Obama’s Pakistan plan

By Shahid Javed Burki
Tuesday, 07 Apr, 2009

WITH his March 27 address televised live from the White House as Secretaries Hillary Clinton and Robert Gates stood by his side, President Barack Obama embarked on America’s fourth venture in Pakistan.

The previous three had not ended happily. This time the Americans may have greater success if they are careful about learning some lessons from their previous engagements.

America’s first deep involvement in Pakistan was in the early 1960s. It was designed to curb the advance of communism into the heartland of Asia. Pakistan signed on to become a link in the chain that the administration of President Dwight Eisenhower was throwing around the communist world. According to today’s rates some $5bn flowed into Pakistan from the US in the 1960-65 period. It included both military assistance and economic aid.

One of the monuments to that engagement is the large cantonment at Kharian built to American specifications. The assumption was that if the American troops needed to move into Pakistan they would have a place from where they could operate. However, this association between the two countries came to an abrupt end when Pakistan went to war with India in September 1965. The US refused to side with its ally and significantly scaled down its involvement in Pakistan. The second engagement came in the 1980s when Pakistan was recruited as an active partner in America’s campaign to dislodge the Soviet Union from neighbouring Afghanistan. This time the American support was directed at achieving three goals: energising and equipping the Mujahideen to fight the Soviets, helping the Pakistani military improve its operational capability just in case the Soviets extended their reach to Pakistan, and providing some support to the economy.

About $12bn of American money, again in today’s prices, flowed into Pakistan. The American effort ended abruptly once the Soviet Union pulled out of Afghanistan.

Washington’s mission had been accomplished and it did not need Pakistan any more. The third American effort was launched after 9/11. It was meant to secure Pakistan’s cooperation to remove the Taliban and the Al Qaeda from Afghanistan. About $12bn worth of assistance was provided to Islamabad over the years between 2000 and 2007.

Although the military was the main beneficiary, Washington helped Islamabad ease its external debt burden. Pakistan’s debt to the US was written off and other western capitals were encouraged to follow suit. These measures created fiscal space for the central government in Pakistan which allowed it to pump money into the stagnating economy.

This engagement has not ended. In fact, it has morphed into a different kind of involvement.

This time President Obama has promised to be involved in Pakistan’s affairs in a different way. The objectives of engagement spelled out by him on March 27 are limited in scope but extended in time. What limits the involvement is the need to ensure that Pakistan’s territory, in particular its wild west, is not used by Islamic extremists of various hues to launch attacks on America and its assets in different parts of the world.

What is likely to be an involvement over an extended period of time is the goal of modernising the Pakistani society, polity and economy.

This will help America with the world of Islam since Pakistan is the second largest Muslim country in the world. Not only that, it occupies an exceptionally delicate geographic space, one that is very important for America’s strategic interests. Obama did not call his enterprise nation-building since that term was thoroughly discredited by President George W. Bush’s unfortunate and ill-advised Iraq adventure.

America’s planned association with Pakistan, this time under the direction of President Obama, comes with the promise of a steady flow of a decent amount of money. As much as $1.5bn a year is being promised and an act of Congress will ensure that it will not be suddenly halted. The initial promise is for five years.

This amount is of about the same order as provided in the three previous periods of American involvement. But there are differences. This time the recipient of aid will be a democratically elected government and the main purpose will be sustained economic and social development. That said, a number of questions await answers. Among them: how will this money be used, who will use it, how will its use be monitored, what institutional mechanisms will be deployed to ensure its effective use?

Pakistan has a good record of using foreign money for implementing large projects. The most impressive example of this are the Indus Water Replacement works executed over a period of 10 years at a cost of $10bn in current dollars. It has, however, a poor record of using external funds for social development and also for bringing about long-postponed structural changes in the economy.

The most obvious example of the failure of a multi-billion dollar soft programme is the World Bank’s Social Action Programme, the SAP, which was expected to significantly increase enrolment of children in primary schools, provide basic healthcare to the poor, and socially and economically empower women.

SAP failed almost totally. The main reason was that those who designed the programme failed to strengthen the institutions that were to bring about these changes. In other words, Pakistan seems to be able to handle ‘hard’ projects but not ‘soft’ programmes. But if President Obama’s speech is an indication of the direction the new American programme is likely to take, it is the soft side of development that will receive very high priority.

The theory behind this approach is simple; it is also correct. It has now been concluded in Washington that the use of force alone will not eliminate the danger posed by extremism in places such as Pakistan. The destructive ideology pursued by a segment of the population is attractive for the youth who have lost faith in their future. This has happened because they have not benefited from the economic growth that has taken place since most of its rewards were captured by a few.

In recent years, interpersonal and inter-regional disparities have widened considerably creating an enormous amount of resentment among those who have been left behind and also in the regions of the country that have done less well. It is these deprived people that have taken up the cause of Islamic extremism and they are most active in the more backward regions of the country.

For the new American effort to succeed in Pakistan and for President Obama to achieve the objectives, the ground will have to be carefully prepared before money starts flowing in. How this should be done is the subject I will turn to next week.

The meaning of the G20 deal for Pakistan

Since capital-short Pakistan has to repeatedly go to the IMF to be rescued, it has been subjected to the Washington Consensus conditions. Some of these conditions were right. Some others did damage. Foremost among those that hurt the economy were the emphasis on adjustment over growth, opening the capital markets and not putting emphasis on reg- ulating the private sector. After the London agreement to take ideology out of economic advice, countries such as Pakistan should be able to craft their own policy framework.

By Shahid Javed Burki
Monday, April 13, 2009

WAS the ability of the G20 countries to reach an agreement at their second summit devoted to addressing the problem created by the current economic downturn highly significant? Or was it just a papering over of the differences among the leaders representing the world’s largest economies?

The G20 had met in Washington in November soon after the election of Barak Obama as the president of the United States. The President-elect did not attend the meeting. For that reason alone, the summit was a holding operation, waiting for Obama to settle down in his office. Only then could the world leaders seek to address the problems associated with the global economic downturn.

There was considerable apprehension before the leaders sat down for deliberations in London on April 2 that the summit may not produce significant results. There were great differences in the approaches adopted in particular by the United States and continental Europe about the way crisis was best handled. These could produce, if not a deadlock, an agreement that was not worth very much.

Had that happened it would have been devastating for the markets in the large countries and that, in turn, would have deepened the recession. The world was spared such an outcome. The communiqué signed by the summiteers produced a euphoric market response. Almost all major stock indices around the globe registered major advances.

However, the agreement came short on one important issue: the need for concerted action by the large countries to stimulate their economies. The United States, under Obama, had taken a major step in that di rection by getting Congress to agree to a large stimulus package. The amount of money that was to be pumped into the economy was close to $800 billion following on $750 billion Washington had already earmarked for helping the ailing banking and automobile industries.

Even before the Americans moved, the Chinese had announced a large stimulus package of their own amounting to nearly $600 billion. The Europeans, how ever, declined to take this route, concerned that spending of such amounts would result in inflation. The European resistance was led by Germany which had deep memories of hyper-inflation that had contributed to the break out of the Second World War.

The Europeans wanted the world’s large powers to take a long view.They wanted them to regulate their financial sectors more meaningfully. They not only wanted the strengthening of domestic regulatory mechanisms, they also wanted an international institutional arrangement to keep watch over all major financial systems and ring the alarm bells if there was apprehension that in some part of the global system there were developments that could threaten world financial stability.

The focus on the regulatory systems clearly pointed a finger at the United States that had followed the strategy of allowing the private sector enormous free dom to operate. This was done in the belief that “selfregulation” was much better than regulation by state agencies, in particular in the non-banking sector. If some institutions in this part of the system went off track they will be pulled back by the forces of the market place. This turned out to be a naïve belief and the entire US financial system got caught up in greed and unsound practices.

The Europeans were keen that such behaviour should be caught early before it infected other parts of the globe as had happened this time around.There was an underlying philosophical difference in the two approaches. The continental Europeans wanted to bury for good what they called “Anglo-Saxon capitalism”. The United States did not think that the time had come to write an obituary of the system that had bought it immense prosperity.

In the end a compromise was reached. The United States agreed to strengthen its own system by bringing in non-banking institutions into the regulatory framework. It also agreed to be exceptionally vigilant about the workings of very large institutions that could not be allowed to fail. Citigroup and AIG were two examples of such institutions that had already received hundreds of billions of dollars of government money but were still struggling. Their failure would reverberate all over the world.

What does the G20 agreement mean for a country in Pakistan’s situation? Although Pakistan was not present at the London meeting – it is unfortunately one of the few large emerging economies that have not made it to the list of G20 and thus has no influence over its deliberations– it should closely watch how this group evolves its thinking over time and how it begins to reshape the global economic and financial structures.

Three developments at London hold significance for Pakistan.The first is the large increase in the resources available to the IMF. The Fund was given most of the liquidity that is to be pumped into the global economy. It will receive $750 billion of the $1.1 trillion the group promised to provide for ending the global financial crisis. It will come in two forms.

Large countries will inject new money into the Fund so that it continues to mount the kind of rescue operations from which Pakistan is already benefiting. The European Union, Japan, and the United States will provide $100 billion each while China will give another $40 billion. The Fund will also sell some of its large gold holdings to raise additional amount. In addition the Fund will increase its share capital which will be available to all countries according to the quota they hold at the institution.

The second important development from the perspective of the emerging world is the conclusion reached by the London conference that The Washington Consensus will be buried. This Consensus, developed by the institutions located in the American capital, has guided the World Bank and the IMF in their endeavors in the developing world.

Since capital short Pakistan has to repeatedly go to the Fund to be rescued, it has been subjected to the Consensus conditions. Some of these conditions such as the need to promote exports by keeping an appropriate exchange rate and to reduce fiscal deficits to the level where they did not cause inflation were right.

Some others did damage. Foremost among those that hurt the economy were the emphasis on adjustment over growth, opening the capital markets and not putting emphasis on regulating the private sector. After the London agreement to take ideology out of economic advice, countries such as Pakistan should be able to craft their own policy frameworks.

The third London decision of significance for Pakistan is to provide trade finance where the inability to access credit has affected trade. Pakistan is one of those countries. The G20 decided to provide $250 billion for this purpose. It is yet not clear what will be the conduit for this infusion of capital.

In sum, it can be said that the London summit produced useful results for Pakistan. However, for the country to benefit from London’s outcome, it will have to look carefully at the decisions taken by the G20 and draw up a plan of action to gain access to the additional flows of capital that will soon become available to Pakistan and other emerging markets that are under considerable economic stress.

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Obama must think again

By Shahid Javed Burki
Tuesday, 14 Apr, 2009

I CONCLUDED the article last week with a question: how can the American administration headed by President Barack Obama serve America’s strategic interests in the area where Pakistan is located while helping Pakistan to achieve a high rate of economic growth that reaches all segments of the population and all regimes of the country?

The new approach adopted by Washington has already moved in the right direction by ensuring Islamabad and the people of Pakistan that its engagement with them will be for a long time. It has been promised that the United States will not fold up its tent and move on once its immediate interests have been achieved. It will remain engaged apparently for as long as Pakistan remains vulnerable to extremism. That may indeed be for a long time.

However, before Washington begins to disburse a great deal of money to Pakistan it needs to develop a theory that links the absence of the right kind of economic and social progress to the rise of extremism. And before it develops such a theory it needs to acquaint itself better with Pakistan’s history. It should do the latter by asking a simple question: what has happened in Pakistan that has given the opportunity to extremist elements in the society to expand their influence? To answer this question we need to go back to the beginning. Pakistan was created as a state in which the Muslim population of British India would be able to live according to its own social norms. These were deemed to be different from those to which the Hindus subscribed. The Muslims needed political space of their own in which they could define their social and economic priorities. This space was created but repeatedly violated by elites that dominated the political system. Even though the composition of the elites changed over time with some surrender of political authority by the landed interests to those in the urban areas, the political system did not become representative. The common citizen was excluded.

Those who were near the bottom of the income-distribution scale turned to various Islamic ideologies in the belief that these would be able to change the system and ultimately satisfy their unmet needs. There was a certain amount of legitimacy in this move: after all the founders of the state of Pakistan had used the political idiom of Islam to draw popular support for their movement.

In other words, what connects the rise of extremism in Pakistan to the policies pursued by the state is the absence of institutions that give a voice to the people and the disregard by rulers of the people’s economic and social needs. The state’s failure has been across a number of fronts, in particular the legal and judicial fronts, leading to increasing frustration as the legal system had failed to serve them and the judiciary became corrupt and was unable to deliver timely justice.

It is not surprising that two popular movements won the support of the people. There was broad support for the lawyers’ movement to restore the judges fired by Gen Pervez Musharraf. And there was limited — in geographic terms — appeal for the move by one segment of the population to redefine the local legal system according to what were viewed as the principles of Islam. That happened in Swat.

The first priority of any economic and social reform programme, therefore, should be institutional restructuring and development along a wide front. A significant part of the effort should be directed at achieving at least five objectives. First, the political system must be strengthened so that the people’s view of it changes. At this time the citizenry has little confidence that its representatives in the national and provincial governments will work for the interests of the constituents. The legislators must legislate for the benefit of their people and not pursue their own interests.

Second, the legal and judicial systems must be reformed so that speedy justice is delivered by courts at various levels. This would need the modernisation of the system, much better remuneration for officers in the system and greater authority for an autonomous set-up that can watch over their performance.

Third, the state must have the ability to develop strategies for economic growth and social development that will serve the people better. This should see strengthening the planning process that once worked well.

Fourth, the government has to come closer to the people. This would mean the federal government devolving a significant amount of its current authority to the provinces and for the provinces to hand over a significant amount of economic and financial authority to the institutions of local government.

Fifth, a more durable and apolitical system of accountability needs to be established that can begin to cleanse the political and administrative structures of corruption.

A significant amount of American money is likely to be directed at social development, to the education and health sectors and towards improving the situation of women in society. This is good and commendable. But social development should not be interpreted in a narrow sense; its aim should mean more than providing primary education and basic healthcare to all citizens. It should include skill development. It should make it possible for the country’s young population to get employment that fetches reasonable returns and holds promise for rewards in the future.

For that to happen the state will need to work closely with the private sector that is increasingly engaged with the education and health sectors. A plan for such cooperation should be a condition of American support to the country.

For economic development to work for the people, the state needs to create an environment in which sectors that can provide employment to the rapidly increasing work force can grow, develop and modernise. The sectors that can serve this purpose include high-value agriculture and livestock, small- and medium-scale engineering, urban and inter-city transport, information and communication technologies and domestic commerce.

In other words, for America to get involved in developing Pakistan and saving it from the clutches of extremism Washington will need to factor in not just the quantity of money it can give to the country. It also needs to provide quality advice on how that money can and should be used. I have argued before that there is a moral hazard in coming to Pakistan’s help. The country has become used to being pulled back from the brink by its foreign friends. This time the friends should ask for a serious Pakistani effort.

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Evolving strategies for a new phase of capitalism

By Shahid Javed Burki
Monday, April 20, 2009

SOME crises produce hysteria which leads to inappropriate public responses. Some clear the mind and result in fundamental changes in thinking about critical issues. The Great Depression of the 1930s produced both responses.
The same is true of the financial crisis that began in the United States last summer and has affected all countries of the world, including Pakistan. It is leading to some serious rethinking about the meaning of capitalism, globalisation and the role of the state.

The new ideas and concepts being developed will have enormous consequences for all nations, including emerging economies. It is especially true for a country such as Pakistan which, because of the inability to generate domestic resources to invest in the economy, continues to rely on external finance.

A few days ago after a meeting with the United States’ Senator John Kerry, Prime Minister Raza Shah Gilani said that Pakistan did not want conditions attached to the provision of aid. His reference presumably was to political but not to economic conditions that may accompany the flow of capital to his country.

The community of potential donors that have offered to aid Pakistan would want to see that the money they provide is handled properly; that it gets used within a policy framework that can and should contribute to economic stability and progress. It is in this context that the rethinking on the meaning of capitalism gets to be relevant for Pakistan.

The last occasion when Pakistan had to factor in external views about appropriate domestic economic management and the role of the state was in the early 2000s. At that time – as is the case now – Pakistan had gone to the IMF to save it from a severe economic downturn, even the possibility of default on external obligations. The Fund came to the help of Pakistan but attached a number of conditions to the use of its money.

At that time the policy framework general ly referred to as The Washington Consensus was all the rage in development circles. It called for opening the economy, curtailing the role of state and putting the private sector on the commanding heights of the economy. Pakistan accepted the offered advice and brought about a major change in the way it looked at these aspects of economic management.

The impact of these changes in public policy was to initially slow down the rate of economic growth and allow almost unconstrained role to the private sector in the sphere of economics. Later when the country came out of the Fund’s programme and fiscal and monetary policies were eased, the private sector allocated the savings available to it from the banking sector or from abroad, into the sectors that produced the highest rates of return for it. Real estate, especially luxury housing and shopping malls; telecommunications, in particular mobile phones; and automobiles, both passenger cars and motorcycles, became the favoured sectors.

All three grew at very high rates and helped the economy to pick up the rate of increase in GDP. But the sectors did not generate a significant amount of employment. Consequently, while the GDP increased at an impressive rate in 2003-07, the impact on the incidence of poverty and narrowing of income disparities was insignificant.

Given the way the thinking on economic management is evolving since the financial crisis slowed the global economy, Pakistan will undoubtedly be asked to follow a different approach. What is this change in thinking following the burial of The Washington Consensus announced by Gordon Brown at the conclusion of the meeting of G20? How will this new thinking affect the way the Pakistani policy makers manage the domestic economy?

In answering these two questions, I will also reflect on what I heard from the representatives of the private sector during my most recent visit to Pakistan.

In late February and early April I chaired two sessions of the Planning Commission’s Task Force on Private Sector Development. This was established in December last year with me as its chairman. Its mandate is to advise the government and have it factor in the thinking of the private sector in the making of public policy with reference to reviving economic growth and modernising the economy.

The current economic and financial crisis has led to rethinking covering at least three areas. First, there is a consensus that the neo-liberalism of the Reagan-Thatcher era was not an appropriate policy to be pushed. People don’t always behave rationally, especially if they are using borrowed funds. This can lead to excessive speculation since prices don’t always reflect the risks that are being taken to producing goods and services and doing transactions in them.

Second, unchecked there is a tendency towards monopolistic behaviour as the firms with good contacts with the policy makers or with built-in efficiencies that cannot be matched by rivals, rapidly grow in size. These firms capture a very large share of the market. For instance, in Britain only four grocery chains control 70 per cent of the market, leaving very little space to thousands of small operators.The government should be extremely wary of the strains that can be put the economy if a large firm is considered to have become too large to fail.

Third, globalisation of finance means that domestic regulators cannot always control the operations of firms working in the market place. Domestic regulation has to be supported by an international regulatory mechanism.

The major public policy consequence of this new thinking is to allow a much larger role to the state in managing and guiding the economy than was envisaged by The Washington Consensus. The state must properly regulate the economy by ensuring that there is no excessive risk taking, by preventing the development of monopolies, easing the entry and exit of firms, and protecting the citizenry from the predatory behaviour of enterprises.

The Washington Consensus advocated a minimal role for the state; the new consensus lifts the state’s role towards a much higher profile. The challenge before Islamabad is to redefine the role of the government and make it more effective as well as prominent. How should this be done? This is where the work of the Planning Commission’s Task Force on Private Sector Development enters the picture.

In the discussions we have had thus far, the private sector representatives have made a number of suggestions about the supportive role of the state. Of these the following three are particularly important.

One, those representing large enterprises feel that they confront an exceptionally uneven playing field in the domestic market place. Small operators are able to keep themselves out of the tax net, can avoid labour and health regulations and don’t have to deal with repeated visits by various regulators. As such small businesses can keep their costs low.

Second, they are of the view that their work is inhibited by the absence of appropriate skills in the labour market. Skill development is an important matter but since the government does not have the resources to meet business men’s needs, what is required is a public-private sector partnership. However, for the private sector to invest in skill development, it needs tax incentives.

Third, they are of the view that Pakistan’s unique geographic situation has provided the businesses with opportunities but has also posed problems for them. Economic relations with Afghanistan, China and India are particularly important but need to be carefully an alysed by the government working with the private sector.

Afghan transit trade dumps a lot of dutyfree consumer goods in the Pakistani economy; cheap imports from China are hurting the domestic industry and slow Indian response to Pakistan’s initiatives are not opening up that country’s large market to Pakistan’s producers.

In sum, looking at Pakistan’s economic situation in the context of redefined capitalism and the country’s own somewhat unique circumstances is now a matter of urgent government attention. We will provide an input into these by taking up these matters in the deliberations of Task Force on the Private Sector Development.

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The Indian election

By Shahid Javed Burki
Tuesday, 21 Apr, 2009


EVER since economists began to factor in institutional development as a determinant of economic growth and modernisation, they have begun to emphasise the many links between politics and economics.

The economists’ definition of institutions covers a much wider field than commonly believed. Following the work done by Douglass North, the Nobel Prize-winning economist, institutions are seen to mean more than organisations. They also include cultural and social norms and how people interact with one another and also with the organs of the state. It is by looking at the contribution which broadly defined institutions make towards economic and social change that economics and politics begin to overlap.

According to conventional wisdom, India has succeeded in developing its institutional base to the point where it helps rather than hinders its economic and social progress. After more than six decades of allowing institutions to develop to meet the demands of its citizenry, it has reached the stage where it appears that the political, legal and judicial systems have begun to work for the people. This cannot be said either for Bangladesh and Pakistan, countries that together with India constituted the British India empire.

Institutional and political progress in both Pakistan and Bangladesh has been patchy. Often the two countries have taken a step forward only to fall back by two steps. In both countries the military has been a prominent presence in the political landscape. It was sometimes invited by the people through street agitation to stop the countries from plunging into chaos as a consequence of the politicians’ inability to resolve their differences by using available institutions. Since Pakistan has a longer history than Bangladesh, military interventions were more frequent there than in the latter.

Why did India succeed while its two neighbours seemed to have failed in developing a durable political structure and a strong institutional base supporting it? What is the probability that India will continue to make progress in this important area, providing a model its South Asian neighbours could follow? Both questions are important. The second question is important at this stage because elections in India are under way. They began on April 16 and will be conducted over a period of five weeks. The elections have already generated a fairly rich commentary in the press on their meaning for India’s future, in particular for the development of its political system.

There is a point of view gaining traction both inside and outside India that the prevailing Indian political system may not, after all, be as durable as suggested by conventional wisdom. The strains and stresses that are being brought to bear on the political structure may bring about a deep structural change that will not only affect the country’s politics but also its economy. The Indians have come to believe that they are on the verge of becoming an economic superpower. This belief has been reinforced by the way the world has looked at the country’s remarkable economic progress over the last of couple of years. But that would need a stable political system.

India has shown a remarkable ability to adapt its political institutions to the changes in the country’s social and economic conditions. The Indian constitution is easy to amend and it has frequently changed — in fact hundreds of times — to keep the country’s basic law in tune with changes in circumstances. There have also been changes in practices. Originally the Indians produced a unitary form of government in which most of the power resided with the union government operating out of New Delhi.

However, after the passing of Jawaharlal Nehru, India’s first prime minister, who governed the country for 17 years, it was realised that a commanding political figure did not exist who could run a highly centralised system of governance. Accordingly constitutional changes allowed the creation of more states in order to bring government closer to the people. At the same time the Congress party that had dominated India’s politics for more than seven decades saw its political base gradually whittled away.

This happened first because of the rise of regional parties, particularly in the country’s south, and later by the increasing influence of politics based on caste. Consequently, the Indian political scene is now littered with scores of political parties whose number increases at the time of each election. Neither of the two national parties — Congress and the BJP — is expected to get more than one-third of the 543 seats in the Lok Sabha, the lower house of the Indian parliament. For the last couple of decades, the Indian political landscape has been dominated by “coalition politics”.

There are both pros and cons to this development. The emergence of numerous regional and caste parties has provided a voice to the people, at least during election time. This is why the politics of the street has not been called upon to produce political change as is the case in both Bangladesh and Pakistan. While the multiplication of parties may have brought political stability there is a growing concern in the country that the political system, in the words of a foreign observer of the changing political scene, “is too hamstrung by its diverse parts to agree on a national vision and push through badly needed reforms”.

The elections have given the right to vote to 714 million people. But their choices are likely to further reduce the effectiveness of the political system. The campaign has been light on policy but heavy on communal and caste concerns. Varun Gandhi, a grandson of Indira Gandhi, landed in jail after being caught on tape calling for the massacre of Muslims. The fact that he was punished by the aggressively independent Election Commission and sent to jail speaks volumes for the strength of India’s political institutions.

Hindu-Muslim tension is not the only defining moment of the run-up to the elections. Some other communal fissures have also surfaced. A Sikh threw a shoe at a senior member of the cabinet to show his displeasure that Congress had given tickets to two politicians who were accused of inciting riots in 1984 after the assassination of Indira Gandhi by one of her Sikh bodyguards. The reaction to the killing of the prime minister resulted in the deaths of 2,500 people, mostly Sikhs.

In the weeks ahead, I will return to the issues brought to the surface by the elections in India since they have meaning for the rest of South Asia, in particular for Pakistan which is seeing the birth of a new political order. Pakistan has many lessons to learn from the Indian experience.

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Restructuring IMF for an expanded mandate

By Shahid Javed Burki
Friday, 27 Apr, 2009

PAKISTAN’S presence on the international financial scene will not end with the call it has made on the IMF. Nor will it end with what the finance officials have termed a successful meeting at Tokyo of the “Friends of Pakistan” group.

The world is focused on the country’s economic problems and has recognised the fact that an important way of addressing them is to provide the country with a great deal of additional finance – additional to what the Fund has already provided and what was pledged at Tokyo. As the world’s finance ministers gathered in Washington this week for the “spring meetings” of the World Bank and the IMF, they had a very full agenda. Included in it was the restructuring of the Fund. What was decided here will matter for countries such as Pakistan that will remain financially stressed for many years to come. More IMF resources could become available for Islamabad if it is is able to persuade the organisation that it has developed a strategy for development that will help all citizens. And that it has the capacity to implement such a strategy.

Bowing to the demands from large emerging markets that flexed their economic muscle at the G20 meeting held in London earlier this month, the Fund will begin the process of granting additional powers to likes of Brazil, Russia, India and China. These four countries have a nomenclature of their own – the BRICs.They will have a significantly larger presence on the economic and financial landscape compared to their collective power before the world went into a deep economic crisis. Along with South Africa, Saudi Arabia and Mexico, these seven emerging economies will have a say when countries such as Pakistan appear in the IMF court asking for financial favours.

The process of restructuring that began in London, gathered pace in Washington. When done, it will leave the institution with expanded authority to act as a global banker not just for the world’s poor countries but also for those that are rich. It will have the power to print its own money on a much bigger scale than it is permitted to do at this time. The Fund has the authority to create Special Drawing Rights (SDRs), a currency that serves an accounting rather than a transactional purpose. Some countries would like to see the SDRs become a real currency which could serve as a reserve currency augmenting if not replacing the American dollar. That that should happen was a demand put forward by China before the G20 convened in London.

The most important change for the Fund is the way the developing world is beginning to look at it. This change in attitude was nicely summed up by the Brazilian president Luiz Inacio Lula da Silva, commonly called Lula. “I spent 20 years of life carrying posters that said ‘IMF out’. Now my finance minister says we are going to lend money to the IMF.” Lula was referring to his country’s decision to provide the Fund $4.5 billion as part of the trillion dollar package of resources that was being put into the Fund’s coffers.

This was a remarkable turn-about for a country which received a massive bailout from the IMF in the 1990s. As vice president in charge of Latin America and the Caribbean, I was a member of the team of international negotiators who worked out the deal with the country. Such was their suspicion of the Fund, that the Brazilians insisted that they would only work with the agency if the World Bank and the Inter-American Bank were also involved. The two banks did get involved and Brasilia signed the deal.

There was a reason for Brazil’s unease about going to the Fund unaccompanied by development institutions since the agency had established a record in the developing world that brought it a bad name. That was one reason why President Lula, when he was a trade union leader, went around carrying posters against the Fund. The institution’s current leadership insists that new Fund will be really different from the one that got to be despised in the developing world.

If the Fund does reform itself, it will be going through structural change for the third time in its 64 year history. It was originally conceived as one leg of the three-legged stool that was to underpin the international economic system after the end of the Second World War. It was to maintain stability in the global currency markets under a system of fixed exchange rates. The rates were set against the US dollar; the United States agreed to maintain a fixed price for gold in terms of its dollars while all other countries fixed their exchange rates with reference to the American dollar.

Other countries could alter their exchange rates with respect to the dollar, something that was usually done at the advice of the IMF. In advising the countries to change their rate of exchange, the Fund also provided capital to help them tide over whatever difficulties they were faced with at that time. The Fund stepped in with its help since no other country or market would provide the needed financial resources. As such, it came to be known as the lender of last resort.

The Fund’s mandate changed in the early 1970s as President Nixon delinked the dollar from gold and most countries, in particular those from the developed part of the world, floated their currencies. This was the start of what came to be called the process of “globalisation”. The process exposed developing countries to new forms of risks. Rather than each country getting into difficulties, contagion became common as crises spread from one country to the other. Developing countries that went to the Fund for help had to sign up to undertake reforms that were part of a neo-liberal economic philosophy that came to be called The Washington Consensus.

Governments were required to severely limit their economic role by privatising the assets they held, some of which were acquired by the nationalisation of the properties owned by the private sector. This Pakistan had done in the early 1970s. When Islamabad went to the Fund on a number of occasions in the 1990s, privatisation was one of the conditions to which it agreed.

Countries with Fund programmes were also required to control their expenditures which many did by cutting their spending on social and human resource development. This affected the poor. They also had to open their economies by reducing tariffs which often exposed poor farmers to competition from rich countries. It did not seem to matter to the Fund that many rich agricultural systems were subsidised by the state.

With latest series of reforms, the IMF is entering into the third phase. Dominique Strauss-Kahn, former finance minister of France and now the Fund’s managing director, says that what will emerge after the contemplated reforms have been put in place will be very different from the institution that became controversial in the 1980s and 1990s.

“The IMF is changing, and with it there will be a sea change in the way the world economy is run”, says C. Fred Bergsten, director of the Peterson Institute for International Economics that was responsible for developing the Washington Consensus. “Their role will dramatically shift. You’re talking about monitoring fiscal stimulus, moving toward tighter regulations for financial institutions. You’re talking about global economic management in a way never seen.”

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Battle for hearts & minds

By Shahid Javed Burki
Tuesday, 28 Apr, 2009

THE Washington Post headlined a recent story on the latest developments in Pakistan ‘Extremist tide rises in Pakistan’.

The story ran on the front page; its subtitle was even more revealing about the worry that is now consuming many in America and the West about Pakistan’s future.

‘After reaching deal in north, Islamists aim to install religious law nationwide’ read the story’s subhead. The story was built around the statement of Sufi Mohammad, the Swat cleric who had campaigned for decades to bring the Sharia to his part of the world. The newspaper reported that he was now determined to extend his campaign beyond Swat.

The threat was carried out a few days later. On April 22, the western press reported that the Taliban had walked into the district of Buner, south of Swat and nearer Islamabad than the Swat valley. Alarm bells began to ring loudly in Washington. On the same day that the Taliban were reported to have advanced into Buner, Secretary of State Hillary Clinton appeared before the House Foreign Relations Committee whose chairman, Howard L. Berman, had prepared a bill that would allow highly conditional economic and military aid to Pakistan.

Ms Clinton called the Taliban advances an existential threat to Pakistan and called upon its people to put pressure on the government not to continue to cede territory to the insurgents. The government’s lack of resolve was hurting not only Pakistan but could have dire consequences for the rest of the world. She said that Pakistan was becoming a “mortal threat to the security and safety of our country and the world”.

Earlier in the week, The New York Times put on its front page a picture showing a large crowd gathered to hear Maulana Abdul Aziz who was chief cleric at the Lal Masjid in Islamabad before the military action in July 2007. The commando attack killed the cleric’s brother and scores of others. The cleric managed to escape by wearing a burka. The picture showed a bullet- riddled car parked in the middle of the congregation as a symbol for those who had come to listen to the cleric. His attendance at the mosque was made possible by the Supreme Court’s decision to grant him bail. The car was meant to remind the prayer congregation that the struggle to bring Islam to Pakistan would not be easy and that it would be resisted by the state that still had a near-monopoly on power to impose its will. But the state’s will to resist seems to be weakening.

Western newspapers are not the only ones worrying about Pakistan’s future. Policymakers in most western capitals have reached three conclusions. One, that even judged by the standards set by a very violent world that is shaping up in the early years of the 21st century, Pakistan is the most dangerous place on earth.

Two, several influential policymakers are worried that Pakistan’s defences have been lowered to the point where the rest of the country may be overcome by radical Islam. A few days ago Richard Holbrooke, the US envoy to Afghanistan and Pakistan, told a TV audience that Pakistanis need to worry about the government’s decision to compromise with the clerics in Swat. “That ought to be a wake-up call to everybody in Pakistan that you can’t deal with these people by giving away territory as they creep closer and closer to the populated centres of the Punjab and Islamabad.”

Three, that if Pakistan crumbles it will create a tsunami that will hit many distant shores. It is in this context that the statement by President Asif Ali Zardari at Tokyo where he led the Pakistani side at the Friends of Pakistan meeting resonated well in western capitals. The president told his audience that if Pakistan fails the world fails.

All this is a preamble to a simple question: why have the people of Pakistan allowed this to happen? ‘This’ refers to the allowance that has been given to some clerics to openly defy the state, to reject the rule of established law, to show great contempt for most social norms accepted by the vast majority in society. They are doing this in an attempt to establish a social and political order that conforms only to their liking. Why is it that a small group of people believe that they have the licence to impose their will on the country when it has been shown in election after election that a vast majority of the citizenry does not support the point of view these people hold and want to force down millions of reluctant throats?

The answer is as simple as the question. This has happened because the extremists have not met resistance from less radical and saner elements in the country — elements who believe in democracy, the rule of law and personal rights, in particular the rights of women.

Pakistani society can be divided into three parts: the top five per cent or so in terms of income distribution, the middle 50 per cent and the bottom 45 per cent. What has happened in the last couple of decades, as the state failed to provide appropriate services to the citizenry, is that the first class of people have bought insurance for themselves by essentially sealing themselves off from the rest of society. They have their own system of security, their own power supply, their own educational system and their own health services.

The Middle East offers them escape from the country; they go to Dubai to shop and take a vacation. A significant proportion of the middle class, numbering about 85 million, has placed its faith in a democratic system of government. Almost 70 per cent of them voted for the mainstream parties. It was this class that provided the lawyers’ movement the support it needed to battle the state.

There was a moment of extraordinary euphoria after March 16 when this class of citizenry won the restoration of the judiciary. Why is it now showing ambivalence towards the spread of extremism that challenges the social norms to which it subscribes? There are two answers to this question. This class is waiting for leadership to emerge that will mobilise and organise them. But there is also a section in this class that has swung in the direction of extremism. Those who have done so have taken the plunge either because of conviction or because of the failure of the state to provide them with their basic needs. They need to be brought back to the fold.

Then there are the poor, 75 million in all. For them life is a struggle and the state an indifferent and increasingly irrelevant presence. The battle for Pakistan will be fought with the aim to keep the middle class convinced that their best option is to continue to put their faith in the Pakistani state. How can they be persuaded to stay on board is the question for next week.

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Is the economy recovering?

By Shahid Javed Burki
Monday, 04 May, 2009

THE economy seems to be on the road to recovery. At least that is the impression one gets from reading the latest macroeconomic data and the reaction of the IMF. Several other observers have reached the same conclusion.

‘Pakistan is one of the few countries that enjoys more macroeconomic stability today than it did on September 14, the day before the bankruptcy of Lehman Brothers turned the world upside down. In those prelapsarian days, Pakistan’s currency was tumbling; its foreign exchange reserves covered barely two months of imports; and the cost of insuring its sovereign debt against default was almost 1000 basis points (10 per cent ),’ wrote The Economist in its issue of April 25.

The situation has improved considerably since those very difficult days. Foreign exchange reserves (with the State Bank of Pakistan) have climbed significantly, recovering from a low of $3.5 billion on October 31, 2008 to $7.8billion on April 17, 2009.

Fiscal deficit was brought under control although not by raising revenues from inside the country but by drastically cutting development expenditure. Some structural reforms were put in place by removing subsidies on energy. Prices of agricultural products that are still fixed (support price) by the government were raised thus providing incentives to the producers but also reducing the burden on the state.

One consequence of this may be a bumper wheat crop this year. If that happens, the rate of GDP increase may not plunge to the level feared a few months ago. But is this trend sustainable? Will the recovery result in a significant revival of growth, increased employment, particularly for the poor; and, perhaps most important, return in investor confidence?

The answers to these two questions depend upon four factors: continuous availability of external finance, pace of recovery in the global economy, strategic moves by Islamabad to address some of the structural problems the country faces, and the government’s ability to bring the rise of extremism under control.

The Pakistani economic and finance team met with the Fund officials during the recently concluded spring meetings involving the IMF and the World Bank. The Fund, satisfied by the progress Islamabad had made in stabilising the economy, agreed to release the second tranche of its $7.6 billion assistance programme. The programme is to run for two years. There was some indication that the amount available to Pakistan could be increased somewhat if the country continues to proceed on the track it has been following.

Both the World Bank and the Asian Development Bank are interested in expanding their programmes, prepared to provide fast disturbing money as well as project aid. The successful outcome of the Tokyo meeting may provide the country with some additional resources from bilateral sources. However, the real issue over here is Pakistan’s ability to implement the programmes and execute the projects which interest the donors. This will need considerable amount of emphasis on building state institutions.

This brings me to the second question: Would the country’s economic recovery be helped by the recovery in the global economy? There are some faint signs that the global economy may have begun to recover and the recession may be bottoming out.

Pakistan’s economic problems were more the result of internal developments than the cause of the global downturn. That notwithstanding, sharp deterioration in the global economy had an unexpected impact on Pakistan. Most other emerging economies were hurt by the contraction in international trade. Pakistan, with a very small share in global trade, was not as deeply affected. But it was hurt in a different way. The credit squeeze that followed the problems in the banking sector resulted in a sharp decline in external capital flows to emerging markets.

In the case of Pakistan a significant amount of money came into the stock markets. Not only did the flow dry up, the investments that were made were liquidated and capital flew out of the country. Islamabad responded by putting a floor under the prices of individual scrips. This had the effect of suspending trading and further eroded the confidence of foreign players in the markets. It will take a long time for confidence to return.

There are a number of signs that suggest that improvements are taking place. The Economist, the British news magazine, tracks 42 stock markets and in the past six weeks their value has improved by 20 per cent. The slump in global manufacturing seems to be ending and some of the major economies are showing unexpected strength.

The Chinese economy has begun to respond to the large stimulus provided by the state by a sharp increase in infrastructure spending. The German industrial output appears to be reviving. Perhaps by far the most important development is the seeming revival of consumer confidence in America. In the data released on April 28, the index of consumer confidence in the United States touched an unexpected high level. The American consumer is important for the global economy, in particular for global trade.

Sounding less terrified than they were when they met six months ago at the annual meetings of the World Bank and the IMF, finance ministers representing the world’s richest countries, the G7, saw ‘signs of stabilisation’ in the global economy.

This time they had gathered for the spring meetings of the two institutions. According to Timothy F. Geithner, the US Treasury Secretary, ‘there are signs that the pace of deterioration in economic activity and trade flows has eased. These are encouraging signs, but it’s too early to say that the risks have receded.’ In a joint statement the G7 went further and predicted that economic activity should begin to edge up later in 2009, but it is too early to say that the risks have receded.

If Pakistan continues to recover, if the international environment continues to improve, would this set in an attitude of complacency that has overtaken the policymakers in the past whenever the end of a particular crisis became visible?

Foreign capital flows can only provide temporary relief. Foreign direct investment will only come back once foreign players develop confidence that the state has been able to establish its control over all parts of the population and all parts of the country. Sustainable growth can only be achieved if the country begins to raise resources from within the economy. This will need a significant increase in domestic savings rates and a sharp rise – by as much as 50 per cent – in the tax— to— GDP ratio. Both changes will happen only with the adoption of the right set of public policies.

As mentioned above, domestic and foreign investment will return only when there is confidence that the state has established control over extremist forces who, albeit, not very large in number, have managed to scare not only the people of Pakistan but the entire world. For that to happen Islamabad will need to show a combination of resolve as well as imagination. Resolve should aim at reestablishing the writ of the state in all parts of the country. Imagination should be directed at persuading people that the government will do what needs to be done in order for them to develop confidence in their future.

The worst may be over for the economy but sustaining the trend will need a great deal of hard work by the state. The political leadership will have to convince a worried and nervous population that it is up to the difficult task.

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Way out of the conundrum

Public policy will need to be oriented towards ensuring that the economy does not face the same kind of crisis again.

By Shahid Javed Burki
Tuesday, 05 May, 2009

IN the article last week, I suggested why it was critical for Pakistan to win the hearts and minds of the people marginalised by the way the economy has developed over the last several decades.
It is these people who have been attracted to extremist causes since they have lost hope in the state’s ability to come to their help.

They have been promised nirvana by the extremists. Those who live in great economic and social stress and see little hope in the future if the state does not change its ways, will go for any alternative, even one that does not have a record of providing people with what they want over the medium and long term.

To get out of this conundrum, the Pakistani state will have to reform and restructure itself. Will it be able to do this? Will it be able to leave behind past behaviour and choose an entirely different approach?

The country is seemingly getting out of the woods. Macroeconomic indicators have improved, foreign exchange reserves have been built up, the fiscal deficit has been reduced, compression in imports has improved the balance of payments, the rise in consumer prices have begun to moderate. Will these trends continue? Will the improvements in the economic situation begin to address the problems, the frustrations of the marginalised people who are seething? These questions could have positive answers if two things begin to happen.

Public policy will need to be oriented towards ensuring that the economy does not face the same kind of crisis again. Foreign resources continue to keep flowing in to help the country tide over the severe financial problems it has had to deal with in the last couple of years. In fact these two contributions to economic survival and sustained and inclusive growth are linked. The donors will continue to provide support if there is comfort that the money being provided is being put to good use.

‘Does aid work?’ is a repeatedly asked question in the corridors and conference rooms of development agencies. It is being asked in the case of Pakistan with a sense of urgency. That is for two reasons that go be yond the normal concerns of development institutions. The first, of course, is the rise of extremism and the threat it poses not only to Pakistan but to the rest of the world. There is now a widespread belief in Washington and other western capitals that the Taliban are only 60 miles from Islamabad. If Pakistan falls it will generate a gigantic tsunami that the world is not equipped to deal with.

The second concern about the use of aid in Pakistan can be understood by the use of a term popular in finance. Called ‘moral hazard’, it refers to the behaviour of the firms that believe that they are too big or important to fail. This pushes them towards taking risks that are hard to justify in terms of conventional cost-benefit analysis. If the risks materialise and push the firm towards bankruptcy, someone will come along and launch a rescue mission. In fact, this is precisely what happened in the case of several large financial firms in the United States that were saved by the state with the injection of large sums of money.

Pakistan has been in that position on sev eral occasions. Each time the country came close to bankruptcy and default it was saved by some foreign provider of finance, more often than not the IMF but on occasion also the US, Saudi Arabia and China. This has happened again with the IMF and the Friends of Pakistan coming to the country’s rescue. However, will the post-crisis period now be any different from those in the past?

The answer depends in part on how the funds provided by the donor community are deployed. There is the traditional way and then there is a new way, the latter based on Pakistan’s own experience with the use of donor assistance as well as the nature of the problems the country faces. The conventional way would be to put a significant amount of money directly into the budget in order for the country to bring its fiscal situation close to a sustainable level.

This is estimated by economists to be four to 4.5 per cent of GDP. To get there from the present seven per cent would need a significant amount of fiscal retrenchment that will hurt the public-sector development programme. The country cannot afford to go on that path. It urgently needs economic growth without which it will not be able to provide support to the marginalised segments of the population.

In addition the donors would like to put their money into social development plans since Pakistan has fallen way behind the countries at its level of development in terms of human development. This calculation led the World Bank a decade and a half ago to develop and finance a Social Action Programme, the SAP, which provided billion of dollars of donor money for primary education, basic healthcare and improvement in the social circumstances of women. These were all worthy causes but almost nothing was achieved by SAP. The bank persevered for more than a decade. It even moved its supervision function to Islamabad. But the results were pitiful. The donors are about to commit the same mistake again.

Why did SAP fail and will a similar initiative succeed? Pakistan has yet to create the institutional infrastructure that can efficiently implement SAP type programmes. What is required is a functioning system of local government that is accountable to the people it serves and represents. Pakistan has tried five different systems of local government in the past 60 years. Each one of these was abandoned for the reason that the political system was not prepared to countenance devolution of power to lower levels of government. Devolution is seen in a zero-sum context; if those who have power at the centre or in the provinces transfer some of it to local governments, the latter’s gain will mean the former’s loss. This is wrong, of course, since bringing the government closer to the people improves overall governance and everyone benefits.

The other reason why a SAP type of initiative will always fail is that the social, economic and political structures in which the poor find themselves trapped don’t allow them to benefit from social development programmes. They need to be in better command of their lives in order for such programmes to work. ¦

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Cost of power outages to the economy

By Shahid Javed Burki
Monday, May 11, 2009

THE second annual report of the Beaconhouse Institute of Public Policy offers a menu of options for the policymakers in Islamabad.
Joining me as the authors of the report titled ‘State of the Economy: Emerging from the Crises” are some of the more experienced policy analysts including Sartaj Aziz, Aisha Ghaus-Pasha, Parvez Hasan, Akmal Hussain, Shahid Kardar and Hafiz Pasha.

Here I will deal with one aspect of the analysis offered in the report.The year 2008 witnessed a major increase in the frequency and intensity of power load shedding or outages generally and in particular in the industrial sector. A manifestation of this problem can be seen in the large number of reports in the press of high incidence of outages and protests, by not only the domestic and commercial, but also industrial consumers.

During the course of the year, complaints by the various chambers of commerce and industry and other industrial associations that the level of production in a number of industries has been reduced due to the persistence of outages which apparently have fundamentally disturbed the normal rhythm of the production cycle in a large number of industrial units, especially in electricity-intensive sectors like textiles, non-metallic mineral products, basic metals, leather products, rubber and plastic products, paper and paper products, etc.

The economic costs of power outages in the industrial sector which ac counts for about 28 per cent of total power consumption is having a profoundly negative impact on the economy. The magnitude of cost is a basic indicator of the benefits that could be realised from investment and improved management of the power sector. Major factors contributing to increased power shortages include: growth in demand for electricity, particularly domestic demand fuelled in part by subsidised tariffs; inadequate policy response to the increased demand, reflected in the lack of expansion and upgradation of power plants and the low priority to public sector expenditure on the power sector; lack of improvement/upgradation by the IPPs, partly because of the uncertainty created by the ad hocism in the government’s privatisation policy earlier; overall mismanagement of the power sector, reflected both in the accumulation of over Rs370 billion of circular debt and the heavy line losses and large scale theft; and shortterm supply-demand imbalances due to the seasonality, in particular in hydro power generation.

Costs of outages consist of direct costs which primarily comprise the spoilage cost and net value of lost production and indirect costs incurred by firms to recover at least some of the output lost during and immediately after outages. The particular mechanisms chosen for recovering output lost, will, of course, be based on cost minimisation considerations. Typically, types of adjustments made by a firm include: acquiring self-generation capacity; more intensive utilisation of capacity; working overtime; working additional shifts, and; changing shift timings. A pattern of response by industrial units increasingly observed, is that of development of own sources of energy supply through investment in generators.

Some of the key parameters required to estimate the cost of loadshedding for this report have been collected through a survey of a predesigned and tested questionnaire on a purposive sample, stratified (by city and industry group) of 65 industrial units.

The survey reveals that the average annual hours of outages per unit was 1379 in 2008. The average duration per day was four hours and 36 minutes. The highest incidence of outages in 2008 was between the months of December and January and in June. Industries which have been affected more by outages are textiles, machinery and equipment, food, glass and allied products. Also, continuous-process industries appear to have been less exposed to outages than batch-making industries.

Time losses during the outage plus restart time account for were over 20 per cent of the total time of operation. About 84 per cent of the sample units did make an effort to recover part of the lost production time. The highest proportion, 75 per cent, have done so through self-generation of electricity. Wherever generators have been installed, the extent of substitution has been high, at 85 per cent of the normal power consumption.

Firms which do not have self-generation capacity, either because it is not economically feasible or affordable, have tried to recover some of the lost output through other adjustments identified earlier. However, their level of recovery of lost output is lower, at 29 per cent.

The recovery of lost output is at a higher cost. The average cost of selfgeneration is almost two and a half times more than the cost of acquiring electricity from power utilities. Therefore, the extra cost to the industrial sector due to self-generation of electricity is about Rs32 billion. This is also an indicator of the extent to which profitability of firms is lower because of load shedding. Also, since such firms recovered about 84 per cent of the output, the cost of output permanently lost is estimated at Rs42 billion.

Firms adjusting through other mechanisms also incur additional costs which include overtime/ shift/changing working days premia to labour, additional wear and tear of machinery and spoilage of raw material/inputs in process. These costs aggregated to Rs6 billion at the national level. For such firms, the cost of value added lost is Rs77 billion. Therefore, aggregate cost to the industrial sector of load-shedding is estimated at Rs157 billion. This is equivalent to nine per cent of the industrial value added. The loss of industrial output is estimated at seven per cent of potential production.

Over and above the direct costs on the industrial sector, a change in value added in the industrial sector has secondary or multiplier effects on the rest of the economy. Adjusting for these forward and backward linkages increases the overall costs of industrial load-shedding to the country by Rs53 billion. Overall, power loadshedding in the industrial sector has cost the country Rs210 billion or over two percent of the GDP, over $1 billion of export earnings and potential displacement of 400,000 workers. Costs could be even higher if impact on other sectors like agriculture and services are allowed for, which account for almost the same share in power consumption as industry.

Following are some of the recommendations we have made to deal with this situation. The high economic cost of unsupplied electricity justifies a case for expanding power generation capacity. In fact, there is a stronger case for upgrading existing power generation facilities, which can be accomplished at almost one-third the cost of new plants. This will require development and quick implementation of an accelerated generation investment programme, which includes the project to import 1000 MW electricity from Iran and a comprehensive programme to reduce technical losses and improve the reliability of the distribution system. Simultaneously, the enabling environment has to be improved so that IPPs investment plans can be encouraged and the problem of circular debt has to be resolved on a priority basis Such a strategy should focus on a loss-minimising policy. The load-shedding schedule should reflect clear and transparent priorities, in consultation with stakeholders, and be predictable. Sectors that deserve priority, in particular should include export industries. There is a strong case to develop and implement customer outreach programmes to encourage energy conservation measures, steps to improve the power factor, and methods of limiting peak demand. It is also important that alternative sources of energy, in particular solar energy be explored. Pakistan should enhance its capacity to follow international developments on alternative sources and promote greater use of renewable energy for light, heating, agriculture and smallscale enterprise.

Some of the policy recommendations enunciated above can be implemented immediately while others have a medium-term perspective, given the gestation period required for completion/execution of investments. But one thing is clear. This is a crisis that cannot wait for too long to be sorted. The cost to the economy and to the society are very high and their political consequences could be exceptionally grim.

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