America-Pakistan ties — where are they headed?

By Shahid Javed Burki
Published in Express Tribune, July 18, 2011

Although history may not always repeat itself, it does provide some clues about the future. Pakistan’s relations with the United States have taken a nosedive in the last few weeks. How sharp the descent has been, has surprised many — if not most — observers. It would be instructive to go back to history to remind ourselves why Pakistan became such a close American ally more than half a century ago.

When the British left two parts of their Indian domain that had with Muslim majorities, in the hands of a Muslim elite, they helped found a state that proved not to be viable. It was also a state that was not welcomed by the much larger part of the British Indian colony — the India of today. This bred a sense of deep anxiety among those who governed Pakistan during its formative years. There were two outcomes: A deep suspicion about India’s intentions towards it Pakistan, and a deep yeaning to find friends outside the borders that could produce a feeling of security.

There were four states in the new country’s immediate neighbourhood. India, China, Afghanistan and Iran. Modern China was still not born when Pakistan achieved independence. It was only on October 1, 1948 that the communist party led by Chairman Mao Zedong marched into Beijing and took over the reins of a vast country in total disarray. For the new government in Beijing, the first task was to stabilise the country, not to form alliances with its many neighbours.

Afghanistan was deeply hostile to the creation of an independent state that had a large proportion of Pakhtuns in its population. There were, at the time perhaps five million Pakhtuns residing on the other side of the border drawn by the British and forced upon Kabul. The rulers of Kabul wanted to redraw the Durand Line — the border left by the British between Afghanistan and Pakistan — and push it, as far as possible, towards the western bank of the Indus River. In those circumstances, Afghanistan could not be a friend of Pakistan. Finally, there was Iran. This was the only predominantly Shia state in the Muslim world. It had an uneasy relationship with its Sunni neighbours. There were, thus, good reasons why Tehran did not immediately open its arms to receive a new Muslim state. Pakistan, in other words, was cast into an uncomfortable geopolitical environment.

Anxiety about perceived Indian intentions was one reason why the first generation of Pakistani leaders felt the need to cultivate foreign states as friends. The other was economics. Pakistan had been founded on the basis of a promise to provide better economic conditions for the Muslims of British India. This meant accelerating the rate of economic growth in what was once the poorest part of the subcontinent. The rate of domestic savings was low; certainly not high enough to produce a rate of GDP growth that would help to alleviate poverty. The only way option was to augment domestic savings with foreign flows. At that time, the world had as yet to organise itself to provide cheap development finance to poor countries — for instance, the establishment of the International Development Association was still a decade and a half away. Approaching some rich countries as benefactors was one way of dealing with the situation. The US appeared to be a good candidate to play the role of a rich uncle.

Washington, too, had begun to develop an anxiety of its own. It was deeply suspicious of the intentions of the Soviet Union, its erstwhile ally in the Second World War. The defeat of Germany had opened an opportunity for the government in Moscow that, led by President Joseph Stalin, was able to fully exploit. While London and Washington watched helplessly, the Soviet Union expanded and consolidated its hold over Eastern Europe. In a way, the Soviet Union emerged geographically stronger compared to its former allies. The US made no territorial gains and the UK lost a good part of its empire in 1947, only two years after the collapse of Germany in Europe. Accompanying these changes was the communist advance in East Asia. Mao Zedong’s forces were advancing in China while Ho Chi Minh had begun to threaten France’s hold over Vietnam and the rest of Indo-China. The only option Washington felt it had to deal with this developing situation was to throw a set of chains around the countries that had fallen to what it saw as the communist menace.

John Foster Dulles, secretary of state in the administration headed by President Dwight Eisenhower, built three chains around the Communist world: The North Atlantic Treaty Organization, (Nato), for Western Europe; the Baghdad Pact, later renamed the Central Treaty Organization, (Cento) for the Middle East and West Asia; and the Southeast Asia Treaty Organization, (Seato) for East Asia. Pakistan joined the last two, thus becoming an important link in the chains to contain the spread of communism.

Pakistan’s entry into these alliances was not motivated by ideology or any fear about the advance of communism into its territory. The first generation of country’s leaders had other worries. They were busy creating a new central authority where none existed. They had to settle eight million Muslim refugees who had arrived as total destitutes from India. Economic stability and territorial integrity thus were the main concerns of the fledgling government. A close alliance with the US promised help in both areas.

The situation has not changed since then. More than six decades later, as the world around it is being rapidly reshaped, Pakistan still remains deeply concerned about these two elements pertaining to statecraft. It remains nervous about the intentions of most of its neighbours. And it is still woefully short of resources with which it can build a strong economy. Half a century ago, the US was the only country that could provide some comfort in both these areas. But that seems unlikely now. Given this, what are the options available to Pakistan today? This is a question I will take up in this space next week.

How dependent is Pakistan on US aid?

By Shahid Javed Burki
Monday, 18 July, 2011

JUDGING from the debate in the electronic and print media in Pakistan on the US decision by the US authorities to hold back disbursements of $800 million owed to the country, there seems to be a state of panic amongst reasonably well informed people of the likely impact on the economy.
The American decision signals to the authorities in Pakistan that they cannot – in fact should not – rely on a regular flow of funds from the United States. Telephone calls from the news media for comments on the American decision came to me while President Barack Obama was giving a live press conference on the state of his discussions with the leaders of the Republican Party about getting from the US Congress an increase in the country’s debt ceiling.

Without such an agreement, the United States would have reached the legally authorised debt limit on August 2 and will have to default on which ever foreign or domestic obligation that had to be honored that day.

America had never defaulted before and if it did no body was prepared to guess what would be the implications for the global economy not to mention the consequences for the US economy. Given the importance of the matter the American president was discussing with the press, it was interesting to note that the TV channels found the news about the likely cut in US aid to Pakistan to be important enough to run it on the moving sticker at the bottom of the screen. This raises the obvious question: should the policymakers in Pakistan panic?

The simple answer is no and that is for two reasons. First, let us put the $800 million that was being put on hold in context. Pakistan is currently running a fiscal deficit of 6- 7 per cent of its GDP of some $170 billion. This means that it needs to find some $10-12 billion this financial year to close the gap between government expenditures and government revenues. This is a large amount but $800 million is in the neighbourhood of seven per cent of the expected deficit. Keeping that from coming to Pakistan won’t break the back of the economy.

The second deficit to be concerned about is in the current account. This is the gap between what the country pays for the import of goods and services and for servicing foreign debt and what it earns from abroad. This year the gap is estimated at about five per cent of GDP or about $8.5 billion. If the entire amount put on hold by the United States was used for closing this second gap, it would be equivalent to a bit less than 10 per cent. This amount not becoming available won’t break the economy’s back either.

The other thing worth noting about this amount is that it is strictly not economic assistance. A part of it is for payment for the services the Pakistan military has already provided to the American and NATO forces operating in Afghanistan and part of its is to pay for the equipment the military would like to purchase from the United States. Legally the United States cannot hold back the amount which has been spent as a part of a binding agreement. Of the $800 million not being paid, significant amount cannot be held back for long. The other bit is for military purchases. There are reports that the Pakistanis no longer want to acquire some of this equipment, not sure whether its availability would not be interrupted at some day. They may be turning to the Chinese as the more reliable source of supply.

For the moment, it does not seem that the Americans are putting a hold on economic assistance being provided under the Kerry-Lugar bill approved by Congress in 2009. This committed $7.5 billion of grants to Pakistan over a five year period, is for financial years 2009 to 2014.

Congressional commitments, under the US law, do not mean actual disbursements. This only happens when a particular item gets included in the budget for the year. Given the American unhappiness with Pakistan these days, it would not be surprising if these get excluded or significantly reduced under the annual budgeting process.

Since both the administration and Congress are working on reducing government expenditure and since there is not a powerful constituency for foreign aid in the American legislature, it would be a miracle if Pakistan is given the promised amount. To bank on the receipt of this money year after year would not be prudent for the people managing Pakistan’s finance.

If the assistance from the US does begin to flow it should be treated as a wind-fall gain rather than as a component of normal revenue availability to run the government and get the economy moving again.

However the financial flow that matters for the health of the economy is the one promised by the IMF. The iamount was $11 billion to be disbursed over a period of two years starting in late 2008. More than $7 billion was released; leaving $4 billion that got stalled. It was stopped since Pakistan did not fulfill one of the more important conditions imposed by the Fund.

Islamabad promised to raise the woefully low tax-to-GDP ratio by reforming the fiscal system. Since bringing more tax payers into the system would have proven politically problematic, both sides – Pakistan and IMF—agreed to tax consumption.

Ideally this should have taken the form of a value-added tax, the VAT. But the tax acquired a bad name in the country. Its purpose and the method of collecting it were both poorly explained and deliberately distorted.The government settled instead for what it called the General Sales Tax which got transformed into RGST or reformed general sales tax. The “reform” appellation referred to the elimination of some loopholes, elimination of some exemptions, and extending the tax to the serve sector.

But RGST also proved to be politically difficult to impose. Most of the opposition to the tax was due to the impression that that it would add to the rate of inflation which was already very high. There was also opposition from the provinces that saw the sales tax as a provincial levy and not a tax that could be legitimately collected by the federal government. These problems meant that Pakistan continued to miss the deadlines laid down by the IMF which has refused to start releasing funds from the blocked account.

It would be wiser for the government and the citizenry not to worry about the American threat to slow down the flow of funds to Pakistan. They should worry much more about the policy failure that has led to the freezing of disbursements from the IMF. Since these are tied to the reform of the tax system, politicians should have both the wisdom and the l nerve to convince the voters that without a fundamental restructuring of the tax system and the tax code, Pakistan cannot put its economy on a trajectory that would take it towards sustainable high rates of GDP growth.

The Fund had offered an opportunity for doing precisely that but the country let it pass. Instead of putting its effort where it is needed the most, both the government and the people are prepared to heap blame on Washington for the poor performance of the economy. Not mobilising resources from within the economy and continuing to blame foreigners may be politically expedient but is a short-sighted strategy for producing economic growth.

http://epaper.dawn.com/ArticleText.a...7_2011_606_002

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Where do Pakistan and US go from here?

By Shahid Javed Burki
Published in Express Tribune July 25, 2011

The situation in which Pakistan finds itself today, as it forges a new relationship with the United States, is very different from the one that led to a tight embrace between the two countries more than half a century ago. Then, both needed each other. Pakistan was seeking a partner that would help build up its defences against India. The first generation of Pakistani leadership did not fully trust their neighbour’s intentions towards the new state they were hard at work to establish. Pakistan also needed finance to quicken the pace of economic development. The United States needed a partner in South Asia, which could be a part of the virtual wall it was erecting against the spread of communism.

Now more than 50 years later, it would not be an exaggeration to say that Washington needs Islamabad more than Pakistan needs the United States. Even after the death of Osama bin Laden, the Americans remain apprehensive about the harm Islamic extremists could do to its economic and political interests around the globe. Terrorism experts believe that Pakistan is now the epicenter of international terrorism inspired by Islamic fundamentalists. But Pakistan is not alone; there are other even more unsettled places around the world — Afghanistan, Yemen, Somalia to name three but perhaps also Libya, Iraq, and Syria if the current unrest in these countries cannot be brought under control — that could become exporters of terrorist activities. America and Europe are keen on throwing a fence around this troubled area and both believe that Pakistan could be a critical partner in such an enterprise. Pakistan, however, would like to partner but on its own terms.

There are at least three items in Pakistan’s term sheet for cooperation with the West. The first is that the announced pull out from Afghanistan by the United States should not leave a regime in Kabul that would be openly hostile to Pakistan. There was such a regime in place for 30 years, from 1947 (the year of Pakistan’s founding) and 1978 (the year the Soviet Union moved into Afghanistan). Then Kabul campaigned actively for the creation of an autonomous Pakhtun state that would extend to the western bank of the Indus River. It would also not want an Afghan government that was very closely aligned with India. That said, the change in thinking on security issues in Islamabad does not preclude a tripartite arrangement involving Afghanistan, India and Pakistan, in which all three countries work together to collectively promote their economic interests. Building of cross-country pipelines would be an important part of such an arrangement. Sustainable economic growth at reasonable rates will not be possible in mainland South Asia, unless a way is found to resolve critical shortages of energy. One way of doing this is to import natural gas through pipelines that would connect the area with energy-surplus Central Asia and the Middle East.

The second item on the Pakistani term-sheet, is to ensure a steady flow of foreign capital to augment its very low levels of domestic savings. Even if the country embarks on a structural adjustment program that would bring about increases in the rate of domestic savings and tax-to-GDP ratio, foreign flows would still be required for many years into the future. In that context the United States has been an unreliable partner.

The third item is Pakistan’s requirements that the United States desists from those acts that add to the state of fragility in the country. Some of the US sponsored activities in recent months fall into this category. For instance, CIA agents are operating freely in Pakistan — as The Economist wrote in a recent issue there were “CIA agents who roamed across cities without the oversight of local intelligence agencies.” One of them — a man by the name of Raymond Davis — murdered two individuals in broad daylight on a busy Lahore street. He was let go after spending several weeks in a Pakistani jail. The same issue of the magazine expressed surprise at the gathering in the compound of the American embassy in Islamabad of gay, lesbian, bisexual and transgender people. It wrote: “Even at the best of time it would have been unusual for America’s embassy in Islamabad to organise (such a meet). Given the grim state of bilateral relations, the meeting looked downright provocative. Some in Pakistan’s religiously conservative society accused America of conspiring to attack them by spreading outrageously liberal sexual views. One Islamic political party called it ‘cultural terrorism’”.

Most in Pakistan, including the country’s civilian leadership and the military establishment, believe that an alternative is available to which Islamabad could now turn more openly. In recent months, a number of senior people from Pakistan have gone to Beijing hoping to cultivate a relationship that will be more durable and less demanding. This year Pakistan will be celebrating the fiftieth year of the establishment of a formal relationship with China. This will be done with great fanfare and will no doubt bring in more indications of Chinese economic help and military support. To distinguish its relations with Beijing, Pakistan has begun to call it an ‘all-weather friendship’. Three weeks after the death of Osama bin Laden, Ahmad Mukhtar, Pakistan’s defence minister announced that China would take over the management of Gwadar, a deep-water Pakistani port on the Arabian Sea. The port is currently managed by a company from Singapore. But there was some confusion about what had transpired. According to one western newspaper, “the government in Beijing said the Gwadar takeover had come as news to China”. Even if the claims Pakistan was making about China’s interest in their country are somewhat exaggerated, it is clear that a tilt has occurred. There cannot be any doubt that Islamabad was moving away from the United States and was leaning towards China. Such a move will have profound implications not only for South Asia but for the evolving world political order as well.

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Another kind of business fear

By Shahid Javed Burki
Monday, 25 July, 2011

PAKISTAN today has the youngest population of all countries with more than 100 million people. The median age of the population is only 21 years. This means that some 90 million people in the country are below that age.
A large and young population is one of the important sources Pakistan can deploy to achieve not only a high rate of growth but also to create an economy that will generate well paid employment for its youth.

One reason why Pakistan’s income distribution is worsening is that the more traditional sectors of the economy deliver larger returns to the owners of assets. Workers are poorly compensated.

To have the workers receive more the country should change its economic strategy. That would mean treating the large human resource as an important factor of production and encouraging the establishment of industries that are labourintensive.

However, the labour that needs to be employed should be well trained and skilled. This means encouraging the development of modern services.

Among these the more important ones are information and communication, health and education, tourism and entertainment. But the demand for these kinds of industries is mostly in more developed countries.

They cannot be built on the basis of relatively small domestic markets. And this is where Pakistan is facing a serious problem.

There is a sense of fear that has begun to permeate businesses that that may begin to lose their clients. This is particularly the case with those enterprises that have clients outside the country. For some businesses – the IT sector in particular –most of their clients are in countries other than Pakistan while the work itself gets done here. The firms operating in this area are fearful that they may not be able to keep the buyers of their services if the security situation does not improve quickly. This will require a great deal of effort by the government, (a subject to be dealt later in the article). It will also requiring convincing international businesses that by getting work done in Pakistan, the supply chain on which they are dependent will not be seriously affected by terrorist activities.

That the country is hurt badly from this perception is illustrated by a comparison with India which does not suffer from the same kind of perception problem that is affecting Pakistan. India expects revenue from the IT sector to increase by 15 per cent to about $70 billion in the year to March 2012. N. Chandrasekaran, the head of Tata Consulting Services, India’s largest IT outsourcing group, delivered an upbeat assessment a few days ago of not only his own company’s prospects but that of the entire sector. He expects to see a steady demand for its services if the managements were more agile and entrepreneurial.

This would involve the Indian companies setting up operations in other emerging economic such as Mexico and Brazil. That would not only service the growing demand for IT services in these countries but also pick up business from multinationals that were moving their operations overseas. Tata Consulting aims to increase its emerging markets revenue to 30 per cent in the next five years from 17 per cent now.

Some of the pressures being felt by the Pakistani companies doing business abroad are also affecting firms in India. It is important not only to have foreign customers send their officials to the countries where exports are generated but al so to have the exporting enterprises send their own people abroad. It is well known that the businesses here are hurting since they face enormous difficulties in obtaining visas to have their employees travel to the West, in particular to the US. But Indian companies are also feeling the pinch.

According to one assessment, rejection rates for applicants from India are running at almost 40 per cent, up from five per cent only 18 months ago.

This is one of the issues that were taken up by the Indian government and the business owners during the US Secretary of State visit to India for three days in late July.

Her stay in India included a visit to Chennai, an important IT hub in the country. There the managers of the IT companies pressured Mrs Clinton to ease visa restrictions and allow an easier flow of Indian business managers and workers to and from the US.

She promised action in the area by her government.

What then can the Pakistan government do to help the enterprises in the modern services sector to improve their situation? Of the several initiatives the government can take, four can be mentioned here. The first is a more active role by Islamabad to change the perception about Pakistan as an unsafe place not only to do business in but also to make it a part of the international supply chain.

The government could hold a conference to which some of the more important global companies should be invited to show-case the country and to send the message that repeated acts of terrorism notwithstanding, businesses continue to operate.

There is also terrorist activity in India. Maoists are active in many Indian states and they have killed many people including the members of security forces.

However, their operations don’t get the kind of play in the western press that happens in the case of terrorism associated with Islamic extremists.

Second, the government should work with the western governments to get their airlines to come to Pakistan. For the last several years, Pakistan has become isolated and detached from most of the world. To travel from the West means going through various Middle Eastern airline hubs. No American or European airline flies directly to Pakistan.This contributes to the impression that for business purposes Pakistan is an unsafe place.

A more imaginative way of dealing with the situation would be to partner with some of the agencies in the business world that provide guarantees to their businesses. Two such agencies in the US – the Overseas Private Investment Corporation (OPIC) and the Export Import Bank could be persuaded to create a special facility to cover the operations of foreign firms doing business in Pakistan or willing to come to the country. The government should also contribute to such a facility.

The fourth area of government involvement would be to work with the members of the Pakistani diasporas to invest in some of the modern services in which they have expertise.

Some of this is being done already but more needs to happen. Their investments could also be covered by the guarantee mechanisms discussed above. The Pakistani community in the US is large and well-resourced. It is also willing to assist the development of their erstwhile homeland if there are available opportunities. This calls for a more active role by Islamabad.

The difficult situation modern services in Pakistan face will not go away on its own.

The government needs to get actively involved to have this part of the economy realise its enormous potential.

Another kind of business fear

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Obama’s promised new beginning

By Shahid Javed Burki
Published: July 31, 2011

In June 2009, less than six months after being sworn in as America’s president, Barack Obama addressed the citizens of the Islamic world. He chose Cairo’s Al Azhar University, the oldest surviving centre of Islamic learning, as the site for his much anticipated address. This was to be one of the most important and remembered speeches the president gave in the early part of his tenure. In it, he promised a new beginning in America’s relations with the world of Islam.

“I have come here to seek a new beginning between the United States and Muslim world, one based upon mutual respect; and one based upon the truth that America and Islam are not exclusive, and need not be in competition,” he told his large audience. “Instead they overlap, and share common principles of justice and progress; tolerance and dignity of all human beings. The people of the world can live together in peace. We know that is a God’s vision. Now that must be our work on Earth.”

President Obama thought that defining a new relationship between Islam and America was expected of him. He was a different kind of American president. “I’m a Christian, but my father came from a Kenyan family that includes generations of Muslims. As a boy I spent several years in Indonesia and heard the azan at the break of dawn and at the fall of dusk. As a young man, I worked in Chicago communities where many found dignity and peace in their Muslim faith.”

That speech was given two years ago. The American president could not have imagined how much would change in the Muslim world since the Cairo address. He must have hoped that democracy, liberty, freedom of expression, respect for the rule of law and rights of all citizens — ideas on which America had built its own society and its own political and social orders — would be adopted by those in the Muslim world where authoritarianism governed. That began to happen in ways that could not have been imagined in June 2009. One single and tragic act of defiance by a frustrated young fruit vendor in a small Tunisian town ignited the Arab world. The Arab street erupted and brought down two long-enduring regimes and threatened several others. The West, including America, surprised by these rapid moving events, stood by and watched as the Arab youth turned out in the streets and in public squares, no longer afraid that they will be mercilessly assaulted by the security forces. They brought down the presidents of Tunisia and Egypt. It was only when the Libyan regime threatened to massacre its own people that the West intervened.

The West began a military operation against the regime of Muammar Qaddafi in Libya that has lasted longer than expected. The Assad family that represents a small non-Sunni minority in a Sunni majority country launched a viscous campaign of repression to beat back those who wanted a more open political system. The opposite happened in Bahrain, where the Sunni establishment and monarch were challenged by the country’s large Shia majority. In Yemen, a society that was still governed by tribalism and tribal loyalties was set on fire, and it rages on even as the country’s long-serving president has gone to Saudi Arabia to recover from the injuries suffered during an attack on his compound by those who had rebelled against his rule. The Arab political revolution is actually work in progress.

There were other developments in the Muslim world. A political party inspired by Islam won the plurality of the vote in a general election and prolonged the rule of the country’s prime minister, Teyyip Erdogan. The Turks demonstrated that Islam was not incompatible with democracy. America and its Nato allies, fearing that they may get stuck in Afghanistan, began the search for a way out of that country that had defied so many other foreign interventions. The Americans found and killed Osama bin Laden in a city deep inside Pakistan’s territory, by carrying out an operation that was deeply resented by many in Pakistan, who considered it an act of aggression committed against a sovereign nation. After relations with Pakistan rapidly deteriorated, Washington indicated that it was holding back part of the aid it had promised the country’s military. A resolution was moved in Congress demanding a cut back in economic aid as well.

The Muslim world’s relations with America, therefore, were moving in directions that were not expected by the country’s new president. To use a favourite Obama expression, it is necessary for Washington to press the reset button. In doing so, it needs to cognise a few things. First, the world of Islam is not homogenous. The people living in these countries belong to many different cultures and have had different histories. They are making economic, political and social progress at different speeds.

Second, the political systems that are evolving in these countries will be different. This is not surprising since the Christian nations in Europe and America don’t have the same political structures. Third, the strategic interests of countries in the Muslim world will not always be the same as that of America and its European allies. To force countries to follow Washington, Berlin, London and Paris is to generate resentment which is not good for any country inside or outside the Muslim world. Let us take three examples.

A more confident Istanbul has begun to carve out a role for itself in the Middle East, Central and South Asia that may not be in line with what the Americans consider to be their interests. An economically weakened and politically unsettled Islamabad is rightly nervous about what might emerge in its neighbourhood after the United States begins to pull out of Afghanistan. Tehran feels anxious because of the fact that it is the only major Shia country in the middle of a Sunni world. It may be inclined to give up its nuclear ambitions if it feels comfortable about its security situation.

In other words, in resetting the button, President Obama needs to move forward from rhetoric to real politics.

Published in The Express Tribune, August 1st, 2011.
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America is finding its way in Asia

By Shahid Javed Burki
Monday, 01 Aug, 2011

FOR Pakistan’s businesses to increase their share in the global market place, they must figure out which destinations should they seek for their exports.
Should they move from the crowded markets in the old world or work to cultivate clients in the more dynamic and more rapidly growing economies in Asia? The right answer to this question will depend to some extent on how Asia is shaped by the rivalry between America and China.

America is trying hard to find its way in a world it no longer dominates. For two decades, from 1991 to 2011, it was the uncontested super power, in command of the global economy and in possession of military might which made it possible to project its power in the world’s four corners.

The space it then occupied was created by the collapse of the Soviet Union and with it that of European Communism. Now, two decades later, it is finding it hard to remain the unchallenged master of the world largely because of the damage that was done to its economy by the Great Recession of 2008-09. The muddled way it had handled the problem of dealing with selfimposed debt ceiling has further alerted the world to the decline in its power. The most significant challenge it now faces is because of the economic rise of Asia.

Washington knows that it has to accommodate Asia and create a world order which would deal with the relative decline in its own economic power along with the rise of the economies of Asia, in particular that of the continent’s two large economies-- China and India. However, it has not yet quite figured out how to manage this transition.

When President Barack Obama visited Asia for the first time in his official capacity, he talked openly and frequently about a world that had two contending economies – that of his own country and China – and offered to create a multi-tiered global system. In it the world would be guided by a G2, America and China, with the G20 countries helping with the more detailed work. The rest of the world would constitute the last step on the ladder.

President Obama’s willingness to make space for China in the new world order did not go well with the more nationalistic elements in his own country. Many in the United States continue to maintain that “American exceptionalism” makes the country unique and also gives it a mission to export its social values to all parts of the world. As such it would be wrong to share its place in the world order with any other nation.

As President Obama settled in his office, he also seemed to change his mind about G2 arrangement. In November 2010, he went on his second visit to Asia, this time stopping in India where he famously declared that India was not a rising economic power but had already risen. He also indicated the US’s support for the Indian effort to get a permanent seat in the United Nations Security Council. Since then America’s relations with India have warmed even more while there has been a cooling-off with Beijing.

Added to this state of flux in America’s attempts to find a new basis of working with Asia is the rapid deterioration of relations between Islamabad and Washington.This then is the context with which we should look at the important speech given by Hillary Clinton in Honk Kong on July 25. This was the last stop in her five-nation visit to the several spots of vital interest to her country.

Mrs Clinton had no problem recognising that Asia’s rise was ushering in a new global economy. “The economic rise of the Asia-Pacific region is an astonishing historic achievement that is reshaping our world today and into the future…the numbers tell a powerful story. Never in history have so many climbed so far, so fast,” she told her Hong Kong audience. Asia’s remarkable performance was good for America, she emphasised.

America has been steadily building its ties with the Asian countries to contribute to Asia’s growth as a major trade and investment partner, a source of innovation that benefits Asia’s companies, a host to 350,000 Asian students every year, a champion of open markets, an advocate of universal human rights, and a guarantor of stability and security across the Asia-Pacific.

But Washington’s approach to Asia would be comprehensive, not focused on one or two countries. In that respect she was walking away from the line taken by her president, Barack Obama, during his first visit to the continent. In the revised American strategy, the approach to Asia would not be focused on China, admittedly the continent’s largest economy and also it’s most dynamic. It will involve all major and minor countries in the area. “The Obama administration has made a comprehensive commitment to reinvigorate our engagement as a Pacific power- shoring up alliances and friendships, strengthening multilateral institutions”.

The secretary of state also strongly indicated that those who in the area were suggesting that Asia now had the strength to go alone without continuing its dependence on the United States were making a mistake. They were misreading the dynamics of the change that was underway in the global economy. She promised that America will remain fully involved in the region.

The country had strong interests in the area. American exports to the Pacific Rim were $320 billion in 2010, supporting 850,000 jobs in the country. “America’s future is linked to the future region. And the reverse is also true as well because the future of Asia-Pacific is linked to America. We are a resident power in Asia – not only as a diplomatic and military power, but a resident economic power. And we are here to stay.

Having laid out the ground for relations between America and the Asian continent, she spent a fair amount of her time in detailing what she considered to be the main policies all countries needed to pursue if they wanted to benefit from the global system. “Last March in APEC meetings in Washington, I laid out four attributes that I believe characterise healthy economic competition. And these are very simple concepts, easy to say, hard to do: open, free transparent, and fair. Fair means sustained faith in the system. That faith is difficult too sustain when countries are forced to trade away their intellectual property just to enter and expand in foreign markets, or when vital supply chains are blocked.” Lest there was any doubt as to the direction in which her finger was pointing, she said: “And a number of nations, wealthy in the aggregate but poor in per capita might even think that rules don’t apply to them.” Mrs Clinton then went on to extol the virtues of rule-enforced multilateral trade. “Enough of the world’s commerce takes place with developing nations that leaving them out of the rule-based system would render the system unworkable.” Mrs Clinton’s Hong Kong address presented a kind of Monroe Doctrine for Asia – perhaps it will come to be called the Obama doctrine. While President Monroe had declared Latin America to be the exclusive area of influence for the United States, warning off other rich countries from the area, the Clinton speech warned China not to pursue interests in the region in her immediate neighbourhood by attempting to exclude the US. The meaning for Pakistan was clear. Its attempt to use China to balance the economic pressure that the US had begun to work on the country will not work under the Obama doctrine since all the major Asia-Pacific power will be required to pursue their common interests in a framework where rules hold sway.

America is finding its way in Asia

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Economics and political evolution

By Shahid Javed Burki
Published: August 7, 2011

While politics and political science are not my fields, I have always maintained that it is difficult to understand economic history without bringing them in as explanatory factors. Without an appreciation of the environment in which policymaking is carried out, it is hard to fully understand why those in power do what they do. Why did Governor Shahid Kardar of the State Bank of Pakistan resign after being in office for only a few months? Why, after the governor’s departure, did the central bank decide to lower the rate of interest when Pakistan has the second highest rate of inflation in Asia?

Economic theory and practice would have suggested a tightening of money supply, not its easing. This was not expected by a dozen or so senior economists, who, when they were questioned before the Bank’s credit committee met, predicted that either the policy won’t change or there may be a slight rise in the rate. The bank’s action confounded economists and further eroded the confidence of those watching economic developments on the seriousness of policymakers with regard to addressing the grim economic situation the country currently faces.

The answers to these questions are not to be found in economics but in politics. As democracy continues to take hold in the country, policymakers are working to ensure their survival by not keeping the men in uniform satisfied with their performance. This is what happened when a series of prime ministers were sent home by the powerful military for having failed to provide good economic management. Their removal was in fact demanded by senior politicians who occupied the opposition benches in the legislature. And when the military intervened, even the press welcomed their arrival. There are no calls this time around for history to repeat itself. The reason is that political forces are looking at some of the developments outside the country’s borders and drawing important lessons for shaping their own actions. Three of these developments are particularly important. Two of these occurred — or, more accurately are still occurring — in the Arab world, while the third took place in Turkey.

The first of these is the effective use by the youth in the Arab world of new media to get organised and challenge the established political order. They used such new instruments of communication as Facebook and Twitter and such devices as the iPad and mobile telephones to gather and demonstrate on the streets. This expression of discontent didn’t need political organisations for mobilisation. The strength of this uprising was drawn from the depth of despair that had built up over years and decades. The authoritarian regimes in Tunisia and Egypt were not able to use their well-developed security forces to keep themselves in power. Once the military establishment in these two countries indicated that it would not intervene to keep in place the discredited leaders, regime change became inevitable. Yemen, Libya and Syria have not gone the way of Tunisia and Egypt for the reason that those in power have managed to stay there by exploiting the social, cultural and religious divisions in their societies. They may have bought some time for themselves but not longevity.

The second lesson is that the ‘political street’ has been inserted as another balancing factor in the evolving political systems. If there is general dissatisfaction with the way the executive branch is acting and its actions cannot be constrained or controlled by the legislature and the judiciary, the street will be prepared to act. The street is not just in the Arab world but in all parts of the Muslim world. It is ready to throb with activity because of the age of the population. The median age of the populations in Muslim countries is much lower than in other parts of the world. It is only 21 years in Pakistan, which means that some 90 million people in a population of 180 million are below that age. Most of them are not active participants in the established political order. They are deeply concerned about their present economic situation and future prospects and could come out on the streets if they lose hope in their future.

The third important development of note is the sudden departure of all senior military commanders in Turkey. As Anthony Shadid, the Pulitzer Prize-winning journalist, wrote recently in The New York Times, “50 years ago, when a populist prime minister tangled with the Turkish military, he ended up on the gallows, the mandate of three election victories little consolation. This time around, the rivalry climaxed with most of Turkey’s military high command resigning simultaneously, its leader complaining of powerlessness and bad press.” There is a consensus among analysts that this action by the commanders has strengthened the position of Recep Tayyip Erdogan, the thrice elected prime minister, rather than weakened it. The once powerful militaries in the Muslim world have had to recognise that the people of their countries want representative political orders in place rather than rule by strongmen.

The main lesson Pakistan’s political establishment has drawn from these developments is that it cannot simply rely on the support of its traditional constituencies. It has to keep an eye on the way people are reacting to their policies. The street also matters. The politicians have also gained some confidence that the military, while still influential in several aspects of policymaking, is not likely to directly intervene. These are reasonable responses to the important developments outside the country’s orders but they have not resulted in good economic policymaking.

One important illustration is the way Islamabad is dealing with the State Bank and the way it is using the monetary policy to keep the street on its side. Most political mistakes are made by sacrificing the future to the present. It is quite clear that the current rulers are getting ready for the next general elections. They have to be held in the next 20 months. If held under the current political dispensation, this would be the first time that an elected government would have completed its full term. To get to that point, the PPP-led government seems to have concluded that it is important to bring growth back by easing money supply and that tightening of money would reduce investment by the private sector and thus slow down the increase in employment. These are short-term responses to a difficult economic situation but their consequences will, in the long run, be politically and economically grim.

Published in The Express Tribune, August 8th, 2011
Economics and political evolution – The Express Tribune

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The ‘troubling cut in discount rate’

By Shahid Javed Burki
Monday, 08 Aug, 2011

THE recent move by the State Bank of Pakistan to ease money supply by lowering the discount rate is troubling. The motivation for lowering the discount rate was political. The decision was not taken for economic reasons.

The lesson being drawn from the Arab Spring by Pakistan’s old as well as new political establishment is that the “street” has been inserted as another balancing factor in the evolving democratic systems. If there is general dissatisfaction with the way the executive branch is acting and its actions cannot be constrained or controlled by the legislature and the judiciary, the street will be prepared to act.

The street in not just in the Arab world but is in all parts of the Muslim world. It is able to throb with activity because of the age of the population. The median age of the populations in Muslim countries is much lower than in other parts of the world. It is only 21 years in Pakistan which means that some 80 million people in a population of 180 million are below that age.

Most of them are not active participants in the established political order. They are, however, deeply concerned about their present economic situation and future prospects. They will become politically active if the state of the economy continues to follow its present trend and does not promise them a better future.

Adopting a responsible fiscal stance has proved to be extraordinarily difficult for the democratic government in Pakistan. It understands that the deficits that the government is currently running are unsustainable. And yet it has shown carelessness in terms of controlling current expenditures or disciplining big loss-making enterprises. Senior public officials continue to spend government money on themselves or on the activities that don’t have a positive impact on the economy. Public corporations such as PIA, the railways and the Wapda continue to run heavy losses.

An important lesson Pakistan’s political establishment has drawn from the Arab Spring is that it cannot simply rely on the support of its traditional constituencies. They have to keep an eye on the way people are reacting to their policies. The street also matters. They also seem to have gained some confidence that the military, while still influential in several aspects of policymaking, is not likely to directly intervene. These are reasonable responses to the important developments outside the country’s borders but they have not resulted in good economic policy making. One important illustration is the way Islamabad is dealing with the State Bank and the way it is using the monetary policy to keep the street on its side.

However, the government by leaning on the central bank to adopt an accommodating monetary policy has created a delicate economic situation. It will adversely affect the long-term health of the economy. On 30 July, Acting State Bank Governor Yaseen Enver announced that the discount rate was being brought down from 14 to 13.5 per cent.

The acting head took a position different from the one adopted publicly by Shahid Kardar.The former governor had openly expressed a deep concern for resort by Islamabad to the printing press for financing large fiscal deficits.

His successor adopted a different policy stance. “The key parameter in this assessment is the out look for inflation which in FY 2012 is expected to remain in line with the announced target. The SBP’s forecast for inflation ranges between 11-12 per cent”, he told the press in a meeting following the announced cut.

Most political mistakes are made by sacrificing the future to the present. It is quite clear that the current rulers are getting ready for the next general elections. They have to be held in the next 20 months. If held under the current political dispensation this would be the first time in the country that an elected government would have completed its full term.

To get to that point the PPP-led government seems to have concluded that it is important to bring growth back by easing money supply and that tightening of money would reduce investment by the private sector and thus slow down the rate of increase in employment.These are short-term responses to a difficult economic situation but their consequences will, in the long run, be politically and economically grim.

If the economy was growing at a rate of 6-7 per cent a year, it will be performing as well as Bangladesh of today while still lower by a couple of points from India’s current rate of GDP increase. Instead the rate of GDP growth in 2010-11 was only two per cent and, even for those who are optimists, the rate in 2011-12 will not be higher than three per cent.This means that the economy is performing well below its potential by as much as 4-5 per cent a year.

I pointed this out to President Asif Ali Zardari in a meeting in his office a few months ago. He said that that was an unfair comparison – comparing apples with oranges. “The Indians have had democracy ever since they became independent; Bangladesh also has had years of democratic rule. Pakistan was governed by military dictators for a good part of its history. Democracy returned to the country less than three years ago. Without democracy you cannot have sustained economic growth”, he explained.

Has the return to democracy been good for economic development? As indicated above, the economy is performing considerably below the rates of growth being achieved by other countries of mainland South Asia. Some of this poor performance can be blamed on factors beyond the control of policymakers in Islamabad. The Great Flood of 2010 shaved off at least one percentage point from the rate of growth, at least for a year, possibly even two.

Terrorist activities which have taken such a heavy human toll and are exacting a significant economic price cannot be blamed on government policies. It is the consequence of geo-politics with Pakistan a largely passive player. The Lahore based Institute of Public Policy estimated in its 2009 annual report that persistent terrorism was costing the economy in a number of different ways. “These costs (direct and indirect) aggregated to Rs678 billion (approximately $8.4 billion) in 2008-09, equivalent to five per cent of the projected GDP.” Some of this could have been contained and, therefore, reduced by the adoption of the right sets of policies.

It would not be an exaggeration to suggest that poor policies are costing the economy at least 2-3 per cent in lost growth every year. If this trend continues poor policy performance would have cost the economy 16 per cent of the gross domestic output in the five year period between 2008 and 2013.

The failure of the policymakers stretches over a number of fronts. At least six of these matter a great deal: absence of a clear leadership in economic matters, absence of strategic thinking concerning the revival of the economy and bringing growth back, absence of clear division of authority between the central government and the provinces, absence of fiscal discipline, reliance on central bank finance to meet government’s fiscal deficits, and lack of attention to increasing Pakistan’s share in the global markets. Most of these failures can be lumped together under the heading of poor economic governance.

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Exploding Karachi

By Shahid Javed Burki
Published: August 15, 2011

Will Pakistan soon recover — or recover at all — from the deep malaise that currently inflicts it? There are a number of things that are hurting the country. Some of them are understood, such as the troubles on the economic front. Economists know what the solutions are to get the country to walk back from the edge of the abyss. The real problem is that the political establishment does not have the will to do what needs to be done. Then there is the problem created by unsettled politics. In a way, this is healthy for the development of the political system. The country is learning to find solutions through discourse and accommodation rather than letting the military put its heavy hand on politics.

It is the third problem — that of resort to violence to gain ground against opponents — that poses the most serious challenge to the country. Pakistan cannot make progress unless different kinds of violence that have become routine are brought under control. It is because of this that the World Bank in its 2011 World Development Report has included Pakistan, along with a score of other countries, in its list of fragile states. In fact, there are three ongoing wars in Pakistan. There is no end in sight for any of them: they are the wars in Karachi, the war among the various sects of Islam, and the war between the state and various extremist groups. It is the explosion in Karachi with which I will deal today.

The ethnic war in Karachi started a couple of decades back but subsided in intensity for a while. Its main cause is the inability of its very diverse population to further their interests without hurting those of the rest. The city has grown fifty-fold since the country gained independence 64 years ago. Had Karachi grown by the natural increase in population — in Pakistan’s case by 2.85 per cent a year — it would have doubled in size about every 25 years. Had it grown at a rate normal for large urban centers — about five per cent a year — its population would have doubled every 14 years. In the latter case, the city’s population would be around nine million, less than half its present size. Instead, the city’s population has increased by six per cent a year.

What caused the explosion in Karachi’s population are three waves of migration that brought three very different people in search of jobs and, ironically, security. In other words, if Karachi today has a population of 20 million, slightly more than a third of it is made of the Muhajir community, about a fourth of the original Sindhi-Makrani population, about a fourth also the of the Pashtun and the remaining one-sixth of other ethnic groups. There are supposedly one million people from Bihar and Bangladesh who reside in the city.

This ethnic brew continues to churn and produce violence. The several communities that make up the city’s population have not found a way of developing an institutional response to resolving their differences.

Research suggests that rapid urban growth is associated with weakened social cohesions and increased risk of violence. Karachi, as discussed above, increased in size at a rate much more than that of other megacities in the world. But despite its explosive growth, the city had one advantage: rough balance in the numbers of people belonging to different ethnic and social groups. This should have led to politics and economics of inclusion rather than that of exclusion. That happened for a while when the Muhajir community gained political control of the city. Its leaders worked to develop not only the areas populated by their community but those of other ethnic groups as well. However, that balance was disturbed by the escalation of violence in the Pashtun areas of Pakistan and Afghanistan. This generated another wave of migration which has brought in more people from this ethnic group. They are now trying to find economic and political space for themselves in the city and that has led to violence once again. The solution is not the use of force; it has to be economic and political accommodation of the people who feel excluded.

Source: Exploding Karachi

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Time to boost trade with India

By Shahid Javed Burki
Monday, 15 Aug, 2011

SINCE its independence, Pakistan has developed new markets for its products, mostly at distant places. First Japan and then the United States became important markets for it while the commercial exchanges with India became insignificant.

This development went against what economist call the “gravity model of trade”. It means the largest trading partners should be those that are relatively close and have large markets.

According to the model, China and India should be Pakistan’s largest importers and exporters not the US and the European Union. The potential of Pakistan-China trade may be realised as a consequence of what the two countries call an “all-weather friendship”. The heavy burden of history, however, continues to weigh on the development of trading relations between Pakistan and India.

If trade was to resume without constraints, gains to Pakistan would be higher than those for India. There would be large returns for Pakistan, if transit trade between India and Afghanistan and points beyond was to be allowed. In other words, the push for removing trade barriers that continue to inhibit the movements of goods and services between the two countries should come from Pakistan.

Islamabad should continue to press for Indian cooperation in this area even if New Delhi drags its feet as it is likely to do once the conversation on trade begins in earnest. We know from the experiences of other countries that the Indian bureaucracy is extremely rigid and conservative in matters of trade.

It is a good indication of the current Indian mood that on August 5, Anand Sharma, the country’s commerce minister, invited his Pakistani counterpart, Makhdoom Amin Fahim, to visit New Delhi for discussions on trade matters. There are indications that these talks will focus on half a dozen issues.The first of these is the grant of the “most favoured nation” status by Pakistan to India. Pakistan is obliged to do that under the World Trade Organisation’s rules for its members. Its reluctance to fulfill this obligation is hard to understand.

But a lot of water has flowed under many bridges over time and public opin ion has certainly softened in Pakistan about its relations with India. Pakistan’s business community also wants trade to be conducted with India without too many constraints. It rightly views the many advantages of being able to reach the vast Indian market — a market that is rapidly increasing in size. .

What are the issues that Pakistan should raise with India? Islamabad should focus on at least three.The first of these are non-tariff barriers that India uses not only against Pakistan but against most other countries. Some of these are allowed under the WTO rules. India has been one of the more aggressive countries to make use of the antidumping provisions of the WTO. These may be used in case Pakistan’s exports to India increase rapidly.

The second issue is cross-border land trade. As trade economists point out, trade facilitation is the best way to promote commerce. All of South Asia followed the import substitution approach to economic development for about 40 years after the British left the subcontinent. Tariffs were kept very high to encourage domestic production.

However, that began to change in the early 1990s as all South Asian countries began to lower their tariff walls. As Gary Pursell, a well regarded trade economist, points out in a recent article, “during the 1997/7 to 2002/3 trade liberalisation period, Pakistan’s tariffs were gradually reduced: the average came down from 42 to 17.3 per cent”. Indian tariffs went in the same direction but from a higher level compared to Pakistan to a level much lower. In India’s case, the decline was from 89.6 per cent in 1982/83 to only 9.8 per cent in 2007/08.With low tariffs there will not be much benefit if they are further reduced as is the aim of the South Asia Free Trade Area agreement (Safta).

Since the trend began towards lowering tariff barriers there is much to be gained by easing the restrictions the countries impose on their borders. The drama that takes place on the Wagah border with India is well-known. But this is not restricted to the “lowering of the flags” ceremony that is conducted each evening by the two sides. There is also drama when the goods that flow from one country to the other are moved from the trucks that have brought them to the border to the trucks that will take them to the other side. Each country should allow trucks from the other side to transport the goods to their intended destinations. This will save both money and time: the latter is important for perishable commodities for which there is considerable scope for a profitable exchange for both countries.

The third issue concerns the revitalisation of Safta. This was negotiated in January 2004 at a summit of the countries belonging to the South Asian Association for Regional Cooperation(Saarc). It became effective in July 2006. However, both India and Pakistan have shown considerable lack of enthusiasm for the agreement. India would rather focus on what it calls its “looking east” approach to developing trade relations. New Delhi seems more interested in working with the ASEAN countries. It is assigning a relatively low priority to cementing strong economic relations with the countries in its immediate neighbourhood.

Pakistan’s policymakers have been too distracted by other matters to pay much attention to Safta. This is unfortunate. There is enough empirical evidence available from other parts of the world — from Europe and Latin America, for instance — to suggest that regional associations are a good way of developing trade among the countries that have long been rivals.

Time to boost trade with India

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