Move towards a new development paradigm

By Shahid Javed Burki
Monday, 14 Feb, 2011

PAKISTAN’s earlier five year development plans were based on development thinking of those times. What has generally been regarded as the most successful plan of the series — the Second Five Year Plan, 196065 — used capital accumulation as the driver of growth.
Even more, the plan put emphasis on the development of the public sector, the resources for which came not from domestic savings but from foreign capital flows.

Foreign funds were provided by a number of bilateral and multilateral development agencies, in particular the World Bank. While the plan was being implemented the bank set up a new agency, the International Development Agency (IDA), which provided funding to poor countries such as Pakistan on concessional terms. In other words, Pakistan received financial flows it required for meeting the investment targets of the Second Plan as cheap money.

The Second Plan set three traditions which remained the backbone of planning for several decades. These were emphasis on capital accumulation, development of the public sector and reliance on cheap foreign money to provide for investment. The short-term consequences of this approach were impressive. The GDP growth during the plan period more than doubled compared to the first decade after independence. This quickening in the pace of growth caught the attention of the global development community.

For some time - in the late 1960s, to be precise - Pakistan was lauded as the model of development that the developing world could and should follow. Several conferences were held outside Pakistan to communicate to the developing world the country’s extraordinary growth experience.

Pakistan’s performance was compared favourably with that of India which was then caught in the grip of what the Indian economists themselves called the “Hindu rate of growth”. While Pakistan’s GDP during the plan period had increased by an impressive 6.7 per cent a year, India was stuck at 3.5 per cent per annum rate of growth. The word about Pakistan’s success spread far and wide. A team of economists and planners from South Korea visited Islamabad to learn from Pakistan’s experience.

However all this excitement died quickly essentially for two reasons. The September 1965 war with India suddenly bought to an end the availability of cheap foreign capital for Pakistan. The Americans in particular punished Pakistan for going to war with its neighbour by holding back economic and military assistance. The country had now to fall back on its own resources which unfortunately were not plentiful.

Domestic resource generation could not meet the gap between savings and investment. The investment binge that had fueled economic growth in the first half of the ‘sixties could not be maintained. The second problem was the increasing growth and income disparities between the two wings of the country. East Pakistan (today’s Bangladesh) was left behind by the western wing. This bred enormous resentment among the citizens of that province. This resentment provoked a movement to gain autonomy for East Pakistan which ultimately led to a civil war and the birth of Bangladesh as an independent state.

It should be noted that today the rate of growth of the Bangladeshi economy is twice as high as that of Pakistan and it is well on its way to meeting the social de velopment objectives prescribed as Millennium Development Goals (MDGs). These were accepted in 2000 by Pakistan and other developing countries. Pakistan is not likely to meet these goals any time soon. The growth slump has now persisted for more than three years. The question is whether renewed development planning can reverse the process.

The answer from the new leadership in the Planning Commission is that it is possible to place Pakistan on the trajectory of growth that can be sustained over time. However for that to happen, the country will have to subscribe to a new development paradigm entirely different from the one that produced the short-term success achieved by the Second Five Year Plan. The new team of planners wants to adopt an entirely dif ferent approach.

In moving towards the new paradigm the planners have the support of economic theory. Development and growth economists have now moved away from the emphasis on capital accumulation and on moving workers from low productivity to high productivity jobs. Instead there is emphasis on improving the quality of human resource, on improving the technological base of the economy, on placing the private sector on the commanding heights of the economy, and on rewriting the role of the state in economic management. These four attributes of the new paradigm will require a massive shift in government priorities.

“Pakistan: A New Growth Framework”, the document issued by the Planning Commission last month asks for concentrating on what it calls the “soft” determinate of growth rather than those that it defines as “hard”. By soft the commission means policies that will channel savings into most productive uses thereby improving the quality of investments. There is also the belief that elements such as innovation, creativity and learning will yield higher and more sustainable growth than public sector investment. By hard the commission implies investment in bricks and mortar.

The table accompanying table provides some indication on how fast Pakistan has fallen in terms of some of the more important determinants of growth on which the new growth theory has began to place emphasis. The coun try is by far the worst performer when we examine in a comparative framework indices of innovation and quality of education. On the innovation index Pakistan is in the 79th place out of 132 countries on which data were collected by a group of researchers. On the quality of education the country ranks even lower. India, on the other hand, is on another scale altogether. Its position is closer to that of China. In fact, it scores better than China on the quality of education scale.

The conclusions that one draws from these numbers is obvious. The pay-off in terms of accelerating growth would be considerably higher were the country to invest in these areas than in a large number of “bricks and mortar” activities. In the Planning Commission’s above cited paper it is estimated that the government has 2000 projects that have been under implementation for years if not for decades. They continue to be on the books since they provide privileges such as cars, staff, and telephones – sometimes also housing – to project managers.

The amount of money that needs to be spent in order to complete these projects is of the order of Rs3,000 billion. Reappraising these projects, canceling those that are redundant or are too far from completion could save a significant amount of resource which could be redeployed in the “soft” part of the economy. Such an approach would have high dividends. I think it is right for the Planning Commission to put forward this paradigm to get the economy moving again.

Oversight of the global financial system

By Shahid Javed Burki
Monday, 21 Feb, 2011


AFTER a great amount of introspection and reflection economists and policy analysts have reached two conclusions about the causes of the just concluded Great Recession. They believe that there were basically two reasons of the downturn of the world economy that devastated so many economies around the globe.
The first was the malfunctioning of the financial system. The second was the use of the housing sector to bring about better distribution of wealth. The latter was adopted as public policy by the government in the United States in particular.

Both, Democrats and Republicans concluded that the public was not prepared to use fiscal policies to improve the distribution of income. During the 1990s when the American economy boomed much of the benefit went to the wealthy while the real incomes of the middle and lower classes stagnated. One way of dealing with this situation was to improve the distribution of wealth and housing was the best available asset for achieving this goal. But this approach was adopted at the time the deregulation of the financial system was being diligently pursued. The result was that banks were able to lend large amounts of money often by not bringing it on their books through the use of products that were not regulated at all.

Enormous amount of profits were made by a number of operators in the financial system while the institutions they controlled acquired extremely risk assets. When the economy came crashing down it was the poor and the lower middle classes – the very people the system was supposed to help – who suffered the most.

The Great Recession reached well beyond the borders of the United States and hurt many countries including Pakistan. It was agreed that a new financial structure was needed that would prevent the recurrence of these series of events.The United Nations appointed a commission under the chairmanship of Joseph Stiglitz, the Nobel Prize winning economist to suggest how a new system should be structured. Stiglitz was expected to recommend a system that did not put the developing world at any disadvantage. The report the commission submitted is now being discussed by many forums around the world.

The commission correctly maintains that financial markets are not an end in themselves as they became in many parts of the Anglo-Saxon world, in particular the United States and Britain. They are supposed to perform many functions which enable the real economy to be more productive.These functions include mobilisation of savings, allocating capital and managing risk. The last function is meant to transform risk from those least able to bear it and to those that have the means to shoulder it. However, the opposite happened as the global economy unraveled in 2008-09.

In America and several other rich countries, the commission says, financial markets did not perform well the functions mentioned above. They encouraged people to spend rather than save, bringing the domestic savings rates close to zero, they misallocated capital, and they left huge risks with ordinary people.Write the authors of the United Nations’ Commission: “These problems have oc curred repeatedly and are pervasive evidence that they are systemic and systematic. And failures in financial markets have effects that spread out to the entire economy.” A number of recommendations made by the Commission have relevance not only for well-developed financial systems but also for those that are less mature such as the banking system in Pakistan. “The deregulatory philosophy that has prevailed in many Western economies during the past quarter century has no grounding in economic theory or historical experience: quite the contrary, modern economic theory explains why the government must take an active role, especially in regulating financial markets.” At this point it is useful to recall that Pakistan under the stewardship of President Pervez Musharraf and its bank er-turned prime and finance minister pulled the state further back from overseeing the banking system and capital markets than was the case in many other emerging markets, including India. Pakistan’s neighbour kept much of the banking system under the control of the state; in Pakistan, on the other hand, fourfifths of the total banking assets was placed in private hands.

That was a good move. As the recent experience with such public sector enterprises as Pakistan International Airlines and Pakistan Steel Mills has shown state’s direct involvement in the management of public utilities and manufacturing enterprises can have dire consequences for the economy. However, private ownership has to be married with public regulation to be a positive contributor to the economy. According to the Stiglitz Commission:

“Government regulation is especially important because inevitably, when problems are serious enough, there will be bailouts; thus government is explicitly or implicitly, providing insurance. And all insurance companies need to make sure that either the premiums they charge for the risks are commensurate with the risks or that the insured do not take actions which increase the burden on the insurer”. In the publicly owned companies in Pakistan, the certainty that the government will come to their rescue encouraged irresponsible behaviour.

There has been considerable innovation in the financial sector but much of it was regulatory, accounting and tax arbitrage. There was a great deal of money to be made by developing products that took advantage of the differences in these three things. Financial markets failed to make innovations which would have helped individuals and the society to manage risk better. The regulators also failed to create an environment in which firms can compete with one another. Without competition capitalism does not deliver on its promise.

According to Stiglitz and his colleagues: “When a firm is bailed out because it is too big to fail, it is evident that competition laws have not been effectively enforced. Now financial institutions have become so big that they are almost too big to save. And in the process of addressing the current crisis, we are creating ever larger financial institutions, sowing the seeds for problems down the line.The high fees and other abusive practice of credit card companies is a result of anti-competitive behaviour.” After diagnosing the problem, the commission under the direction of Joseph Stiglitz offered a series of recommenda tions that, if adopted, would save the world from facing in the future disasters such as those that threw man parts of the global economy on the ropes.The main direction of these recommendations is to involve the government in putting in place robust regulatory systems. These existed before but were designed and managed in a way that did not save the financial system from taking excessive risks in the knowledge that if the risks turned out to too much for the firms to survive , the state will step in save the faltering firms.

An ideal system of regulation would serve at least five important functions. It will (a) ensure the safety and soundness of individual financial institutions and financial system as a whole, (b) protect consumers, (c) maintain competition (d) ensure access for all and (e) maintain overall economic stability. These are all laudable objectives but the question is whether governments in emerging societies have the competence and the political will to put together a regulatory system that would operate totally without interference from vested interests.

Pakistan’s experience with the Competition Commission is an interesting illustration of how a well functioning institution operating under a brave and independent head can be thwarted from carrying its legitimate role. In such situations the regulators themselves need protection from an interfering government. This could perhaps be provided by the judicial system if it is able to function independently of government influence.

The main criticism of the Stiglitz Commission’s recommendations is that the governments are not always virtuous and would at times be prepared to act in ways that could cause damage to the society.

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‘Diaspora economics’

By Shahid Javed Burki
Monday, 28 Feb, 2011


IN spite of the near melt-down of the economy, the level of Pakistan’s foreign exchange reserves remains high, reaching record levels in recent weeks. This has happened as fiscal deficit continues to increase.

Economic theory tells us that as the government runs up its deficit, it impacts the external account. The relationship is simple. A higher deficit is usually financed – if not fully then at least in part – by borrowing from the central bank. The bank prints money to provide for the government’s needs and therefore adds to money supply. With the printing of money aggregate demand increases, some of which is satisfied by increased imports. This creates a gap between import expenditure and export earnings. The gap is financed by using accumulated reserves. We know that Islamabad is running a large deficit on the fiscal account. The deficit continues to climb and is expected to reach eight to 8.5 per cent of the gross domestic product by the time the current fiscal year runs its course. That will be on June 30. And yet no pressure is being felt on the external side. As the accompanying table shows, the level of reserves continues to rise, reaching $17.45 billion by February 12.

On a yearly basis, the current levels of reserves is the highest in the last 12 years, increasing from $2.3 billion in 1998-99 to eight times as much a dozen years later. The amounts received from the International Monetary Fund have certainly contributed to this increase. Pakistan signed a stand-by arrangement (SBA) with the Fund in late 2009 which was ultimately set at well over $11 billion. More than $7 billion of this amount has been disbursed. Even if this entire amount is factored out, the reserves still remain high.

One explanation for this development is that Pakistan has benefited from an extraordinary increase in the amount of remittances sent by its people living and working abroad. According to the latest data provided by the State Bank, remittances received increased by 17.7 per cent in the seven month period between July 2010 and January 2011, reaching $6.12 billion compared to $5.2 billion in the same period last year.

There are five main sources of remittances; together the UAE, Saudi Arabia, the United States, the GCC states, and Britain account for more than 87 per cent of the total. That was to be expected since the bulk of the Pakistani population working abroad lives in these five places. But there have been changes in the ordering of these sources of flows. At one point Saudi Arabia was the most important source. It was replaced by United States for a while. Now the largest source is UAE.

In some of my earlier works on the Pakistani economy I looked in some detail at what I called “diaspora economics”. We know that diasporas follow a four-phase life cycle. Initially people who settle in new lands spend the bulk of their savings in establishing themselves economically. Once this is done they begin to send money to help families and friends back home. The third phase entails giving for organised charities – the various foundations that have established entities abroad for raising funds for their operations. The fourth phase involves making investments in the home country. The diaspo ras from Pakistan are now old and mature enough to be in their third and fourth phases. The amounts of money that can be sent home are dependent on the economic situation of the remitters.

There was an expectation that the Great Recession of 2008-09 would affect the amount of remittances since there must have been the same kind of pressure on these populations as was felt by the populations at large. That did not happen. What could be the reason? The State Bank provides one answer to the question. “It may be pointed out that the State Bank, ministry of finance, and ministry of overseas Pakistanis had undertaken a joint initiative called ‘Pakistan Remittances Initiative’ (PRI) with a view to facilitating the flow of remittances through formal channels,” says the bank in a recent report. “This initiative has started to materialise and remittances through formal channels are showing considerable growth.” While channeling remittances away from such informal transmissions as those undertaken by hawala and hundi systems may have played a part, this effort began soon after the regulatory changes adopted by the United States Treasury in the post-9/11 world. It is unlikely that the impact of these requirements continues even ten years after the regulatory system was developed. Meekal Ahmad who has written extensively on the Pakistani economic issues has speculated that the whitening of black money may have much to do with the continuing increase in the level of remittances. He explains that Section 114 (4) of the Income Tax Act of 2001allows any capital inflow into Pakistan to be recorded as “workers’ re mittances” on the payment of a small fee. Once thus recorded it becomes free of tax. This provision in the tax code runs counter to the intention of another law – the AntiMoney Laundering Law – passed during the Musharraf period as a result of the US pressure.

His interpretation is worth examination especially when there have been such large increases in the amounts of remittances coming in from UAE. Ahmed believes that in the effort to escape the tax net a significant amount of capital has left the country and comes back as remittances and goes untaxed. There is some substance in this argument. Pakistani capitalists have also made undeclared investments abroad, in particular in the Middle East. It is known that Pakistanis participated in the real estate boom in UAE – in particular in Dubai – and the residential properties they bought were rented out. The rents came into Pakistan as remittances. Under the tax law, even incomes earned abroad are taxable in Pakistan unless they fall in one of the categories on which tax is not levied. Remittances belong to this category.

One more explanation was provided to me recently by the senior executives of a large IT firm in Pakistan. They have studied the growth of their sector in the country and believe that a significant amount of the earnings from IT come from what they label as the “cottage industry”. There are, they believe, thousands of people – mostly women with basic computer skills – who do simple jobs for their friends and relatives living abroad. Preparation of web sites or maintenance of accounts are two such tasks that can be performed from the kitchen table. The compensation for this type of activity comes in the form of remittances.

While the flow of remittances has become an important part of the Pakistani economy and is now an important source of foreign exchange earnings for the country, it is not well understood exactly what kind of flow this actually is. It is important to understand what is happening in this area.

This knowledge is essential for the design of tax policies and also for developing the IT sector. Studying remittances, therefore, is good for the making of public policy.

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Can G20 create a new financial order?

By Shahid Javed Burki
Monday, 07 March, 2011


THE Group of Twenty, or G20, is made up of seven industrial, a dozen emerging economies and the European Union. It was assembled in 1999 as a response to the Asian financial crisis that took a heavy toll on the economies of that region.

Until then much of the direction to the major organisations that have the responsibility for providing relief to the economies in distress was given by G7, the group of industrial economies.

The crisis in Asia made it clear that some of the major emerging economies have to be involved as well to shape a new global economic order. This led to the creation of G20. Since most of the issues addressed by the new group concerned finance, the IMF became its de facto secretariat.

Questions remain as to how representative is the G20 of the global economy. Of the 12 countries from the emerging world the largest number is from Asia. The continent is represented by Australia, China India, Indonesia, and the Republic of Korea. Latin America has three members: Argentina, Brazil and Mexico. Saudi Arabia and Turkey are from the Middle East. The African continent and East Europe each has only one member – South Africa, and Russia respectively. There are some glaring omissions in the composition of the group. Pakistan and Egypt, for instance, have large enough economies to have been included but were kept out mostly for political reasons.

The G20 has handled a range of issues since its creation in 1999. These include growth policies, the international financial system, dealing with financial crises and combating terrorist financing. The group has attempted to foster the adoption of internationally recognised standard through the example set by its members in areas such as the transparency of fiscal policy, combating money laundering, and financing of terrorism.

In 2004, the group committed itself and by implication the entire world to new higher standards of transparency and exchange of information on tax matters. It is this decision that led to the exposure of thousands of Americans who were maintaining large amounts in accounts in foreign banks to avoid being taxed. It is the work done by the G20 ministers concerning transparency that will help locate and possibly repatriate the large sums of money that were siphoned off by the autocrats of the Middle East some of whom have fallen and some other will undoubtedly be removed in the coming weeks and months. It is in the area of the management of the global economic and financial systems that G20 has attempted to play an important role. However, its efforts have only been half successful. In November 2008, as the world was rapidly plunging into what has come to be called the Great Recession of 200809, the administration of then President George W. Bush took the decision to turn to G20 to devise public policies needed to cushion the impact of the downturn. However, those were the waning days of the Bush administration.

Barack Obama had already been elected as the new American president and his predecessor was not in any position to commit his country to any particular approach. That changed in April 2009 when the heads of state met in London for their second summit – the first being the one held in Washington – and took two decisions that were to significantly affect the course of events in the global economy. The first was to commit the countries to launch programmes for stimulating their economies through fiscal expansion. The largest of the many programmes that were launched as a consequence of this decision were in China and the United States.

Each country spent close to a trillion dollars in stimulating their respective economies. The second decision was to provide large amounts of new resources to the International Monetary Fund, the World Bank, and three regional development banks to inject capital into the countries in distress. It was because of this additional funding made available to the IMF that Pakistan was able to sign a large Stand-by Arrangement with the IMF.

While the G20 was apt at dealing with economic and financial crises, it has made little progress in getting its members to agree on solutions to the structural problems that currently plague the global economy. These are collectively referred to as “global imbalances”.

These include the large trade and current account surpluses in countries such as China, South Korea and Japan. These surpluses are balanced by equally large deficits by the rich countries in particular the United States. In explaining why there are such imbalances China and the United States have focused on different causes and hence have pushed different approaches to deal with them. China believes that the cause is the large fiscal deficit being run by Washington which increases domestic demand in that country and forces it to import more than it can really afford. This is the second global imbalance.The United States’ view, on the other hand, is that the Chinese have created a large demand for their manufactures by keeping low the value of their currency.

If the Chinese allowed the yuan to appreciate, the demand for their exports would decline and it would not run such large surpluses in the trade account. Misalignment of international currencies, therefore, is an important issue for Washington. There is also a belief in the United States that if the Chinese were to properly price their currency, it would slow down the process of de industrialisation that is affecting the structure of the American economy and is causing severe job losses in that country.

Some progress was expected in resolving – or at least making some advance – with respect to this dispute at the recently concluded meeting in Paris of the G20 finance ministers and central bank governors. That did not happen.

The communiqué issued after the conclusion of the meetings made some general statements. “We reaffirm our commitment to coordinated policy action by all G20 members to achieve strong, sustainable and balanced growth”, wrote the ministers and central bankers.

Our main priority actions include implementing medium term fiscal consolidation plans differentiated according to national circumstances in line with our Toronto commitment, pursuing appropriate monetary policy, enhancing exchange rate flexibility and to better reflect underlying economic fundamentals and structural reforms, to sustain global demand, increase potential growth, foster job creation and contribute to global rebalancing”.These were essentially a list of the objectives to be achieved not how they would be realised.

From Pakistan’s perspective it is important that the group “discussed concerns about consequences of excessive commodity price volatility and asked our deputies to work with international organisations and to report back to us on the underlying challenges posed by these trends for both consumers and producers and consider possible action. Keeping in mind the impact of this volatility on food security, we reiterate the need for longterm investment in the agricultural sector in developing countries”.

What this quick overview of the progress made by G20 over the last dozen years, especially since the heads of state and government got involved in its deliberations is that a forum is in the making that will provide direction to the global economy.

However, Pakistan is absent from the forum and has only a weak voice in the IMF and the World Bank where it can – and should – pursue its national interest. One of the priorities of Islamabad’s diplomacy should be to gain access to G20 even if it means increasing the size to G25.

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Oil price hike to retard economic recovery

By Shahid Javed Burki
Monday, 14 March, 2011

THE global economy — and that means not just the economies of the developed world but also of developing countries such as that of Pakistan — are going through another ‘black swan’ moment. The term was coined by Nassim Taleb to describe the impact on the economic systems of what are very low probability events.
He claimed that most economic thinking and most financial models are based on the assumption that the past will define the present and the future. That may be the case most of the time but not all the time. In fact, it is the unexpected that has more to do with the way economic systems move than normal occurrences.

The latest “black swan moment” is related to the unfolding revolution in the Middle East. Not even the most astute observer of politics of the area had imagined that the Arab streets would explode the way they did; that two well-established regimes would collapse within days of feeling the pressure from the streets, and that a third country would see a civil war between the defenders and opponents of a regime that had lasted for more than four decades.

If these developments had occurred in some other parts of the world, they may not have been noticed with as much interest. But in the case of the Middle East, with the world’s dependence on imported oil of which the region had a great deal of spare, the political upheaval had far-reaching consequences.

Once it became clear that the political change in Libya will not be as fast as those that took place in neighbouring Tunisia and Egypt, the world oil markets became nervous. Although Libyan exports account for only two per cent of the oil traded in international markets and although disruption in supplies affected one-half of Libya’s exports, the market reacted with near-panic. On Monday, March 7, the US oil prices increased to their highest levels since September 2008, trading at an intraday high of $106.95 a barrel, as Brent, the European benchmark, hit a session high of $118.50.

Gold jumped to a record of $1,444 an ounce. Stock markets in both developed and developing countries came under pressure. Any prolonged downturn in their values would dampen consumer confidence.Vix index is one indicator of the way the markets were looking at the situation. Often called “Wall Street’s fear gauge”, it rose by eight per cent on March 7, one of the sharpest increases in recent times.

These increases were bad news for most parts of the global economy. If they persisted they would reduce the pace of recovery from the Great Recession of 2008-09 and seriously hurt countries such as Pakistan that were not only dependent on imported oil but were still struggling with serious economic downturns. Even though experts pointed out that the disruption in supply was minimal, and that there was enough capacity in the oil exporting countries to meet the shortfalls that had originated in Libya, the market sentiment remained jittery.

Oil price depends not only on the balance between demand and supply. As became evident in 2008 during the previous period of price escalation, speculators played an important role in the market. They were back in play. There was speculation that the situation in Libya will get much worse before it stabil ises. The turmoil could reach Saudi Arabia and were that to happen, not only will the price go through the roof but would also produce a severe global economic downturn, deeper than the one from which the world had only just begun to recover. Nouriel Roubini, an economist who had predicted the global financial crisis said that an increase in price to $140 a barrel will cause some advanced economies to slide back into recession.

Of the options that were available to the global community, one was already in place and the other was being talked about. The first was to have the countries with the capacity to increase their output to step in and increase their supplies. The second was for the United States to tap its strategic reserves. Opec which controls about 40 per cent of global oil supplies was divided about its response to the crisis. While Saudi Arabia, Kuwait and Nigeria were ready to increase their output, Iran and Algeria were of the view that such a response was not required.

Nonetheless, industry’s officials said the production increase ex pected by early April including the increase already announced by Saudi Arabia would make up the shortfall in supply expected to occur in Libyan oil exports. Riyadh had already increased its pumping by 700,000 barrels a day while the Kuwaitis and the Nigerians were working on increasing their output by 300,000. The two together would provide an additional one million barrels a day which was equal to the decline in Libyan exports.

The other option to take out some excitement from the oil market was for the United States to tap its Strategic Oil Reserve which holds 727 million barrels of oil in the depleted salt mines in Texas and Louisiana. These reserves were created in response to the 1973 oil embargo imposed by the Arab oil producers but have not been used to stabilise prices. Several analysts believe that even a hint that the reserves could be used would take the panic out of the markets.

One consequence of the increase in oil price is to significantly enhance the economic power and standing of Russia, now the largest producer of oil in the world. The country does not keep any spare capacity – that would be difficult to do in the extreme cold in which its wells are located. Combining gas with oil, Russia is by far the largest energy exporter in the world. According to one analyst, “Russia is not only outside Opec, and thus free from cartel’s restraints but also, with its formidable secret policy apparatus and population bulge among the elderly rather than the young, is seen as less vulnerable to an outbreak in social unrest.” Moscow has been able to exploit this advantage and has succeeded in inviting large investments by foreign energy companie--- $4 billion by the French firm Total and $7.8 billion by BP. It is also working on building two gas pipelines that will carry its gas under the sea to points of consumption in Western Europe. And, after three years it has begun to add to the accumulated $50 billion in its sovereign wealth fund. It would not be inaccurate to suggest that the Middle East’s loss is Russia’s great economic and strategic gain.

Among the many different ways in which the turmoil in the Middle East is likely to affect the global and economic landscapes, one that is of immediate consequence is the turbulence in the oil market.The affect of this on Pakistan will be severe, a possible repeat of the balance of payments crisis of 2008.

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Entrepreneurship as driver of growth

By Shahid Javed Burki
Monday, 21 March, 2011

WITH Pakistan being the poorest performing economy of South Asia, is there something the policymakers in Islamabad and the provincial capitals could do to get the economy moving again?

In fact, there is something that can be done by the state to revive the growth process. It is about the role entrepreneurship can play in reviving and developing the economy and, in the process, developing the underdeveloped Pakistani firm.

Initially the developing world relied on their governments to create the environment which would make possible the transfer of workers from low productivity activities as well choose the activities in which these workers would get engaged. India under Jawaharlal Nehru, the country’s first prime minister, became the most articulate advocate of what can be called the “state-led model of economic growth.” With many regime changes, Pakistan wavered between the approach to put the state on the commanding heights of the economy, and the approach to free private entrepreneurs to work on their own without too many restrictions placed in their way. It is the latter approach that is now at the centre of what is called entrepreneurship-focused model of development. In this model the kitchen is left in the hands of the private sector to mix the ingredients for growth in the way that is the best to produce the best results. What good entrepreneurs do is to develop “production recipes”.

The “recipe” metaphor was used recently in a report done by group of consultants for the Planning Commission. Professor Philip Auerswald of George Mason University who headed the team explains that in traditional development economics the emphasis is placed on inputs and outputs – so much labour and capital need to combine to produce so much output – but not on the “recipe” that will turn the inputs into outputs. It is the recipe that really produces growth at the margin.

He calls this the “production recipe” to distinguish it from the “production function” of growth economics. Even though in recent years other variables such as human development, technological improvements, and institutional capacity have been brought in directly into the production function, there is still not the full recognition that it takes individual firms to play the role of a chef to produce the best meal out of the available ingredients.

Firms only exist when the cost of doing business is reasonable and what economists call “transaction” costs are not excessive. If these are high as can be the case when the political and bureaucratic systems suffer from a great deal of corruption, or when the state of infrastructure is poor, or when the regulatory system is very demanding, efficient firms will not develop. Too much entrepreneurial energy will be spent on dealing with these distractions in the production process. These are Pakistan’s conditions today; resolving them would help entrepreneurship to play an important role in economic revival and growth.

Auerswald also maintains that the growth of an economy usually means growth of firms and only those firms be come growth oriented when they work on their recipes to improve the efficiency of the production process as well as the quality of the output being produced. There are three different ways in which ordinary firms become growth firms.

First, they make modifications to the existing production recipe. This they do by learning from their own experiences. Second, they create their own recipes. This requires investment in research and development and, of course, entrepreneurship. Third, when an environment is created that allows the entry of new firms that bring in new ideas while encouraging the exit of those that have lost the cutting edge because they are set in their own ways. At the margin, much of the growth that occurs comes about because of the entry of new firms.

If it is expected that a growth strategy must give considerable attention to the development of firms, what are precisely the policy options the state must emphasise. Here some international experience should help to point to some of the areas of considerable importance to forge ahead. The first is investment in the development of human capital, a neglected area in the country.

Those who study China’s extraordinary economic growth since 1979 when the reformist Deng Xiaoping established his control over the Communist Party and thus over the country, should recognise that he would not have been able to achieve his miracle, unless Mao Zedong had not prepared the Chinese population to develop themselves and the economy in which they worked.This was done by providing universal education and healthcare and by liberating women. That said Deng would not have achieved the remarkable transformation of the Chinese economy had Mao not preceded him.

If the development of human resource is critical for the development of the firms, it will need the expenditure of enormous amount of resources to close the gap that exists in Pakistan in terms of what needs to be done in this area and what has actually been accomplished.

While the state’s performance has been weak, the private sector – often led by entrepreneurial women – has done very well. The Beaconhouse is said to be one of the largest schooling system in the world. This is a classic case of entrepreneurs improving the production recipe to provide an output with high demand. In their case, the demand is by the large middle class for quality education that is not provided by the public sector. The Pakistani state stood aside and let these systems develop.

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Improving governance to produce growth

By Shahid Javed Burki
Monday, 28 March, 2011

PAKISTAN’s economy has currently settled on a low-growth path. The average rate of GDP increase from the time the country become independent to the present – a period of almost 64 years – was five per cent a year. As a result, the economy is 19 times larger than the size with which it was born.

Since the population during the same period increased at an average rate of 2.6 per cent per annum, income per head of the population grew by a 2.4 per cent a year.This was a respectable rate of increase in personal income which allowed the country to keep a much smaller proportion of a considerably larger population out of poverty.

There are no reliable estimates of the number of people who were absolutely poor in 1947 when the country was born. What is known though is that the areas that currently make up the Pakistani state were much poorer compared to those that became independent India. Then, the proportion of the poor in the population of British India was estimated by economists at 40 per cent.

It was in fact, this number that led to the expression “the bottom 40 per cent” to refer to the society’s poor. Given these estimates, it would not be seen as an exaggeration to suggest that at the time of its birth some 55 to 60 per cent of the population of 30 million – or 17 to 18 million people were absolutely poor at the time of the country’s birth.

A number of estimates are available for the current level of poverty in the country. If we settle for a proportion of 35 per cent of a population of 180 million in 2011, the size of the pool of poverty can be said to be 66 million. In other words, the population since independence has increased six-fold while the pool of poverty has grown four-fold. Therefore, in broad historical terms, Pakistan’s economic performance if viewed in the context of its impact on poverty can be viewed as satisfactory – but not outstanding.

Growth is essential for the alleviation of poverty. Empirical work done at the World Bank indicates that the rates of increase in GDP need to be twice as high as the rate of increase in population for the proportion of the poor to remain about the same. It could be a bit higher if the distribution of income is more skewed than is normal for developing countries. It could be lower if the national income is more evenly distributed.

For a significant charge in the incidence of poverty to occur, the rate of increase in GDP has to be at least three times the rate of growth in population. Applying these ratios to Pakistan’s case, a GDP increase of four per cent a year (about twice the increase in the rate of population) could keep its incidence of poverty at about the same level as it in today – about 35 per cent. Anything lower would increase the incidence, anything higher would result in its reduction.

An urgent task before the policymakers, therefore, is to reverse the current trend and get growth going again.

What are the determinants of growth has been and continues to be a subject of central interest for those who are pursuing the disciplines of growth and development economics. In Pakistan’s case it is well understood that the economy must save more and invest more in order to get sustained growth embedded in the economic system. It is also now realised that by improving the quality of human capital it is possible to get more growth out of the same amount of investment.

It is possible to lower the incremental capital out ratio (ICOR) – the percentage of national income that needs to be invested to produce one percentage point of increase in gross domestic product – by introducing efficiency into the production system. The production system becomes more efficient if transaction costs are reduced, by allowing inefficient firms to exit and by allowing new firms to enter. It is also important to improve the technological base of the economy.

For that to happen the state must invest more in education and also provide resources for activities that go under the name of research and development. Finally, there is a positive relationship between the ratio of trade to gross domestic product and the rate of increase in national income.These are all some of the elements in growth economics. When the state promotes all of them simultaneously the result can be very rewarding. It is the emphasis on these factors in the production function that produced some of the many miracles in East Asia.

However, somewhat less understood is the relationship between the quality of governance on the one side and growth and poverty alleviation on the other. That good governance is essential for promoting growth, alleviation of poverty and improving income distribution is a realisation that has come only recently to development economists.

Numerous indices (developed by the World Bank) into which the term governance has been divided, can be assembled into essentially three categories of activities: responsibility, deliverability and accountability. The extent of the state’s responsibility for delivering services differs, determined by tradition, history and how effective are people in exercising their influence on policymakers.

Generally the failure of nonstate institutions to deliver what people desire leads to an extension in the reach of the state. The reverse is also true as the failure of the state to provide what were once regarded as its core functions were taken over by non-government institutions.

In most of mainland South Asia - but in Pakistan in particular - the private sector has stepped in to provide quality education to the segments of the population that have the means to pay for it. Where such means were not available, religious schools-generally going by the name of “madrasses” have become active.

Consequently Pakistan now has a segmented educational sector with the public sector catering for the needs of three-fourth of the school-going population, privatesector schools serving a fifth of the population and religious seminaries taking care of the remaining five per cent. This division of responsibilities will have serious social, political and economic consequences. Some of these have already begun to manifest themselves.

Currently Pakistan is poorly governed. A strategy aimed at improving growth performance of the economy must direct its attention to improving these three dimensions of governance. Failing to do that would mean that the resources of the state would be largely wasted, the rate of growth will remain sluggish and incremental income would continue to be distributed inequitably. If this happens over an extended period of time the result can be the types of revolutions we have seen erupting on the Arab streets.

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Will Japan’s tsunami wave hit Pakistani shores

By Shahid Javed Burki
Monday, 04 April, 2011

WILL the tsunami waves unleashed by the giant 9.0 earthquake in Japan reach Pakistani shores? Not in the literal sense. The waves died out quickly doing little physical damage outside Japan. But they produced another kind of turbulence that will surely affect Pakistan as the viability of the atom as the source of electric power begins to be questioned once again.
Pakistan facing a serious power crisis that has already taken a heavy economic toll was depending on the development of nuclear power to increase generation and thus close the severe demand-supply gap that has proved to be so difficult to overcome. Of the three domestic sources of energy available, one (gas) is being rapidly exhausted, the second (hydro) is proving difficult to exploit for political reasons, and the third (coal) faces numerous environmental problems.

Nuclear energy seemed like a good option until recently when the 40-year old reactor at Fukushima was hit by the earthquake and inundated by the tsunami waves. It had to be shut down. How much health damage it has done to the Japanese who came in the way of the radiation produced by the troubled reactor will not be known for years. What is known is that the viability of nuclear power is being questioned all over the globe. This has happened before.

After the “Three Mile” accident to a reactor in the United States (it happened in 1979) development of nuclear power for civilian use was slowed down. Confidence had begun to return when Chernobyl happened in the Soviet Union in 1986.The Russian accident was much more serious as was its impact on the development of the nuclear industry.

The medium to long-term impact on the future of the nuclear energy will depend on two things. First, how fast cooler and more rational heads prevail over those who are currently in a state of hysteria. The first reaction came from conservative countries such as Germany that ordered that seven of its old reactors should be immediately slowed down. Even Beijing temporarily suspen ded the approval of new nuclear reactors.

In this environment it was not easy to point out by those who look at the environmental advantage, that even under the worst case scenario, the number of deaths from Fukushima will be less than the lives lost every year because of the health problems caused by coal-fired electric plants. Coal mining accidents killed 2,400 people in China alone.

For Pakistan, the only silver lining visible in this very dark cloud is that it had turned to China as a supplier of nuclear energy. Chinese built reactors are already operational at Chasma and more are on the drawing board. During one of the many visits President Asif Ali Zardari has paid to China, the two countries signed a memorandum of understanding which, if fully implemented, will have nuclear power become a major source of energy supply.

The silver lining in the dependence on China is for the fact that for all the countries exporting nuclear technology, China appears to be the most advanced in terms of making the science and engineering behind the reactors safer than it is today.

The new technology being developed in China will be used in two reactors on a peninsula jutting into the Yellow Sea. The authorities are confident enough that this will be a much safer way of producing nuclear power than turned out to be the case in Fukushima-Daiichi types of machines. The crippled Japanese reactor used tightly packed fuel rod assemblies each with about 180 kilograms of uranium.

These packages were generally cooled by water and once the fuel was spent they were kept for hundreds of years at what were considered to be safe sights. The design used by the Japanese at Fukushima had two defects that were not present in later reactors. The backup generators used for pumping water into the reactor were located in the basement and therefore easily inundated once the tsunami water rushed in at great speed. The second problem was that the spent fuel was stored on top of the building which made it exceptionally vulnerable if the building itself got compromised.

The Shidao plants are being built by the state-owned Huaneng Group, the biggest Chinese electric company. It will attempt to prove that the technology can work on a commercial scale. Each plant can meet the power needs of cities with population of 75,000 to 100,000 people at the United State’s level of consumption.

The new Chinese design uses small uranium balls rather than rods as the core of the reactor. Thousands of balls will be used, each with its own graphite packing which will prevent radiation from leaking even in the case of a malfunction.The reactors will also be cooled by a non-explosive helium gas instead of relying on a steady flow of water.

The technology behind the new reactors has been known for a while. Called the pebble-bed reactor approach it was experimented with by Germany, South Africa and the United States but was not developed. It was a costly machine. However, there is virtual consensus among nuclear experts that the technology works better than the conventional one and produces more manageable waste. The spent balls are considerably less radio-active than the rods and can be disposed off in the sites near the plants. The experiments outside China were not continued since the private sector was not prepared to outlay a large amount of capital that may ultimately not yield economic results. Financially rich China has taken care of this problem by coming in with massive support. The government has paid for the entire research and development bill and will pay an additional 30 per cent as subsidy for the capital cost of building the plants.

China now has the world’s largest nuclear reactor building plans in the world. As many as 50 new reactors will be built, mostly of the conventional design. But if the pebble-bed approach works a larger proportion of the plants will be of the new variety. Western opinion about the Chinese approach is generally positive.

“China epitomises the stark choices that we face globally in moving away from current forms of coal-based electricity”, says Jonathan Sinton, the top China specialist at the International Energy Agency in Paris. “Nuclear is an essential alternative to coal. It’s the only one that can provide the same quality of electricity at a similar scale in the medium and long-term”.

While locating the new plants the Chinese are being cautious, having fully imbibed the lessons from the Three Mile and Fukushima accidents. The authorities have ordered that all nuclear plants be located at least 50 kilometers from the nearest city. Chinese nuclear safety agency met after the incident in Japan and reviewed the Shidao plant design as well as its siting. They have given the goahead for construction work to proceed.

Since one is not privy to the on-going discussions between China and Pakistan on the nature of the former’s promised assistance to the latter, it would be prudent for Pakistan’s Atomic Energy Commission to look again and with considerable care at the programme of Chinese assistance.

It would be wise to include one of the pebble-bed reactors among those headed eventually Pakistan’s way. Joining the Chinese even at the experimental stage of the development of this breed of reactors would help the Pakistani engineers and scientists to gain enormous valuable experience.

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Growing worries about

By Shahid Javed Burki
Monday, 11 April, 2011

THERE appears to be a slight break in the rate of increase in the level of prices in recent weeks. But it is not significant enough for the policymakers not to worry about the prospect of increasing inflation.

A small increase in the level of prices is expected and is healthy for the economy. It leads to a better allocation of resources within the economic system. What is not healthy is a persistent increase in prices with an upward trend. This is has been the case in Pakistan and should be a matter of concern for the policymakers in Islamabad as well as those who manage the central bank.

There are several reasons for the increase in prices. These can be caused by disruptions in supplies. This is what happened during the floods of last year when the damage to the infrastructure made it difficult to transport goods from the points of production to those of every day consumption.

Supplies may also be affected if a crop that is an important source of consumption suffers from an unexpected decline in production. This could be caused by floods as hap pened last summer.

But it could also result from disease and pestilence. This occurred in the early years of the rule by General Zia ul Haq. In these supply related reasons for inflation, the country can bring in imports if it has the resources to purchase them. This is what was done by the Zia government which not only bought wheat from abroad but set up a new body for hauling it to the major centres of consumption. Thus was born the National Logistics Cell which was established by the military and managed the task of transporting more than a million tons of wheat upcountry.

The NLC went on to become not a major road haulage company. It has also become a large road construction enterprise. The Lahore ring road, for instance, is being constructed by NLC.

Inflation can also result from the stimulation of domestic demand. This normally happens when the governments run large fiscal deficits and finance them by borrowing from the central bank which in turn uses the printing press to print money. This is what is occurring at this time.

Consumer prices increased by 12 per cent in the financial year 200708, the last year of the Musharraf period, and then again by 20.8 per cent in 2008-09, the first year of the democratic government.

The level of price increase moderated in 2009-10 when it was estimated at 11.7 per cent but picked up once again in the first six months of the current financial year. There were different reasons for these price movements and it is worth recalling them in order to draw some public policy lessons from them.

The price rise in the waning days of the Musharraf period was because of the loosening of the fiscal purse strings by the government and the use of cheap money to stimulate domestic demand. This was the classic approach of a government preparing for elections.

Musharraf’s financial and political advisors thought that by creating a sense of prosperity among the people it would be able to persuade a large segment of the electorate to cast votes for the ruling party, the Pakistan Muslim League (Q). That did not happen and the opposition triumphed, using the need for the country to return to democracy as a more powerful tool than perceived economic wellbeing.

The successor government inherited a difficult economic situation, the consequence of the poor management of the economy by the previous regime. Whether it would have been to stabilise the economy is debatable; before it could settle down Pakistan was hit by one of the sharpest increases in commodity prices the world has experienced in recent years.

The international increase in prices was led by oil, an extremely important commodity for Pakistan. The price of oil climbed to unprecedented levels and Pakistan found that it was rapidly running out for foreign exchange reserves in order to meet the ever-increasing import bill. Islamabad turned to the International Monetary Fund when the fear grew that it may not be able to meet with its foreign obligations.The Fund, which had received a large infusion of finance to handle the problems faced by countries such as Pakistan, obliged by signing a very large Standby Arrangement with Islamabad. The SBA came with the usual conditions, among them the need to reduce the fiscal deficit.

This was necessary, as indicated above, to prevent the government from having the State Bank run the printing press. Some of the IMF-induced fiscal discipline helped to moderate the price situation. There was also help from the international side, as the price of oil declined almost as rapidly as it had increased.

The current inflationary situation is the result mostly of a political environment which, the rulers believe, severely limits their options. They are of the view that the reform of the tax system which is essential to place the government’s finance in order cannot be put in place without disturbing the fragile coalition that governs the country at this time.

Among the measures that need to be adopted include taxing agriculture. This is one of the largest sectors of the economy. It is scandalous that income from it is not being taxed. ZA Bhutto’s decision to tax farm incomes was annulled by Ziaul Haq.

Services are proving difficult to tax since the provinces argue that this should be their revenue to collect. The rich either manage to escape paying taxes or ensure through pressure to keep their assets outside the purview of the tax authorities. It is because of this that owner-occupied houses are not taxed, why capital gains are tax exempt, why the Musharraf administration abolished wealth tax, and why the items of consumption by the rich are kept out of tax net.

Ultimately the rich by lightening their own burden shift it to the poor. Low tax-to-GDP ratio hurt the poor in many ways. Of these two are important. The government is unable to provide them the services the poor need. This is one reason why the quality of education and health care provided to the poor by the state in Pakistan is of such poor quality.

Also, as discussed above, a cashstrapped government tends to run to the printing press to provide itself with the money it needs. This results in inflation which, in fact, is a tax on the poor. Another way of looking at rapidly increasing prices is to see it as an erosion in the incomes of the poor.

The thrust of the argument made here is that the government has many reasons for being concerned about inflation. If it persists it produces inflationary expectations which builds price rise into human behaviour. Once that occurs it is difficult to get it out of the economic system.

Also, by reducing the real incomes of the less advantageous, it causes great resentment which could lead to political explosion on the streets that is rocking the Middle East at this very moment.

By not addressing the problem of inflation by improving the tax system since such a move would not be supported by the well-to-do, the policymakers are inviting another political problem: the wrath of the poor.

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Shaping economy in times of crises

By Shahid Javed Burki
Monday, 18 April, 2011

PAKISTAN today is passing through difficult times. With the rate of growth plunging to 2.5 per cent, there will be a significant increase in the incidence of poverty. Perhaps another six to seven million people will be added to the pool of poverty.

However, in a recent press statement, President Asif Ali Zardari said that his government had managed to stabilise the economy. As evidence in support of this view he spoke about the extraordinary increase in exports and remittances as well as the build-up in foreign exchange reserves. These developments have indeed taken place but do not signal that the economy is out of the woods.

Where will Pakistan go from here? The Institute of Public Policy at Lahore has constructed an econometric model to draw up some scenarios for its annual report to be released on April 25. Of these, two scenarios are presented here to set the stage for policymakers to contemplate adopting an approach that would help the economy move in the right direction.

In the best case scenario, Islamabad undertakes major tax reforms, starting with the budget of 2011-2012 which includes introduction of a comprehensive reformed general sales tax, the RGST. This means withdrawing all exemptions on goods and eliminating all distortions that have crept into the current system.

Wealth tax will be reintroduced and a strong effort will be made to curb tax evasion. These measures will be seen as making the system more equitable and should improve compliance. Provincial sales tax on services will be broadened and the provinces will develop their tax systems to generate more resources from within their economies, taking advantage of some of the provisions in the 7th National Finance Commission Award 2009.

On the expenditure side, the best case scenario focuses on improving working of large lossmaking enterprises, on eliminating the problem of “circular debt” that is constraining the supply of electric power from existing capacity, and a careful review of public sector development programme by placing emphasis on completion of high priority projects. These measures will bring about a significant improvement in the govern ment’s financial situation.

Within the context of monetary policy, the best case scenario assumes that the State of Bank of Pakistan will have the autonomy to order its policies with the objective of containing inflation and not meeting the fiscal deficits of the federal government. The SBP will back off from the printing press and let the government finance its operations by increasing tax revenues and by going to the market to raise additional money. The central bank will also let the market determine the exchange rate.

This package of measures will have a number of positive consequences including the resumption of tranche release by the International Monetary Fund, Pakistan’s return to international capital markets, increase in foreign direct investment, and resurgence in business confidence.

With the pick up in the rate of economic growth and increase in government revenues at the central and provincial levels, new fiscal space will be created so that there is significantly greater focus on social development and social protection policy. On the external side, there will be considerable improvement in the rate of growth in trade.

This model estimates the real GDP growth increasing from a low of 2.2 in 2010-11 to 6.5 per cent four years later; the rate of investment increasing from 12.5 to 25.1 per cent of GDP; the rate of inflation dropping from 14.2 to 9.8 per cent; and the fiscal deficit declining from 6.2 to 3.6 per cent.

The worst case scenario produces a particular ly grimmer picture of the economy. It is based on the assumption that the policymakers will not gather the political will and the required support to introduce the proposed policy changes; allow further deterioration in the quality of governance to take place, further decline in the delivery of public services to the citizenry including those provided by the large state-owned corporations, and greater economic isolation of the country. There will be haemorrhaging of foreign exchange reserves due to a sharp increase in the current account deficit.

By the end of 2012-13 foreign exchange reserves could reduce to the level equivalent to only two months of imports. There could be a serious financial crisis by the second half of 2012-13, on the eve of the next set of general elections.

According to the worst case scenario, the rate of GDP increase is only two per cent in 2011-12, increases to 3.3 the following year, only to drop to 2.8 per cent in 2014-15. The rate of investment declines from 11.5 to 8.5 per cent; the rate of inflation increases from 14.5 to 20.1 per cent; and fiscal deficit grows from seven to 7.6 per cent. Real exchange rate drops from Rs92.7 to the dollar to Rs133.2.

These illustrative scenarios raise the question of probability. What is the likelihood that the political system will have the wherewithal to introduce the reforms needed to move to the best case scenario? Or, conversely, will the policymakers, not recognising the consequences of inaction, allow the policy environment within which the economy is working to further deteriorate?

It is not likely that the stakeholders within the system will have the will or the interest to adopt the measures spelt out in the best case scenario unless they are pressured by circumstances that threaten their hold on power.

One type of pressure that could build up has brought about significant change in the structures of politics in some of the countries of the Middle East. The explosion on the streets of that part of the world happened unexpectedly; it reflected the frustrations of the citizenry with the political and economic systems under which they were kept for decades.

Some of the recent developments suggest that building blocks have been gathered that could allow the construction of a political structure that will be more responsive to the needs of the people.

The most important building block is the passage of the 18th amendment last year and the speed with which it is being implemented.

The 7th National Finance Commission award of 2009 is another part of the foundation that is being laid. If done with appropriate care, the intended devolution will bring government closer to the people.

Economists have long recognised that good governance means a government that is not too distant from the people it is intended to serve. In other words, there is much that remains to be done before the government can claim – as President Zardari did the other day – that the economy has been stabilised.

(The writer is chairman of The Institute of Public Policy, Lahore.)

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