unmatched by any other country. Pakistan is poor and even after more than 60 years of having achieved independence it is still attempting to define itself.

‘During your three-day stay you will attempt to achieve the following four objectives: the first one is to convince your audience in Pakistan that the Americans don’t have a quarrel with the Muslim world. Unlike his predecessor, President Obama is making a genuine effort to improve America’s relations with the world of Islam. He gave a major speech in Cairo in June this year explaining how he views the Muslim world and how much he appreciates the fact that the followers of the Islamic faith have made contributions to science and learning. ‘But that was in the past, 1,000 years ago. Over the last few decades — in particular since the terrorists attacked the United States on Sept 11, 2001 — a segment of the Muslim population has decided it prefers obscurantism to the accumulation of knowledge as its goal. There is ferment in the Muslim world. This has produced both despair among Muslims and extreme hostility towards the outside world on the part of the few who are trying to redefine their religion to take it back to medieval times. You will recall what Samir Kassir, the respected Lebanese scholar wrote in an essay in 2005: “It’s not pleasant being Arab these days. Feelings of persecution for some, self-hatred for others; a deep disquiet pervades the Arab world.”

‘He paid for his life for these words when he was gunned down on June 2, 2005. What he said about Arabs applies to most Muslims around the globe.

‘If this approach continues, the Muslim world will fall further behind. Pakistan has already been left behind other countries of Asia including India in its immediate neighbourhood. In comparing Pakistan’s situation with India’s, you will, of course be appropriately circumspect. Most Pakistanis remain suspicious of India’s intentions with respect to their country, remembering the harm India tried to do to Pakistan just as it was finding its feet after winning independence.

‘But that is more than 60 years ago. The situation has changed, especially over the last quarter century. Pakistan could benefit enormously by developing a close relationship with its large and now much more affluent neighbour.

‘The second issue you will need to deal with is also very important for Pakistan. Madam Secretary, you might want to focus on India-Pakistan relations during your brief stay in Pakistan. The United States will need to work on both countries to convince both policymakers that they should work to help rather than hurt each other. The Obama administration believes that this realisation has come to Islamabad but not to New Delhi. Once you have given that message to the Pakistanis we will follow it up with the Indians.

‘Third, you arrive in Pakistan at the time of a lively debate on the Kerry-Lugar bill that President Obama has signed into law. Most of the debate is focused on a misunderstanding of what the act purports. You know from the internal debate in the administration that we dealt with a number of concerns in putting together the bill. We were anxious to place our relations with Pakistan on a longer-term basis rather than on the achievement of our short-term strategic objectives. Pakistanis, unlike the Americans, have long memories. They remember how quickly we abandoned them once they had done our task of expelling the Soviet Union from Afghanistan. They were left holding the baby, including, most importantly, extremism.

‘We also wanted to shift our focus to economics rather than simply provide additional weapons to the military. This would be the first time that we will be dealing with a civilian government rather than the military while increasing the flow of our money to the country. At the same time we should keep in mind that the money we are providing is only a small fraction of the amount the country receives as remittances from its own citizens working and living abroad. This means that $1.5bn a year won’t provide us with the kind of leverage we had in earlier periods. We should not exaggerate about what we can purchase with the money on offer.

‘Fourth, Madam Secretary, you will run into a great deal of hostility towards the United States. This is not unique to Pakistan; it is shared by many other countries in the Muslim world. We don’t think we have made a serious attempt to study the reasons for this or to direct public policy towards bringing about changes in attitudes.

‘Our stance in the long-enduring Arab-Israeli conflict; the way we went into Iraq and conducted our operations there; the humiliation Muslims — in particular the young people of Pakistan — face in obtaining visas to travel to the US; the way we have obstructed the development of genuine democracy in Muslim countries, including Pakistan; and, in Pakistan’s case, our attempt to develop strong ties with India even though New Delhi is considerably less forthcoming are genuine reasons for discomfort concerning us.

‘These are rich terms of reference and you will not be able to accomplish all of this or much of this during three days. But we hope you will be able to make a start. Have a good stay in Pakistan.’

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Is India making gold return to the reserve system?[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, Nov 16, 2009[/B]

ON November 3, India shook the international gold market and sent shivers down the spine of the international financial system by announcing the purchase of 200 tons of gold from the International Monetary Fund.
The $6.7 billion transaction cost was paid from the foreign exchange reserves it had accumulated over the years. The Indian purchase was slightly less than one-half of 403 tons the institution plans to sell in the market in order to finance its programmes to help the countries that find themselves in acute economic stress. The list of the states that have gone to the IMF includes Pakistan. In a way it can be argued that the Indians are paying for Pakistan’s rescue.

By making the purchase India was signaling that it saw an end of the system dominated by the dollar as a reserve currency. The move marks the end of the socalled anti-gold sentiment that had prevailed for more than 20 years among central banks. Since 1989, the official sector has been a net seller of gold, increasing supplies and thus depressing prices. Most of the sales were made by the European central banks.

While the Europeans were selling gold, the Asian central banks were hoarding their accumulated wealth mostly in the US Treasuries. As a consequence, by the end of 2008, the share of gold in the world’s official reserves had fallen to a record low of 10.3, down from 32.7 per cent in 1989. As governments abandoned gold, the price of the metal declined to a low of $250 an ounce in 1999.

The Indian move reversed the trend. It pushed the price of gold to a record $1,087.45 per ounce on the day the purchase was announced by the Reserve Bank of India. “We have money to buy gold. We have enough foreign exchange reserves”, said Finance Minister Pranab Mukherjee announcing the purchase in New Delhi. “Europe collapsed and North America collapsed. We are strong”, he continued.

The Indian finance minister also recalled the time when one of his predeces sors had to carry gold in the hold of his aircraft to raise funds for his country to pay the bills it owed to its creditors. That was in 1991 and Dr Manmohan Singh was finance minister who had to humble himself to get the money his country badly needed. Seventeen years later, India was buying gold rather than pledging it.

The transaction boosted the Indian gold holdings to 6.2 per cent of its foreign exchange reserves, higher than that for China. The Chinese have also been accumulating gold but they have made their purchases secretly so as not to disturb the gold market or depress the value of the dollar.It had doubled its holdings over the last six years. Beijing holds about 1,054 tons of gold, equivalent to about two per cent of its much larger reserves.

India is the world’s largest consumer of gold. Most of it is held by private citizens in the form of jewelry. The government has made an effort to get the propensity to hold wealth in the form of gold to create liquidity. It has allowed private investment banks to issue gold bonds. In the same spirit the government had not relied on gold to hold its reserves. Its official gold holdings had fallen in recent in years. Fifteen years ago, the Reserve Bank of India held 20 per cent of its reserves in gold. But since 2004 gold had dropped to 3.6 per cent of an estimated $285.5 billion foreign exchange reserves.

Producers of gold continue to add about 2,500 tons of gold every year to the total world stock. If countries such as India continue to purchase the metal for their official reserves, gold price will keep on increasing.

At the annual meeting of the London Bullion Market Association, this time held in Edinburgh, a poll of delegates present at the meeting forecast that the price in September next will be 10 per cent higher and touch $1,183 an ounce. Some traders predicted the price to rise to as much as $2,000 an ounce.

What are the broader implications of the Indian action? For centuries gold was the only commodity in which those who had the means were prepared to store their wealth. One reason for this was the metal’s properties, the most important of which was that it did not react with oxygen and, therefore, unlike silver, was not tarnished. The metal lost some of its lus tre with the development of paper currencies and the ability of governments to protect their value.

But one problem remained. How should the trading communities around the world, including governments, settle their accounts. This issue was addressed by the conferrees that met at Bretton Woods, a small town in the northeast of the United States. They established a new financial system based on an international reserve currency.

The United States agreed that it would be prepared to exchange the reserves held by countries in exchange for gold. The price of gold was fixed at $35 to an ounce. Most countries pegged their currencies to the dollar and the dollar, in turn, was pegged to gold. This was the Bretton Woods system that lasted for over a quarter century. It was dismantled in 1971 by the administration of President Richard M. Nixon when it floated the dollar with respect to gold.

Since then most large economies have allowed their currencies to float. The only exceptions among the word’s ten largest economies who are managing their currencies are China, India and Brazil. The Chinese have pegged their currency to the dollar at a rate considerably below what would be the case if it was allowed to float. This has helped the country to become highly competitive in the global market place. This has been a bone of contention between Beijing and Washington for several years. The result of China’s management of its currency by the state rather than by the market is enormous imbalance that exists in the global economy.

The Chinese continue to accumulate reserves while the Americans continue to pile up debt to foreign nations, particularly to China. One way of dealing with this situation may be to allow the emergence of a new global monetary system less dependent on the American dollar and more on a multiple of currencies as well as gold.

The secret Chinese purchases of gold and the more open Indian action may push the world in that direction. But there is still a long distance to go. In spite of these moves, gold represents only a minute share of total world reserves. Europe still holds about 60 per cent of its reserves in gold.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]AfPak policy a mistake[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 17 Nov, 2009[/B]

[B][CENTER][SIZE="3"][I][FONT="Georgia"]PAKISTAN is not Afghanistan. By coupling the two countries together and calling it ‘AfPak’, the United States’ intention was to make policymaking simpler. It may have had the opposite effect.[/FONT][/I][/SIZE][/CENTER][/B]

The idea was that by lumping Afghanistan and Pakistan into one analytical framework, Washington and its allies would be able to focus on one geographic entity and would be able to use the same strategy to counter the threat posed to the West by the rise of Islamic extremism.

Looking at the threat from the prism of 9/11, Washington and other western capitals worried about the launch of another attack perhaps even more lethal than that of Sept 11, 2001. But there are a number of flaws in the unfolding strategy aimed at the AfPak region.

The first, of course, is the enormous difference between Afghanistan and Pakistan. Afghanistan was not colonised. This meant that it did not develop what the West knows as the ‘state’. It did not develop a strong central authority that could manage disparate regions within the country and the people that reside in them. There was relative peace when Kabul, ruled mostly by monarchs but most recently by presidents, left local chieftains and warlords alone.

The latter allowed a small portion of the resources collected from the people over whom they ruled to go to Kabul to provide the central authority some funds to pay for its basic needs — the running of the king’s or the president’s palaces, funding of a small federal bureaucracy, and the upkeep of a small army. Until the Cold War contestants developed some interest in the country, the few urban centres — Kabul, Kandahar, Herat, Jalalabad and Mazar-i-Sharif — were poorly connected.

The Afghans were not a mobile people. They mostly stayed in their villages and insularity became their defining characteristic. All this changed when the US built all-weather modern highways in the south and the Soviet Union followed with roads in the north. The state made little investment in human development and not much in anything else. Afghanistan, consequently, was one of the most backward societies when the Soviet Union sent its troops in 1979 in an attempt to create a vassal state.

Moscow’s aging leadership — once again — got the wrong message from history. The Soviet leaders believed that what had worked in other Muslim states in Central Asia could also work in Afghanistan. But Moscow did not succeed and a loosely knit alliance of warlords, aided by the US and Saudi Arabia, with Pakistan providing essentially logistical support, was able to expel them from the country.

Afghanistan would have reverted to its traditional but stable state had the Taliban administration in Kabul not granted sanctuary to Al Qaeda. That led to a chain of events that included the 9/11 terrorist attacks on the United States and the American counter-attack. In the post-Soviet era the country would have been carved into a number of fiefdoms each controlled by the Mujahideen warlords who had collaborated with the West to push the Soviets out. That is not the way the country went. Led by the US, the West attempted to force a system of government and economic management that is totally foreign to Afghanistan.

Thirty years of instability and a stagnating economy have left the country enormously polarised. A small class of enormously rich people, drawing income and wealth from corruption and the production of poppies and the associated drug trade, are attempting to establish their control with the help of private armies — the lashkars — that are loyal only to them.

They don’t have an interest in creating an Afghan state that would work for bringing economic development or improving the welfare of the common man. Women in particular remain suppressed. The few that have benefited from some openings in the system that accompanied the overthrow of the Taliban regime once again fear for their lives and their social status.

But Pakistan is different. When it emerged as an independent state in 1947 it already had a functioning state with functioning institutions put in place during the long British rule. Although there is not much resemblance between the Pakistan of today and the one at the time of independence, it has the makings of a modern state. Two things set it apart from Afghanistan: it has a large, well-organised and disciplined military with 650,000 men and women in uniform and a large and growing middle class.

The latter is particularly important for Pakistan’s economic and political future. Numbering about 50 to 60 million and with per capita income two-and-a-half times the national average of $1,000, it has a great deal at stake in the direction the country takes. This class has already shown its political muscle in support of the judiciary. An impressive campaign that lasted for two years forced former president Pervez Musharraf out of office and also persuaded Asif Ali Zardari to reinstate the judges fired by his predecessor from the provincial high courts and the Supreme Court. The middle class also has a strong presence in the armed forces.

It appears that the campaign the army has launched in the hills of South Waziristan has the full backing of the powerful middle class. It has now recognised that the war being fought in that inhospitable territory is their war; it is not a proxy war being waged on behalf of the US. This suggests that the West needs to work with this class of people and help it gain a firmer footing in Pakistan’s fertile economic but troubled political soil.

Treating Pakistan in the context of an AfPak strategy would be a colossal mistake. The West under the leadership of President Barack Obama needs two different strategies, one for Pakistan and the other for Afghanistan.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Oil and the national economy[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Monday, 23 Nov, 2009[/B]

The country’s economy suffers from many structural weaknesses. These have been identified by many analysts over a long period of time but those in policymaking positions have found it difficult to address them.

Without resolving them, the country will not be able to put the economy on the trajectory of high rates of growth on which it can remain without having to deal with disruptions. One of the more serious problems is the inability of the economy to match the increased demand for imports with an equally large – in fact larger – increase in exports. It is only when the rate of increase in exports overtakes the rate of increase in imports by a wide margin that the country will be able to deal with the recurring balance of payments problem.

One reason why imports continue to increase much faster than exports is the economy’s increasing dependence on imported oil. A significant share of the import-export difference is accounted for by oil. This deficit increases when the price of oil in the international market goes up. This happened in most of 2008 with the consequence that the economy plunged into a deep crisis from which it has not yet fully recovered.

But the price of oil plunged as quickly as it had increased. Now, after a pause, it has begun to rise once more. It has almost doubled over the last six months. This has begun to strain the economy once again. Where is the oil price headed and will Pakistan be able to cope with another increase?

There is consensus among experts that while there will be a gradual increase in the price of oil for many years to come, the type of escalation that occurred last year will not happen again. Then the oil markets were caught by surprise because of the unanticipated increase in demand in China and India. This led to a great deal of speculation in the market which pushed up the prices.

Both the markets and the producers are prepared this time. Saudi Arabia, by far the world’s largest producer, has prepared itself well for another run up in prices. It has developed a significant surplus capacity it can use to moderate an increase in oil prices. It is not in the Kingdom’s interest to have the price go much beyond $75 a barrel which is where it seems headed at this time.

Saudi Arabia’s oil reserves are estimated at more than 250 billion barrels about twice as much as Iran’s the second largest holder of reserves. Iran is estimated to be sitting on 130 billion barrels. Iraq with 120 billion barrels has the third largest reserve, followed by Kuwait with 100 billion barrels and UAE with 98 billion.

Venezuela with 80 billion barrels is the largest non-Arab oil country followed by Russia with 55 billion barrels. Khalid al-Falih, the head of Saudi Aramco, the state-owned oil company, expects that demand will grow at a “reasonable pace” by perhaps 1-1.5 million barrels a day from 2010 and beyond.

The Kingdom has recently increased its production capacity to 12.5 million barrels a day following a $100 billion development programme aimed at preparing some of the known reserves for exploitation.

The Saudi officials are much more relaxed now than they were a year ago when there was a great deal of Western pressure – in particular pressure from the United States – to expand supply. They believe that with the implementation of the ambitious development plan they can raise their daily production to 15 million barrels. That would be enough to calm the markets. This is 18 per cent of the global demand of 85 million barrels a day.

The International Energy Agency which advises rich nations on energy matters has also forecast that the type of pressures that were felt by the market in 2008 will not materialise. It is projecting an increase in demand in the next 20 years by a total 25 per cent which would bring global consumption to 106 million barrels a day by 2030.

According to one analysis of the developing situation, “If demand pessimists are correct, future increases in the price of crude could be damped as weaker consumption stretches world oil supply by billions of barrels. Various estimates maintain that the roughly two per cent increase a year average growth rate in world oil consumption seen earlier this decade – the biggest reason for crude prices increases hitting a record $147 a barrel last year – may turn out to an anomaly and that annual growth in the neighbourhood of 0.5 to one per cent is more the norm”.

With that cushion available, the Saudis are beginning to focus on developing their gas reserves for which there is a growing domestic demand. “The big story today is gas”, Mr. Falih told the Financial Times in an interview. The Kingdom is the world’s fourth largest holder of gas reserves but with domestic demand increasing at seven per cent a year, it has no plans to become an exporter, leaving the gas market to countries such as Qatar, Russia and Iran that have large exportable reserves. Mr. Falih says that his company, Aramco, is “exploring kingdom wide” with drilling to begin in 2012 in Red Sea for the first time in order to increase the production of gas.

What do these changes in market conditions and market perceptions mean for Pakistan? A less excited market implies that the country won’t be faced with the kind of crunch it had to deal with in 2008. However, with the price of oil settling at between $70 and 80 a barrel still means a considerable balance of payments burden. There are two options policy makers have to deal with this situation, of which the first can be effective only over the long-run.

A concerted effort should be made to reduce the dependence of the economy on imported oil by developing domestic sources of energy supply. These include not only hydro and coal but also wind and solar. Pakistan, as in so many other things, could take a leaf out of the Indian book. New Delhi has launched a well-funded programme to develop renewable sources of energy, including research in the area.

While it has more financial resources to spend than Pakistan, Islamabad could get the private sector interested in investing in these programmes by offering tax relief. The second is to improve the efficiency of the economy in order to reduce the rate of increase in the consumption of energy.

Among the countries at Pakistan’s level of development, consumption per unit of gross domestic output is high as is the rate of increase in anticipated demand when the economy expands. The recent increases in prices of the products controlled by the government should slow down the rate of increase in energy demand. However, along with the increase in prices the government needs to provide relief to the poor through income transfers.

[B]SHAHID JAVED BURKI[/B]

DATE OF BIRTH: [B]September 14, 1938[/B]

PLACE OF BIRTH: [B]Simla, India.[/B]

[B][SIZE="4"]EDUCATION[/SIZE][/B]

M.Sc. Physics, Government College, Lahore, 1959
M.A. Economics, Oxford University, 1961
M.P.A. Kennedy School, Harvard University, 1968
PH.D. Economics (not completed), Harvard University, 1974
Advanced Business Management, Harvard Business School, 1998

ACADEMIC AWARDS AND FELLOWSHIPS

Rhodes Scholar, Oxford University, 1961-1963
Mason Fellow, Kennedy School, Harvard University, 1967-1968
Public Policy Scholar, Woodrow Wilson International Center for
Scholars, 2004

[B][SIZE="4"]WORK EXPERIENCE[/SIZE][/B]

2003-2006: Consulting.
1999-2003: CEO, EMP-Financial Advisors, LLC
1994-1999: Vice President of the Latin America and Caribbean Region,
The World Bank
1996-1997: Finance Minister, Pakistan
1987-1994: Director for China and Mongolia, The World Bank
1983-1994: Director of the International Relations Department,
The World Bank
1981-1983: Senior Economic and Policy Advisor, External Relations,
The World Bank
1976-1981: Division Chief, Policy Planning and Review Department,
The World Bank
1974-1976: Senior Economist, Policy Planning and Program Review
Department, The World Bank
1974-1976: Senior Fellow, Development Advisory Service, Harvard University, Cambridge, Massachusetts
1973-1974: Advisor, Ministry of Commerce, Government of Pakistan,Islamabad
1972-1973: Senior Fellow, Center for International Affairs, Harvard
University, Cambridge, Massachusetts
1971: Chief Economist, Government of West Pakistan, Lahore
1970-1971: Economic Advisor and Deputy Secretary to the Governor,
West Pakistan, Lahore
1966-1967: Deputy Secretary (Foreign Aid), Planning and Development
Department, Government of West Pakistan, Lahore
1964-1966: Director, Rural Works Program, Government of West
Pakistan, Lahore
1963-1964: Deputy Commissioner, Sheikhuipura, West Pakistan
1964: Sub-Divisional Magistrate, Shadara, West Pakistan
1963-1964: Sub-Divisional Magistrate, Shujabad, District Mukan,
West Pakistan
1963: Assistant Commissioner (Under-training), Jhelum District,
West Pakistan
1961: Assistant Commissioner (Under-training), Rawalpindi
District, West Pakistan
1960-1961: Under-training at the Civil Service Academy of Pakistan,
Lahore

[B][SIZE="4"]BOARDS[/SIZE][/B]

Netsol Technologies, California, USA. (Member of the Board, Chairman
of Compensation Committee, Member of Audit Committee).
EWW-Vista, Washington DC. (A non-profit organization working to bring
new technologies to the poorer regions of the developing world.
Education Testing Service, Princeton, USA. (Member of the Advisory
Board.)

[B][SIZE="4"]SELECTED EXPERIENCE[/SIZE][/B]

[B][I]The World Bank[/I][/B]

• Head of the World Bank staff team working on the Development
Committee (1978-87).

• Designed and implemented the World Bank’s lending program in China – at one point the largest Bank-financed program in the world. Under his direction, the World Bank devised a large lending and policy analysis program for Shanghai. Supervised and directed the World Bank’s ambitious program of analysis of various aspects of the Chinese economy.

• As Director of China and Mongolia Department (1987-1994), dealt extensively with all aspects – environmental, technical, political, etc. – of the Three Gorges Dam project, as well as numerous lower profile projects.

• Formulated the World Bank’s response to a number of county
crises, including those experienced by Mexico (1994-95),
Argentina (1995) and Brazil (1998-99).

• Chairman, the World Bank Task Force on Social Development,
1998..

• Chairman, the World Bank-Commonwealth Joint Task Force on
Small States, 1999-2000.

[B][SIZE="4"]Special Projects for the World Bank[/SIZE][/B]

• Led the team that prepared the World Bank sponsored study, IDA
in Retrospect (World Bank, 1986).

• Secretary, Development Committee Task Force on Concessional
Flows. The Task Force was chaired by Professor John Lewis of
Princeton University.

• Oversaw the writing of the book by Robert Cassen, Does Aid
Work, sponsored by the Development Committee.

• Chairman, World Bank’s Task Force on Social Development.

• Chairman of the World Bank-Commonwealth Task Force on Small
States.

[B][SIZE="4"]Government of Pakistan[/SIZE][/B]

• In July-October 1994, responding to an invitation from Prime Minister Moeen Qureshi, served as advisor to the Prime Minister, and formulated and implemented an ambitious program of economic reforms.

• In November 1996, at the request of the President of Pakistan, took a sabbatical from the Bank to join the interim cabinet that took office following the dismissal of the government of Benazir Bhutto. As Finance Minister, was in charge of the portfolios of finance, planning, economic affairs and statistics in the caretaker cabinet.


[B][SIZE="4"]LIST OF RELVANT PUBLICATIONS[/SIZE][/B]

[B][I][SIZE="3"]Books:[/SIZE][/I][/B]

• A Study of Chinese Communes, Harvard University Press, 1969

• First Things First (With Paul Streeten and others), Oxford University Press, 1981.

• Globalization: An Agenda for Policy Analysis (with Joseph J. Savitsky). Washington, D.C., Emerging Markets Partnership, 1999

• Changing Perceptions and Altered Reality: Emerging Economies in the 1990s. Washington, D.C., The World Bank, 1999

• Development in Latin America and the Caribbean: The Challenges of Reform (with Sebastian Edwards and Sri-Ram Aiyer). Washington, D.C., The World Bank, 1997

• Development in Latin America and the Caribbean: Decentralization and Accountability of the Public Sector (with Guillermo Perry). Washington, D.C., The World Bank, 2000

• The Long March: A Reform Agenda for Latin America and the Caribbean in the Next Decade (with Guillermo Perry). Washington, D.C., The World Bank, 1997

• Development in Latin America and the Caribbean: Poverty and Inequality (with Sri-Ram Aiyer and Rudolf Hommes). Washington, D.C., The World Bank, 1998

• A Revisionist History of Pakistan, Vanguard Books, 1998

• Beyond the Washington Consensus: Institutions Matter (with Guillermo Perry). Washington, D.C., The World Bank, 1999

• Pakistan: A Historical Dictionary, Scarecrow Press, London 1999

• Pakistan: Fifty Years of Nationhood, Westview Press, 1999

• Pakistan: Continuing Search for Nationhood, Westview Press,
1991

• Pakistan Under the Military: Eleven Years of Zia ul-Haq (with
Craig Baxter), Westview Press, 1991

• Pakistan: A Nation in the Making, Westview Press, 1986

• Pakistan: Development Choices for the Future, Oxford University
Press, 1986

• Pakistan’s Development Priorities: Choices for the future (with Robert Laporte), Oxford University Press, 1980.

• State and Society in Pakistan 1971-77, The Macmillan Press Ltd,
1980

[B][SIZE="4"]Articles:[/SIZE][/B]

• Several articles published in various journals including Journal of Asian Studies, China Quarterly, Asian Review, Middle East Journal, Pakistan Development Review.

• A weekly column published in Dawn, Karachi.

[B][I]source:[/I][/B] [url]http://www.pndpunjab.gov.pk/user_files/File/sjb%20resume,%20Cosmos.pdf[/url]

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The path of corruption[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 24 Nov, 2009[/B]

CORRUPTION is back in the news. Several newspaper columnists have written about it and it is the favoured subject of TV talk shows these days. Prime Minister Yousuf Raza Gilani has set up a task force to look into the problem.

Headed by Finance Minister Shaukat Tarin, the group has promised to report back to the government in four weeks.

I was queried by the Voice of America on the subject some days ago. The host of that programme played a clip from a statement by Minster Tarin who said that it was well known that large sums of money were being siphoned off by people who had the power to dispense services. It was also known, he went on to say, which government institutions were corrupt. The government was aware of what needed to be done, he seemed to imply. What was required was the political will to take action. He was right on both counts.

What has occasioned this revival of interest in the subject is the publication of the 2009 report of Transparency International which once again shows that Pakistan is doing poorly in the area although not as poorly as was the case a decade or so ago. Then the country was ranked as one of the most corrupt places on earth. The dubious honour belongs to even more troubled countries such as Somalia and Afghanistan. Rather than being the second most corrupt country in the world as was the case then, it is now a middling one.

Looking at the subject from the perspective of economics provides some useful insights into the practice. Corruption as a phenomenon can be easily explained in economic terms and economics also guides us towards some of the solutions. Corruption becomes endemic for a number of reasons. It may result when the cost of the services provided far outweigh the compensation given to those who are giving them away. This leads to a temptation on the part of those who have the authority to dispense these services to charge the receiver.

A policeman has the authority and the ability to maintain law and order. Security means a great deal to the people over whom the policeman has some authority. The people may be prepared to pay the officer for providing the services they need.

The same happens on the demand side of the equation. When the benefit of the services being received is much greater than the price being charged for them, those who want them would be prepared to pay additional amounts to receive them. This economic calculus can be changed by altering the cost benefit ratios for both the provider and receiver of services. There are some interesting examples of the reduction in the incidence in corruption when those with authority were given better compensation.

Singapore is often cited as an example of a country that has succeeded in practically eliminating corruption by giving handsome salaries to its senior public servants, including ministers. But we don’t have to go to Singapore to underscore the point that narrowing the difference between legitimate rewards to government employees and the cost to the receiver of the services they provide lowers the incidence of corruption.

The Motorway Police in Pakistan has a good reputation. Those who serve in this force are well compensated by the state. They also follow the procedures that are hard to circumvent. The latter point leads me to the second approach for controlling corruption. This is to strengthen the system and the processes used to provide services. Those who provide services and those who receive them should be clear about the procedures that have to be followed. Transparency has to be part of a system of controls. Any wilful departure should be brought to the attention of those who hold public servants accountable.

This brings me to the subject of accountability and corruption. Pakistan has a long history of coming up with accountability systems that were put in place to curtail corruption. Both Gen Ayub Khan and Gen Yahya Khan fired scores of civil servants to pacify the citizenry when corruption became a serious issue. This was an ex post way of dealing with the problem; to take action once the crime was committed. The first Nawaz Sharif administration set up an elaborate system of accountability. This was the ex ante approach, to address the problem before it became one.

The Sharif system was massively tinkered with by his successors and was scrapped by Gen Pervez Musharraf. The military government then went on to institute a system of its own, setting up elaborate investigative procedures as well as accountability courts for trying the cases investigated by the National Accountability Bureau.

Eventually, as is well known, the NAB process itself was corrupted and used for political purposes. The lesson to be drawn from this experience is that continuity of approach is vital. A jerky response to the problem does not create enough confidence on the part of the citizens that the system works to their advantage.

The Shaukat Tarin task force does not have to cover any new ground in pointing the government towards adopting the right set of solutions. Instead, it needs to watch over the implementation of the proposals it would be putting out. The proposals should be directed towards achieving three objectives. The system of compensation has to be drastically revised as should the systems of hiring and firing of people in government service, including the corporate sector controlled by the state.

Sound proposals were made by the commissions headed by Ishrat Husain and Moeen Afzal in this context. These need to be implemented. Along with better compensation should come accountability and that should be embedded in the legal system. No changes should be allowed once the system is in place. This can only happen if there is a broad political consensus behind its creation. Finally, while compensation for providing services should be increased so should the cost of being corrupt. Only then will the calculus change in favour of cleaner governance.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]Obama in China[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B]By Shahid Javed Burki
Tuesday, 01 Dec, 2009[/B]

[CENTER][B][I]By moving to grant China an equal status, Barack Obama moved light years away from the approach adopted by his predecessor President George W. Bush.[/I][/B][/CENTER]


IF there were any doubts that the global economic and political order was being reshaped they were set aside by the outcome of President Barack Obama’s recently concluded threeday visit to China.
That was the high point of the nineday trip to Asia. It has great significance in terms of charting a new course for American diplomacy not only in Asia but in the world.

By moving to grant China an equal status, President Obama moved light years away from the approach adopted by President George W. Bush, his predecessor. Under Bush, the United States proclaimed its intention to remain the world’s sole superpower, declaring formally that it would resist any effort by any other country to claim an equal status. That course was abandoned by the new American president.

President Obama invited Beijing to join Washington within a G2 configuration — it was never called that in official or other pronouncements but the meaning was clear — that would take the world towards peace and greater pros perity. According to Geoff Dyer and Edward Luce of the Financial Times, who have watched the evolution of AmericaChina relations for years, this signals a shift in America’s “specific approach to China — arguably the first time Washington has acknowledged an equal or near equal partner since the dying days of the Cold War. Perhaps counterinstitutively for a candidate who inspired so much youthful idealism on the campaign trail, Mr Obama’s extended hand of friendship to China also ushers in a new era of realist diplomacy in Washington”.

What was the Chinese response to this initiative? How will it be viewed in the United States? What mechanisms will be used to move forward this relationship? How will some of the other power centres in the world react to this reconfiguration in world politics? The Chinese, ever cautious, had been preparing for the time when their arrival on the stage of international politics and economics would be taken seriously by other powerful states.

The discussion about China’s new role starts with Deng Xiaoping’s 1989 slogan “hide the brightness and nourish obscurity”. The highly pragmatic Deng wanted China to concentrate on developing its economy without inviting a great deal of attention from its competitors. He had given his country about 50 years to develop an economy that would begin to have a large presence in the world. This happened sooner than he had envisioned. While obscuring its intention, Deng promised that the country would “accomplish some things” by adding this phrase to his edict. This year the Chinese added the word ‘actively’, to the old slogan, meaning they were prepared to actively achieve something.

A question has been asked at this point in China’s evolving relationship with the United States: whether the country is ready to partner with the Americans in the context of what is being called a G2 arrangement. This is an old relationship; it was mostly based on trade. The first merchant vessel to sail from New York to Canton in 1784 was on a tea buying voyage.

For centuries the Chinese admired America and what it had achieved in a relatively short period of time. But the American model now seems to the Chinese to have limitations. According to Simon Schama, an old China hand, “the secret truth is that the Chinese have not yet become accustomed to being the strong party in this relationship. The communist oligarchs who have made eyes at the American model for so long can hardly bear to see it as it is: lying in the dust, reduced to just another broken model, no more attractive than the dim and dusty memory of Karl Marx”.

While the Chinese were moving forward cautiously in establishing themselves as the joint leaders of the international community, the Americans moved in that direction briskly. Since Washington’s move meant reducing its stature in global politics and economics, it was not received with much enthusiasm by various segments of the American population. There were loud criticisms of the way President Obama handled himself in Asia, in particular in China.

“The trip was a template for rising American anxieties about the rising Asian power,” wrote The New York Times in an editorial assessing President Obama’s China trip. “President Obama went into his meetings with President Hu Jintao with a weaker hand than most recent American leaders — and it showed. He is still trying to restore the country’s moral authority and a battered economy dependent on Chinese lending. Yet the United States needs China’s cooperation in important and difficult problems, including stabilising the global financial system, curbing global warming, persuading North Korea to give up its nuclear programme and preventing Iran from building any nuclear weapons.” How did President Obama play this difficult hand? The New York Times, reflecting the views of the liberal community in the United States, came up with a mixed review. “President Obama was elected in part because he promised a more cooperative and pragmatic leadership in world affairs. The measure of the success (or failure) of his approach won’t be known for months, and we hope it bears fruit. But the American president must be willing to stand up to Beijing in defence of core American interests and values.” There were concerns in some places outside America that President Obama was perhaps moving too quickly to bring Beijing into a G2 relationship with Washington. This was especially the case with India that had begun to expect it would have a major role in the reconfigured world order.

Many influential Indians had convinced themselves that their model based on democracy was more durable than that of China directed from the top by a small coterie of unelected leaders. They saw China’s remarkable growth as a flash in the pan while there’s was sustainable. India’s hurt pride was assuaged to some extent by the warmth with which Prime Minster Manmohan Singh was received on a state visit to Washington. This was the first state visit for the Obama presidency and the president heaped a great deal of praise on the Indian leader as well as on his country.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]The Dubai default [/FONT][/SIZE][/COLOR][/CENTER][/U][/B]


[B][I][CENTER]What would be the impact of the Dubai meltdown on Pakistan? For several years now Pakistan has drawn closer to the Gulf States as sources of fi- nance. That happened as other financial and capi- tal markets became increasingly shy of putting money into Pakistan. In 2008, the UAE provided 20 per cent of the total foreign direct investment that came to Pakistan. Dubai had agreed to participate actively in the financing of several mega projects launched by the Musharraf government. Their total cost was estimated at $36 billion.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Monday, 07 Dec, 2009[/B]

FOR a number of years Dubai’s model of economic development seemed to be a spectacular success.
Among its main elements was competition among the several companies owned by the state; the decision by the managers of these companies to invest in the service sector, thus leap-frogging into the most dynamic part of the global economy; to leverage these investments by borrowing abroad, often using the sukuk, an Islamic bond, for this purpose; and the belief that, in case of financial difficulties, Abu Dhabi, the emirate’s oil rich neighbour, would come to its rescue.

The economy was centrally managed with the full involvement of Sheikh Muhammad bin Rashid alMaktoun, the head of Dubai state. The sheikh had been personally involved in encouraging the development of many projects in Dubai and was convinced that by turning the emirate into an airline hub, a tourist attraction and an educational and health centre for the region, he would give a non-oil base to the economy.

Initially, there was concentration on developing housing and office space in Dubai. However, the economy came under considerable strain when real estate prices fell by 40 per cent, repeating the pattern seen in other highly leveraged world economies. This put a tremendous strain on the highly leveraged Dubai firms.

The announcement on November 26 that Dubai World, the emirate’s flagship company, will default on its $3.5 billion bond due for maturity on December 14, 2009 shook the world of finance. The state owned company was struggling under the burden of $59 billion in liabilities. Dubai’s total debt was estimated at $80 billion, equal to its gross domestic product. The unexpected action by the government sent shivers down the spines of the international financial and capital markets. It will also have profound consequences for Pakistan, a country that had become increas ingly integrated with the economies of the Gulf states. I will get to the likely impact on Pakistan later in this article.

In announcing the decision, Dubai government did not use the word “default”; it called it “debt standstill” and asked that the creditors they will need to accept a six months moratorium on the payments on the bond. In the world of finance a failure to make payments on time is called default. It is no wonder that the action by Dubai had such an impact on the global markets.

According to one analyst, “the restructuring of Dubai World’s debt has been in the works for some time, but investors had grown confident that the Islamic bond, or sukuk, guaranteed by the stateowned company would be treated separately and would be paid off to maintain confidence in the trade and finance-oriented economy.” It appeared that the government was working to ward off the possibility of default. The department of finance had issued $5 billion bonds from two Abu Dhabi-controlled banks. But the government made clear that the resources raised would not be used to pay the Nakheel bond. That may have been a requirement of the Abu Dhabi government, the oil rich and more conservatively managed sister state of Dubai.

These bond issues were one-half of the second tranche of $10 billion that the Dubai government is raising after borrowing $10 billion from the United Arab Emirates central bank in February. Apparently officials in Abu Dhabi – the country that is acting as the lender of last resort for its financially troubled neighbour – were not aware of the default decision. There was considerable consternation in Abu Dhabi’s official finan cial circles.

According to one London based fund manager, “it’s good that Abu Dhabi isn’t going to support every white elephant in Dubai. It’s a hard but a correct decision. It would have been irrational to write the cheque for Nakheel.” Abu Dhabi sits on nine per cent of the world’s oil reserves and manages the world’s largest sovereign wealth fund but was not prepared to finance its sister state’s extravagant ways.

Sheikh Ahmed bin Saeed Al Maktoum, chairman of the Supreme Fiscal Committee, said: “While the government understands the concerns of the market and the creditors, it had to intervene because of the need to take decisive action to address its particular debt burden.” He said that the payment moratorium was needed to restructure Dubai World and place its business on a sound footing. The main problem with the company was the aggressive play by Nakheel, a property company, a subsidiary of Dubai World. The cost of insuring Dubai’s debt jumped to five per cent a year.

Restructuring of Dubai world would involve considerable pain, including the scaling down of some of the expensive properties owned by the subsidiary companies of Dubai World as well as the sale of some of the properties acquired in some of the world’s more prestigious addresses.

Istithmar, the investment arm of Dubai World, owned a number of prime properties around the world including some in London and New York. These will probably be offered for sale as a part of the restructuring of the parent company. More problematic will be the properties Nakheel has developed in Dubai including Palm Jumeirah, the first of three artificial islands off the Dubai coast and the acquisition of Q2 luxury liner which will be anchored outside Dubai and become a hotel. The liner has as yet to make it to Dubai; it has been diverted to Cape Town and will serve as a hotel for the World Cup football contest in that city in 2010.

What would be the impact of the Dubai meltdown on Pakistan? For several years now Pakistan has drawn closer to the Gulf States as sources of finance. That happened as other financial and capital markets became increasingly shy of putting money into Pakistan. The UAE investment community was less shy and was prepared to bring finance into Pakistan. This was particularly the case in the sectors in which the Gulf States had gained some experience. These included banking and real estate.

Heavy investments were made in these two sectors of the Pakistani economy by the public and private companies in the Dubai and Abu Dhabi. The UAE investment in Pakistan is estimated at $13.1 billion. In 2008, the UAE provided 20 per cent of the total foreign direct investment that came to Pakistan. Dubai had agreed to participate actively in the financing of several mega projects launched by the Musharraf government. Their total cost was estimated at $36 billion.

Shunned by western airlines, a number of Gulf carriers had aggressively penetrated the Pakistani market. The Dubai problem, however, will make the investors from the Gulf more weary of taking risks in a country faced with numerous crises including a security situation that is keeping away the Westerners from the country. In fact, I had come to believe that Pakistan could play the role of a bridge between the oilrich countries of the Middle East and China to its east and India to its south. Such ambitions may to be put on hold while Dubai comes to terms with its new economic situation.

[B][U][CENTER][COLOR="DarkGreen"][SIZE="5"][FONT="Georgia"]An important factor[/FONT][/SIZE][/COLOR][/CENTER][/U][/B]

[B][I][CENTER]The response in Pakistan to the country’s inclusion in the refined Afghan strategy was mixed. There is no doubt that as the new strategy unfolds, Pakistan will be in the middle of things.[/CENTER][/I][/B]

[B]By Shahid Javed Burki
Tuesday, 09 Dec, 2009[/B]

THE decision to send in more American troops to Afghanistan was a long time coming. In his recent speech US President Barack Obama walked a fine line between the two positions advocated by his advisers: some wanted to pursue what has come to be called the counter-insurgency approach while others advocated a counter-terrorism strategy.
The first is aimed at using considerable amount of force to overcome the insurgency while undertaking intensive development of the liberated terrain. The second is aimed at concentrating firepower on the strongholds from where the terrorists are launching their attacks. Areas in Pakistan are not to be spared since US intelligence had concluded that the insurgents had made these not only their sanctuaries but also their training grounds.

The military did not get all it wanted but it got more than President Obama’s most ardent supporters would have wanted him to provide. The long process of deliberation that resulted in the decision to send 30,000 additional soldiers — a process the president’s detractors called “dithering” — resulted in giving the commanders additional troops so that they could concentrate their effort in the south and southeast, in the provinces that border Pakistan.

President Obama told his audience that it was neither his intention to go over the distraction of the war in Iraq from America’s mission in Afghanistan nor to repeat the “wrenching debate over the Iraq war”. Instead he wished to detail why America needed to recommit itself to winning the struggle against extremism. He wanted to speak to the nation “about our effort in Afghanistan — the nature of our commitment there, the scope of our interests, and the strategy that my administration will pursue to bring this war to a successful conclusion”.

He acknowledged that mistakes had been made under the watch of his predecessor although he did not refer to them as mistakes or directly referred to the policies pursued by President George W. Bush. “But while we’ve ach ieved hard-earned milestones in Iraq, the situation in Afghanistan has deteriorated. After escaping across the border into Pakistan in 2001 and 2002, Al Qaeda’s leadership established a safe haven there.” Pakistan, in other words, had become an important factor in the Afghan equation.

President Obama told the American nation — and the world — that while he planned to send an additional 30,000 troops “this burden is not ours alone to bear. This is not just America’s war.” Nato forces were likely to increase to 40,000. The additional American troops would be moved quickly but it would take six to eight months to complete the deployment. By late July or early August 2010, the full American force would be present on the ground. This would be the peak of the fighting season in the country. Most of the American troops would be concentrated in the provinces bordering Pakistan.

What purpose was to be served by this buildup in the size of the American contingent? “Our overarching goal remains the same: to disrupt, dismantle and defeat Al Qaeda in Afghanistan and Pakistan, and to prevent its capacity to threaten America and our allies in the future.” The new mission will last at its peak for a period of 18 months after which “our troops will begin to come home. These are the resources that we need to seize the initiative, while building the Afghan capacity that can allow for a responsible transition of our forces out of Afghanistan”.

President Obama recognised that nothing would succeed in Afghanistan unless Pakistan was helped to stabilise its economy and equipped to handle insurgency. “... [W]e will act with the full recognition that our success in Afghanistan is inextricably linked to our partnership with Pakistan. We’re in Afghanistan to prevent a cancer from spreading through that country. But this same cancer has also taken root in the border region of Pakistan. That’s why we need a strategy that works on both sides of the region. In the past, there have been those in Pakistan who’ve argued that the struggle against extremism is not their fight, and that Pakistan is better off doing little or seeking accommodation with those who use violence. But in recent years, as innocents have been killed from Karachi to Islamabad, it has become clear that it is the Pakistani people who are the most endangered by extremism. Public opinion has turned. The Pakistani army has waged an offensive in Swat and South Waziristan. And there is no doubt that the United States and Pakistan share a common enemy.” This time around, President Obama promised an enduring relationship with Pakistan that would go beyond contacts with the military and the intelligence services. He had already signed into law the Kerry-Lugar bill that promised Pakistan $1.5bn of economic assistance a year spread over a period of at least five — possibly 10 — years.

“In the past, we too often defined our relationship with Pakistan narrowly.

Those days are over. Moving forward, we are committed to a partnership with Pakistan that is built on a foundation of mutual interest, mutual respect and mutual trust. We will strengthen Pakistan’s capacity to target those groups that threaten our countries, and have made it clear that we cannot tolerate a safe haven for terrorists whose location is known and whose intentions are clear. America is also providing substantial resources to support Pakistan’s democracy and development. We are the largest international supporter for those Pakistanis displaced by the fighting. And going forward, the Pakistan people must know America will remain a strong supporter of Pakistan’s security and prosperity long after the guns have fallen silent, so that the great potential of its people will be unleashed.” The response in Pakistan to the country’s inclusion in the refined Afghan strategy was mixed. Prime Minister Yousuf Raza Gilani worried about the movement of the Afghan insurgents into Balochistan as the pressure on Afghanistan’s province of Helmand increased. He wanted some assurance that the American troops will block these escape routes. There is no doubt that as the new strategy unfolds, Pakistan will be in the middle of things to come. ¦