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  #211  
Old Monday, June 13, 2011
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Chinese investments in water projects


By Shahid Javed Burki
Published: June 13, 2011


There is news in the western press that the Chinese may be getting ready to make large investments in developing Pakistan’s water resources. These investments will be made to increase the amount of water available for irrigation and using water to generate electricity. According to an item in a recent issue of the Financial Times, the contemplated amount of investment is of the order of $15 billion. This amount has been proposed by the Three Gorges Project Corporation, the entity that built and operates the largest water control project in the world.

The Chinese company would like to write a new master plan for using the available flows in the Indus River. A total of $50 million would be spent on the plan and would draw upon the studies carried out several decades ago by the World Bank and the United Nations Development Programme. The earlier plans had also identified a number of potential sites for the development of the enormous hydroelectricity potential of the rivers of the Indus basin.

But the plans remained just that, plans. No action was taken either for political reasons or for the reason that the various administrations that held the reins of power at various times did not pay attention to the development of the sources of energy supply. Now as energy shortages are taking heavy economic and social tolls, Islamabad has begun to look around for help. China is one direction in which it is heading.

In 2010, China and Pakistan agreed on an investment deal to build the Bunji dam on the Indus. In additions to this investment, the new plan that China is offering to develop will include large projects at sites such as Kohala and Dashu. If these investments materialise, China will bring to Pakistan its expertise in building large water projects. It is ironic that some of the knowledge China will bring to Pakistan was learnt initially from Pakistan itself. In the 1970s, Pakistan was recognised as the leader in the developing world on the management of large river projects. China then looked to Pakistan to learn what it needed to know when it turned its attention to harness its many rivers.

The dam on the Yangtze at Three Gorges has provided China unparalleled experience in managing large projects. The country has replaced Canada, Italy, Germany and the United States in terms of hands-on experience with water investments. When Pakistan built the lndus Water Replacement Works in the 1960s, it engaged several western companies to design, build and supervise the construction of the projects on the three western rivers in the Indus system. The Indus, the Jhelum and the Chenab had come to Pakistan’s share after the signing of the Indus Water Treaty with India in 1960. China was then absent from the scene. Now no other country has the kind of experience with large water projects that China has accumulated in three decades.

It is interesting to note how China developed this expertise. My own involvement with the Three Gorges project exposed me to the way China does large water investments. In 1987, I was appointed to head the department responsible for the Bank’s operations in China. One of my early responsibilities in the new job was to chair the three-man Three Gorges Committee. The other two members were from China and Canada. The staff work for the committee was done by the Yangtze Valley Authority and the World Bank. At our very first meeting, the Chinese made it clear that their interest in turning to the Bank was not to obtain financial support from the institution. They were much more interested in getting the Bank to use its knowledge of large water projects to help them with the design of the Three Gorges development program. By that time the Bank had acquired worldwide reputation in the area of water management. Much of this rested on the Bank’s work in Pakistan and some of the engineers who worked on the various Bank-funded and supervised projects were from Pakistan.

The Bank’s technical staff – many of them from Pakistan – told me to press the Chinese on three issues: To satisfy the global community that the project would not be an environmental disaster, that the large number of people it would displace would be properly settled and that water shortages would not result downstream of the project. At the first meeting of the committee under my chairmanship, I made it clear that the feasibility report would not be approved unless the committee was satisfied on these three counts. The effect of this was to postpone the decision on the project by several months. I had expected that the Chinese would be unhappy at this decision since they were keen to proceed with implementation. That did not turn out to be the case. In fact, they were pleased that I was able to bring to the table some of the knowledge the Bank had accumulated in the area. It was the Canadians who were unhappy with the delay. They were anxious to have the project go forward. They hoped to pick up a number of contracts once Beijing started to build the massive dam.

We hired a number of consultants to look at the three aspects of the project with the result that a great deal of additional work got done on environmental and settlement issues. A year later, the committee approved the project and once that was done the Chinese told me that they would not ask the Bank for financial support nor would they engage foreign consulting companies for implementing the project. Given this experience, what would be my recommendation to Islamabad for managing the Chinese involvement in water management in Pakistan? I recommend bringing in the World Bank and the Asian Development Bank as advisers, once the Chinese have done the spade work.

Islamabad may also consider establishing a new authority committed entirely to the implementation of the Chinese plan. And, special emphasis should be given to addressing the types of issues we examined when the feasibility report of the Three Gorges Project was being looked at.

Chinese investments in water projects – The Express Tribune
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  #212  
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Fallout of volatile oil prices


By Shahid Javed Burki
Monday, 13 June, 2011


PAKISTAN’S economy is often affected by developments that take place outside the country’s borders and over which the policymakers in Islamabad have no control. Policies such as those adopted in framing national and provincial budgets and in determining the structure of tariffs matter.
But what also matter is what happens in some of the international markets. One of these is the oil market, given Pakistan’s large and increasing dependence on imported oil.

This is why it is important to take note of the decision taken on Wednesday June 8 by the representatives of the eleven states that make up the OPEC, the cartel of oil producers. The meeting ended in considerable acrimony and dashed expectations that the members of oil cartel will increase production to steady the markets. The development led to an increase in the price of Brent crude by $2 to $118.59 a barrel.

Saudi Arabia, with the OPEC-allocated level of production of 8.9 million barrels a day, is the largest member of the OPEC followed by Iran with 3.7 mbd, UAE 2.5 mbd, Kuwait 2.4 mbd, Venezuela 2.2 mbd and Nigeria 2.1 mbd. The remaining four – Angola, Algeria, Ecuador and Libya together account for 4.4 mbd. Ecuador is the smallest producer in the group with production of only 400,000 mbd. Iraq, the twelfth member, has not been subjected to a production quota since the country was invaded by the United States. The OPEC production of 26.2 mbd is 40 per cent of the world total. In December 2008, the members had agreed to produce 24.85 mbd but the actual production is about 10 per cent higher. Some of the large oil producing and exporting countries such as Russia have not joined the cartel.

The production quotas fixed by the cartel are not always followed by its members. Saudi Arabia, for instance, unilaterally increased its production to compensate for the decline in exports from Libya. It increased it again in May by about 200,000 and is set to add further production of 200,000 and 300,000. In spite of the OPEC determined quotas and the powerful oil ministries that manage production in their countries, no firm estimates are available as to how much the cartel really produces. This lends to a great deal of speculation and volatility in the oil market. There is a consensus among experts that the cartel is currently pumping about 1.3 mbd more than the agreed limit.

The oil ministers met in Vienna on June 8 to decide on the levels of production and it’s sharing among the members. Vienna is the city where the OPEC has its headquarters.The meeting was held as political turmoil in the Middle East was raging. Libya because of the civil war was not producing much oil and exporting even less.The country’s 1.3 mbd of exports seemed lost for as long as the struggle in the country remained unresolved. Its place at the meeting was contested by the government and the rebels. The ranks of the rebels were strengthened by the defection of the former oil minister. Small of the smaller Arab producers were also having political difficulties. Syria’s 150,000 barrels a day of oil exports were in jeopardy because of the mounting violence in the country.Yemen’s 260,000 barrels a day of production had virtually halted. The country’s president had gone to Saudi Arabia on the eve of the Vienna meeting. His future as well as that of his country remained uncertain. A complete breakdown in law and order could conceivably threaten the nearby Bab el Mandeb shipping lane through which an estimated 3.7 mbd passed. According to one oil expert, “Yemen was wild card. It could be the failed state in the middle of the gulf and it threatens the stability of the largest oil producer, Saudi Arabia.” In light of all these uncertainties, there was hope expressed on the eve of the meeting that the oil ministers, meeting in Vienna, will act to stabilize a jittery market. The decision to increase production would have been the first taken in nearly four years. The aim would have been to put a lid on the continuing increase in the price of oil following political problems in many countries of the Middle East. Saudi Arabia wanted the price of crude to settle down well below the current levels. Ali elNaimi, the Kingdom’s oil minister had indicated on several occasions that he wanted oil prices to remain between $70 to $80 a barrel, much below the trading range between $105 and $125 which has been in place for more than four months.

The Saudis were also concerned that the world demand would increase as the refineries, following the pe riod during which they shut down for maintenance, return to full production and that would add to the pressure on prices. Riyadh was nervous that at the current levels, the global economy may not be able to sustain the tepid recovery from the Great Recession of 2008-09. ElNaimi described the Vienna meeting “the worst we have ever had”. His attempt to raise production was blocked by Iran. Terhran was joined by several small producers who did not have the capacity to increase in output. A decline in the price of oil would have reduced their earnings. The Saudi minister wanted to add 2.5 mbd to the club’s production level. OPEC’s spare capacity of some $4 mbd is in the hands of just three countries – Saudi Arabia, Kuwait and the United Arab Emirates. All three were in favor of raising the level of output.

There was also some concern in several quarters about what is called “demand destruction” – when consumers begin to reduce consumption on a permanent basis by making changes in their life style while investments are made in developing non-oil sources of energy. Experts believe that this is likely to happen if the price of oil remains above $125 a barrel for a long period of time. After the difficult meeting in Vienna it has begun to approach that level.

What should be the reaction in Islamabad to the Vienna decision? Pakistan, like several other developing countries, tightly controls the oil market. Sale price at the service stations are set by the government and are well above the price at which the companies buy the product. The difference is collected by the government as a form of oil tax. There is uniform price in the country which means that the areas near the ports through which much of the oil comes subsidize those that are upcountry. This kind of regime produces enormous distortions which are not helpful for an economy that is so troubled most of the time.

Among the several structural changes the government needs to introduce is in the area of oil marketing. Ideally the government should let the price at the pump and at the points of distribution to be set by the market. It should reflect competition among the distributors. The state can charge a tax on sales so as not to affect the revenues generated by oil. The market should be allowed to develop instruments that will take out the wide fluctuations that have become the norm in oil trade.
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  #213  
Old Monday, June 20, 2011
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The urban-rural divide


By Shahid Javed Burki
Published: June 19, 2011


Pakistan’s economic and political future — perhaps even its continued existence as a unified state — will be defined by the way the urban-rural divide finally gets resolved. This divide has been at the centre of social conflict ever since the country emerged as an independent state when there was a sudden infusion of urbanism into a culture that was predominantly rural. This led to conflict between the ‘insiders’ and the ‘outsiders’. The insiders were led by the landed community who, after having worked out a comfortable relationship with the British rulers, saw no reason why it should support the idea of Pakistan. They were confident that they could work out a similar arrangement with the Hindus, once the British transferred power to them.

The outsiders were less sanguine about their future in a Hindu-majority political system. They feared that domination by the Hindu community in an independent India would further reduce the economic and political chances available to the Muslim minority. This community had already suffered a great deal once Muslim power had given way to British rule. The British, in fact, had adopted a number of policies to reduce the influence of the Muslim community in the affairs of the country over which they now ruled. Persian was replaced with English as the official language; in recruiting the personnel for the expanding British administration, the new rulers preferred non-Muslims over Muslims; and from 1828 onwards, British authorities began to confiscate land endowments which financed Muslim education. As MJ Akbar reminds us in Tinderbox, “the principal Muslim grievances were in education policy that denied them opportunity, reducing them to ‘contempt and beggary’”.

Once the British established control over what is now Punjab and Khyber-Pakhtunkhwa, they used the state to protect the Muslim community from the economic power of the Hindus and Sikhs. This change in approach towards the Muslims was to reward them for the help they had given the new rulers to suppress the Indian Mutiny of 1857.

Since most of the leadership of the insiders was lukewarm to the idea of creating a separate homeland for the Muslim community, it took some time before this group was able to reassert itself. In the meantime, Pakistan was governed by a ruling elite that drew its power from the outsiders — the muhajir community. In other words, the first generation of Pakistani rulers had a strong urban bias in their thinking about economic and political issues. One consequence of this orientation was the neglect of agriculture which was the most important part of the economy.

As a result of this history, these two Muslim communities — those from Muslim-minority and Muslim-majority areas — developed very different approaches towards the state. The former saw the state’s role limited to a few functions; the latter placed a heavy reliance on the state. Once the insiders were in power, they pulled the state in to help them consolidate their economic hold over the country.

The urban bias could not be maintained over time. It was corrected when the military came to power under General Ayub Khan. Both the military president and the troops he commanded had deep roots in rural Pakistan. Ayub Khan brought in a landlord — the Nawab of Kalabagh — to help him govern the then West Pakistan . The nawab introduced a style of governance that has persisted to this day. In spite of the enormous amount of demographic and economic change that has occurred over the last several decades, the landed interests continue to exercise a disproportionate amount of influence over political and economic decision-making . The nawab’s influence on statecraft has not been fully appreciated. He froze the process of change and the political ascendency of the refugee community that had begun to occur with the founding of Pakistan. This is where the situation stands today. The ruling elite refuse to allow modernisation from entering the political, economic and social domains, even when they profess to favouring democracy. The ruling elite exercise total control over policymaking. They don’t allow people to influence the making of policy through their representatives in the national and provincial assemblies. In this context, I am intrigued by the focus the Planning Commission has placed in its growth strategy on the city as the driver of economic and social change. Whether the current political masters allow this strategy to be pursued and how it could correct the current, rural-based system are some questions for a later article.

Published in The Express Tribune, June 20th, 2011
The urban-rural divide – The Express Tribune
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Old Monday, June 20, 2011
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Energy links may reshape South


By Shahid Javed Burki
Monday, 20 June, 2011


SOME of the confidence displayed by the senior Indian leaders about the country’s economic future has begun to dissipate.
In his budget speech in 2010, Pranab Mukherjee, the current finance minister, had predicted that the country was headed towards double digit rates of GDP growth.

The revised growth numbers for the first quarter of the current financial year suggest a much lower rate of growth – of about 7.6 per cent on an annualised basis.

There are several reasons for this decline in expectation of the country’s future economic performance, some of them shared by other countries of the South Asian region. Inflation — in particular food inflation — has begun to take a heavy economic toll.

Large scale corruption has undermined the confidence of the citizenry in the quality of governance offered by the governments that hold the reins of power in South Asia. And, there are serious shortages of energy that inhibit investments in the economies. There is some indication that the South Asians may be on the way to find ing regional solutions to the problem of energy deficiency.

At the time of independence, the electric systems of the countries of mainland South Asia were connected with one another, albeit in a low technology way. For instance, a significant share of power used by Lahore came from a power station that was located in the part of the Punjab that went to the share of India.This link was severed soon after the two countries gained independence. Since then the power systems have not been linked. There have been some discussions but without much progress of connecting the much more elaborate grid systems in Bangladesh, India and Pakistan.

At one point when Pakistan had a surplus of energy, a number of power stations were commissioned by the private sector, there was some talk of exporting the surplus power to India. This could have been done only if the grid systems of the countries were connected. The proposal did not go very far as within a few years Pakistan had gone from being a surplus to a power-deficit situation.

The recognition that without regional integration, South Asia will not be able to realise its economic potential has been slow in coming.

If there is a lesson to be learned from experiences around the globe, it is the largest economy in the area that has to play a leading role in bringing about greater economic integration.

This was the case in Europe when the initiative to move towards greater economic cooperation was taken by the area’s largest economies, France and Germany. In the North America Free Trade Area, the United States took the lead. In the Association of South East Asian Nations, ASEAN, Indonesia, by far the largest country in the region, decided not to throw its weight in moving forward the arrangement.

India, South Asia’s anchor economy and also by far the most rapidly growing economy in the region, has been reluctant to take the lead. In fact, it was Bangladesh that was behind the initiative to create the South Asian Association for Regional Cooperation (Saarc) The Indian insistence that the goals set out in the Saarccharter should be relatively modest has kept this initiative from developing a momentum.

Politics, rather than economics, was the reason why the South Asian region remains poorly integrated. That may be changing with the sector of energy taking the lead. According to a study carried out by USAID with the help of the Confederation of Indian Industry only nine per cent of the hydropower potential of South Asia has been tapped. Coal and water are the two most important sources of power in South Asia followed by natural gas. But India and Nepal are making some progress in developing plans that would result in providing benefits to both countries from the tremendous hydroelectricity potential of the fast flowing rivers and streams that originate in the Himalayas.

India will need to add 250,000 megawatts of power to its current capacity by 2017, a five-fold increase to sustain its economic growth. According to the AI study, “a South Asia grid will give the region 100,000 megawatts of power to trade and help India tap the hydropower and natural gas reserves of its neighbours.” There are several projects at the planning stage. The most advanced is a 87 miles inter-country grid to be built to initially supply Indian power to its neighbour, Nepal. In return Nepal will construct power plants that will tap into its enormous hydro potential and supply the surplus power to India over the same grid. By 2019, Nepal will harness about 3,000 megawatts of power and will export most of it to India. Another project — but at an early stage of development — is a $450 million undersea power transmission link between India and Sri Lanka.

Among the projects that have gone beyond the planning stage is the New Silk Route that will bring natural gas to Pakistan and India from Turkmenistan. This promises to supply 3.17 billion cubic feet of natural gas daily to the energy starved nations of South Asia. The project being developed with the help of the ADB will cost $7.6 billion and could be completed by 2016. Fuel prices, transit fees, and gas sales and purchases are being negotiated.

According to one assessment, “discussions have faltered many times in the past decade, and many issues remain unsettled. Officials in the region also worry about how to ensure against supply disruptions in the event of political hostilities between India and Pakistan.” More or less the same applies to another multi-country gas pipeline – this one will connect Iran with Pakistan and India. Negotiations for concluding this deal have gone on for years but remain inclusive. Added problem is the pressure by the US is putting on both Pakistan and India not to go forward with this project.

While Pakistan has successfully resisted this pressure, India has been less willing to defy the US. It is deeply engaged in working out the arrangements that will allow the flow of western nuclear technology to India.

Thawing of relations between Bangladesh and India after the return of power of the India-friendly Awami League in Dhaka may result in the building of a pipeline that would connect the two countries. Again, this is one of the projects that have been under discussion but politics rather than economics came in the way. Now that New Delhi has opened a line of cheap Indian credit that Dhaka could use, there is a possibility that the pipeline may get to be built.

Given all these projects now in discussion and planning stages, it would appear that gas pipelines connecting the countries of mainland South Asia may result in building confidence and lead to the development of connections in other energy areas. If that happens, the economies of the region may get to be better integrated.

Energy links may reshape South
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Turkey back in the Muslim world



By Shahid Javed Burki
Published: June 26, 2011


There is no doubt that the year 2011 brought about irreversible changes in the way the Muslim world is organised politically and the way it is likely to shape its relations with the West and in the West, in particular with the US. As the year 2010 gave way to 2011, even the most well-informed Muslim world watchers could not have seen what the next six months would bring. A fruit vendor in a small Tunisian town set himself on fire, not able to live with the insult heaped on him by a police-woman. This act of self-immolation had far-reaching and hard-to-imagine consequences.

Some of the more obvious results have already entered as important markers for the unfolding history of the Muslim world. The exploding streets in Tunisia and Egypt forced out of office long-serving presidents. While Tunisia’s Zine elAbidine Ben Ali has found a sanctuary in Saudi Arabia, Egypt’s Hosni Mubarak was unable to leave the country. He is now facing the courts that he had once packed to serve his regime. He is defending a number of charges, some of which carry the death penalty. A third long-serving president, Ali Abdullah Saleh of Yemen, after having been seriously injured in the bombing of the mosque in the presidential compound, is in Saudi Arabia being treated for the burns on his body. It is unlikely that he will be allowed to return.

Two other regimes — those in Libya and Syria — are under attack by large numbers of dissidents who have drawn courage from the actions of those who were successful in getting rid of the rulers in three other countries. The regimes have managed to survive by using the tactics that kept them in power for so long. The governments headed by Muammar Qaddafi in Libya and Bashar al Assad in Syria have used terror to stay in power. They may have bought some time but it seems unlikely that they will continue to hold on to power when so much change is occurring all around them.

One of these changes is in Turkey, a Muslim country that had once ruled the Arab world as part of the Ottoman Empire. When it was dispossessed of its imperial domain, it tried hard to turn the other way. Kamal Ataturk, the father of modern day Turkey, worked hard to de-Islamise his nation and to associate his country with Europe. But Turkey’s attempt to Europeanise itself was not reciprocated by Europe, especially after Islamophobia became a potent rallying cry in the continent. It was in this state of uncertainty that a new Turkish leader stepped in with a new political, economic and social philosophy. His impact on the Muslim world may also be of as much consequence as that of the explosion in the Arab street. In the elections held on June 12, Recep Tayyip Erdogan and his Justice and Development Party (known by its Turkish acronym, AKP) took 50 per cent of the vote and comfortably retained its majority in the unicameral legislature. The party, whose roots are in Turkey’s Islamic movement, fell shy of the 330 seats needed in the legislature to send for a referendum to make the changes in the constitution written by the military. In fact, the prime minister had hoped for a super majority of 367 seats that would have made it possible to pass the constitutional changes by the parliament acting alone. Mr Erdogan wanted a French style republic with a strong presidency and himself as president. But the verdict from the electorate was clear: It liked the prime minister but wished to give him constrained powers. The re-elected prime minister seemed to have received the message. “We’ll go to the opposition and we’ll seek consultation and consensus,” he said, responding to the results. “We will bring democracy to an advanced level, widening rights and freedoms. The responsibility has risen, so has our humility.” While the exercise of people’s will was open and in full public view, there is a consensus amongst Turkey watchers that the country still had some distance to go before it could become a truly democratic state.

Turkey has important lessons for those busy designing new political systems in Muslim countries where the street won over the establishment. There are also lessons for Pakistan, another Muslim country that is trying hard to find its political feet. The Turks have shown that they can trust a political party that does not profess to be secular; one that has deep roots in the conservative elements within the society. It is of some comfort for the moderates in Turkey that Erdogan’s party has not made any attempt to impose its views on the society at large. It is happy to go as far as the electoral process will let it proceed. Prime Minister Erdogan has handled his relations with the powerful military with great restraint but also with firmness. He was not afraid to push the generals back if they attempted to assert their right to protect what they regard as the legacy of Kamal Ataturk. If ‘Kamalism’ is not what the majority of the people desire, then it would not be forced on them.

What the world is watching with breathless anxiety is the political and social transformation of the Muslim world. Change is occurring all over. The process has begun and cannot be resisted for too long by those who favour the status quo. America under President Barack Obama appears to recognise this and instead of resisting political modernisation in the Muslim world, as it did on several occasions in the past — in Iran, for instance, when Prime Minister Mohammad Mossadegh tried to assert its constitutional authority — it is prepared to go along with it.

Published in The Express Tribune, June 27th, 2011.
Turkey back in the Muslim world – The Express Tribune
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Trade in a changing world market


By Shahid Javed Burki
Monday, 27 June, 2011


THOSE who have been arguing that the centre of the global economy is moving from the Atlantic to the Pacific normally focus their attention on the sharp differences in the rates of GDP growth between today’s rich countries and those that have been classified as “large emerging economies”.
After the global economy began to recover from the Great Recession of 2008-9, the rates of economic growth for the BRICS picked up to the levels they had attained before the downturn. However, recovery in the developed world has remained sluggish. Some economists have begun to talk about the possibility of a double dip recession of the type that hit the global economy in 1981, some 30 years ago.

These differences in the rates of economic growth have meant that the bulk of the increase in global product is being produced by the emerging world. With this being the case, the share of the BRICS in global GDP is increasing rapidly. Already China has passed by Japan and become the second largest economy. Some analysts including those working at the IMF believe that within a decade to a decade and half, China will overtake the US and become the world’s largest economy.

While the size of the economy and the share in global product matter, what is even more significant is the development of new trading relations among the more rapidly growing economies. This is happening around the globe and we are approaching the time when the emerging markets will do more trade among themselves than with the United States, Europe and Japan — the three centres of the old economy.

“The greatest show on earth is happening elsewhere: the creation of a southern Silk Road, a network of new ‘SouthSouth’ trading routes connecting Asia, the Middle East, Africa and Latin America,” wrote Stephen King in a recent article. He is the Chief Economist of the HSBC group, a bank that has a large stake in emerging markets, and the author of a recent book, Losing Control: the Emerging Threats to Western Prosperity.

China and now increasingly India are at the centre of the new trading links that are being forged around the globe. While the West would like to use India as a check on the economic rise of China, the Indians have no problem in linking up with China to take advantage of the enormous economic power of their large neighbour. China is now India’s largest trading partner having displaced the United States from that position. The same change has occurred with respect to China’s economic relations with Pakistan, South Asia’s second largest economy. Once again China has replaced the United States as the most dynamic trading partner for Islamabad. Both India and Pakistan are China’s immediate neighbours and the commonly used “gravity model of trade” tells us that large countries that share borders or are not very far from each other should do a great deal of trade with one another.This has begun to happen in the Asian Mainland.

But distance is not discouraging China to develop new trading relations. It is jumping the oceans to get close to Latin America and Africa. These two continents have the natural resources that the Chinese need in order to sustain their present high rate of growth into the future. Brazil is an interesting example of the change that is occurring in the global pattern of trade. For the moment 42 per cent of its trade is with the developed world, another 22 per cent with the countries in Latin America, and the remaining 36 per cent with the rest of the world.

If the present trends hold, it is the last of these three patterns of trade that are set to increase significantly, outstripping the trade with the developed world. By the middle of this century, the share of the intercontinental South-South trade in Brazil’s total is likely to be more than 50 per cent. Most of this increase will come from the decline in the share of the old economies.

Increase in commerce brings other changes. Not only are the large emerging economies looking at each other as potential markets.They are also developing other kinds of relationships. Chinese tourists have begun to travel to Africa and Latin America and see the parts of the world that was not within their reach a few years ago.

New air connections are being made practically every day. Qatar Airways, one of the most rapidly expanding airlines in the world now has more destinations in the emerging world than in Europe and the United States. At the recent air show in Paris, airlines from emerging economies were far more active customers than the carriers from the Western world. A private sector airline from India placed one of the largest orders in aviation history for the purchase of planes manufactured by Europe’s Airbus.

Firms based in the large emerging markets have begun to acquire assets in other countries. For instance, the second largest merger and acquisition deal in Brazil last year was between two oil companies from China and Brazil — China’s Sinopec concluded a $7.1 billion deal to acquire a large share in Brazil’s Repsol-YPF.

When nations develop close economic relations they also establish institutional infrastructure to iron out the wrinkles that may arise. The creation of the Breton Woods system in 1946 following the defeat of Germany and Japan was meant to provide an institutional underpinning for minding the evolving relations among the victors.

However, as the struggle over the choice of the new head of the IMF amply demonstrates, well established clubs don’t like to give management positions to new members. The job is likely to go to the woman who is currently the foreign minister of France. Realising that old institutions will be hard to break into, China and other large emerging economies have begun to create institutions of their own from which the old world is being excluded.

BRICS are holding regular summits; the Shanghai Forum does not have the West represented.That said, this approach should not be seen as replicating the Non-Aligned Movement and the G77 when a group of countries not willing to be associated with the major powers, developed relations among themselves that kept them out of Cold War. This time the effort is not to exclude large powers but to create an institutional base that will help these countries to build firm economic relations within their own ranks.

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Post Afghanistan and the US troops’ withdrawal

Afghanistan and the US troops’ withdrawal


By Shahid Javed Burki
Published: July 4, 2011


The American leadership positioned in Afghanistan was confident that it had turned the Taliban tide in the country. It was reluctant to lose that advantage by too precipitous a withdrawal. One indication of success was the relative quiet in the southern districts bordering the province of Balochistan in Pakistan. According to a recent New York Times (NYT) report, “the poppy harvest is over and the fighting season has arrived in southern Afghanistan — except this year the Taliban have not returned in their usual numbers to intensify the war”. This change in what had been the normal pattern was ascribed to the presence of large American troops in the region. The change was palpable not only in the province of Helmand that had been since long a strong base of support for the Taliban. It was also apparent in the neighbouring province of Kandahar, the heartland of the insurgency. “In both places, the insurgency is now mostly limited to small groups of local fighters who lay mines or carry out assassinations or suicide bombings in the cities, attacks that are more important psychologically than strategically,” said the same report.

The weakening of the Taliban presence allowed some signs of the government’s presence to re-emerge. Hundreds of Afghan police officers guarding outposts along the main road allowed traffic to flow again, while crews began clearing the irrigation canals that run along the road. For a number of years, roads were dominated by the Taliban who used roadside bombs to discourage people from using them. Lack of maintenance of the irrigation system affected agriculture and crop productivity. These improvements made it possible for people to return to work.

Development aid provided by the Americans and their allies to the southern provinces also helped. Helmand received the most aid per capita of any province in the country in 2010. Aid projects to pave roads, dredge canals, construct schools and clinics improved economic life in the area by providing thousands of new jobs.

Will this success be maintained now that the American pull-out is underway? The answer to the question depends on a number of factors. The most important of these is the manner and speed of the pull-out. It is unlikely that having achieved some success in the south, the Americans will abandon the area in order to satisfy a political timetable of their own. The Afghan forces may be much more developed than was the case six years ago but they were still not strong enough to prevent the Taliban from re-entering the area as they had done in 2005, when the Americans withdrew some of their forces in order to fight the war in Iraq.

The United States and Nato aimed to build up the Afghan Army and the police to a force of 395,000 by 2014, the year by which all foreign troops were to leave the country. But at issue was the competence and loyalty of the Afghan force. Loyalty became a real concern once some soldiers trained by the US and Nato turned their weapons on their benefactors. According to another NYT report, “since March 2009, at least 57 people including 32 American troops have been killed in at least 19 attacks in which Afghan service members had turned their weapons on coalition forces. Another 64 were wounded. More than half of the casualties in the first five months of this year, signalling an escalation in the number and intensity of the attacks. But while the Taliban often take credit for these attacks, Nato officials say the majority of the episodes stem from disagreements and arguments that escalate into violence.”

Also troubling for the government was the heavy loss of innocent lives as result of Taliban activity and the military effort by the United States and its allies. According to the United Nations, May 2011 was the deadliest month for Afghan civilians since it began to keep count in 2007. It estimated civilian deaths during the month at 368. “The majority of the casualties, 82 per cent, were caused by Taliban and other militants, while 12 per cent were caused by Nato troops and Afghan force; in six per cent of the cases, it was not clear who was responsible.” The Taliban continued to target security forces as well as those whose beliefs differed from their own. For instance, on June 11, they attacked two buses that were carrying members of two families who were travelling to a shrine in Kandahar province to pray for the health of a sick child.

The uneasy relationship between Afghan President Hamid Karzai and the American government became even more uncomfortable as Washington inched closer to making the decision about the number of troops it planned to pull out of the country starting July 1, 2011. On July 18, reports said Karzai “appeared to have crossed a line” when, in “a rambling speech” to a youth convention in Kabul, he accused the United States and other western allies of using his country for their own purposes. He asserted that they take away more money than give, pollute Afghanistan’s environment and ‘dishonour’ the Afghan people. This was not the first attack by him on the US and its Nato allies. According to reports, in an “emotional speech” in the eastern city of Asadabad, he called for Nato and the United States to stop military operations in Afghanistan; officials later issued a clarification, saying he was referring only to operations that caused civilian casualties. At a news conference in May, he threatened to denounce Nato as occupiers if they did not stop air attacks that caused civilian casualties. That was in response to an air strike in Helmand province that was aimed at Taliban insurgents but killed several civilians, including women and children. On at least two occasions, most recently in April, Mr Karzai has threatened at closed-door meetings of parliament to join the Taliban, according to published accounts.”

Given this background, Afghanistan is not likely to move on a smooth road once the Americans begin to pull back.

Source: Afghanistan and US troops withdrawl
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Averting world recession


By Shahid Javed Burki
Monday, 04 July, 2011


A GREAT deal of excitement that resulted from the fast recovery of China and India from the Great Recession of 2008-09 has begun to dissipate. Both countries raced forward while much of the industrial world continued to languish.
There is now some talk of the possibility of a double-dip recession in both America and Europe and some weakening in the large emerging world economies. The global economy is not proceeding in the direction in which it was supposed to go.

As the rates of GDP growth diverged in the West and in the large emerging markets there was talk of a faster-than-expected realignment of the global economy. There was expectation that the centre of gravity of the global economy would move from the Atlantic to the Pacific within a decade or two. Now both parts of the world economy are hurting but in different ways. The West is worried about the burden of debt carried by a number of economies that is not sustainable over the medium-term; the emerging economies are concerned with rising levels of prices.

According to the Bank of International Settlements (BIS), Germany’s gross public debt is 87 of its GDP; Japan’s 213; Britain’s 89; and the United States’, 101 per cent. The levels of debt in Greece, Ireland, and Portugal are much higher – high enough to trouble the bond markets and hence the ability of these countries to borrow in order to meet their obligations. But in the West, inflation is not a problem. In fact the Federal Reserve Bank, the American central bank, launched a programme called “quantitative easing” aimed at preventing deflation from further hurting the economy.

The situation in the emerging world is very different. While Pakistan has lagged behind other large emerging countries in terms of rate of growth of its economy, there is no reason why it should not attain the rates of growth that seem structurally possible in the South Asian mainland.

This means that its economy should be able to grow at rates between 6--8 per cent a year. However, for that to happen its political structure must develop further, it should be able to hold its leaders and other functionaries of the state accountable for their actions while they hold office, and it should be able to resolve the unsettled relations between the military and the civilian authority.

At the same time, it must develop closer economic relations with its two giant neighbours. Both China and India are now among the fastest growing economies of the world. They are also very large. How their economies evolve in the future will matter for Pakistan.

Both China and India are finding it hard to manage rapidly growing economies without igniting inflation. Both have decided to focus on monetary management as the way for taming price increases. And both are finding that this cure may not deliver the results they seek.They need deep structural changes in order to ensure that the momentum of growth is not lost.

For political reasons, both China and India need to have their economies grow at or near 10 per cent a year. China needs a high growth rate to contain discontent among its workers. The regime has allowed some expression of unhappiness on the part of the working population.This has had the result of increasing wages by significant amounts and would change in quite a dramatic way the contours of the model of growth the country has followed for several decades. It is unlikely that future growth can come from investments that produce cheap goods for western markets by low paid labour.

In India, coalition politics has delayed actions on a number of fronts without which the potential of the economy would not be realised. If the economy softens, it will have political implications for the governing coalition. India needs growth to address the problem of poverty as well as inter-state and inter-personal income distribution disparities.

While China passed the 10 per cent growth target on several occasions, India remains below that threshold. The recent changes in interest rates ordered by the Reserve Bank of India, India’s central bank, has had the effect of reducing the rate of investment and hence the rate of future growth in its domestic product. But it has not succeeded in controlling inflation. Both food and core inflation rates have passed the levels regarded as economically and politically sustainable. China has used a combination of monetary tightening as well as administrative controls to tame inflation. Both China and India are not succeeding in these endeavours.

What is needed in both countries is a combination of short-term adjustments and longterm structural changes. China needs to prepare itself for the time when it will no longer be an export powerhouse exploiting its low wage workforce.The assumption that the presence of hundreds of millions of workers in the countryside who will be prepared to move to the relatively high productivity sectors of the economy and thus continue to contribute to growth proved not to be realistic.

The spread of new information technologies has meant that the aspirations of the workers in the modern sectors could not be separated from that of people who remained in the countryside.There is now a widespread demand for improvements in the living standards of all workers which even a tightly controlled political system cannot ignore. This means a significant restructuring of both the sources of supply and demand in the country.

China must begin to refashion its economy in order to satisfy meeting rapidly rising domestic demand and not just continuing to provide for the western markets that are now less hungry for cheap Chinese products.

There are somewhat different demands being placed on the Indian economy and the political system. Perhaps taking their cue from the explosion in the Arab streets that produced what is called the Arab Spring, citizens in India are also prepared to come out in large numbers and ask for higher quality of governance.

Over time India has developed a political system that has shown that democracy in the developing world need not retard economic progress. It must now move this system forward so that it becomes more accountable to the people. The country cannot afford to wait for periodic elections to cleanse the system. It must also have the institutional wherewithal to hold those placed in office by elections to satisfy the public demand for cleaner governance.

There is also the need in India to further open its economy. It was the dramatic opening in 1991 that produced the Indian miracle of the last two decades. But further opening is required for India to take advantage of the rapid changes in the structure of the global economy. Foreign capital inflows must not be deterred by populist demands that have made it difficult for large retail firms to set up shops in the country and for manufacturing enterprises to acquire land for building new, green-field plants.

What the world needs now is a new way of handling the problems being confronted by its different parts. Unfortunately for different reasons, the political establishments in almost all the major world economies don’t seem equal to the task of managing the needed structural change.

China and India pursued to different political models to achieve the same economic results: high rates of GDP growth. Now that their economies have matured they will need to pursue different policies to smoothen out the wrinkles that have appeared.

Averting world recession
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Post What the new ‘catch-up’ period is likely to bring

What the new ‘catch-up’ period is likely to bring


By Shahid Javed Burki
Published: July 12, 2011


One distinguishing feature of the profound adjustments taking place in the global economy from those that occurred in the previous catch-up periods is that new world economic leaders will be structurally very different from those of the past. The race to the top in the previous catch-up periods involved countries that had the same economic and social characteristics. Some of them had been rivals for long but one took off, leaving the other behind. This was the case with Britain in the 18th century, which, for societal, institutional and technological reasons, took a lead over the European economy. Britain’s rapid advance created incentives for the countries that had lagged behind to catch-up. Different strategies were adopted by different countries. As economic historian Alexander Gerschenkron pointed out in his seminal work on economic backwardness, the state played an active role in getting the laggards to catch up with the front-runner: France with Britain and then Germany with both Britain and France.

In the current catch-up period, the two countries that are rapidly moving forward in the global economy are very different from those they have replaced as leaders, or are in the process of replacing. They have very large populations. China in 2009 had a population of 1,373 million, more than four times that of the current leader, the United States. China’s gross national income (GNI) was estimated in 2009 as $9.3 trillion in purchasing parity terms, and income per head at $6,770. On the other hand, per capita income in the US was $46,730, about seven times as large as that of China. India, with a population of 1,155 million, GNI of $3.8 trillion and GNI per head of $3,260 had the same economic characteristics as China’s. In other words, both China and India are significantly different from the previous leaders of the global economy — the US, Japan and some of the large countries of western Europe.

There are three important socio-economic differences among the new and old leaders of the global economy that will profoundly affect the way they will interact with one another in the years ahead. The first is what Alan Greenspan, once the acclaimed chairman of the US Federal Reserve System, had called the ‘weight’ of the gross domestic product (GDP). By that he meant that the GDP in developed countries, with a much larger share of services, which in turn drew much of their value from knowledge, was much lighter than those produced by the relatively less advanced economies such as China and India. Consequently, as the use of natural resources such as energy and minerals per unit of output was much larger for the latter than the former, pressure on them will increase over time with much large rates of economic growth in emerging countries.

The other two differences are demographic. China’s population growth in 2000-09 was 0.6 per cent a year, India’s 1.4 per cent. While the rate of increase in the American population of 0.9 per cent lies between that of China and India, those of Germany, Japan, France and the UK are tending towards zero growth. In 2000-09, the UK’s population was growing at 0.5 per cent a year; that of France at 0.3 per cent; of Japan at 0.1 per cent and of Germany at zero per cent. In other words, the developed world was approaching the stage where there will be little or no increase in the size of the population, while some populations may even begin to decline.

On the other hand, even with declines in the rates of population, the more populous countries in Asia are adding tens of millions of people to their already large populations. In 2011, for instance, China and India together will add more than 20 million people, Pakistan another 3.5 million. This demographic asymmetry will have profound implications: It will result in increasing the dependence of the currently rich countries on the work forces available in large emerging nations. As former President Bill Clinton pointed out recently in a detailed interview with an American news magazine, “There is a simple way to get Americans back to work: Make it easier for talented foreigners to come here and work.” Much of this talent is available in Asia, surplus of its albeit growing needs.

The third difference is that while today’s developed countries are already mostly urban — when people move in these countries, they mostly go from one urban area to another — in the emerging world, hundreds of millions of people will leave the countryside for towns and cities. In the next two decades, by the year 2030, a billion and half people will be in the urban areas of China and India, demanding the kinds of services and products already available in the developed world. This will change in a significant way the structure of world industrial and agricultural output and the pattern of international trade.

As we know from world economic history, such large adjustments in relative economic power seldom occur without serious conflict between those who are losing stature compared to those who are gaining it. Will something similar happen this time around? The situation in the early 21st century is compounded by the competition among large economies over the world’s fast depleting non-renewable resources. Oil is the obvious commodity facing a serious supply stress but there are a number of other commodities that have reached the same situation. Since there are reports of the presence of large deposits of important minerals in both Afghanistan and Pakistan — in fact, a Pentagon report published by The New York Times in the summer of 2010 said that the “US has discovered nearly $1 trillion in untapped deposits in Afghanistan, far beyond the previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself” — there is considerable interest on the part Beijing to gain access to them.

Source: New Catchup Period
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Remittances and the Pakistani diasporas


By Shahid Javed Burki
Monday, 11 July, 2011


PAKISTAN’S dependence on remittances has increased as some other sources of finance have either dried up or proving difficult to access. It would be hard and expensive to tap funds to fill the large financing gap — the gap between export earnings and what is needed to pay for imports and also the amount required to service debt.
Non-project aid, particularly from the United States, has slowed down to a trickle as the relations between the two countries continue to proceed on a downward slope.

The IMF remains unhappy with Islamabad’s performance in mobilising domestic resources for de velopment. The institution wants an effective tax on consumption which the policymakers find politically difficult to deliver.

Project assistance is available from China and the two development banks — the World Bank and the Asian Development Bank — but this form of capital disburses slowly and is thus not particularly helpful in closing the financing gap. This makes remittances from the eight million or so Pakistanis living and working abroad as one source of foreign assistance that helps to cover the country’s needs.

Of late while foreign investors have either left Pakistan because of the worsening security situation or because they don’t see the economy offering the opportunities available in other countries, the Pakistani diasporas continue to send back increasing amounts of foreign capital to the country.

For 2009, the World Bank estima ted Pakistan’s receipt from remittances at $8.7 billion; in 2012, the State Bank of Pakistan believes that the flow will reach $12 billion. In 2009 as shown in the accompanying table, remittances were equivalent to 5.1 per cent of the Pakistani gross national income (GNI). The proportion was higher than the average for South Asia.

The sizes of the Pakistani diasporas across the four continents of Asia, Africa, Europe and North America can only be roughly estimated.The government does not maintain data on migration stocks in various destinations popular with Pakistanis. A combination of data from various sources, including the United Nations and the World Bank along with anecdotal evidence from various embassies in the countries where Pakistanis are present in large numbers suggest that about eight million people of Pakistani origin are living and working abroad. The largest proportion of these — about five million — are in various countries of the Middle East. Britain with 1.2 million has the second largest concentration and the United States with about 0.9 million comes in third.

While there was some out-migration from the parts of British India that are now Pakistan, most of the current large diasporas were formed after the country gained independence. Both pull and push factors have contributed to the formation of Pakistani communities outside the country’s borders. The current outmigration is largely the consequence of the push from Pakistan – a very large proportion of people leaving the country do not see good economic prospects for themselves if they stay behind.

In the five year period between 2005 and 2010, Pakistan was among the four countries across the globe that had more than one million people migrating to other countries. With a net outmigration of 1.4 million in this period , Pakistan was the third largest contributor of outflow in the world.

The largest number came from Mexico (2.43 million) with China in the second place (1.73 million). India with a total net outflow of one million people was well below Pakistan in this respect. The reason why a smaller number of Indians are now moving abroad is that they have more confidence in their country’s future.

With fairly tough restrictions having been put in place by the United States and Britain, outmigration destinations have become limited for the people of Pakistani origin. This is another toll that the rise of the Islamic extremism has taken on the Pakistani economy. Economists now consider out-migration in a positive light. It has proved to be an important contributor to the efforts to alleviate poverty.

Wages in the developed world for the kind of jobs available to the migrants with relatively low level of skills are about 15 times of what they can hope to make at home and that too if they are able to find employment. According to one estimate, “completely open borders would add an astonishing $39 trillion over 25 years to global economy. This is more than 500 times the amount the rich world spends on foreign aid each year. Migration is the most effective tool yet devised for reducing global poverty.” But extraordinarily positive results are available if migrations draw upon people with low levels of skills. They are usually a burden on the domestic economies but provide badly needed services in rich countries. For instance, very large number of the workers in the sectors of agriculture, construction and domestic services in the United States are from relatively low income countries in the neighbourhood. But this type of workforce is not likely to be admitted into the US from Pakistan.

There is another type of movement of people from South Asia that is underway at this time. Its destinations are the city states in East Asia that are aggressively building their service sectors in response to the opportunities created by the restructuring of the global economy. For instance, Singapore aims to become a financial centre; a centre for high-tech industries in the fields of information, communication and health; and a centre of entertainment that includes gambling to cater to the interests in various table games of the people from the countries in the region. Similar developments are taking place in the several city states in the Middle East. These new economic sectors need very large number of highly skilled people. They are moving from rich countries as well as from South Asia. This flow of people from developed countries is the first time since the period of European colonisation in the 18th and 19th centuries that such workers are coming to the developing world in search for jobs.

There are two conclusions that can be drawn from this brief discussion of the contribution that diasporas of Pakistani origin are making. Both are positive when viewed from two different perspectives.The remittances being sent back by these communities are critically important at a time when the country has a very limited recourse to other sources of finance.

Second, outmigration has contributed enormously to keep many people out of poverty. Movement of construction workers with low level of skills contributed to alleviating poverty in some of the poorer areas of the country.

Notwithstanding these positive developments there are some worrying trends. Current policies in many labour importing countries have made it very difficult for the Pakistani poor to migrate while the demand for the highly trained workers remains relatively high. This may keep the level of remittances high but would reduce the impact of migration on poverty.
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